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Section 1: 10-Q (10-Q)

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

or

            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number: 001-38873

Palomar Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

 

83-3972551

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

7979 Ivanhoe Avenue, Suite 500

La Jolla, California

 

92037

(Address of principal executive offices)

 

(Zip Code)

(619) 567-5290

Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer ☒   

Smaller reporting company 

Emerging growth company ☒ 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes     No ☒ 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

PLMR

Nasdaq Global Select Market

 

 

Number of shares of the registrant’s common shares outstanding at May 15, 2019: 23,468,750

 

 

 


 

Table of Contents

PALOMAR HOLDINGS, INC.

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Balance Sheets at March 31, 2019 (Unaudited) and December 31, 2018

3

 

Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income (Unaudited) for the Three Months Ended March 31, 2019 and 2018

4

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2019 and 2018

5

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2019 and 2018

6

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4. 

Controls and Procedures

37

 

 

 

PART II. OTHER INFORMATION 

38

 

 

 

Item 1. 

Legal Proceedings

38

Item 1A. 

Risk Factors

38

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

60

Item 3. 

Defaults Upon Senior Securities

60

Item 4. 

Mine Safety Disclosures

60

Item 5. 

Other Information

60

Item 6. 

Exhibits

61

 

Signatures

61

 

 

 

 

 

2


 

Table of Contents

Part 1: FINANCIAL INFORMATION

Item 1: Financial Statements

 

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except shares and par value data)

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2019

 

2018

 

 

(unaudited)

 

 

 

Assets

 

 

  

 

 

  

Investments:

 

 

  

 

 

  

Fixed maturity securities available for sale, at fair value (amortized cost: $125,051 in 2019; $122,949 in 2018)

 

$

126,946

 

$

122,220

Equity securities, at fair value (cost: $21,429 in 2019; $27,188 in 2018)

 

 

21,778

 

 

25,171

Total investments

 

 

148,724

 

 

147,391

Cash and cash equivalents

 

 

10,494

 

 

9,525

Restricted cash

 

 

397

 

 

399

Accrued investment income

 

 

856

 

 

734

Premium receivable

 

 

24,348

 

 

18,633

Deferred policy acquisition costs

 

 

16,741

 

 

14,052

Reinsurance recoverable on unpaid losses and loss adjustment expenses

 

 

10,296

 

 

11,896

Reinsurance recoverable on paid losses and loss adjustment expenses

 

 

2,094

 

 

2,666

Prepaid reinsurance premium

 

 

21,838

 

 

18,284

Prepaid expenses and other assets

 

 

8,264

 

 

5,863

Property and equipment, net

 

 

921

 

 

947

Intangible assets

 

 

744

 

 

744

Deferred tax assets, net

 

 

523

 

 

 —

Total assets

 

$

246,240

 

$

231,134

Liabilities and stockholders' equity

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Accounts payable and other accrued liabilities

 

$

8,361

 

$

9,245

Reserve for losses and loss adjustment expenses

 

 

12,628

 

 

16,061

Unearned premiums

 

 

92,259

 

 

79,130

Ceded premium payable

 

 

9,664

 

 

10,607

Funds held under reinsurance treaty

 

 

750

 

 

720

Income and excise taxes payable

 

 

1,566

 

 

 —

Long-term notes payable

 

 

19,103

 

 

19,079

Total liabilities

 

 

144,331

 

 

134,842

Stockholders' equity:

 

 

  

 

 

  

Preferred stock, $0.0001 par value, 5,000,000 and 0 shares authorized as of March 31, 2019 and December 31, 2018, respectively, 0 shares issued and outstanding as of March 31, 2019 and December 31, 2018

 

 

 —

 

 

 —

Common stock, $0.0001 par value, 500,000,000 shares authorized, 17,000,000 shares issued and outstanding as of March 31, 2019 and December 31, 2018

 

 

 2

 

 

 2

Additional paid-in capital

 

 

91,459

 

 

68,498

Accumulated other comprehensive income (loss)

 

 

1,624

 

 

(563)

Retained earnings

 

 

8,824

 

 

28,355

Total stockholders' equity

 

 

101,909

 

 

96,292

Total liabilities and stockholders' equity

 

$

246,240

 

$

231,134

 

See accompanying notes.

3


 

Table of Contents

Palomar Holdings, Inc. and Subsidiaries

 

Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income (Unaudited)

(in thousands, except shares and per share data)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Revenues:

 

 

  

 

 

  

Gross written premiums

 

$

54,031

 

$

34,033

Ceded written premiums

 

 

(26,106)

 

 

(13,762)

Net written premiums

 

 

27,925

 

 

20,271

Change in unearned premiums

 

 

(9,575)

 

 

(2,284)

Net earned premiums

 

 

18,350

 

 

17,987

Net investment income

 

 

960

 

 

617

Net realized and unrealized gains (losses) on investments

 

 

2,411

 

 

(621)

Commission and other income

 

 

586

 

 

540

Total revenues

 

 

22,307

 

 

18,523

Expenses:

 

 

  

 

 

  

Losses and loss adjustment expenses

 

 

316

 

 

938

Acquisition expenses

 

 

6,975

 

 

7,790

Other underwriting expenses (includes stock-based compensation of $22,961 and $0, respectively)

 

 

28,853

 

 

3,805

Interest expense

 

 

429

 

 

404

Total expenses

 

 

36,573

 

 

12,937

(Loss) Income before income taxes

 

 

(14,266)

 

 

5,586

Income tax expense (benefit)

 

 

145

 

 

(6)

Net (loss) income

 

 

(14,411)

 

 

5,592

Other comprehensive income, net:

 

 

  

 

 

  

Net unrealized gains (losses) on securities available for sale for the three months ended March 31, 2019 and 2018 respectively

 

 

2,187

 

 

(899)

Net comprehensive (loss) income

 

$

(12,224)

 

$

4,693

Per Share Data:

 

 

  

 

 

  

Earnings per share, basic and diluted

 

$

(0.85)

 

$

0.33

Weighted-average common shares outstanding

 

 

17,000,000

 

 

17,000,000

 

See accompanying notes.

4


 

Table of Contents

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Number of

    

 

 

    

 

 

    

Accumulated

    

 

 

    

 

 

 

 

Common

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Shares

 

Common

 

Paid-In

 

Comprehensive

 

Retained

 

Stockholders'

 

 

Outstanding

 

Stock

 

Capital

 

 (Loss) Income

 

Earnings

 

Equity

Balance at December 31, 2017

 

17,000,000

 

$

 2

 

$

68,498

 

$

2,993

 

$

6,921

 

$

78,414

Impact of equity accounting guidance adoption

 

 —

 

 

 —

 

 

 —

 

 

(3,215)

 

 

3,215

 

 

 —

Change in net unrealized loss on investments

 

 —

 

 

 —

 

 

 —

 

 

(899)

 

 

 —

 

 

(899)

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,592

 

 

5,592

Balance at March 31, 2018

 

17,000,000

 

$

 2

 

$

68,498

 

$

(1,121)

 

$

15,728

 

$

83,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

17,000,000

 

$

 2

 

$

68,498

 

$

(563)

 

$

28,355

 

$

96,292

Change in net unrealized gain on investments

 

 —

 

 

 —

 

 

 —

 

 

2,187

 

 

 —

 

 

2,187

Distribution to stockholder

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5,120)

 

 

(5,120)

Stock-based compensation

 

 —

 

 

 —

 

 

22,961

 

 

 —

 

 

 —

 

 

22,961

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(14,411)

 

 

(14,411)

Balance at March 31, 2019

 

17,000,000

 

$

 2

 

$

91,459

 

$

1,624

 

$

8,824

 

$

101,909

 

See accompanying notes.

5


 

Table of Contents

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Operating activities

 

 

  

 

 

  

Net cash provided by operating activities

 

$

2,457

 

$

8,410

Investing activities

 

 

  

 

 

  

Purchases of property and equipment

 

 

(27)

 

 

(249)

Purchases of fixed maturity securities

 

 

(14,738)

 

 

(24,469)

Purchases of equity securities

 

 

(21,430)

 

 

(1,495)

Sales and maturities of fixed maturity securities

 

 

12,547

 

 

13,225

Sales of equity securities

 

 

27,278

 

 

1,430

Receivable for securities

 

 

 —

 

 

250

Net cash provided by (used in) investing activities

 

 

3,630

 

 

(11,308)

Financing activities

 

 

  

 

 

  

Distribution to stockholder

 

 

(5,120)

 

 

 —

Net cash used in financing activities

 

 

(5,120)

 

 

 —

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

967

 

 

(2,898)

Cash, cash equivalents and restricted cash at beginning of period

 

 

9,924

 

 

10,932

Cash, cash equivalents and restricted cash at end of period

 

$

10,891

 

$

8,034

Supplementary cash flow information:

 

 

  

 

 

  

Cash paid for income taxes

 

$

 —

 

$

 —

Cash paid for interest

 

$

444

 

$

424

 

The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the Condensed Consolidated Balance Sheets (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 

    

December 31, 

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

Cash and cash equivalents

 

$

10,494

 

$

9,525

 

Restricted cash

 

 

397

 

 

399

 

Cash and cash equivalents and restricted cash

 

$

10,891

 

$

9,924

 

 

 

See accompanying notes.

6


 

Table of Contents

Palomar Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

1. Summary of Operations and Basis of Presentation

Summary of Operations

Palomar Holdings, Inc. (the Company), is an insurance holding company that was incorporated in Delaware on March 14, 2019. Prior to incorporation in Delaware, the Company was known as GC Palomar Holdings (GCPH), which was a Cayman Islands incorporated insurance holding company formed on October 4, 2013 when GC Palomar Investor LP (GCPI) acquired control of GCPH. The Company and its wholly owned subsidiaries include Palomar Specialty Reinsurance Company (PSRE) and Palomar Insurance Holdings, Inc. (PIH), which wholly owns Palomar Specialty Insurance Company (PSIC) and Prospect General Insurance Agency, Inc. (PGIA).

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and include the accounts of the Company and its wholly‑owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Stock Split

On March 15, 2019, the Company effected a 17,000,000 for one forward stock split in conjunction with domestication in the United States. All share and per share information included in the accompanying condensed consolidated financial statements and notes to the condensed consolidated financial statements have been retroactively adjusted to reflect the stock split for the Company’s common stock for all periods presented.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. All revisions to accounting estimates are recognized in the period in which the estimates are revised. Significant estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, reserves for losses and loss adjustment expenses, reinsurance recoverables on unpaid losses, and the fair values of investments.

Recent Accounting Pronouncements

The Company currently qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, the Company is provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non‑emerging growth companies or (ii) within the same time periods as private companies.

The Company has elected to adopt new or revised accounting guidance within the same time period as private companies, unless, as indicated below, management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance.

 

7


 

Table of Contents

Recently issued accounting pronouncements not yet adopted

In May 2014, the FASB issued new accounting guidance related to revenue recognition, “ASU 2014‑09, Revenue from Contracts with Customers (Topic 606).” The guidance applies to all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards, such as insurance contracts. Under this guidance, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligations. According to the superseding standard ASU 2015-14 that deferred the effective dates of the preceding, and because the Company is filing as an emerging growth company, the standard became effective for the Company January 1, 2019, but the Company is not required to present the impacts of the standard until it files its annual report on Form 10-K for the fiscal year ended December 31, 2019. The Company expects to adopt this standard using the modified retrospective method. The Company does not expect adoption to have a material impact on its consolidated financial statements, but will continue to assess the potential impact of adoption throughout 2019. 

In February 2016, the FASB issued new guidance for accounting for leases, “ASU 2016‑02, Leases (Topic 842).” Under current guidance, leases are only included on the balance sheet if the criteria to classify the agreement as a capital lease are met. This update will require the recognition of a right‑of‑use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months.

This guidance was subsequently amended multiple times and offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This new guidance requires a modified retrospective adoption, applying the new standard to all leases existing at the date of initial application, with early adoption permitted. An entity may choose to use the standard’s effective date, rather than the beginning of the earliest comparative period presented, as the date of initial application. An entity would record the effects of initially applying the new guidance as a cumulative‑effect adjustment to retained earnings. Consequently, an entity’s reporting for the comparative periods presented in the year of adoption would continue to be in accordance with the current guidance, including the current disclosure requirements.

To facilitate transition, the new guidance includes a package of practical expedients that entities may elect to apply on adoption. The package of practical expedients relates to the identification and classification of leases that commenced before the effective date and initial direct costs for leases that commenced before the effective date. The new guidance also includes a practical expedient permitting the use of hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset.

This update is effective for annual reporting periods beginning after December 15, 2019, and interim reporting periods within fiscal years beginning after December 31, 2020 with early adoption permitted. The Company is currently evaluating the impact that this new guidance will have on its condensed consolidated financial statements.

In June 2016, the FASB issued “ASU 2016‑13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Current guidance delays the recognition of credit losses until it is probable a loss has been incurred. This updated guidance will require financial assets measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Credit losses relating to available‑for‑sale debt securities will also be recorded through an allowance for credit losses, with the amount of the allowance limited to the amount by which fair value is below amortized cost. This update will be effective for annual reporting periods beginning after December 15, 2020 and interim reporting periods within fiscal years beginning after December 15, 2021. Early adoption is permitted, but not before annual reporting periods beginning on or after December 15, 2018. The Company is currently evaluating the impact that this new guidance will have on its condensed consolidated financial statements.

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Table of Contents

 

In August 2018, the FASB issued “ASU 2018‑13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. Among other things, this new guidance eliminates the need to disclose transfers between Level 1 and Level 2 of the fair value hierarchy, changes the policy for timing of transfers and the valuation processes for Level 3 fair value measurements and includes requirements to disclose quantitative information about Level 3 measurements. This new guidance will be effective for annual and interim reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact that this new guidance will have on its condensed consolidated financial statements.

 

2. Investments

The Company’s available‑for‑sale investments are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

March 31, 2019

 

Cost or Cost

 

Gains

 

Losses

 

Value

 

 

(in thousands)

Fixed maturities:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Governments

 

$

12,326

 

$

195

 

$

(59)

 

$

12,462

States, territories, and possessions

 

 

2,304

 

 

59

 

 

 —

 

 

2,363

Political subdivisions

 

 

818

 

 

 —

 

 

(5)

 

 

813

Special revenue excluding mortgage/asset-backed securities

 

 

11,388

 

 

220

 

 

(27)

 

 

11,581

Industrial and miscellaneous

 

 

70,626

 

 

1,368

 

 

(199)

 

 

71,795

Mortgage/asset-backed securities

 

 

27,589

 

 

359

 

 

(16)

 

 

27,932

Total available-for-sale investments

 

$

125,051

 

$

2,201

 

$

(306)

 

$

126,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2018

 

Cost or Cost

 

Gains

 

Losses

 

Value

 

 

(in thousands)

Fixed maturities:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Governments

 

$

15,299

 

$

96

 

$

(126)

 

$

15,269

States, territories, and possessions

 

 

1,227

 

 

 —

 

 

(6)

 

 

1,221

Political subdivisions

 

 

825

 

 

 —

 

 

(10)

 

 

815

Special revenue excluding mortgage/asset-backed securities

 

 

12,429

 

 

115

 

 

(91)

 

 

12,453

Industrial and miscellaneous

 

 

65,885

 

 

192

 

 

(951)

 

 

65,126

Mortgage/asset-backed securities

 

 

27,284

 

 

133

 

 

(81)

 

 

27,336

Total available-for-sale investments

 

$

122,949

 

$

536

 

$

(1,265)

 

$

122,220

 

Security holdings in an unrealized loss position

As of March 31, 2019, the Company held 91 fixed maturity securities in an unrealized loss position with a total estimated fair value of $36.8 million and total gross unrealized losses of $0.3 million. None of the fixed maturity securities with unrealized losses has ever missed, or been delinquent on, a scheduled principal or interest payment. As of December 31, 2018, the Company held 173 fixed maturity securities in an unrealized loss position with a total estimated fair value of $73.8 million and total gross unrealized losses of $1.3 million. None of the fixed maturity securities with unrealized losses has ever missed, or been delinquent on, a scheduled principal or interest payment.

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The aggregate fair value and gross unrealized losses of the Company’s investments aggregated by investment category and the length of time these individual securities have been in a continuous unrealized loss position as of March 31, 2019 and December 31, 2018, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

More Than 12 Months

 

Total

 

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

March 31, 2019

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

(in thousands)

Fixed maturity securities:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Governments

 

 

 —

 

 

 —

 

$

5,742

 

$

(59)

 

$

5,742

 

$

(59)

States, territories, and possessions

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Political subdivisions

 

 

 —

 

 

 —

 

 

549

 

 

(5)

 

 

549

 

 

(5)

Special revenue excluding mortgage/asset-backed securities

 

 

 —

 

 

 —

 

 

5,237

 

 

(27)

 

 

5,237

 

 

(27)

Industrial and miscellaneous

 

 

2,723

 

 

(22)

 

 

20,029

 

 

(177)

 

 

22,752

 

 

(199)

Mortgage/asset-backed securities

 

 

867

 

 

(5)

 

 

1,696

 

 

(11)

 

 

2,563

 

 

(16)

 

 

$

3,590

 

$

(27)

 

$

33,253

 

$

(279)

 

$

36,843

 

$

(306)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

More Than 12 Months

 

Total

 

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

December 31, 2018

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

(in thousands)

Fixed maturity securities:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Governments

 

$

1,970

 

$

(25)

 

$

6,197

 

$

(101)

 

$

8,167

 

$

(126)

States, territories, and possessions

 

 

719

 

 

(5)

 

 

501

 

 

(1)

 

 

1,220

 

 

(6)

Political subdivisions

 

 

264

 

 

(1)

 

 

550

 

 

(9)

 

 

814

 

 

(10)

Special revenue excluding mortgage/asset-backed securities

 

 

1,706

 

 

(14)

 

 

5,916

 

 

(77)

 

 

7,622

 

 

(91)

Industrial and miscellaneous

 

 

30,544

 

 

(556)

 

 

14,913

 

 

(395)

 

 

45,457

 

 

(951)

Mortgage/asset-backed securities

 

 

6,653

 

 

(39)

 

 

3,830

 

 

(42)

 

 

10,483

 

 

(81)

Total

 

$

41,856

 

$

(640)

 

$

31,907

 

$

(625)

 

$

73,763

 

$

(1,265)

 

The Company considers the following factors in determining whether declines in the fair value of investments are other‑than‑temporary:

·

The significance of the decline in fair value compared to the cost basis,

·

The time period during which there has been a significant decline in fair value,

·

Whether the unrealized loss is credit‑driven or a result of changes in market interest rates,

·

A fundamental analysis of the business prospects and financial condition of the issuer,

·

The Company’s intent to sell the securities as of each reporting date, and

·

If the Company does not expect to recover the entire amortized cost basis or cost of the investment.

Based on the Company’s reviews as of March 31, 2019 and December 31, 2018, the Company determined that the fixed maturity securities’ unrealized losses were primarily the result of the interest rate environment and not the credit quality of the issuers. None of the fixed maturity securities were determined to be other‑than‑temporarily impaired. The company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis. Therefore, none of the fixed maturity securities were written down during the respective periods.

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Contractual maturities of available‑for‑sale fixed maturity securities

The amortized cost and fair value of fixed maturity securities at March 31, 2019, by contractual maturity, are shown below.

 

 

 

 

 

 

 

 

    

Amortized

    

Fair

 

 

Cost

 

Value

 

 

(in thousands)

Due within one year

 

$

2,968

 

$

2,959

Due after one year through five years

 

 

46,692

 

 

46,600

Due after five years through ten years

 

 

35,745

 

 

37,053

Due after ten years

 

 

12,057

 

 

12,402

Mortgage and asset-backed securities

 

 

27,589

 

 

27,932

 

 

$

125,051

 

$

126,946

 

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

Net investment income summary

Net investment income is summarized as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Interest income

 

$

1,010

 

$

578

Dividend income

 

 

30

 

 

122

Less: investment expense

 

 

(80)

 

 

(83)

Net investment income

 

$

960

 

$

617

 

Net realized and unrealized investment gains and losses

The following table presents net realized and unrealized investment gains and losses:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

 

 

 

(in thousands)

Realized gains:

 

 

  

 

 

  

Gains on sales of fixed maturity securities

 

$

44

 

$

 9

Gains on sales of equity securities

 

 

66

 

 

26

Total realized gains

 

 

110

 

 

35

Realized losses:

 

 

  

 

 

  

Losses on sales of fixed maturity securities

 

 

(66)

 

 

(42)

Losses on sales of equity securities

 

 

(156)

 

 

(446)

Total realized losses

 

 

(222)

 

 

(488)

Net realized investment losses

 

 

(112)

 

 

(453)

Net unrealized gains (losses) on equity securities

 

 

2,523

 

 

(168)

Net realized and unrealized gains (losses) on investments

 

$

2,411

 

$

(621)

 

The Company places securities on statutory deposit with certain state agencies to retain the right to do business in those states. These securities are included in available‑for‑sale investments on the balance sheet. At March 31, 2019 and December 31, 2018, the carrying value of securities on deposit with state regulatory authorities was $5.0 million.

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3. Fair value measurements

Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment.

The three‑tier hierarchy of inputs is summarized in the three broad levels listed below:

Level 1—Unadjusted quoted prices are available in active markets for identical investments as of the reporting date.

Level 2—Pricing inputs are quoted prices for similar investments in active markets; quoted prices for identical or similar investments in inactive markets; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data.

Level 3—Pricing inputs into models are unobservable for the investment. The unobservable inputs require significant management judgment or estimation.

To measure fair value, the Company obtains quoted market prices for its investment securities from its outside investment managers. If a quoted market price is not available, the Company uses prices of similar securities. The fair values obtained from the outside investment managers are reviewed for reasonableness and any discrepancies are investigated for final valuation.

The fair value of the Company’s investments in fixed maturity securities is estimated using relevant inputs, including available market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. An Option Adjusted Spread model is also used to develop prepayment and interest rate scenarios. Industry standard models are used to analyze and value securities with embedded options or prepayment sensitivities. These fair value measurements are estimated based on observable, objectively verifiable market information rather than market quotes; therefore, these investments are classified and disclosed in Level 2 of the hierarchy.

The following tables present the Company’s fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Fixed maturity securities

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Governments

 

$

 —

 

$

12,462

 

$

 —

 

$

12,462

States, territories, and possessions

 

 

 —

 

 

2,363

 

 

 —

 

 

2,363

Political subdivisions

 

 

 —

 

 

813

 

 

 —

 

 

813

Special revenue excluding mortgage/asset-backed securities

 

 

 —

 

 

11,581

 

 

 —

 

 

11,581

Industrial and miscellaneous

 

 

 —

 

 

71,795

 

 

 —

 

 

71,795

Mortgage/asset-backed securities

 

 

 —

 

 

27,932

 

 

 —

 

 

27,932

Equity securities

 

 

21,778

 

 

 —

 

 

 —

 

 

21,778

Cash, cash equivalents, and restricted cash

 

 

10,891

 

 

 —

 

 

 —

 

 

10,891

Total assets

 

$

32,669

 

$

126,946

 

$

 —

 

$

159,615

Liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

Long-term notes payable

 

$

 —

 

$

 —

 

$

20,000

 

$

20,000

Total liabilities

 

$

 —

 

$

 —

 

$

20,000

 

$

20,000

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Fixed maturity securities

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Governments

 

$

 —

 

$

15,269

 

$

 —

 

$

15,269

States, territories, and possessions

 

 

 —

 

 

1,221

 

 

 —

 

 

1,221

Political subdivisions

 

 

 —

 

 

815

 

 

 —

 

 

815

Special revenue excluding mortgage/asset-backed securities

 

 

 —

 

 

12,453

 

 

 —

 

 

12,453

Industrial and miscellaneous

 

 

 —

 

 

65,126

 

 

 —

 

 

65,126

Mortgage/asset-backed securities

 

 

 —

 

 

27,336

 

 

 —

 

 

27,336

Equity securities

 

 

25,171

 

 

 —

 

 

 —

 

 

25,171

Cash, cash equivalents, and restricted cash

 

 

9,924

 

 

 —

 

 

 —

 

 

9,924

Total assets

 

$

35,095

 

$

122,220

 

$

 —

 

$

157,315

Liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

Long-term notes payable

 

$

 —

 

$

 —

 

$

20,000

 

$

20,000

Total liabilities

 

$

 —

 

$

 —

 

$

20,000

 

$

20,000

 

The carrying amounts of financial assets and liabilities reported in the accompanying condensed consolidated balance sheet including cash and cash equivalents, restricted cash, receivables, reinsurance recoverable, and accounts payable and other accrued liabilities approximate fair value due to their short term‑maturity.

The fair value of the Company’s long‑term debt was determined by calculating the present value of expected future cash flows under the terms of the note agreements discounted at an estimated market rate of interest at March 31, 2019 and December 31, 2018, respectively. This is a level 3 measurement.

Transfers between levels result from changes in the availability of market observable inputs and are recorded at the beginning of the reporting period. There were no transfers between Level 1, Level 2 or Level 3 during the three months ended March 31, 2019 or the three months ended March 31, 2018.

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4. Reserve for Losses and Loss Adjustment Expenses

The following table provides a reconciliation of the beginning and ending reserve balances for losses and loss adjustment expenses on a net of reinsurance basis to the gross amounts reported in the accompanying balance sheet:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

 

 

 

(in thousands)

Reserve for losses and loss adjustment expenses net of reinsurance recoverables at beginning of period

 

$

4,165

 

$

4,432

Add: Incurred losses and loss adjustment expenses, net of reinsurance, related to:

 

 

 

 

 

  

Current year

 

 

278

 

 

2,436

Prior year

 

 

38

 

 

(1,498)

Total incurred

 

 

316

 

 

938

Deduct: Loss and loss adjustment expense payments, net of reinsurance, related to:

 

 

  

 

 

  

Current year

 

 

106

 

 

558