10-Q 1 plmr-20190630x10q.htm 10-Q plmr_Current_Folio_10Q

 

 

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 June 30, 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)

 

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

 

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  

 

Number of shares of the registrant’s common shares outstanding at August 12, 2019: 23,468,750

 

 

 

PALOMAR HOLDINGS, INC.

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Financial Statements

 

 

Condensed Consolidated Balance Sheets at June 30, 2019 (Unaudited) and December 31, 2018

3

 

Condensed Consolidated Statements of  Income (Loss) and Comprehensive  Income (Loss) (Unaudited) for the Three and Six Months Ended June 30, 2019 and 2018

4

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Six Months Ended June 30, 2019 and 2018

5

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 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

21

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4. 

Controls and Procedures

42

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

Item 1. 

Legal Proceedings

43

Item 1A. 

Risk Factors

43

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

64

Item 3. 

Defaults Upon Senior Securities

64

Item 4. 

Mine Safety Disclosures

64

Item 5. 

Other Information

64

Item 6. 

Exhibits

65

 

Signatures

65

 

 

2

Part I: FINANCIAL INFORMATION

Item 1: Financial Statements

 

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except shares and par value data)

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2019

 

2018

 

 

(unaudited)

 

 

 

Assets

 

 

  

 

 

  

Investments:

 

 

  

 

 

  

Fixed maturity securities available for sale, at fair value (amortized cost: $202,437 in 2019; $122,949 in 2018)

 

$

208,061

 

$

122,220

Equity securities, at fair value (cost: $21,563 in 2019; $27,188 in 2018)

 

 

22,368

 

 

25,171

Total investments

 

 

230,429

 

 

147,391

Cash and cash equivalents

 

 

14,405

 

 

9,525

Restricted cash

 

 

476

 

 

399

Accrued investment income

 

 

1,310

 

 

734

Premium receivable

 

 

33,878

 

 

18,633

Deferred policy acquisition costs

 

 

19,077

 

 

14,052

Reinsurance recoverable on unpaid losses and loss adjustment expenses

 

 

13,202

 

 

11,896

Reinsurance recoverable on paid losses and loss adjustment expenses

 

 

3,427

 

 

2,666

Prepaid reinsurance premium

 

 

22,467

 

 

18,284

Prepaid expenses and other assets

 

 

9,127

 

 

5,863

Property and equipment, net

 

 

886

 

 

947

Intangible assets

 

 

744

 

 

744

Total assets

 

$

349,428

 

$

231,134

Liabilities and stockholders' equity

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Accounts payable and other accrued liabilities

 

$

9,732

 

$

9,245

Reserve for losses and loss adjustment expenses

 

 

14,630

 

 

16,061

Unearned premiums

 

 

103,394

 

 

79,130

Ceded premium payable

 

 

16,927

 

 

10,607

Funds held under reinsurance treaty

 

 

1,729

 

 

720

Income and excise taxes payable

 

 

3,322

 

 

 —

Deferred tax liabilities, net

 

 

58

 

 

 —

Long-term notes payable

 

 

 —

 

 

19,079

Total liabilities

 

 

149,792

 

 

134,842

Stockholders' equity:

 

 

  

 

 

  

Preferred stock, $0.0001 par value, 5,000,000 and 0 shares authorized as of June 30, 2019 and December 31, 2018, respectively, 0 shares issued and outstanding as of June 30, 2019 and December 31, 2018

 

 

 —

 

 

 —

Common stock, $0.0001 par value, 500,000,000 shares authorized, 23,468,750 and 17,000,000 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively

 

 

 2

 

 

 2

Additional paid-in capital

 

 

179,189

 

 

68,498

Accumulated other comprehensive income (loss)

 

 

4,922

 

 

(563)

Retained earnings

 

 

15,523

 

 

28,355

Total stockholders' equity

 

 

199,636

 

 

96,292

Total liabilities and stockholders' equity

 

$

349,428

 

$

231,134

 

See accompanying notes.

3

Palomar Holdings, Inc. and Subsidiaries

 

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

(in thousands, except shares and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2019

    

2018

    

2019

    

2018

Revenues:

 

 

  

 

 

  

 

 

  

 

 

  

Gross written premiums

 

$

58,346

 

$

37,342

 

$

112,377

 

$

71,354

Ceded written premiums

 

 

(24,632)

 

 

(26,674)

 

 

(50,737)

 

 

(40,436)

Net written premiums

 

 

33,714

 

 

10,668

 

 

61,640

 

 

30,918

Change in unearned premiums

 

 

(10,506)

 

 

7,611

 

 

(20,081)

 

 

5,327

Net earned premiums

 

 

23,208

 

 

18,279

 

 

41,559

 

 

36,245

Net investment income

 

 

1,483

 

 

729

 

 

2,443

 

 

1,346

Net realized and unrealized gains (losses) on investments

 

 

493

 

 

255

 

 

2,904

 

 

(366)

Commission and other income

 

 

721

 

 

629

 

 

1,306

 

 

1,190

Total revenues

 

 

25,905

 

 

19,892

 

 

48,212

 

 

38,415

Expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Losses and loss adjustment expenses

 

 

643

 

 

732

 

 

959

 

 

1,670

Acquisition expenses

 

 

8,971

 

 

7,450

 

 

15,946

 

 

15,240

Other underwriting expenses (includes stock-based compensation of $306 and $0 for the three months ended June 30, 2019 and 2018, respectively and $23,267 and $0 for the six months ended June 30, 2019 and 2018, respectively)

 

 

7,165

 

 

4,339

 

 

36,017

 

 

8,143

Interest expense

 

 

639

 

 

434

 

 

1,068

 

 

839

Total expenses

 

 

17,418

 

 

12,955

 

 

53,990

 

 

25,892

Income (loss) before income taxes

 

 

8,487

 

 

6,937

 

 

(5,778)

 

 

12,523

Income tax expense (benefit)

 

 

1,789

 

 

 3

 

 

1,934

 

 

(4)

Net income (loss)

 

 

6,698

 

 

6,934

 

 

(7,712)

 

 

12,527

Other comprehensive income, net:

 

 

  

 

 

  

 

 

  

 

 

  

Net unrealized gains (losses) on securities available for sale for the three and six months ended June 30, 2019 and 2018, respectively

 

 

3,298

 

 

(91)

 

 

5,485

 

 

(990)

Net comprehensive income (loss)

 

$

9,996

 

$

6,843

 

$

(2,227)

 

$

11,537

Per Share Data:

 

 

  

 

 

  

 

 

  

 

 

  

Basic earnings per share

 

$

0.30

 

$

0.41

 

$

(0.40)

 

$

0.74

Diluted earnings per share

 

$

0.30

 

$

0.41

 

$

(0.40)

 

$

0.74

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

21,975,962

 

 

17,000,000

 

 

19,501,727

 

 

17,000,000

Diluted

 

 

22,105,009

 

 

17,000,000

 

 

19,501,727

 

 

17,000,000

 

See accompanying notes.

4

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

 

Income (Loss) 

 

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

 

 —

 

 

 —

 

 

 —

 

 

(990)

 

 

 —

 

 

(990)

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12,527

 

 

12,527

Balance at June 30, 2018

 

17,000,000

 

$

 2

 

$

68,498

 

$

(1,212)

 

$

22,663

 

$

89,951

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

17,000,000

 

$

 2

 

$

68,498

 

$

(563)

 

$

28,355

 

$

96,292

Change in net unrealized gain on investments

 

 —

 

 

 —

 

 

 —

 

 

5,485

 

 

 —

 

 

5,485

Distribution to stockholder

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5,120)

 

 

(5,120)

Stock-based compensation

 

 —

 

 

 —

 

 

23,267

 

 

 —

 

 

 —

 

 

23,267

Proceeds from common stock sold in initial public offering, net of offering costs

 

6,468,750

 

 

 —

 

 

87,424

 

 

 —

 

 

 —

 

 

87,424

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7,712)

 

 

(7,712)

Balance at June 30, 2019

 

23,468,750

 

$

 2

 

$

179,189

 

$

4,922

 

$

15,523

 

$

199,636

 

See accompanying notes.

5

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30, 

 

    

2019

    

2018

Operating activities

 

 

  

 

 

  

Net cash provided by operating activities

 

$

16,893

 

$

15,183

Investing activities

 

 

  

 

 

  

Purchases of property and equipment

 

 

(44)

 

 

(272)

Purchases of fixed maturity securities

 

 

(138,528)

 

 

(47,796)

Purchases of equity securities

 

 

(21,563)

 

 

(22,935)

Sales and maturities of fixed maturity securities

 

 

58,901

 

 

29,605

Sales of equity securities

 

 

27,278

 

 

23,941

Securities receivable or payable, net

 

 

(284)

 

 

250

Net cash used in investing activities

 

 

(74,240)

 

 

(17,207)

Financing activities

 

 

  

 

 

  

Proceeds from initial public offering, net of costs

 

 

87,424

 

 

 —

Redemption of Floating Rate Notes

 

 

(20,000)

 

 

 —

Distribution to stockholder

 

 

(5,120)

 

 

 —

Net cash provided by financing activities

 

 

62,304

 

 

 —

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

 

 

4,957

 

 

(2,024)

Cash, cash equivalents and restricted cash at beginning of period

 

 

9,924

 

 

10,932

Cash, cash equivalents and restricted cash at end of period

 

$

14,881

 

$

8,908

Supplementary cash flow information:

 

 

  

 

 

  

Cash paid for income taxes

 

$

 —

 

$

 —

Cash paid for interest

 

$

1,162

 

$

880

 

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

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

2019

 

2018

 

 

(unaudited)

 

 

 

Cash and cash equivalents

 

$

14,405

 

$

9,525

Restricted cash

 

 

476

 

 

399

Cash and cash equivalents and restricted cash

 

$

14,881

 

$

9,924

 

See accompanying notes.

6

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.

Initial Public Offering (IPO)

On April 22, 2019, the Company completed its IPO with the sale of 6,468,750 shares of common stock at a price to the public of $15.00 per share, including 843,750 shares sold upon the exercise in full of the underwriter’s option to purchase additional shares. After underwriter discounts and commissions and offering expenses, net proceeds from the IPO were approximately $87.4 million.

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.

7

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.

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.  In 2019, the

8

FASB issued amendments to this guidance which provide an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost and provide additional clarification and implementation guidance. 

 

This update and its amendments 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.

 

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

June 30, 2019

 

Cost or Cost

 

Gains

 

Losses

 

Value

 

 

(in thousands)

Fixed maturities:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Governments

 

$

13,331

 

$

392

 

$

(12)

 

$

13,711

States, territories, and possessions

 

 

2,302

 

 

116

 

 

 —

 

 

2,418

Political subdivisions

 

 

1,930

 

 

14

 

 

(1)

 

 

1,943

Special revenue excluding mortgage/asset-backed securities

 

 

15,337

 

 

470

 

 

(4)

 

 

15,803

Industrial and miscellaneous

 

 

117,652

 

 

3,784

 

 

(32)

 

 

121,404

Mortgage/asset-backed securities

 

 

51,885

 

 

900

 

 

(3)

 

 

52,782

Total available-for-sale investments

 

$

202,437

 

$

5,676

 

$

(52)

 

$

208,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

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 June 30, 2019, the Company held 42 fixed maturity securities in an unrealized loss position with a total estimated fair value of $15.9 million and total gross unrealized losses of $0.1 million. 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.

9

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 June 30, 2019 and December 31, 2018, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

More Than 12 Months

 

Total

 

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

June 30, 2019

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

(in thousands)

Fixed maturity securities:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Governments

 

 

 —

 

 

 —

 

$

3,302

 

$

(12)

 

$

3,302

 

$

(12)

States, territories, and possessions

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Political subdivisions

 

 

 —

 

 

 —

 

 

550

 

 

(1)

 

 

550

 

 

(1)

Special revenue excluding mortgage/asset-backed securities

 

 

 —

 

 

 —

 

 

1,444

 

 

(4)

 

 

1,444

 

 

(4)

Industrial and miscellaneous

 

 

398

 

 

(2)

 

 

8,197

 

 

(30)

 

 

8,595

 

 

(32)

Mortgage/asset-backed securities

 

 

510

 

 

 —

 

 

1,454

 

 

(3)

 

 

1,964

 

 

(3)

Total

 

$

908

 

$

(2)

 

$

14,947

 

$

(50)

 

$

15,855

 

$

(52)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30, 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.

10

Contractual maturities of available‑for‑sale fixed maturity securities

The amortized cost and fair value of fixed maturity securities at June 30, 2019, by contractual maturity, are shown below.

 

 

 

 

 

 

 

 

    

Amortized

    

Fair

 

 

Cost

 

Value

 

 

(in thousands)

Due within one year

 

$

5,594

 

$

5,592

Due after one year through five years

 

 

70,251

 

 

71,115

Due after five years through ten years

 

 

52,075

 

 

55,112

Due after ten years

 

 

22,632

 

 

23,460

Mortgage and asset-backed securities

 

 

51,885

 

 

52,782

 

 

$

202,437

 

$

208,061

 

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

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

 

(in thousands)

Interest income

 

$

1,452

 

$

689

 

$

2,462

 

$

1,267

Dividend income

 

 

137

 

 

126

 

 

166

 

 

247

Investment expense

 

 

(106)

 

 

(86)

 

 

(185)

 

 

(168)

Net investment income

 

$

1,483

 

$

729

 

$

2,443

 

$

1,346

 

Net realized and unrealized investment gains and losses

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2019

    

2018

 

2019

    

2018

 

 

 

(in thousands)

 

 

(in thousands)

Realized gains:

 

 

  

 

 

  

 

 

  

 

 

  

Gains on sales of fixed maturity securities

 

$

53

 

$

 —

 

$

97

 

$

 9

Gains on sales of equity securities

 

 

 —

 

 

386

 

 

67

 

 

410

Total realized gains

 

 

53

 

 

386

 

 

164

 

 

419

Realized losses:

 

 

  

 

 

  

 

 

  

 

 

  

Losses on sales of fixed maturity securities

 

 

(3)

 

 

(113)

 

 

(69)

 

 

(156)

Losses on sales of equity securities

 

 

 —

 

 

(3,621)

 

 

(156)

 

 

(4,066)

Total realized losses

 

 

(3)

 

 

(3,734)

 

 

(225)

 

 

(4,222)

Net realized investment gains (losses)

 

 

50

 

 

(3,348)

 

 

(61)

 

 

(3,803)

Net unrealized gains on equity securities

 

 

443

 

 

3,603

 

 

2,965

 

 

3,437

Net realized and unrealized gains (losses) on investments

 

$

493

 

$

255

 

$

2,904

 

$

(366)

 

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 June 30, 2019 and December 31, 2018, the carrying value of securities on deposit with state regulatory authorities was $5.0 million.

11

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 June 30, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)