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Form 10-Q Palomar Holdings, Inc. For: Mar 31

May 5, 2022 5:53 PM EDT

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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, 2022

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 May 3, 2022: 25,179,959

PALOMAR HOLDINGS, INC.

TABLE OF CONTENTS

 

Page

PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets at March 31, 2022 (Unaudited) and December 31, 2021

3

Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (Unaudited) for the Three Months Ended March 31, 2022 and 2021

4

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2022 and 2021

5

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2022 and 2021

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

40

Item 4.

Controls and Procedures

40

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

65

Item 3.

Defaults Upon Senior Securities

66

Item 4.

Mine Safety Disclosures

66

Item 5.

Other Information

66

Item 6.

Exhibits

66

Signatures

67

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)

    

March 31, 

    

December 31, 

2022

2021

(Unaudited)

Assets

 

  

 

  

Investments:

 

  

 

  

Fixed maturity securities available for sale, at fair value (amortized cost: $461,206 in 2022; $426,122 in 2021)

$

444,320

$

432,682

Equity securities, at fair value (cost: $41,836 in 2022; $31,834 in 2021)

 

41,983

 

33,261

Total investments

 

486,303

 

465,943

Cash and cash equivalents

 

46,876

 

50,284

Restricted cash

 

63

 

87

Accrued investment income

 

2,648

 

2,725

Premium receivable

 

94,615

 

88,012

Deferred policy acquisition costs

 

54,977

 

55,953

Reinsurance recoverable on unpaid losses and loss adjustment expenses

 

113,726

 

127,947

Reinsurance recoverable on paid losses and loss adjustment expenses

 

32,082

 

29,368

Ceded unearned premiums

 

84,975

 

58,315

Prepaid expenses and other assets

 

31,479

 

37,072

Property and equipment, net

 

483

 

527

Intangible assets, net

 

9,201

 

9,501

Total assets

$

957,428

$

925,734

Liabilities and stockholders' equity

 

  

 

  

Liabilities:

 

  

 

  

Accounts payable and other accrued liabilities

$

26,561

$

21,284

Reserve for losses and loss adjustment expenses

 

165,112

 

173,366

Unearned premiums

 

316,675

 

284,665

Ceded premium payable

 

47,318

 

37,460

Funds held under reinsurance treaty

 

6,362

 

10,882

Deferred tax liabilities, net

3,908

Borrowings from credit agreements

15,000

Total liabilities

 

577,028

 

531,565

Stockholders' equity:

 

  

 

  

Preferred stock, $0.0001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021

Common stock, $0.0001 par value, 500,000,000 shares authorized, 25,231,571 and 25,428,929 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

 

3

 

3

Additional paid-in capital

 

322,048

 

318,902

Accumulated other comprehensive income (loss)

 

(13,151)

 

5,312

Retained earnings

 

71,500

 

69,952

Total stockholders' equity

 

380,400

 

394,169

Total liabilities and stockholders' equity

$

957,428

$

925,734

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

March 31, 

    

2022

    

2021

Revenues:

 

  

 

  

Gross written premiums

$

170,934

$

103,577

Ceded written premiums

 

(89,552)

 

(43,364)

Net written premiums

 

81,382

 

60,213

Change in unearned premiums

 

(5,350)

(13,160)

Net earned premiums

 

76,032

 

47,053

Net investment income

 

2,579

2,219

Net realized and unrealized losses on investments

 

(1,278)

(739)

Commission and other income

 

777

711

Total revenues

 

78,110

 

49,244

Expenses:

 

  

 

  

Losses and loss adjustment expenses

14,954

(4,423)

Acquisition expenses

28,054

19,313

Other underwriting expenses

15,925

14,248

Interest expense

93

Total expenses

 

59,026

 

29,138

Income before income taxes

 

19,084

 

20,106

Income tax expense

4,547

3,476

Net income

 

14,537

 

16,630

Other comprehensive income, net:

 

  

 

  

Net unrealized losses on securities available for sale for the three months ended March 31, 2022 and 2021, respectively

(18,463)

(6,199)

Net comprehensive income (loss)

$

(3,926)

$

10,431

Per Share Data:

 

  

 

  

Basic earnings per share

$

0.57

$

0.65

Diluted earnings per share

$

0.56

$

0.63

Weighted-average common shares outstanding:

Basic

25,362,179

25,552,629

Diluted

25,899,290

26,256,281

See accompanying notes.

4

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in 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, 2020

 

25,525,796

$

3

$

310,507

$

13,246

$

39,957

$

363,713

Other comprehensive loss, net of tax

 

 

 

 

(6,199)

 

 

(6,199)

Stock-based compensation

 

 

 

938

 

 

 

938

Issuance of common stock via employee stock purchase plan

4,596

333

333

Issuance of common stock via equity incentive plan

59,358

967

967

Net income

 

 

 

 

 

16,630

 

16,630

Balance at March 31, 2021

 

25,589,750

$

3

$

312,745

$

7,047

$

56,587

$

376,382

Balance at December 31, 2021

 

25,428,929

3

$

318,902

$

5,312

$

69,952

$

394,169

Other comprehensive loss, net of tax

 

(18,463)

 

(18,463)

Stock-based compensation

 

2,760

 

2,760

Issuance of common stock via employee stock purchase plan

6,078

333

333

Issuance of common stock via equity incentive plan

15,625

53

53

Repurchases of common stock

(219,061)

(12,989)

(12,989)

Net income

 

14,537

 

14,537

Balance at March 31, 2022

 

25,231,571

$

3

$

322,048

$

(13,151)

$

71,500

$

380,400

See accompanying notes.

5

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

Three Months Ended

March 31, 

    

2022

    

2021

Operating activities

 

  

 

  

Net cash provided by (used in) operating activities

$

47,801

$

(13,054)

Investing activities

 

 

Purchases of property and equipment

 

(7)

 

Purchases of fixed maturity securities

 

(73,921)

 

(43,768)

Purchases of equity securities

 

(10,002)

 

(96)

Sales and maturities of fixed maturity securities

 

38,159

 

31,099

Sales of equity securities

 

 

13,092

Change in securities receivable or payable, net

(7,843)

1,500

Payment of additional costs associated with purchase of policy renewal rights

(15)

(11)

Net cash provided by (used in) investing activities

 

(53,630)

 

1,816

Financing activities

 

  

 

  

Proceeds from line of credit

15,000

Proceeds from common stock issued via employee stock purchase plan

333

333

Proceeds from common stock issued via stock option exercises

53

967

Repurchases of common stock

(12,989)

Net cash provided by (used in) financing activities

 

2,397

 

1,300

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

 

(3,432)

 

(9,938)

Cash, cash equivalents and restricted cash at beginning of period

 

50,371

 

33,786

Cash, cash equivalents and restricted cash at end of period

$

46,939

$

23,848

Supplementary cash flow information:

 

  

 

  

Cash paid for income taxes

$

$

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, 

2022

2021

(unaudited)

Cash and cash equivalents

$

46,876

$

50,284

Restricted cash

 

63

 

87

Cash and cash equivalents and restricted cash

$

46,939

$

50,371

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 a Delaware incorporated insurance holding company that was founded in 2014. The Company has several wholly owned subsidiaries including an Oregon domiciled insurance company, Palomar Specialty Insurance Company (“PSIC”), a Bermuda based reinsurance company, Palomar Specialty Reinsurance Company Bermuda Ltd. (“PSRE”), an Arizona domiciled surplus lines insurance company, Palomar Excess and Surplus Insurance Company (“PESIC”), and a California domiciled property and casualty insurance agency, Palomar Insurance Agency, DBA Palomar General Insurance Agency (“PGIA”).

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and include the accounts of the Company and its wholly-owned subsidiaries. These condensed consolidated financial statements do not contain all information and footnotes required by U.S. GAAP for complete consolidated financial statements. For a more complete description of the Company’s business and accounting policies, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 24, 2022 (the “2021 Annual Report on Form 10-K”)

In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. All intercompany balances and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results of operations for the full year.

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

Recently adopted accounting pronouncements

The Company has not adopted any new accounting guidance during the three months ended March 31, 2022.

Recently issued accounting pronouncements not yet adopted

There are not currently any recent accounting pronouncements or pending accounting guidance that have significance, or potential significance, to the Company’s consolidated financial statements.

7

2. Investments

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

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

March 31, 2022

Cost or Cost

Gains

Losses

Value

 

(in thousands)

Fixed maturities:

 

 

  

 

  

 

  

U.S. Governments

$

34,100

$

72

$

(736)

$

33,436

States, territories, and possessions

 

3,786

 

86

 

(244)

 

3,628

Political subdivisions

 

6,282

 

 

(391)

 

5,891

Special revenue excluding mortgage/asset-backed securities

 

44,412

 

84

 

(2,290)

 

42,206

Industrial and miscellaneous

 

246,481

 

988

 

(10,333)

 

237,136

Mortgage/asset-backed securities

 

126,145

 

217

 

(4,339)

 

122,023

Total available-for-sale investments

$

461,206

$

1,447

$

(18,333)

$

444,320

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

December 31, 2021

Cost or Cost

Gains

Losses

Value

 

(in thousands)

Fixed maturities:

 

  

 

  

 

  

 

  

U.S. Governments

$

16,713

$

347

$

(190)

$

16,870

States, territories, and possessions

 

3,789

 

288

 

(63)

 

4,014

Political subdivisions

 

6,295

 

107

 

(22)

 

6,380

Special revenue excluding mortgage/asset-backed securities

 

43,301

 

1,273

 

(76)

 

44,498

Industrial and miscellaneous

 

245,064

 

5,873

(1,891)

 

249,046

Mortgage/asset-backed securities

 

110,960

 

1,377

 

(463)

 

111,874

Total available-for-sale investments

$

426,122

$

9,265

$

(2,705)

$

432,682

Security holdings in an unrealized loss position

As of March 31, 2022, the Company held 534 fixed maturity securities in an unrealized loss position with a total estimated fair value of $346.7 million and total gross unrealized losses of $18.3 million. As of December 31, 2021, the Company held 231 fixed maturity securities in an unrealized loss position with a total estimated fair value of $170.1 million and total gross unrealized losses of $2.7 million.

8

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, 2022 and December 31, 2021, are as follows:

Less Than 12 Months

More Than 12 Months

Total

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

March 31, 2022

Value

Losses

Value

Losses

Value

Losses

(in thousands)

Fixed maturity securities:

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Governments

 

$

20,842

$

(339)

$

5,667

$

(397)

$

26,509

$

(736)

States, territories, and possessions

 

1,786

(244)

 

 

 

1,786

 

(244)

Political subdivisions

 

4,224

(230)

 

1,667

 

(161)

 

5,891

 

(391)

Special revenue excluding mortgage/asset-backed securities

 

36,289

(2,290)

 

 

 

36,289

 

(2,290)

Industrial and miscellaneous

 

149,315

(7,826)

 

23,089

 

(2,507)

 

172,404

 

(10,333)

Mortgage/asset-backed securities

 

97,596

(3,804)

 

6,204

 

(535)

 

103,800

 

(4,339)

Total

$

310,052

$

(14,733)

$

36,627

$

(3,600)

$

346,679

$

(18,333)

Less Than 12 Months

More Than 12 Months

Total

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

December 31, 2021

Value

Losses

Value

Losses

Value

Losses

(in thousands)

Fixed maturity securities:

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Governments

$

5,968

$

(147)

$

1,457

$

(43)

$

7,425

$

(190)

States, territories, and possessions

 

1,444

(63)

 

 

 

1,444

 

(63)

Political subdivisions

 

1,815

(22)

 

 

 

1,815

 

(22)

Special revenue excluding mortgage/asset-backed securities

 

6,280

(76)

 

 

 

6,280

 

(76)

Industrial and miscellaneous

 

94,020

(1,468)

 

5,570

 

(423)

 

99,590

 

(1,891)

Mortgage/asset-backed securities

 

51,246

(412)

 

2,319

 

(51)

 

53,565

 

(463)

Total

$

160,773

$

(2,188)

$

9,346

$

(517)

$

170,119

$

(2,705)

The Company reviews all securities with unrealized losses on a quarterly basis to assess whether the decline in the securities fair value necessitates the recognition of an allowance for credit losses. The Company considers numerous factors in its review as described in Footnote 1 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report on Form 10-K.

The Company has recorded an immaterial allowance for credit losses pertaining to one investment security. Based on the Company’s review as of March 31, 2022, for the remainder of securities, 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. 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.

9

Contractual maturities of available-for-sale fixed maturity securities

The amortized cost and fair value of fixed maturity securities at March 31, 2022, by contractual maturity, are shown below.

    

Amortized

    

Fair

Cost

Value

 

(in thousands)

Due within one year

$

21,245

$

21,261

Due after one year through five years

 

146,073

 

142,553

Due after five years through ten years

 

118,053

 

111,966

Due after ten years

 

49,690

 

46,517

Mortgage and asset-backed securities

 

126,145

 

122,023

$

461,206

$

444,320

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, 

    

2022

    

2021

 

(in thousands)

Interest income

$

2,558

$

2,238

Dividend income

 

155

 

99

Investment expense

 

(134)

 

(118)

Net investment income

$

2,579

$

2,219

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, 

    

 

2022

    

2021

 

(in thousands)

Realized gains:

 

  

 

  

Gains on sales of fixed maturity securities

$

2

$

52

Gains on sales of equity securities

 

 

809

Total realized gains

 

2

 

861

Realized losses:

 

  

 

  

Losses on sales of fixed maturity securities

 

(2)

Losses on sales of equity securities

 

Total realized losses

 

 

(2)

Net realized investment gains

 

2

 

859

Net unrealized gains (losses) on equity securities

 

(1,280)

 

(1,598)

Net realized and unrealized gains (losses) on investments

$

(1,278)

$

(739)

Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date.

10

Proceeds from the sale of fixed maturity securities were $4.8 million and $6.2 million for the three months ended March 31, 2022 and 2021, respectively.

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. As of March 31, 2022, the carrying value of securities on deposit with state regulatory authorities was $8.2 million. As of December 31, 2021, the carrying value of securities on deposit with state regulatory authorities was $7.5 million.

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 hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021.

March 31, 2022

    

Level 1

    

Level 2

    

Level 3

    

Total

 

(in thousands)

Assets:

 

  

 

  

 

  

 

  

Fixed maturity securities

 

  

 

  

 

  

 

  

U.S. Governments

$

$

33,436

$

$

33,436

States, territories, and possessions

 

 

3,628

 

 

3,628

Political subdivisions

 

 

5,891

 

 

5,891

Special revenue excluding mortgage/asset-backed securities

 

 

42,206

 

 

42,206

Corporate and other

 

 

237,136

 

 

237,136

Mortgage/asset-backed securities

 

 

122,023

 

 

122,023

Equity securities

 

41,983

 

 

 

41,983

Cash, cash equivalents, and restricted cash

 

46,939

 

 

 

46,939

Total assets

$

88,922

$

444,320

$

$

533,242

11

December 31, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

 

(in thousands)

Assets:

 

  

 

  

 

  

 

  

Fixed maturity securities

 

  

 

  

 

  

 

  

U.S. Governments

$

$

16,870

$

$

16,870

States, territories, and possessions

 

 

4,014

 

 

4,014

Political subdivisions

 

 

6,380

 

 

6,380

Special revenue excluding mortgage/asset-backed securities

 

 

44,498

 

 

44,498

Industrial and miscellaneous

 

 

249,046

 

 

249,046

Mortgage/asset-backed securities

 

 

110,374

 

1,500

 

111,874

Equity securities

 

33,261

 

 

 

33,261

Cash, cash equivalents, and restricted cash

 

50,371

 

 

 

50,371

Total assets

$

83,632

$

431,182

$

1,500

$

516,314

 

  

 

  

 

  

 

  

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 carrying amount of the Company’s borrowings under the Federal Home Loan Bank (“FHLB”) line of credit approximates fair value as the Company is currently borrowing at the overnight rate.

Transfers between Level 3 and Level 2 securities result from changes in the availability of observable market inputs and are recorded at the beginning of the reporting period. As of March 31, 2022, the Company had no fixed income securities classified as Level 3. As of December 31, 2021, the Company had $1.5 million of fixed income securities classified as Level 3 due to the availability of observable market inputs for recently purchased securities.

4. Reserve for Losses and Loss Adjustment Expenses

The following table represents a reconciliation of changes in the ending reserve balances for losses and loss adjustment expenses (“LAE”):

 

Three Months Ended March 31, 

 

2022

    

2021

 

(in thousands)

Reserve for losses and LAE net of reinsurance recoverables at beginning of period

$

45,419

$

34,470

Add: Incurred losses and LAE, net of reinsurance, related to:

Current year

 

13,449

(1,696)

Prior years

 

1,505

(2,727)

Total incurred

 

14,954

 

(4,423)

Deduct: Loss and LAE payments, net of reinsurance, related to:

 

  

 

  

Current year

1,490

1,680

Prior years

7,497

9,351

Total payments

 

8,987

 

11,031

Reserve for losses and LAE net of reinsurance recoverables at end of period

 

51,386

 

19,016

Add: Reinsurance recoverables on unpaid losses and LAE at end of period

113,726

188,448

Reserve for losses and LAE gross of reinsurance recoverables on unpaid losses and LAE at end of period

$

165,112

$

207,464

Considerable variability is inherent in the estimate of the reserve for losses and LAE. Although management believes the liability recorded for losses and LAE is adequate, the variability inherent in this estimate could result in changes to the ultimate liability, which may be material to stockholders’ equity.

12

The Company experienced adverse prior year development of $1.5 million during the three months ended March 31, 2022 and favorable prior year development of $2.7 million in the three months ended March 31, 2021. Adverse prior year development during the three months ended March 31, 2022 was primarily due to higher than anticipated severity of attritional losses from prior years. Favorable prior year development during the three months ended March 31, 2021 was primarily due to lower than anticipated severity of catastrophe losses associated with certain hurricanes which occurred during the second half of 2020 primarily in the Company’s Specialty Homeowners line of business.

5. Stockholders’ Equity

Common stock reserved for future issuance

Common stock reserved for future issuance consists of the following as of March 31, 2022:

Stock options outstanding under 2019 Equity Incentive Plan

1,032,960

Restricted stock units outstanding under 2019 Equity Incentive Plan

313,009

Performance stock units outstanding under 2019 Equity Incentive Plan, at target

383,379

Shares authorized for future issuance under 2019 Equity Incentive Plan

2,593,247

Shares authorized for future issuance under 2019 Employee Stock Purchase Plan

915,762

Total

5,238,357

Stock based compensation

The below table summarizes the Company’s stock-based compensation expense for each period presented:

Three months ended March 31, 

    

2022

    

2021

 

(in thousands)

Stock-Based Compensation

$

2,760

$

938

Stock-based compensation expense is recognized on a straight-line basis over the vesting period of equity-based awards. For performance stock units (“PSUs”), any changes to expense resulting from differences in actual performance versus target are recognized over the remaining vesting period of the awards. The Company does not apply a forfeiture rate to unvested awards and accounts for forfeitures as they occur. All stock-based compensation is included in other underwriting expenses in the Company’s unaudited condensed consolidated statement of income and comprehensive income.

2019 Equity Incentive Plan

On April 16, 2019, the Company's 2019 Equity Incentive Plan (the “2019 Plan”) became effective. The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares and units, and other cash-based or share-based awards. In addition, the 2019 Plan contains a mechanism through which the Company may adopt a deferred compensation arrangement in the future.

A total of 2,400,000 shares of common stock were initially authorized and reserved for issuance under the 2019 Plan. This reserve increases on January 1 of each year through 2029 by an amount equal to the smaller of: 3% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or an amount determined by the board of directors.

Stock Options

Recipients of stock options can purchase shares of the Company’s common stock at a price equal to the stock's fair market value on the grant date, determined by the closing price of the Company's common stock on the grant date.

13

Stock options vest over a two to four-year period with a portion vesting on the first anniversary of the grant date and the remainder vesting monthly over the remaining period, subject to continued service. Stock options expire ten years after the grant date.

The following table summarizes stock option transactions for the three months ended March 31, 2022:

Number of shares

Weighted-average exercise price

Weighted average remaining contractual term (in years)