Palomar Holdings Inc

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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 in2014. 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”), a California domiciled property and casualty insurance agency, Palomar Insurance Agency, DBA Palomar General Insurance Agency (“PGIA”), and a Delaware incorporated management company, Palomar Underwriters Exchange Organization, Inc. ("PUEO").

PSIC is a property and casualty insurance company domiciled in the state of Oregon. PSIC is licensed to underwrite insurance on an admitted basis in 44 states in the United States, as of* December 31, 2024*, mainly through managing general insurance agencies, wholesale brokers, and independent agents.

PSRE is a Bermuda captive reinsurance company that has historically been used to reinsure certain premiums on a quota share basis exclusively for PSIC.

PESIC is an Arizona domiciled surplus lines insurance company. PESIC is licensed in Arizona to write surplus lines policies across all the Company’s lines of business and was formed and began writing policies in2020.

PGIA is a property and casualty general insurance agency for PSIC, PESIC, and unaffiliated insurance carriers. As a general insurance agency, PGIA assists in developing insurance products, underwriting insurance policies, and receiving and disbursing funds from premium and loss transactions under contracts on behalf of insurance companies. PGIA earns commissions from the product development, marketing, and servicing of the insurance companies’ programs. PGIA also earns fee income from policyholder transactions.

PUEO is a Delaware corporation that was formed in2023 and provides management services to Laulima Exchange ("Laulima"), a Hawaii domiciled reciprocal exchange, as its attorney-in-fact. Laulima was formed in2023 and is comprised of an unincorporated association of Hawaii homeowners ("subscribers") that agree to insureone another.

The Company operates as an insurance holding company system and is subject to the insurance holding company laws of the States of Oregon and Arizona, the states in which PSIC and PESIC are domiciled. The Company is also commercially domiciled in California, making it subject to California insurance holding company laws. These statutes require that each insurance company in the system register with the insurance department of its state of domicile and furnish information concerning the operations of companies within the holding company system that* may*materially affect the operations, management or financial condition of the insurers within the system and domiciled in that state.

Segment Reporting

The Company has a single operating segment, the property and casualty insurance business. The Company's chief operating decision maker ("CODM") is the Chief Executive Officer. The significant segment expenses provided to the CODM are consistent with the categories shown in the Company's Consolidated Statements of Income and Comprehensive Income and there areno other segment items used by the CODM. The CODM reviews the Company's revenue, expenses and net income as reported under GAAP, which is the primary measure of segment profit or loss. The CODM reviews these measures, comparing them to prior periods and expectations, and makes resource allocation decisions based on the analysis. While the Company’s CODM also reviews the revenue streams attributable to individual products, operations are managed, resources are allocated, and financial performance is evaluated on a consolidated basis.

Basis of Presentation

The accompanying 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. The consolidated financial statements also include the accounts of Laulima, as Laulima is a variable interest entity ("VIE") for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.

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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 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 consolidated financial statements include, but arenot limited to, reserves for losses and loss adjustment expenses, reinsurance recoverables on unpaid losses, and the fair values of investments.

2. Significant Accounting Policies

Cash and Cash Equivalents

Cash and cash equivalents include time deposits and marketable securities with original maturities ofthree months or less at acquisition and are stated at cost, which approximates fair value. The Company maintains cash balances in federally insured financial institutions.

Restricted Cash

Restricted cash includes cash on deposit with reinsurance carriers. Restricted cash also includes cash held in a fiduciary capacity for the benefit ofthird-party insurance carriers.

Investments

All of the Company’s investments in fixed maturity securities are classified as available-for-sale and are carried at fair value.

Investment income consists primarily of interest and dividends. Interest income is recognized on an accrual basis. Premiums and discounts on mortgage-backed securities and asset-backed securities are amortized or accrued using the prospective method which considers anticipated prepayments at the date of purchase. To the extent that the estimated lives of such securities change as a result of changes in estimated prepayment rates, the adjustments are included in net investment income using the prospective method. Dividend income is recognized on the ex-dividend date. Net investment income represents investment income, net of expenses.

Unrealized gains and losses related to fixed maturity securities are included in accumulated other comprehensive income as a separate component of stockholders’ equity. Equity securities are carried at fair value with unrealized gains and losses included as a component of net income on the Company’s consolidated statement of income and comprehensive income. The Company uses the specific-identification method to determine the cost of fixed maturity securities sold and thefirst-in,first-out method for lots of equity securities sold. The Company hasone investment in a limited liability company which is accounted for under the equity method of accounting whereby the investment carrying amount is adjusted in subsequent periods to reflect the Company's share of earnings or losses. Gains or losses from this equity method investment are recognized as a component of realized and unrealized gains or losses on investments in the Company's Statement of Income and Comprehensive Income. The Company also invests a small portion of its portfolio in limited partnerships, which are classified as other investments on the consolidated balance sheet. These investments are measured at estimated fair value utilizing a net asset value per share (or its equivalent) as a practical expedient. Gains or losses from other investments are recognized as a component of realized and unrealized gains or losses on investments in the Company's Statement of Income and Comprehensive Income.

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. Factors considered in the review include the extent to which the fair value has been less than amortized cost, and current market interest rates and whether the unrealized loss is credit-driven or a result of changes in market interest rates. The Company also considers factors specific to the issuer including the general financial condition of the issuer, the issuers industry and future business prospects, any past failure of issuer to make scheduled interest or principal payments, and the payment structure of the investment and the issuers ability to make contractual payments on the investment.

The Company also considers whether it intends to sell the security or if it is more likely thannot that it will be required to sell the security before recovery of its amortized cost. When assessing whether it intends to sell a fixed-maturity security or if it is likely to be required to sell a fixed-maturity security before recovery of its amortized cost, the Company evaluates facts and circumstances including, butnot limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs, and potential sales of investments to capitalize on favorable pricing.

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For fixed-maturity securities where a decline in fair value is below the amortized cost basis and the Company intends to sell the security, or it is more likely thannot that the Company will be required to sell the security before recovery of its amortized cost, a credit-loss charge is recognized in net income based on the fair value of the security at the time of assessment. For fixed-maturity securities that the Company has the intent and ability to hold, the Company compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. The extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of the security represents the credit-related portion of the impairment, which is recognized in net income through an allowance for credit losses. Any remaining decline in fair value represents the noncredit portion of the impairment, which is recognized in other comprehensive income.

The Company reports accrued interest receivable as a component of accrued investment income on its consolidated balance sheet which is presented separately from available-for-sale securities. The Company doesnot measure an allowance for credit losses on accrued interest receivable and instead would write off accrued interest receivable at the time an issuer defaults or is expected to default on payments.

Fair Value

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.

Thethree-tier hierarchy of inputs is summarized in thethree broad levels listed below:

Level1—Unadjusted quoted prices are available in active markets for identical investments as of the reporting date.

Level2—Pricing inputs are quoted prices for similar investments in active markets; quoted prices for identical or similar investments in inactive markets; or valuation based on models where the significant inputs are observable or can be corroborated by observable market data.

Level3—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 isnot 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 Level2 of the hierarchy.

The fair value of the Company’s investments in equity securities is based on quoted prices available in active markets and classified and disclosed in Level1 of the hierarchy.

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Variable Interest Entities ("VIE")

A VIE is a legal entity that doesnot have sufficient equity at risk to finance its activities without additional financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations through voting rights or donot participate in the gains and losses of the entity. The Company consolidates VIEs in which the Company is deemed the primary beneficiary. The primary beneficiary is the entity that has both (1) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE and (2) the power to direct the activities of the VIE that most significantly affect that entity’s economic performance.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, fixed maturity securities and reinsurance recoverables. The Company places its cash and cash equivalents with high credit quality financial institutions and its fixed maturity securities in securities of the U.S. government, U.S. government agencies, and high credit quality issuers of debt securities. The Company evaluates the financial condition of its reinsurers and reinsures its business with highly rated reinsurers and sometimes requires letters of credit or retains funds from reinsurers (see Note10).

Premiums Receivable

Premiums receivable represent amounts due from policyholders, insurance agents, or program administrators for policies written. Generally, premiums are collected prior to providing risk coverage, minimizing the Company’s exposure to credit risk. Premiums receivable are short-term in nature and due within a year. The Company has established an allowance for uncollectible premiums related to its credit risk, which it reviews on a quarterly basis and adjusts as appropriate. The company considers the current economic environment, specific regulatory developments, and historic payment and cancelation trends by line of business and location when determining whether to record an allowance for uncollectible premiums.

The Company recorded an immaterial allowance for uncollectible premiums as of* December 31, 2024* and* December 31, 2023*, and believes that all other amounts are collectable.

Earned Premiums

Gross premiums written are recorded at policy inception and are earned as revenue ratably over the term of the respective policies. Premiums writtennot yet recognized as revenue are reflected as unearned premiums on the balance sheet, or as advanced premiums if received prior to the policy effective date. Premiums written where cash isnot yet received are recognized as premiums receivable.

A premium deficiency is recognized if the sum of expected losses and loss adjustment expenses, unamortized acquisition costs, and policy maintenance costs exceeds the remaining unearned premiums. A premium deficiency wouldfirst be recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium deficiency were greater than unamortized acquisition costs, a liability would be accrued for the excess deficiency. The Company doesnot consider anticipated investment income when determining if a premium deficiency exists. There wasno premium deficiency at* December 31, 2024* or2023.

Deferred Policy Acquisition Costs

The costs of successfully acquiring new business, principally commission expense and premium taxes, are deferred and amortized over the terms of the policies in force, net of any ceding commissions or fronting fees and are shown as acquisition expenses in the accompanying consolidated statements of income and comprehensive income.

Commission and Other Income

Commission and other income is comprised of commissions and fees earned in conjunction with underwriting policies. Commission and fee income is earned at the time the policy is written.

Property and Equipment

Property and equipment are capitalized and carried at cost less accumulated depreciation. Depreciation for property and equipment is calculated on a straight-line basis using useful lives of 3 to 5 years. Leasehold improvements and other fixed assets are capitalized and depreciated over the useful lives of the properties and equipment. Expenditure for maintenance and repairs are charged to operations as incurred. Upon disposition, the asset cost and related depreciation are removed from the accounts and the resulting gain or loss is included in the Company’s results of operations.

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Capitalized Software

Costs associated with the implementation of certain internal systems are capitalized and carried at capitalized cost less accumulated amortization and are included as a component of prepaid expenses and other assets on the Company’s consolidated balance sheet. Costs capitalized include internal personnel costs, external developer costs, and interest. The implementation costs relate to systems built on software which the Company purchases under a cloud computing arrangement and accounts for as a service contract. As such, capitalized costs are amortized over the term of the service contract.

Intangible Assets and Goodwill

Intangible assets consist of both finite and indefinite lived assets. Finite lived intangible assets consist of customer relationships which are amortized over a period of 8 years. Indefinite lived intangible assets consist primarily of state licenses acquired upon formation of the Company. Goodwill was recognized as a result of a business acquisition during2023. Intangible assets and goodwill are initially recognized and measured at fair value and are subsequently evaluated for impairment annually or more frequently if circumstances warrant. No impairments of intangible assets or goodwill were recognized for the years ended* December 31, 2024*,2023 or2022.

Impairment of Long-Lived Assets

Long-lived assets with finite lives are tested for impairment whenever recognized events or changes in circumstances indicate the carrying value of these assets* may**not* be recoverable. If indicators of impairment are present, the fair value is calculated using estimated future cash flows expected to be generated from the use of those assets. An impairment loss is recognized only if the carrying amount of a long-lived asset or asset group isnot recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group isnot recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. This assessment is based on the carrying amount of the asset or asset group at the date it is tested for recoverability. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset or asset group exceeds its fair value. No impairments of long-lived assets were recognized for the years ended* December 31, 2024*,2023 or2022.

Reserve for Losses and Loss Adjustment Expenses

The reserve for unpaid losses and loss adjustment expenses includes estimates for unpaid claims and claim adjustment expenses on reported losses and estimates of losses incurred butnot reported (“IBNR”), net of salvage and subrogation recoveries. The liability is based on individual claims, case reserves and other estimates reported by policyholders, as well as management estimates of ultimate losses and loss adjustment expenses. Inherent in the estimates of ultimate losses and loss adjustment expenses are expected trends in claims severity and frequency and other factors that could vary significantly as claims are settled.

The Company’s estimates of ultimate losses and loss adjustment expenses are based in part upon the estimation of claims resulting from natural disasters such as hurricanes and earthquakes. Estimation by management of the ultimate losses and loss adjustment expenses resulting from catastrophic events is inherently difficult because of the potential severity of property catastrophe claims. Therefore, the Company uses both proprietary and commercially available models, as well as historic claims experience, for purposes of providing an estimate of ultimate losses and loss adjustment expenses.

Reserves for IBNR are established in accordance with industry practice to provide for (i) the estimated amount of future loss payments on incurred claimsnot yet reported, and (ii) potential development on reported claims. IBNR reserves are estimated based on generally accepted actuarial reserving techniques that consider quantitative loss experience data and, where appropriate, qualitative factors.

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Ultimate losses and loss adjustment expenses* mayvary materially from the amounts provided in the consolidated financial statements. Estimates of unpaid losses and loss adjustment expenses are reviewed regularly and, as experience develops and new information becomes known, the liabilities are adjusted as necessary. Such adjustments, if any, are reflected in operations in the period in which they become known and are accounted for as changes in estimates. The Company doesnot* discount its liability for unpaid losses and loss adjustment expenses.

Reinsurance

The Company purchases excess of loss and quota share reinsurance to protect it against the impact of losses. The Company also writes premiums under fronting agreements where it cedes the majority of premium and risk to reinsurers in exchange for a fronting fee. Reinsurance premiums, commissions, and ceded unearned premiums are accounted for on bases consistent with the underlying terms of the reinsurance contracts and in proportion to the amount of insurance protection provided. The Company receives ceding commissions and fronting fees in connection with quota share and fronting reinsurance contracts. The ceding commissions and fronting fees are capitalized and amortized as a reduction of acquisition expenses. Amounts applicable to ceded unearned premiums are reported as assets in the accompanying consolidated balance sheets. Premiums earned and losses and loss adjustment expenses incurred are stated in the accompanying consolidated statements of income and comprehensive income net of amounts ceded to reinsurers.

Reinsurance recoverables represent balances due to the Company from its reinsurers for paid and unpaid losses and loss adjustment expenses. The Company is exposed to credit losses from reinsurers being unable to meet their obligations. The Company evaluates the financial condition of potential reinsurers and reinsures its business with highly rated reinsurers with a rating of “A-“ (Excellent) (Outlook Stable) or better from A.M. Best. Reinsurers who donot meet the Company’s rating criteria are required to post collateral. The Company reviews credit quality of its reinsurers on a quarterly basis. The Company’s reinsurance contracts also include special termination provisions that allow the Company to cancel and replace any participating reinsurer that is downgraded below a rating of “A−” from A.M. Best, or whose surplus drops by more than20%. Historically, the Company has experienced minimal credit losses from reinsurance recoverables and didnot have an allowance for uncollectible reinsurance recoverables as of* December 31, 2024* or* December 31, 2023*.

Stock Based Compensation Expense

Stock-based compensation expense is recognized on a straight-line basis over the vesting period of awards. The Company doesnot apply a forfeiture rate to unvested awards and accounts for forfeitures as they occur. For stock option grants, the fair value of awards is estimated using the Black Scholes Model. The fair value of restricted stock units is determined using the closing price of the Company's common stock on the grant date. The fair value of performance stock units containing employee service or company financial performance-based conditions is determined using the closing price of the Company's common stock on the grant date. The fair value of performance stock units containing conditions based on performance of the Company’s stock is determined using a Monte Carlo simulation. All stock-based compensation is included in other underwriting expenses in the Company’s consolidated statements of income and comprehensive income.

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Income Taxes

The Company is taxed as a property/casualty insurer for federal income tax purposes. Deferred income tax assets and liabilities are determined based on the difference between the financial statement and the tax bases of assets and liabilities, using enacted tax rates expected to be in effect during the year in which the basis differences reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

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The Company recognizes the tax benefit of uncertain tax positions where the position is more likely thannot to be sustained assuming examination by taxing authorities. Based on its evaluation for the tax years ended* December 31, 2024* and2023, the Company has concluded that there areno significant uncertain tax positions requiring recognition in its financial statements. The Company recognizes interest and penalties related to uncertain tax positions, if any, as a component of income tax expense. The Company hasnot been assessed interest or penalties by any major tax jurisdictions for the respective tax years ended* December 31, 2024*,2023, or2022.

Earnings Per Share

Basic earnings per share is calculated by dividing net income by the weighted-average common shares outstanding for the period. Diluted earnings per share reflects the dilution which could occur if equity-based awards are converted into common share equivalents as calculated using the treasury stock method. When inclusion of additional common share equivalents increases the earnings per share or reduces the loss per share, the effect on earnings per share is anti-dilutive, and the diluted net earnings or net loss per share is computed excluding these common share equivalents.

Recently adopted accounting pronouncements

In* November 2023,the FASB issued ASUNo.* 2023-07, Segment Reporting (Topic280*): Improvements to Reportable Segment Disclosures,which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, allowing financial statement users to better understand the components of a segment's profit or loss to assess potential future cash flows for each reportable segment and the entity as a whole. The amendments expand a public entity's segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker ("CODM"), clarifying when an entity mayreportone* or more additional measures to assess segment performance, requiring enhanced interim disclosures, providing new disclosure requirements for entities with a single reportable segment, and requiring other new disclosures. ASU2023-07 is effective for fiscal years beginning after* December15,* 2023, and interim periods within fiscal years beginning after* December15,* 2024. The Company adopted this guidance beginning with this Annual Report on Form10-K and the adoption didnot have a significant impact to the Company's required disclosures.

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Recently issued accounting pronouncementsnot yet adopted

Income Statement Expenses

In* November 2024,the FASB issued ASU2024*-03, Disaggregation of Income Statement Expenses, which will require disclosure of additional information about specific expense categories in the notes to financial statements for all public business entities. ASU2024-03 is effective for annual reporting beginning with the fiscal year ending* December 31, 2027,*and for interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

Income Taxes

In* December 2023,the FASB issued ASUNo.* 2023-09, Income Taxes (Topic740*): Improvements to Income Tax Disclosures.ASU2023*-09 requires public business entities to disclose additional information with respect to the reconciliation of the effective tax rate to the statutory rate. Additionally, public business entities will need to disaggregate federal, state and foreign taxes paid in their financial statements. ASU2023-09 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after* December 15, 2024.*The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

3. Investments

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

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Security holdings in an unrealized loss position

As of* December 31, 2024*, the Company held 595 fixed maturity securities in an unrealized loss position with a total estimated fair value of $664.0 million and total gross unrealized losses of $37.3 million. As of* December 31, 2023*, the Company held 483 fixed maturity securities in an unrealized loss position with a total estimated fair value of $451.0 million and total gross unrealized losses of $34.3 million.

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* December 31, 2024* and2023, are as follows:

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The Company reviewed the above securities at each balance sheet date to consider whether it was necessary to recognize a credit loss related to any of these securities. An allowance for credit losses of $0.2 million and $0.9 million was recorded pertaining toone investment security as of* December 31, 2024* and2023, respectively. For the remaining securities, the Company determined that the fixed maturity securities’ unrealized losses were primarily the result of the interest rate environment andnot the credit quality of the issuers. The Company doesnot intend to sell the investments and it isnot more likely thannot that the Company will be required to sell the investments before the recovery of their amortized cost basis.

Contractual maturities of available-for-sale fixed maturity securities

The amortized cost and fair value of fixed maturity securities at* December 31, 2024*, by contractual maturity, are shown below.

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

Change in unrealized gains (losses) of investments

The following table presents the change in available-for-sale gross unrealized gains or losses by investment type:

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Net investment income summary

Net investment income is summarized as follows:

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Net realized and unrealized investment gains and losses

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

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Proceeds from the sale of fixed maturity securities were $6.3 million, $10.1 million and $19.7 million for the years ended* December 31, 2024*,2023 and2022, 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 consolidated balance sheets. At* December 31, 2024* and2023, the carrying value of securities on deposit with state regulatory authorities was $9.9 million and $8.6 million, respectively.

The Company has investments in limited partnerships, recorded in the other investments line of the consolidated balance sheet. These investments are measured at estimated fair value utilizing a net asset value per share (or its equivalent) as a practical expedient. As of* December 31, 2024*the Company had unfunded commitments to invest an additional $79.5 million in these limited partnerships.

4. Fair value measurements

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* December 31, 2024* and2023:

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The carrying amounts of financial assets and liabilities reported in the accompanying 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 borrows at a rate which is adjusted daily.

5. Policy Acquisition Costs

The following tables present the policy acquisition costs deferred and amortized over the terms of the policies in force:

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6. Intangible Assets and Goodwill

Intangible assets consist of the following:

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State insurance licenses consist of licenses acquired at the inception of PSIC.

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Customer relationships represents the fair value of acquired policy renewal rights which are amortized on a straight line over a period of 8 years. Amortization expense was $1.6 million for the year ended* December 31, 2024* and $1.5 million for the year ended* December 31, 2023*.

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7. Capitalized Assets

Capitalized software is included as a component of prepaid expenses and other assets in the Company’s consolidated balance sheet. The balances are as follows:

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Amortization expense relating to capitalized software for the years ended* December 31, 2024*,2023 and2022 was $3.4 million, $2.8 million, and $2.6 million, respectively.

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Property and Equipment consists of the following:

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Depreciation expense for the years ended* December 31, 2024*,2023 and2022 was immaterial.

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8. Leases

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The Company has operating leases for office space used to conduct its insurance operations and administration activities. Operating lease right-of-use (“ROU”) assets are a component of prepaid expenses and other assets and operating lease liabilities are included in accounts payable and other accrued liabilities in the Company's consolidated balance sheets.

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The Company determines whether an arrangement is a lease at its inception. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. To determine the present value of lease payments, the Company uses its incremental borrowing rate, which it calculates based on information available at the lease commencement date. For certain leases that contain options to extend, the options are included in lease liabilities only if the company is reasonably certain the option will be exercised. Variable lease costs such as parking are expensed in the period the obligation is incurred and arenot included in the Company’s operating lease liability. The Company's lease agreements donot contain any residual value guarantees.

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Operating lease costs for the years ended* December 31, 2024*,2023 and2022 were $0.8 million, $0.8 million and $0.8 million, respectively. Operating lease costs are comprised of rental expense for operating leases. Lease expense is recognized on a straight-line basis over the lease term and is included as a component of other underwriting expenses in the Company’s consolidated statements of income and comprehensive income.

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The following tables provide supplementary information about the Company’s leases:

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Future minimum lease payments as of* December 31, 2024* are as follows:

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9. Reserve for Losses and Loss Adjustment Expenses

Loss and loss adjustment expenses reserves represent management’s best estimate of the ultimate cost of all reported and unreported losses incurred for the years ended* December 31, 2024*,2023, and2022. The Company doesnot discount loss and loss adjustment expense reserves. The reserves for unpaid losses and loss adjustment expenses are estimated using individual case-basis valuations and statistical analyses. Those estimates are subject to the effects of trends in loss severity and frequency.

In addition to case reserves, which are generally based on reported claims, the Company establishes reserves for incurred butnot reported claims (“IBNR”). IBNR reserves are developed to provide for (i) the estimated amount of future loss payments on incurred claimsnot yet reported, and (ii) potential development on reported claims. IBNR reserves are estimated based on generally accepted actuarial reserving techniques that consider quantitative loss experience data and, where appropriate, qualitative factors. The Company uses statistical analysis to estimate the cost of losses and loss adjustment expenses related to IBNR. Those estimates are based on historical information, industry information and practices, and estimates of trends that* mayaffect the ultimate frequency of incurred butnot* reported claims and changes in ultimate claims severity.

The Company regularly reviews its reserve estimates and adjusts them as necessary as experience develops or as new information becomes known. Such adjustments are included in current operations. During the loss settlement period, if there are indications that claims frequency or severity exceeds initial expectations, the Company generally increases its reserves for losses and loss adjustment expenses. Conversely, when claims frequency and severity trends are more favorable than initially anticipated, the Company generally reduces its reserves for losses and loss adjustment expenses once it has sufficient data to confirm the validity of the favorable trends. Even after such adjustments, the ultimate liability* mayexceed or be less than the revised estimates. Accordingly, the ultimate settlement of losses and the related loss adjustment expenses may*vary significantly from the estimate included in the Company’s consolidated financial statements.

Although considerable variability is inherent in such estimates, management believes the reserves for losses and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known. Any adjustments to estimates are recorded in the current period.

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The following table provides a reconciliation of the beginning and ending reserve balances for losses and LAE on a net of reinsurance basis to the gross amounts reported in the accompanying consolidated balance sheets:

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The foregoing reconciliation shows favorable net development of $3.0 million in2024 and unfavorable net development of $2.2 million and $2.4 million in2023 and2022, respectively.

During2024, the net favorable reserve development was primarily due to lower than anticipated severity of attritional losses in our Inland Marine and other property line of business.

During2023, the net unfavorable reserve development was primarily due to the effect of ceding gross favorable development under our catastrophe XOL reinsurance program and due to unfavorable development on lines of business subject to lower amounts of ceding. During2022, the net unfavorable reserve development was primarily attributable to prior year catastrophe events including certain2020 Hurricanes, offset by favorable development related to2021 attritional and catastrophe losses.

The Company compiles and aggregates its claims data by grouping the claims according to the year in which the claim occurred (“Accident Year”) when analyzing claim payment and emergence patterns and trends over time. For the purpose of defining claims frequency, the number of reported claims is by loss occurrence and includes claims that donot result in a liability or payment associated with them.

The following tables show information about the Company’s incurred and paid loss development as of* December 31, 2024,net of reinsurance, as well as cumulative claim frequency, the total of IBNR liabilities included within the net incurred loss amounts and the average historical claims duration as of December 31, 2024.The loss information has been disaggregated so that losses that are expected to develop in a similar manner are grouped together. The information provided herein about incurred and paid accident year claims development for the years ended December 31, 2024* and prior is presented as unaudited supplementary information.

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Net of Reinsurance Property** Insurance (in thousands) (1)**

Net of Reinsurance Property****Insurance (in thousands) (1)

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Net of Reinsurance Property** Insurance (unaudited)**

(2) Negative payout percentages are due to timing of reinsurance payments, allocations of reinsurance between different lines of business based on actual results, and allocation of reinsurance to different periods for reinsurance treaties in effect for multiple periods. These are primarily associated with larger recoveries from catastrophe events in earlier years of operation.

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Net of Reinsurance Other Liability Occurrence (in thousands) (1)

Net of Reinsurance Other Liability Occurrence (in thousands) (1)

Net of Reinsurance Other Liability Occurrence (unaudited)

Net of Reinsurance Other Liability Claims Made (in thousands) (1)

Net of Reinsurance Other Liability Claims Made (in thousands) (1)

Net of Reinsurance Other Liability Claims Made (unaudited)

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The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated balance sheets is as follows:

10. Reinsurance

The Company utilizes reinsurance in order to limit its exposure to losses and enable it to underwrite policies with sufficient limits to meet policyholder needs. The Company primarily utilizes excess of loss (XOL) and quota share reinsurance to protect against catastrophe and attritional losses. The Company also writes premiums under fronting agreements, whereby the majority of premium and risk is ceded to reinsurers and the Company receives a fronting fee.

In an XOL treaty, the Company retains losses for any occurrence up to a specified amount (its “retention”) and reinsurers assume any losses above that amount. As of* December 31, 2024*, the Company’s catastrophe event retention is $20 million for earthquake events and $15.5 million for hurricane events and all other perils. As of* December 31, 2024*, the Company’s reinsurance structure provides protection up to $3.08 billion for earthquake events, $735 million for Hawaii hurricane events, and $117.5 million for continental U.S. hurricane events.

In a quota share agreement, the Company transfers, or cedes, a portion of its premiums to reinsurers and, in return, the reinsurer must share an agreed upon portion of losses and pay a ceding commission to the Company. In a fronting agreement, the Company writes premium and then cedes the majority of the premium and risk in exchange for a fronting fee, which is the primary source of profit in the arrangement.

The following table shows ceded written premiums under fronting and quota share arrangements by line of business for the years ended* December 31, 2024*,2023 and2022:

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The Company recognizes ceded unearned premiums related to quota share agreements as an asset on its consolidated balance sheets. As of* December 31, 2024* and2023, ceded unearned premiums totaled $276.2 million and $265.8 million, respectively. The increase was driven primarily by premium growth in lines subject to fronting agreements or quota shares.

In addition to reinsurance purchased from traditional reinsurers, the Company has historically incorporated collateralized protection from the insurance linked securities market via catastrophe bonds. During thefirst quarter of2021, the Company closed a $400 million144A catastrophe bond that became effective* June 1, 2021.The catastrophe bond was completed through Torrey Pines Re Pte. Ltd. (“Torrey Pines Re Pte.”). Torrey Pines Re Pte. is a special purpose reinsurance vehicle incorporated in Singapore that provides Palomar with indemnity-based reinsurance covering earthquake events through June 1, 2024.During thesecond* quarter of2022, the Company closed a $275 million144A catastrophe bond that became effective* June 1, 2022.This catastrophe bond was completed through Torrey Pines Re Ltd., a Bermuda-domiciled special purpose insurer that provides indemnity-based reinsurance covering earthquake events through June 1, 2025.During thesecond* quarter of2023, the Company also closed a $200 million144A catastrophe bond that became effective* June 1, 2023.This catastrophe bond was also completed through Torrey Pines Re Ltd and provides indemnity-based reinsurance covering earthquake events through June 1, 2026.During thesecond* quarter of2024, the Company also closed a $420 million144A catastrophe bond which became effective* June 1, 2024.This catastrophe bond was also completed through Torrey Pines Re Ltd and provides indemnity-based reinsurance covering earthquake events through June 1, 2027.*

Written premiums ceded under these catastrophe bond agreements were $55.3 million, $42.7 million and $28.3 million for the years ended* December 31, 2024*,2023 and2022, respectively.

The effect of reinsurance on premiums written and earned and on losses and LAE incurred for the years ended* December 31, 2024*,2023 and2022, is as follows:

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The ceding of insurance doesnot legally discharge the Company from its primary liability for the full amount of the policy coverage, and therefore the Company will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. To minimize exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk.

To reduce credit exposure to reinsurance recoverable balances, the Company obtains acceptable forms of collateral from certain reinsurers that arenot authorized as reinsurers under U.S. state insurance regulations. In addition, under the terms of its reinsurance contracts, the Company* mayretain funds due from reinsurers as security for those recoverable balances. As of December 31, 2024* and2023, the Company had retained $27.9 million and $13.4 million in funds from reinsurers, respectively. The Company is able to use the funds in the ordinary course of its business. The funds are held in cash and cash equivalents and investments with an offsetting liability on the accompanying consolidated balance sheets.

For the year ended* December 31, 2024*, reinsurance premiums ceded to the Company’sthree largest reinsurers totaled $125.9 million, $67.9 million and $61.7 million, representing 28.5% of the total balance. For the year ended* December 31, 2023*, reinsurance premiums ceded to the Company’sthree largest reinsurers totaled $152.4 million, $65.9 million and $47.4 million, representing 36.3% of the total balance. For the year ended* December 31, 2022*, reinsurance premiums ceded to the Company’sthree largest reinsurers totaled $24.7 million, $22.9 million and $18.4 million, representing 23.9% of the total balance.

At* December 31, 2024* reinsurance recoverable on unpaid losses by the Company’sthree largest reinsurers were $137.0 million, $26.9 million and $24.4 million representing 47.7% of the total balance. At* December 31, 2023* reinsurance recoverable on unpaid losses by the Company’sthree largest reinsurers were $69.5 million, $29.8 million and $25.5 million representing 45.7% of the total balance. The Company seeks reinsurers that have an A.M. best rating of A− (excellent) or better or requires them to post collateral.

11. Credit Agreements

U.S. Bank Credit Agreement

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In* December 2021,the Company entered into a Credit Agreement (the “Credit Agreement”) with certain lenders which provides a revolving credit facility of up to $100.0 million (the “Revolving Loan”). The maturity of the facility is December 8, 2026.The Revolving Loan maybe either a SOFR rate loan or a base rate loan, at the Company’s discretion. The Revolving Loan maybe prepaid in full or in part at any time withno* prepayment premium and* may*be reduced in full or in part at any time upon prior notice. Interest on the Revolving Loan accrues on each SOFR rate loan at the applicable SOFR (as defined in the Credit Agreement) plus 1.75% and on each base rate loan at the applicable Alternate Base Rate (as defined in the Credit Agreement) plus (ii)0.75%. In addition, the Company paid a commitment fee of $0.3 million upon closing of the Credit Agreement and must pay an unused line fee of 0.25% per annum on any unborrowed amount under the Credit Agreement.

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The Company’s obligations under the Credit Agreement are unsecured with a negative pledge against all assets of Palomar and its subsidiaries as described in the Credit Agreement. The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, financial covenants, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions.

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The financial covenants in the Credit agreement require the Companynot to exceed a maximum leverage ratio and maintain a minimum net worth at the end of each quarter. The Company’s insurance subsidiaries are also required to maintain a minimum Risk Based Capital Ratio at the end of each year and must always maintain a minimum AM Best Financial Strength rating. As of* December 31, 2024*, the Company was in compliance with all covenants.

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The Credit Agreement provides for events of default customary for revolving loans of this type, including butnot limited to non-payment, breaches, or defaults in the performance of covenants, insolvency, bankruptcy and the occurrence of a material adverse effect on Palomar. During the existence of an event of default, all outstanding amounts of the Revolving Loan shall bear interest at a rate per annum equal to the rate otherwise applicable thereto plus 2.00%.

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As of* December 31, 2024* and2023, there wereno outstanding borrowings under this Credit Agreement. For the years ended* December 31, 2024* and2023, the Company incurred $0.3 million and $1.0 million, respectively, of interest related to borrowings and amortization of fees associated with the credit agreement.

FHLB Line of Credit

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The Company’s PSIC subsidiary is a member of the Federal Home Loan Bank of San Francisco (“FHLB”). Membership in the FHLB provides PSIC access to collateralized advances, which can be drawn for general corporate purposes and used to enhance liquidity management. All borrowings are fully secured by a pledge of specific investment securities of PSIC and the borrowing capacity is currently equal to 10% of PSIC’s statutory admitted assets. All advances have a predetermined term and the interest rate varies based on the term of the advance.

As of* December 31, 2024*, there wereno borrowings outstanding through the FHLB. Interest expense on the FHLB Line of Credit was $0.8 million for the year ended* December 31, 2024*. As of* December 31, 2023*, the Company had $52.6 million of borrowings outstanding through the FHLB line of credit. Interest expense on the FHLB Line of Credit was $2.8 million for the year ended* December 31, 2023*.

12. Stockholders’** Equity**

As of* December 31, 2024* and* December 31, 2023*, the Company has 5,000,000 preferred shares authorized with a par value of $0.0001 andno preferred shares issued and outstanding. As of* December 31, 2024* and* December 31, 2023*, the Company has 500,000,000 common shares authorized and 26,529,402 and 24,772,987 common shares issued and outstanding, respectively, with a par value of$0.0001. Additional paid in capital is $493.7 million as of* December 31, 2024* and $350.6 million as of* December 31, 2023*.

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Common stock reserved for future issuance consists of the following as of* December 31, 2024*:

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The Company doesnot maintain a treasury stock account and issues new shares to settle employee stock purchases, exercises of stock options, and vestings of other types of equity awards.

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

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Stock-based compensation expense is recognized on a straight-line basis over the vesting period of awards. The Company doesnot 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 consolidated statements of income and comprehensive income.

2019 Equity Incentive Plan

On* April**16,* 2019, the Company’s2019 Equity Incentive Plan (the*“2019* Plan”) became effective. The2019 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, the2019 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 the2019 Plan. This reserve increases on* January 1of each year through2029,* 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. Stock options vest over a period betweentwo andfour years with between 25% and 50% vesting on thefirst anniversary of the grant date and the remainder vesting monthly over the remaining period, subject to continued service to the Company. Stock options expireten years after the grant date.

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The following table summarizes stock option transactions for the year ended* December 31, 2024*:

The total intrinsic value of stock options exercised during the years ended* December 31, 2024* and* December 31, 2023* was $18.7 million and $3.5 million, respectively.

Restricted Stock Units

Restricted stock units are valued on their grant date and generally vest either on thefirst anniversary of the grant date or over athree-year period withone third vesting on each anniversary date, subject to continued service with the Company. The fair value of RSUs is determined using the closing price of the Company's common stock on the grant date.

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The following table summarizes RSU transactions for the year ended* December 31, 2024*:

As of* December 31, 2024*, the Company had approximately $14.9 million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 1.6 years.

Performance Stock Units (“PSUs”)

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The Company issues PSUs to employees with a combination of service, performance, and market conditions.

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The majority of PSUs were issued via grants made to certain executives during2021. These PSUs are earned based on the achievement of stock price milestones. If the Company’s stock price reaches and remains at certain milestones for 30 days, the PSUs shall become earned units and will vest upon completion of a requisite service period of approximately five years from the date of grant.

For other PSUs outstanding, vesting of PSUs requires a period of future service and the number of shares that vest depends on performance relative to predetermined targets of the Company’s Gross Written Premiums and Adjusted Return on Equity as set by the Compensation Committee. For PSU grants issued in years prior to2023, the PSU’s performance period was the fiscal year of the grant. For PSU grants issued in2023 and after, the PSU’s performance period is primarily athree-year period beginning with the grant date. At the end of the performance period, the actual results are measured against the predetermined targets to determine the number of PSUs to be earned as compensation. The earned PSUs are then subject to a required service period of approximately three years from the grant date before vesting and being issued as common stock.

The following table summarizes PSU transactions for the year ended* December 31, 2024*:

The PSU grants above represent the number of shares that would vest based on achievement of all stock price milestones in the executive stock grants and the 100% achievement of the predetermined company performance conditions for the other PSU grants. The actual number of PSUs which will vest is subject to adjustment based on the Company’s actual stock price performance and financial performance relative to the predetermined targets and subject to recipient service requirements. As of* December 31, 2024*, the Company had approximately $9.4 million of total unrecognized stock-based compensation expense related to PSUs expected to be recognized over a weighted-average period of 1.7 years.

2021 Executive Stock Grants

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During the year ended* December 31, 2021,the Company granted 192,307 RSUs and 350,000 PSUs to various executives, including the Company’s CEO. The RSUs vest over a period offive years withone* fifth vesting upon the first,second andthird anniversary of the grants and the remainder vesting quarterly thereafter.

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The PSUs are earned based on the achievement of stock price milestones. If the Company’s stock price reaches and remains at certain milestones for30 days, the PSUs shall become earned units and will vest upon completion of a requisite service period. The Company’s CEO must remain as an employee through* December 31, 2025,or as an employee and/or director through thefifth* anniversary of the grant date the PSUs to vest. Other executives must remain as employees through* December 31, 2026for the PSUs to vest. As of December 31, 2024*,28,125 PSU shares have become earned units and will vest upon completion of the requisite service period.

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2019 Employee Stock Purchase Plan

On* April16,* 2019, the Company's2019 Employee Stock Purchase Plan (“the2019 ESPP”) became effective. A total of 240,000 shares of common stock are initially authorized and reserved for issuance under the2019 ESPP. In addition, the2019 ESPP provides for annual increases in the number of shares available for issuance on* January1* of each year through2029, equal to the smaller of 240,000 shares of the Company’s common stock or such other amount as* may*be determined by the board of directors.

Under the2019 ESPP, employees can purchase Company stock at a discount via payroll withholdings. The2019 ESPP is administered through employee participation in discrete offering periods. During each discrete offering period employee funds are withheld, and the stock purchase occurs upon the conclusion of the offering period. The Company issued 17,100 and 17,080 shares pursuant to the ESPP during the years ended* December 31, 2024* and* December 31, 2023*, respectively.

Share repurchases

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The Company's share repurchase program expired on* March 31, 2024.There wereno share repurchases made during the year ended December 31, 2024.*

13. Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income (loss) (“AOCI”) are as follows:

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14. Underwriting Information

The Company has a single reportable segment and offers specialty insurance products. Gross written premiums (“GWP”) by product are presented below:

(1)- Beginning in2024, the Company has updated the categorization of its products to align with management's current strategy and view of the business. Prior year amounts have been reclassified for comparability purposes. The recategorization is for presentation purposes only and doesnot impact overall gross written premiums.

Gross written premiums by state are as follows:

Gross written premiums by insurance subsidiary are as follows:

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The Company distributes a significant portion of its products through select program administrators. Each of the products managed by the program administrators operates as a separate program that is governed by an independent, separately negotiated agreement with unique terms and conditions, including geographic scope, key men provisions, economics and exclusivity. These programs also feature separate managerial oversight and leadership, policy administration systems and retail agents originating policies.

For the year ended* December 31, 2024*, our largest program administrator distributed $403.4 million or 26.2% of our gross written premiums. There wereno other program administrators which distributed greater than 10% of our gross written premiums for the year ended* December 31, 2024*.

For the year ended* December 31, 2023,our largest program administrator distributed $394.1 million or 34.5% of our gross written premiums and oursecond* largest program administrator distributed $152.4 million, or 13.3% of our gross written premiums. There wereno other program administrators which distributed greater than 10% of our gross written premiums for the year ended* December 31, 2023.*

For the year ended* December 31, 2022,our largest program administrator distributed $322.4 million or 36.6% of our gross written premiums and oursecond* largest program administrator distributed $95.1 million, or 10.8% of our gross written premiums. There wereno other program administrators which distributed greater than 10% of our gross written premiums for the year ended* December 31, 2022.*

15. Retirement and Post-Employment Retirement Plans

For employees meeting certain eligibility requirements, the Company provides a defined contribution retirement plan under IRC Section401(k). Under a safe-harbor plan, the Company contributes 3% of each participant’s gross wages regardless of the employee’s contribution. For the years ended* December 31, 2024*,2023 and2022 the Company’s contributions to the plan were $1.3 million, $0.9 million and $0.7 million, respectively.

16. Income Taxes

The components of the Company’s income tax expense (benefit) are as follows:

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As of* December 31, 2024* and2023, significant components of the Company’s deferred tax assets and liabilities were as follows:

The above valuation allowance relates to state net operating losses ("NOL") carryforwards. Due to the limited carryforward period these donot meet the “more likely thannot” criteria and it is necessary to maintain a valuation allowance on these items. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period change or if objective negative evidence in the form of cumulative losses isno longer present.

As of* December 31, 2024*, there isno federal net operating loss or tax credit carryforwards for tax purposes. The Company has $3.4 million of state NOLs (tax-effected, net of federal benefit) set to expire beginning in2025 over various periods. There is $2.9 million of tax capital loss carryforwards which will begin to expire in2030.

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the tax years ended* December 31, 2024*,2023 and2022:

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For the year ended* December 31, 2024*, the difference relates primarily to Section162(m) limitations on executive compensation deductions and state taxes, offset by the permanent component of employee stock option exercises. For the year ended* December 31, 2023,the difference relates primarily to Section162*(m) limitations on executive compensation deductions and state taxes. For the year ended* December 31, 2022,*the difference relates primarily to the permanent component of employee stock option exercises and state taxes.

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As of* December 31, 2024* and2023, the Company hadno uncertain tax positions that required either recognition or disclosure in the consolidated financial statements. This isnot expected to change significantly during the nexttwelve months. The Company classifies interest and penalties, if any, related to the liability for unrecognized tax benefits as a component of the provision for income taxes. The Company’s federal income tax returns for 2021 through2023 and state income tax returns for 2020 through2023 remain subject to examination by the tax authorities. The2024 income tax return is expected to be filed in2025 and is subject to examination when filed.

Under Pillar Two/GloBE rules, certain countries have agreed to enact a jurisdictional-level minimum tax system with a minimum effective tax rate (ETR) of15%. The Bermuda Corporate Income Tax Act of2023 also established a15% income tax regime. Companies with annual revenue above750 million Euros will be within the scope of Pillar Two and the Bermuda CIT. As of* December 31, 2024,Palomar isnot* within this revenue threshold and hencenot an in-scope entity. Subsequent financial years will be assessed for these rules.

17. Earnings Per Share

The following table sets forth the computation of earnings per share of common stock:

Common share equivalents relate to outstanding stock options, RSUs, and PSUs under the2019 Plan and unpurchased shares under the2019 ESPP and are calculated using the treasury stock method.

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18. Statutory financial information

U.S.

U.S. state insurance laws and regulations prescribe accounting practices for determining statutory net income and capital and surplus for insurance companies. In addition, state regulators* maypermit statutory accounting practices that differ from prescribed practices. Statutory accounting practices (“SAP”) prescribed or permitted by regulatory authorities for the Company’s insurance subsidiaries differ from U.S. GAAP. The principal differences between SAP and GAAP as they relate to the financial statements of the Company’s insurance subsidiaries are (a) policy acquisition costs are expensed as incurred under SAP, whereas they are deferred and amortized under GAAP, (b) certain assets arenot* admitted for purposes of determining surplus under SAP, (c) investments in fixed income securities are carried at fair value under GAAP whereas such securities are carried at amortized cost under SAP, and (d) the criteria for recognizing net DTAs and the methodologies used to determine such amounts are different under SAP and GAAP.

Combined statutory net income and statutory capital surplus for the U.S. insurance subsidiaries, PSIC and PESIC as of* December 31, 2024*,2023 and2022 and for the years then ended are summarized as follows:

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Risk-Based Capital (“RBC”) requirements promulgated by the NAIC require property/casualty insurers to maintain minimum capitalization levels determined based on formulas incorporating various business risks of the insurance subsidiaries. As of* December 31, 2024* and2023, the company’s capital and surplus exceeds its authorized control level.

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Bermuda

Under the Bermuda Insurance Act,1978 and related regulations, PSRE is required to maintain certain solvency and liquidity levels. The minimum statutory solvency margin required at* December 31, 2024* and2023 was approximately $1.2 million and $1.2 million, respectively. Actual statutory capital and surplus at* December 31, 2024* and2023 was $17.0 million and $16.1 million, respectively. PSRE had statutory net income of $0.4 million,$0.3 million and$0.2 million for2024,2023 and2022, respectively.

PSRE had stockholders’ equity of $16.9 million and $16.3 million on a GAAP basis at* December 31, 2024* and2023, respectively. The principal difference between statutory capital and surplus and stockholders’ equity presented in accordance with GAAP is related to the valuation of investments. No dividends were paid in2024 and2023.

PSRE maintains a Class3A license and thus must maintain a minimum liquidity ratio in which the value of its relevant assets isnot less than 75.0% of the amount of its relevant liabilities for general business. Relevant assets include cash and cash equivalents, fixed maturity securities, accrued interest income, premiums receivable, losses recoverable from reinsurers, and funds withheld. The relevant liabilities include total general business insurance reserves and total other liabilities, less sundry liabilities. As of* December 31, 2024* and2023, the Company met the minimum liquidity ratio requirement.

19. Dividend Restrictions

U.S.

The Company’s U.S. insurance company subsidiaries, PSIC and PESIC are restricted by the statutes as to the amount of dividends that they* may*pay without prior approval by state insurance commissioners.

Under California and Oregon statute which govern PSIC, dividends paid in a consecutivetwelve month period cannot exceed the greater of (i)10% of an insurance company’s statutory policyholders’ surplus as of* December**31* of the preceding year or (ii)100% of its statutory net income for the preceding calendar year. Any dividends or distributions in excess of these amounts would require regulatory approval. In addition, under Oregon statute, PSIC* mayonly declare a dividend from earned surplus, which doesnot* include contributed capital. Surplus arising from unrealized capital gains or revaluation of assets isnot considered part of earned surplus. Based on the above restrictions, PSIC* maypay a dividend or distribution ofno* greater than$99.6 million in2025 without approval by the California and Oregon Insurance Commissioners. During* October 2024,*PSIC elected to pay a dividend of $95.0 million to its parent company.

Under Arizona statute which governs PESIC, dividends paid in a consecutivetwelve month period cannot exceed the lesser of (i)10% of an insurance company’s statutory policyholders’ surplus as of* December**31* of the preceding year or (ii)100% of its statutory net income for the preceding calendar year. Based on the above restrictions, PESIC* maypay a dividend or distribution ofno* greater than$4.2 million in2025 without approval of the Arizona Insurance Commissioner.

In addition to the above limitations, any dividend or distribution declared is also subject to state regulatory approval prior to payment. In the future, state insurance regulatory authorities* may*adopt statutory provisions and dividend limitations more restrictive than those currently in effect.

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Bermuda

Bermuda regulations limit the amount of dividends and return of capital paid by a regulated entity. A Class3A insurer is prohibited from declaring or paying a dividend if it is in breach of its minimum solvency margin, its enhanced capital requirement, or its minimum liquidity ratio, or if the declaration or payment of such dividend would cause such a breach, or if there are reasonable grounds for believing there has been such a breach. Pursuant to Bermuda regulations, the maximum amount of dividends and return of capital available to be paid by a reinsurer is determined pursuant to a formula. Under this formula, the maximum amount of dividends and return of capital available to the Company from PSRE during2024 is calculated to be approximately$4.2 million. However, this dividend amount is subject to annual enhanced solvency requirement calculations.

20. Commitments and Contingencies

Litigation

The Company is subject to legal proceedings arising from the normal conduct of its business. In the opinion of management, any ultimate liability that* mayarise from these proceedings willnot* have a material effect on the Company’s financial position.

Letters of Credit and Trusts

As of* December 31, 2024*, the Company hasthree irrevocable standby letters of credit for the benefit of ceding insurance companies to secure the unearned premium assumed by PSIC. The bank letters of credit amount to a total of $5.6 million and* may*renew if the Company continues to assume premium from these insurance companies. The letters of credit are collateralized by the Company’s Credit Agreement.

As of* December 31, 2024*, the Company has a Letter of Credit for the benefit of the State of California to secured unearned premium and loss reserves incurred in the Worker’s Compensation program. The letter of credit amounts to*$75* million and are collateralized by the Company’s available-for-sale investments.

​In addition, the Company has establishedsix Regulation114 Trust accounts for the benefit of ceding insurance companies to secure the unearned premium assumed by PSIC. As of* December 31, 2024* the trust had a market value of $7.9 million.

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21. Variable Interest Entities ("VIEs")

Laulima Insurance Exchange, a Hawaii domiciled reciprocal exchange (“Laulima”) is a consolidated VIE. Laulima was formed in2023 as an insurance carrier organized as an unincorporated association.

The Company's PUEO entity manages the business operations of Laulima and receives a management fee for the services provided to Laulima. Upon formation of Laulima, PSIC provided capital of** ** $15.0 million in the form of a contribution to the surplus note issued by Laulima, which remains outstanding as of* December 31, 2024*. The Company holds an interest in the form of this surplus note which is included in other liabilities on the Statement of Assets and Liabilities of Laulima. In addition, the Company provides quota share reinsurance on the property business of Laulima. The Company has determined that is has the ability to direct the activities that most significantly impact the economic performance of the Laulima and, as it has provided capital to Laulima, would absorb any expected losses which could be significant to Laulima. As such, the Company is deemed the primary beneficiary and consolidates the results of Laulima.

The Company doesnot own the equity of Laulima, which is owned by the policyholders. In the event of dissolution, policyholders would share any residual unassigned surplus but arenot subject to assessment for any deficit in unassigned surplus of Laulima. The assets of Laulima can be used only to settle the obligations of Laulima and general creditors haveno recourse to the Company.

The results of operations of Laulima are included in the Company’s consolidated statement of income and comprehensive income and Laulima generated $0.1 million of net loss in2024 and $0.6 million of net loss in2023. As of* December 31, 2024,Laulima's assets totaled $51.0 million, primarily comprised of $18.5 million of cash and investments and $30.5 million of prepaid reinsurance premiums and are included in the Company's consolidated balance sheets. For the same year, Laulima's liabilities totaled $48.9 million and primarily include $30.5 million of unearned premiums and $15.0 million of surplus notes. As of December 31, 2023,*Laulima's assets totaled$16.4 million, primarily comprised of $15.1 million of cash and investments, and are included in the Company's consolidated balance sheets. For the same year, Laulima's liabilities totaled $16.9 million and primarily include $15.0 million of surplus notes. The surplus notes are payable to PSIC and eliminate in consolidation for all years presented.

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Note22. Subsequent Events

On* January 1, 2025,the Company acquired 100% of the outstanding voting stock of First Indemnity of America Insurance Company (“FIA”) for a purchase price of $29.3 million. FIA is a New Jersey domiciled insurance carrier that specializes in the underwriting of surety bonds for small to medium sized contractors primarily in the Northeast United States. FIA is licensed in16* states and is rated "A-" by A.M. Best. To date, the initial accounting for the acquisition is incomplete due to the limited time since the closing date. The Company is still gathering the necessary information to provide such disclosures in future filings.

The Company has evaluated all other subsequent events from the balance sheet date through the date the financial statements were issued and has determined there areno additional events required to be disclosed.

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