Palomar Holdings, Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Strategic Execution:
  • Integrate and Operate: Monetized 2024 and prior investments, with FIA achieving T-listing and acquisition of Advanced AgProtection completed.
  • Build New Market Leaders Deliberately: Casualty and crop franchises showed strong growth. Casualty franchise grew while maintaining modest net line sizes; crop franchise expanded geographic reach and distribution channels.
  • Remember Risk Appetite: Focused on conservative underwriting in property market, avoiding volatile segments and increasing allocation to residential earthquake, Hawaii hurricane, etc.
  • Generate Consistent Earnings: Record adjusted net income of $51.3 million in the quarter, with 85% adjusted net income growth, 69% adjusted combined ratio, and 27% adjusted ROE.
• Talent Investment: Made key hires in underwriting, claims, data, technology, and actuarial departments during the quarter.

Segment Performance

• Earthquake Franchise: Gross written premium grew 23% year-over-year. Residential segment saw record new business, with 57% of in force earthquake premium. Small commercial book (14% of earthquake book) is more insulated from competition, while large commercial market faces softening and competition. Mid to high teens growth expected for full year 2025.
• Inland Marine and Other Property: Grew 29% year-over-year. Hawaiian hurricane grew 82% with rates 26% higher than last year. High value builders risk book saw strong growth, but commercial all risk faced significant rate pressure and the company has largely exited that line.
• Casualty: Gross written premium grew 113% year-over-year, driven by general liability, E&S casualty, real estate E&O, and environmental liability. Rapid growth in talent and systems has accelerated premium growth.
• Crop: Generated $48 million of written premium in the first quarter, an increase of 25% year-over-year. Closed acquisition of Advanced AgProtection on April 1st and began integrating operations. Target of $200 million full year written premium.
• Surety: FIA secured a T-listing from the US Treasury on April 1st, with plans to generate $100 million of written premium over time, though contributions in 2025 will be modest.

Guidance

• Raised full year 2025 adjusted net income guidance to a range of $186 million to $200 million from the previous range of $180 million to $192 million.
• Reinsurance placements, including cat bond and Laulima treaty, position the company to achieve or exceed the original guidance of flat to net 5% growth.

Risks

• Global Economic Uncertainty: Impact of tariffs on the business, though insurance is a defensive sector less affected by tariffs.
• Market Competition: Pricing pressure in commercial property segments like commercial all risk and large layered/shared accounts.
• Reinsurance Risks: Uncertainties related to the placement and performance of reinsurance treaties, though current placements are favorable.

Question and Answer

• Q: David Motemaden on reinsurance placements and earthquake growth A: Mac Armstrong mentioned reinsurance placements have come in better than forecast, with conservatism in guidance. On earthquake growth, residential and commercial were close, with residential seeing new business and awareness from wildfires, while commercial faces competition but underlying unit economics are compelling.
• Q: Mark Hughes on crop premium spread and commercial earthquake A: Chris Uchida discussed crop earned premium spread with 65%-75% in Q3 and 15%-25% in Q4. Mac Armstrong talked about commercial earthquake competition with increased competition in large layered/shared accounts but balanced book providing opportunity.
• Q: Meyer Shields on crop business expenses and inland marine reserves A: Chris Uchida said crop business expenses in Q2 will be higher due to upfront costs, with operating expense ratio expected to be around 8% for the year. Inland marine reserve releases were from conservatively reserved shorter tail lines.
• Q: Pablo Singzon on loss ratio and economic uncertainty A: Chris Uchida discussed attritional loss ratio trends, with property lines showing favorability and casualty reserves not touched. Mac Armstrong talked about sustaining top line growth through multiple vectors despite economic uncertainty.
• Q: Andrew Anderson on fronting and crop loss ratio A: Chris Uchida noted fronting headwind in Q2 around $44 million, with peak impact in the quarter. Crop loss ratio in Q3 will be a blend of expectation and actual results, with clarity in Q4.