Palomar Holdings, Inc. Q2 FY2025 earnings call

• Core strength is ability to operate seamlessly across residential and commercial products in admitted and E&S markets. - Specialty portfolio provides balance across insurance and macroeconomic cyclicality. - Crop and Casualty are growth engines. - Disciplined underwriting and reserving approach. - Successful June 1 reinsurance placements. - Earthquake franchise had 9% growth, with Residential Earthquake seeing record new business premium. - Inland Marine and other property grew 28%, with residential and residential-oriented admitted products performing well. - Casualty had 119% growth in Q2. - Crop franchise had $39 million written premium in Q2. - Board authorized a 2-year $150 million share repurchase program.

Earthquake franchise: Gross written premium grew 9% year-over-year. Inland Marine and other property: Grew 28% year-over-year. Casualty: Gross written premium increased 119% year-over-year in the second quarter. Crop franchise: Generated $39 million of written premium in Q2 compared to $2.2 million in the prior year period. Fronting and premium: Declined 38% year-over-year.

• Raised 2025 adjusted net income guidance to $198 million to $208 million from $195 million to $205 million, midpoint implies adjusted ROE of 24%. - Third quarter expected to be low point of net earned premium ratio, with highest gross earned and net earned premium dollars, highest loss dollars and loss ratio. - Expect net earned premium growth over 12-month period.

• Risks related to market conditions shifting. - Potential impact of reinsurance placements. - Uncertainties in crop and casualty business growth.

Q: Maybe you could focus a little bit more -- talk a little bit more about the property-related competition?

A: Yeah. Of course, Paul, this is Mac. Thanks for the question. And I think I'd start with saying we're still forecasting growth in earthquake for the year and considerable growth in high single digits. It's down from where we started in 2025, but it's still a healthy amount of growth in both earthquake and then the Inland Marine and other property, which grew 30% in the second quarter. What's most important to convey is our book is a balance between residential and commercial, and this is earthquake as well as Inland Marine and other property. It's also a mix between admitted and E&S. So the mix between admitted and E&S and residential commercial allows us to play through market cyclicality and still grow. And if you look at the residential earthquake book, I'll just reiterate what I said on the call, we have a 10% inflation guard. We have 80 -- high 80s policy retention. We are expanding our distribution. We are taking share from the largest incumbent in the California Earthquake Authority, and we are a market leader. So we are growing rapidly. On Commercial Earthquake, there is rate pressure, but we are still seeing attractive business, and we are still writing business at very compelling levels. So when you overlay that dynamic with a softening property cat reinsurance market, we're seeing scale in addition to growth in our earthquake franchise. Inland Marine and other property, again, it's a balance between residential and commercial business. The residential business has healthy growth. The commercial business is seeing rate pressure, but it's also -- we are also seeing great opportunity to expand geographically, add underwriting talent and also deploying larger lines as our balance sheet has grown as our book has grown. So we think we are in very good shape on commercial property. It's not to say there's not competition in segments like large commercial, but in small commercial or admitted commercial business, it's very well-positioned, and it's healthy growth that we expect to see for the remainder of this year into '26. And then on the residential side of the book, there are multiple growth vectors. There are multiple products that are market leaders, and we are going to be able to execute the plan that we put forth and why we've raised our guidance 3x this year and probably will do it a couple of times more this year based on how we've executed. So I'd like to allay any concerns about property pressure. Not to say we're impervious to it, but we are very well-positioned because of the mix of our book and our expertise.

Q: I'm just wondering, is there any way you'd be willing to give us any disclosure around the growth in quake between resi and commercial just to get a better sense of your guys' growth there and the competition that's going on? And then within that, I'm just curious what the assumption around Commercial earthquake pricing is moving forward within that updated high single-digit earthquake outlook that you guys provided?

A: Yeah, Peter. So we don't break out the growth rates between the two. What I can offer you is that residential quake is larger. It's about 55% of the book. It's got a healthy inflation guard and strong policy retention that kind of blends out to a 6% or 7% growth rate if you just apply those two. So there's obviously growth in exposure in new business, as I said, record new business. On the commercial quake, that's where we're seeing more pressure. It's more large account business. And so that's not growing at the same clip that we're seeing in residential quake. But what I would offer you anecdotally is in the month of July, we're off to a good start this quarter with the growth and think that high single digits, if not low double digits based on July is attainable.

Q: The guidance, you raised the guidance, $3 million, the $198 million to $208 million. If we think about the favorable development in the quarter, it was greater than that. And so one might suggest the underlying guidance was a little bit lower. Is that a fair look at it or how would you frame that up?

A: Yeah. I mean, I think, first off, we've raised guidance 3 times this year, and we've only had two quarters of results. So we've raised guidance after a strong first quarter. We've raised guidance after a strong successful reinsurance placement, and then we're raising guidance again after a strong second quarter. I would not read much into that. Our view is -- Chris talked about the seasonality and pulling forward some of the premium, but also the losses from the crop. We have not factored in the potential favorability in there. We still have a cat load that's equivalent to our retention. And mind you, when there were major storms last year, because of the reduction in our continental hurricane exposure, we didn't have anywhere close to retention losses. So we think there's conservatism. And as I said earlier, our goal is to beat earnings. We've done it for 11 straight quarters, and we've raised guidance 8 times in the last few years. So that's going to be our model. And that's what we did this quarter. But I wouldn't read anything into it, Mark.

Q: I'm trying to just get my brain around how the Crop business worked because you talked about booking the premiums earlier. Does that mean that there's more unearned premium compared to what you might normally see on second quarter premium production?

A: Yeah. I think you'd kind of take all pieces of the crop premium coming on a little bit earlier, right? When we initially talked about it and thought about it, we expected most of the written and earned premium to come in, in Q3. While that is still true, some of that written and earned premiums came in a little bit earlier in the second quarter. As Jon Christianson likes to point out, we're talking about matters of days when this is reported, right? If something is reported on June 30, it's reported in Q2. It's reported on July 1, it's reported in Q3, a lot more -- or not a lot more, but more of that premium than we expected came in, in the second quarter. So that results in written premium being higher, that results in ceded premium being higher, that results in earned premium being higher, ceded earned being higher and losses being.

Q: So first question, if we think about the reinsurance retentions across the lines you disclosed, which lines have the most immediate impact on underwriting income? I guess I'm thinking about the bridge between gross premiums and underwriting income, right, and which lines have less. It seems to me that you're getting hit more immediately by slower growth in earthquake, right? But then if you think about your faster-growing lines like casualty, for example, you're not really seeing much of a benefit to underwriting income today. Is that fair? And how would you sort of characterize how those lines feed ultimately into underwriting income?

A: Well, yeah, Pablo, so if I understand your question, I think what you're trying to get is where there is the most leverage, so to speak, in our products. And with the casualty, most of the reinsurance, if not all of it is quota share. And so those quota shares are annual contracts, and we have not really changed our risk participations in those quota shares because of the nascent -- yeah, their nascency. A lot of these programs are early and they are longer tail lines. So we want to see the book season before we meaningfully change our risk participation. So yeah, I think that your point is with casualty, we're probably not earning as much premium. We're definitely not earning as much premium as we are in some of the property, which is more mature and shorter tail. Where we can see potentially more leverage long-term would be in quake and the all perils exposed business if we want to increase our retentions. We actually chose to do the opposite in the circumstance of earthquake, we maintained it at $20 million at 6/1. And then on the wind side, we pushed it down because we wanted to create alignment with our cat load that we've given in guidance. So as the balance sheet grows, and it certainly has, 50% earnings growth does lead to compounding the book value pretty effectively. We can take those retentions up. Those retentions are -- those low layers are at expensive chunky rate on lines, certainly north of our stated return on equity targets. So that does give us some optionality. And that same optionality does persist on the casualty side. It just won't manifest itself for a little bit longer period of time. It's a nice lever to have down the line.

Q: Could you expand a bit on the Neptune relationship here and perhaps how that compares with your prior flood operations? And just remind, are you operating as a frontier or would you be taking balance sheet risk as well?

A: Andrew, yes, so our flood book historically has been concentrated in 5, 6, 7 states, really writing more inland flood. And so the partnership with Neptune allows us to write inland flood and coastal flood. So it expands the TAM. We will be taking underwriting risk. We've taken underwriting risk in flood since we launched the product some 6 or 7 years ago. As I mentioned on my previous remarks, we have [called] back our wind exposure meaningfully. So that's allowing us to write coastal flood and not stack limit. So this will be a risk-bearing partnership with a nice operator that has really strong expertise in coastal flood and then we can marry that up with what we've done in the inland flood to get a nice balanced book of flood that's not overly concentrated from a geographic standpoint or nature of loss standpoint.