Palomar Holdings Third Quarter 2026 Earnings Call - PALOMAR HOLDINGS INC

Financial Performance:

• Adjusted net income reached a record $81.3 million in Q3 2026, up 47% year-over-year (YoY); adjusted EPS grew 50% to $3.01 per share.
• Gross written premiums (GWP) increased 28% YoY to $767 million; net earned premiums surged 62.3% to $365.4 million.
• Adjusted combined ratio was 76.3% (vs. 74.8% prior year), driven by a higher attritional loss ratio (40.3%) offset by a lower expense ratio (17.5% combined).
• Catastrophe losses totaled $4.5 million for the quarter, well within the full-year guidance range of $8–12 million.
• Net investment income rose 54% YoY to $22.4 million, with a quarterly yield of 5.1% on $1.8 billion in invested assets.
• Annualized adjusted return on equity (ROE) hit 33.1%, significantly exceeding the "Palomar 2X" target of 20%.
• Shareholders received $8.9 million in stock repurchases and an inaugural dividend of $0.45 per share; $85 million returned to shareholders YTD.

Guidance and Future Outlook:

• Full-year adjusted net income guidance raised to $280–285 million (from $270–280 million), implying ~31% YoY growth at the midpoint.
• Crop premium outlook for 2026 raised to $425 million (up from $320 million); a $500 million intermediate target for 2027 remains intact, with specific details to be provided in 2027 guidance.
• Full-year 2026 expectations: Net earned premium ratio ~50%, acquisition expense ratio 12.1%, and adjusted combined ratio in the mid-70s.
• Management forecasts continued profitable growth in 2027, driven by residential earthquake, crop, and surety segments.
• Expectation of favorable property catastrophe reinsurance market conditions persisting through January 2027 renewal.

Business Segments and Product Lines:

• Earthquake: GWP up 3% YoY; residential portion grew to 66% of book, driven by consumer awareness and competitor capacity constraints. Commercial rates down ~20% on renewals.
• Inland Marine & Property: GWP up 13% YoY; Hawaii hurricane grew 23% despite active season, with only $3M net losses on three storms. Flood premium up 25%.
• Casualty: GWP grew 3% YoY; growth reflects exits from transactional liability and cyber underwriting, offset by strong performance in niche lines like healthcare liability (10–35% rate increases).
• Crop: GWP surged 89% YoY; launched "PLMR.farm" policy administration system to improve efficiency and agent visibility.
• Surety & Credit: GWP exploded 228% YoY following Gray Surety acquisition and new reinsurance treaty, enabling larger bond issuance.
• Reinsurance: Completed five renewals and one new placement; cyber participation reduced while other treaties improved economics.

Market and Competitive Landscape:

• Portfolio is 64% admitted (pricing stability) and 36% non-traditional lines (crop, surety) less correlated with P&C cycles.
• Residential earthquake market benefits from capacity constraints at a competitor and heightened global demand; commercial earthquake faces price erosion.
• E&S casualty market seeing moderate rate increases (6%) compared to low teens a year ago; admitted market encroaching on E&S space in construction liability, prompting selective walks.
• Reinsurance market conditions remain favorable, allowing Palomar to maintain or increase retention levels on property catastrophe layers if pricing is attractive.

Risks and Challenges:

• Loss Ratio Inflation: Crop business, now 38% of losses (up from 24%), contributes to a rising overall loss ratio, though combined ratio remains stable due to expense efficiency.
• Commercial Pricing Pressure: Commercial earthquake and casualty segments face downward rate pressure, necessitating disciplined underwriting and selective renewal retention.
• Catastrophe Uncertainty: Future hurricane and flood events remain a risk, though current guidance assumes $8–12M in cat losses.
• Technology Implementation: Reliance on new systems (PLMR.farm, AI underwriting workbench) carries execution risk, though early feedback is positive.

Management Commentary and Tone:

• Tone is highly confident and constructive, emphasizing "disciplined underwriting," "profitable growth," and consistent execution of the "Palomar 2X" strategy.
• Management highlighted the success of AI and automation (e.g., handling Hawaii hurricane call volume without additional staffing) as a key competitive advantage.
• Leadership expressed strong conviction in the durability of residential earthquake growth and the scalability of the crop and surety franchises.
• Emphasis placed on maintaining a balanced, diversified portfolio that generates consistent returns across market cycles.

Analyst Questions and Answers:

• Earthquake Drivers: Q: Durability of residential growth? A: Driven by structural factors (inflation guard, 88% retention, competitor capacity) rather than temporary events; expected to sustain.
• Casualty Growth: Q: Organic growth excluding exits? A: Underlying same-store growth would have been 15–18% absent strategic exits in transactional liability and cyber.
• Reinsurance Strategy: Q: Future retention levels? A: Will hold flat on traditional loss layers in soft markets but has balance sheet capacity to increase catastrophe retention if priced attractively.
• Crop Seasonality: Q: Q4 outlook? A: Q4 GWP typically lower, but growth expected YoY; conservative commodity price assumptions may be lifted.
• Surety Scale: Q: Timeline to $200M premium? A: Attainable in an intermediate timeframe (few years) supported by new treaty capacity and team expansion.
• Reserve Adequacy: Q: Nature of unfavorable development? A: Immaterial (<$2M) casualty development offset by property/surety favorability; crop involved a $4M reallocation between years.

Other Key Points:

• New AI agents are deployed for customer service and underwriting data enrichment, reducing manual entry hours.
• Management is investing in specialized underwriting talent across casualty and crop lines to support niche growth.
• Hawaii hurricane losses were minimal ($3M net) due to specific coverage triggers (watch/warning per county) and portfolio spread.
• Second quarterly cash dividend of $0.45 per share declared, payable December 2nd.
• Palomar plans to host a third Investor Day in March 2027 to detail long-term strategy.