Palomar Holdings Third Quarter 2026 Earnings Call - PALOMAR HOLDINGS INC

Explicit Guidance:

• Full-Year 2026 Adjusted Net Income: Raised to $280 million – $285 million, up from a prior range of $270–$280 million. At the midpoint, this implies ~31% year-over-year growth from 2025.
• 2026 Full-Year Financial Metrics:
  • Gross Written Premium (GWP): Expect annual growth over prior year; specifically, Q4 expected to grow slightly over Q3 2025 levels (previously ~$40–41M).
  • Net Earned Premium Ratio: Expected to be around 50% for the full year.
  • Acquisition Expense Ratio: Expected to be 12.1% for the full year.
  • Adjusted Other Underwriting Expense Ratio: Expected to be ~8% for the full year.
  • Loss Ratio: Expects to remain in the mid-to-upper 30s for 2026.
  • Adjusted Combined Ratio: Expects to be in the mid-70s for 2026.
  • Catastrophe Losses: Includes $8 million – $12 million for the full year.
• Crop Premium 2026: Updated forecast to $425 million, an increase from the initial outlook of $320 million.
• 2027 Crop Premium: Aiming for a $500 million premium target; specific guidance details to be provided in Q4 2026/early 2027 earnings releases.
• Share Capital:
  • Dividends: Board approved a second quarterly cash dividend of $0.45 per share, payable December 2, 2026.
  • Buybacks: Continued opportunistic repurchases; no specific FY2027 buyback guidance provided beyond current flexibility.

Business-Segment Outlook:

• Earthquake:
  • 2026 & 2027: Forecast continued growth for the full book. Residential earthquake franchise positioned for sustained growth driven by new business momentum (highest new policy sales since 2022) and 88% retention (high 80s).
  • Commercial Earthquake: No assumption of rate environment reversal in 2026; expects competitive conditions to persist with renewal rates down ~20%. Growth driven by small commercial admitted business (retention >80%) offsetting large account pressure.
• Inland Marine & Property:
  • New Products: Launching a new home builder's product in Q4 2026 to expand reach.
  • Growth Drivers: Continued strength in residential builder's risk, engineering, Hawaii hurricane, and flood products.
  • Hawaii Hurricane: Expect favorable catastrophe reinsurance market conditions to persist through the January 1st renewal and into 2027.
• Casualty:
  • Growth: Expecting moderate growth (indexing to rest of business excluding crop), likely in low single digits post-normalization (vs. 15–18% if excluding strategic exits).
  • Pricing: Rate increases expected to be moderate (e.g., E&S ~6%, Contractors 4%, Real Estate E&O ~10% in CA). Avoidance of auto liability and selective walking away from non-attractive renewals.
  • Underwriting: Continued investment in niche talent (Eno, A&E). Conservative reserving (82% IB&R) and no reliance on IBNR releases.
• Crop:
  • 2027 Outlook: Strong confidence in building a market-leading franchise. New PLMR.farm system launched, supporting 2027 reinsurance year products (livestock, winter wheat).
  • Performance: Anticipate underwriting gains across MPCI and private offerings as claims develop into early 2027.
• Surety:
  • Target: Ambition to become a top 20 surety writer with a $200 million+ premium book (up from ~$100M).
  • Timeline: Attainable in an "intermediate time frame" (few years) leveraging new reinsurance treaty capacity and geographic expansion (Northeast, Northern California, Louisiana).
  • Capacity: New treaty allows writing larger bonds; increased per-risk retention in 2026.
• General Platform: All five product categories expected to show growth vectors; commercial property identified as the most challenging for growth but still expected to be stable.

Market and Competitive Outlook:

• Pricing Dynamics:
  • E&S Market: Softening; E&S casualty rate increases down from low teens to ~6%.
  • Admitted Market: Providing pricing stability and insulation from E&S competition; ~64% of total portfolio is admitted.
  • Commercial Property: Persistent competitive pressure in large, layered, shared accounts; focus shifting to high-value residential and single-shot commercial accounts.
• Competitive Landscape:
  • Earthquake: Competitor capacity constraints (reinsurance limits) created opportunities; expects to sustain growth even if competitor returns.
  • Casualty: See larger accounts facing rate pressure; selective retention strategy to maintain underwriting discipline.
• Share of Wallet: Expecting continued ability to deploy capacity where risk-adjusted returns are attractive across market cycles.

Macro / Industry Outlook:

• Reinsurance Market: Expect favorable property catastrophe reinsurance market conditions to persist through the January 1, 2027 renewal.
• Hurricane Season: 2026 El Niño conditions led to active season in Hawaii but losses ($3M net) were manageable; expects to leverage targeted rate adjustments.
• Crop Market: Pricing for winter wheat and fall crops expected to be favorable; planting season off to a good start.
• Interest Rates/Investments: Investment yields remain strong (Q3 yield 5.1%); average yield on new investments over 5%.

Strategic Initiatives:

• Technology & AI:
  • PLMR.farm: Successfully launched; expanding ANI-enabled software development lifecycle to surety and other lines.
  • AI Agents: Implementing for routine policyholder service and an underwriting workbench for property to drive efficiency and premium growth in 2027.
  • Data Enrichment: AI-driven solution reducing manual data entry for earthquake underwriters.
• Talent & Organization: Continued investment in underwriting talent across crop, casualty, surety, and property; building out the investment team to support growing asset base.
• Reinsurance Optimization:
  • Quota Share/Catastrophe Retention: Will evaluate retention levels at each renewal based on earnings vs. volatility trade-offs. Currently holding casualty quota share sessions flat for 2027; evaluating increased property catastrophe retention if pricing is attractive.
  • Surety Treaty: New placement effective July 1, 2026, enhancing capacity for larger bonds.

Risks and Headwinds to Outlook:

• Catastrophe Volatility: Guidance includes $8–$12M cat losses; uncertainty remains for Q4 and 2027 regarding hurricane season, flooding, and earthquake events (e.g., Hawaii, Midwest).
• Commercial Rate Pressure: Continued pricing declines in commercial earthquake (down ~20%) and large commercial property could impact top-line growth if not offset by volume.
• Crop Seasonality & Weather: Q4 typically sees lower GWP; weather outcomes (moisture, commodity prices) could impact crop profitability and premium levels.
• Reserve Development: Minor unfavorable development observed ($2–4M); potential for volatility in casualty and property reserves.
• Market Softness: Soft E&S market conditions may lead to further price competition or capacity shifts requiring disciplined underwriting to avoid "chasing" volume.

Management Tone on the Future:

• Confidence Level: High confidence in sustaining "Palomar 2X" (20% adjusted ROE) and delivering consistent earnings growth.
• Strategic Outlook: Emphasis on "disciplined execution," "profitable growth," and "capital efficiency." Management views the current soft market as an opportunity to selectively walk away from unattractive risks while growing in niches.
• Guidance Change: Upward revision of 2026 net income guidance reflects strong execution, business mix evolution, and capital return capacity.
• Hedges: Management notes the "automatic inflation guard" (~10%) in residential earthquake policies and high retention rates as stabilizers.

Miscellaneous:

• Investor Day: Third Investor Day scheduled for March 2027 to provide deeper strategic insights.
• Reinsurance Renewal Cycle: Key reinsurance treaty renewals (including crop) occur January 1, 2027; management will use this point to assess retention changes.
• Capital Allocation: Committed to a disciplined strategy balancing organic growth investments (talent, tech) with capital returns (dividends, buybacks). Year-to-date 2026 capital returns approach $100 million.