Palomar Holdings Third Quarter 2026 Earnings Call - PALOMAR HOLDINGS INC

Financial Performance:

• Adjusted net income reached a record $81.3 million in Q3 2026, growing 47% year-over-year (YoY).
• Adjusted earnings per share (EPS) increased 50% YoY to $3.01.
• Gross written premiums (GWP) grew 28% YoY to $767 million.
• Adjusted combined ratio was 76.3%, with an attritional loss ratio of 40.3% and a catastrophe loss ratio of 1.2%.
• Annualized adjusted return on equity (ROE) hit 33.1%, well above the 20% "Palomar 2X" target.
• Net investment income surged 54% to $22.4 million, driven by higher yields (5.1%) and increased invested assets totaling $1.8 billion.
• Net earned premiums increased 62.3% YoY to $365.4 million; the net-earned premium ratio improved to 49.6%.
• Total losses were $151.6 million, including $4.5 million in catastrophe losses and $147.2 million in attritional losses.

Guidance and Future Outlook:

• Full-year 2026 adjusted net income guidance raised to $280–$285 million (prior: $270–$280 million), implying ~31% YoY growth.
• Full-year 2026 crop premium forecast increased to $425 million (prior: $320 million).
• Management expects to reach the long-term intermediate goal of $500 million in crop premiums in 2027.
• Full-year adjusted combined ratio guidance remains in the mid-70s; loss ratio expected in the mid-to-upper 30s.
• Projected full-year catastrophe losses for 2026 are $8–$12 million.
• Revenue and premium growth expected to continue across all five product categories in 2027, driven by technology adoption and new reinsurance capacity.

Business Segments and Product Lines:

• Earthquake: GWP up 3% YoY; residential earthquake (66% of segment) grew significantly due to high demand and competitor capacity constraints; commercial rates down ~20% on renewals.
• Inland Marine & Property: GWP up 13% YoY; Hawaii hurricane business up 23% (net losses $3M from three storms); flood premium up 25%.
• Casualty: GWP up 3% YoY, decelerated from prior quarters due to exiting transactional liability and cyber program changes; healthcare liability rates up 10–35%.
• Crop: GWP up 89% YoY; launched "PLMR.farm" platform for policy administration; new business sales in new geographies (ND, IN, MN).
• Surety & Credit: GWP surged 228% YoY following the integration of the Gray Surety team; secured new reinsurance treaty allowing larger bond issuance.

Market and Competitive Landscape:

• 64% of the portfolio is written on an admitted basis, providing insulation from E&S market volatility.
• Property business is 52% commercial and 48% residential; no single product exceeds one-third of GWP, ensuring diversification.
• Commercial earthquake rates face pressure (down 20%), while residential earthquake benefits from consumer awareness and competitor exit.
• E&S casualty market sees moderate rate increases (6%) compared to double-digit growth previously; admitted market competition is increasing in construction liability.
• Reinsurance market conditions remain favorable for property catastrophe treaties through 2027.

Risks and Challenges:

• Adverse development of ~$2M in casualty reserves and $4M in reallocated livestock losses (crop) contributed to unfavorable prior-year development.
• Persistent competitive pressure in commercial property and large commercial earthquake markets affecting renewal rates.
• Climate volatility and extreme weather events (Hawaii hurricanes, Midwest floods) continue to drive catastrophe loss volatility.
• Dependency on reinsurance terms and capacity for profitability, particularly in crop and earthquake lines.

Management Commentary and Tone:

• Management expressed high confidence ("steadfast commitment") in the "Palomar 2X" framework (20%+ ROE).
• Tone was optimistic, citing "excellent" Q3 results, record earnings, and successful execution of diversification strategy.
• Leadership emphasized disciplined underwriting, conservative reserving, and the strategic value of admitted business mix.
• Significant investment highlighted in AI and technology (PLMR.farm, underwriting workbench) to drive efficiency and growth.

Analyst Questions and Answers:

• Earthquake Growth: Confirmed residential growth is durable due to inflation guards (10%) and high retention (88%); commercial growth remains challenged by pricing pressure.
• Casualty Normalization: Excluding exiting lines, underlying growth is estimated at 15–18%; unfavorable development was immaterial ($<2M).
• 2027 Outlook: Growth vectors identified in crop, residential property, and surety; surety aims for top-20 status with a $200M+ premium book.
• Reinsurance Strategy: Retention percentages held flat in soft markets but maintained optionality to increase for catastrophe and crop lines if pricing allows.
• Crop Performance: Loss ratio lower than expected due to superior reinsurance transfer efficacy compared to industry peers; 4Q crop premium expected to grow slightly.
• Investment Returns: Net new money yield remains above 5%, supporting the 33% annualized ROE.

Other Key Points:

• Shareholder returns: Repurchased $8.9M of stock in Q3 (avg price $127); paid inaugural dividend of $0.45/share; total Q3 2026 returns to shareholders ~$85M.
• Capital Allocation: Second quarterly dividend of $0.45/share declared, payable December 2nd.
• Technology: AI agents now handle routine customer service; "PLMR.farm" enhances reporting and agent visibility.
• Talent: Continued hiring in crop, casualty, surety, and investment teams to support scaling operations.
• Investor Day: Third Investor Day scheduled for March 2027 to detail long-term strategy.