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Palomar Holdings, Inc. (PLMR)·Q2 2024 Earnings Summary

Executive Summary

  • Palomar delivered a record quarter with Gross Written Premiums of $385.2M (+40.4% YoY), adjusted net income of $$32.0M and diluted adjusted EPS of $1.25; net income was $25.7M and diluted EPS $1.00 .
  • Management raised FY2024 adjusted net income guidance to $124–$130M, citing stronger underwriting results and including $6.8M H1 CAT losses plus $5–$7M expected Q3 losses from Hurricanes Beryl and Debby .
  • Reinsurance program was renewed at terms “better than anticipated” and coverage expanded; earthquake retention set at $20M and non-earthquake retention lowered to $15.5M to enhance earnings predictability .
  • Key catalysts: AM Best upgrade to “A”, continued acceleration in earthquake and casualty growth, and acquisition of FIA (surety) to diversify earnings; the fronting business faces a roll-off (~$168M portfolio) beginning mid-Q3, but management expects to offset with other growth vectors .

What Went Well and What Went Wrong

What Went Well

  • “Record gross written premium and adjusted net income,” with GWP +40% YoY and adjusted net income +47% YoY; adjusted ROE reached 24.7% .
  • Reinsurance renewal exceeded expectations (lower rate-online, expanded limits), and retention changes improved earnings predictability; program now extends to $3.06B (EQ), $735M (Hawaii Hurricane), $117.5M (other perils) .
  • Product growth was broad-based: earthquake GWP +25% YoY with acceleration vs Q1; casualty +258% YoY; inland marine/other property +34% YoY .

What Went Wrong

  • Loss ratio rose to 24.9% (attritional 22.1%, CAT 2.8%) vs 21.5% last year, driven by higher attritional losses; elevated Texas severe convective storm/tornado losses impacted Builder’s Risk .
  • Fronting program roll-off (Omaha National) reduces fee income; ~$168M portfolio will exit, with roughly half affecting 2H24 and more in early 2025, though management expects to backfill over time .
  • Net earned premium ratio expected to trough in Q3 (low 30s) due to crop seasonality and full-quarter excess-of-loss costs before rising thereafter, adding near-term ratio volatility .

Financial Results

MetricQ4 2023Q1 2024Q2 2024
Gross Written Premiums ($USD Millions)$303.2 $368.1 $385.2
Net Earned Premiums ($USD Millions)$93.7 $107.9 $122.3
Net Investment Income ($USD Millions)$7.0 $7.1 $8.0
Net Income ($USD Millions)$25.9 $26.4 $25.7
Diluted EPS ($)$1.02 $1.04 $1.00
Adjusted Net Income ($USD Millions)$28.0 $27.8 $32.0
Diluted Adjusted EPS ($)$1.11 $1.09 $1.25
Loss Ratio (%)19.1% 24.9% 24.9%
Combined Ratio (%)74.2% 76.9% 79.1%
Adjusted Combined Ratio (%)68.8% 73.0% 73.1%

Segment GWP breakdown (Q2 YoY):

ProductQ2 2023 ($USD Millions)Q2 2024 ($USD Millions)
Earthquake$107.9 $135.0
Fronting$79.7 $95.9
Inland Marine & Other Property$69.8 $93.5
Casualty$16.4 $58.6
Crop$0.5 $2.2
Total GWP$274.3 $385.2

Key operating KPIs:

KPIQ4 2023Q1 2024Q2 2024
Net Earned Premium Ratio (%)33.9% 35.6% 37.4%
Expense Ratio (%)55.1% 52.0% 54.2%
Cat Loss Ratio (%)0.0% 3.1% 2.8%
Adjusted Combined Ratio ex CAT (%)68.8% 69.8% 70.3%
Annualized ROE (%)23.2% 21.7% 19.9%
Annualized Adjusted ROE (%)25.1% 22.9% 24.7%
Net Written Premium-to-Equity (x)N/AN/A1.02x

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Adjusted Net Income ($USD Millions)FY 2024$110–$115 (Feb-24) $124–$130 (Aug-24) Raised
Adjusted Net Income ($USD Millions)FY 2024$113–$118 (May-24) $124–$130 (Aug-24) Raised
Catastrophe Losses ($USD Millions)Q3 2024N/A$5–$7 related to Beryl/Debby New inclusion
Attritional Loss Ratio (%)FY 2024N/A~21%–25% Outlook reaffirmed
Cat Loss Ratio (%)FY 2024N/A~2%–3% Outlook reaffirmed
Net Earned Premium Ratio (%)Q3 2024N/A“Low 30s” trough Seasonal trough (crop)
Crop GWP ($USD Millions)FY 2024~$125 target Maintain/“achieve or exceed” Target reiterated
Earthquake GWP Growth (%)FY 2024High teens to ~20% Maintain Outlook reiterated

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2023, Q1 2024)Current Period (Q2 2024)Trend
Reinsurance cost/coverageHard market in 2023; preparing for renewal; improved combined ratio Renewal better than expected; more limits; EQ retention $20M, non-EQ $15.5M Improving pricing/support
Casualty reserves & social inflationCasualty scaling, conservative reserves Conservative reserving; niche focus; modest net lines; rates up (>20% excess, 18% E&O) Growth with prudent risk
California E&S dislocationEarthquake growth drivers include admitted market pressures E&S resi quake up 38% YoY; CEA pulling back; retention strong Ongoing tailwind
Fronting programSignificant part of GWP (2023: $364M) Omaha National roll-off (~$168M) begins mid-Q3; pipeline to replace Near-term headwind
Crop seasonalityNew line; early contribution in 2024 ~$40M H1; majority written/earned in Q3; ~95% ceded; seasonality impacts ratios Seasonal trough in Q3
AM Best upgradeA- rating at start of year Upgraded to A; expected to help distribution/talent Strategic positive
FIA (surety acquisition)N/AAcquire at 1.7x book; ~$10M premium; accretive 2025; expand distribution/geography Diversification driver

Management Commentary

  • “We achieved record gross written premium and adjusted net income during the quarter… successfully placing our core excess of loss reinsurance program at June 1st on terms that were better than anticipated… and AM Best upgrading our Financial Strength Rating to an A.” — Mac Armstrong .
  • “Our earthquake franchise grew gross written premium 25%… we remain confident that earthquake premiums will grow in the high-teen 20% range in 2024.” — Mac Armstrong .
  • “We did sacrifice some savings as we reduced our per occurrence event retention to $15.5M for non-earthquake… and slightly increased our earthquake retention to $20M… in the spirit of delivering consistent earnings.” — Mac Armstrong .
  • “We signed an agreement to acquire First Indemnity of America… will allow Palomar to enter an attractive business segment… accretive to 2025 earnings.” — Mac Armstrong .
  • “Our annualized adjusted return on equity was 24.7%… we are raising our full year adjusted net income guidance range to $124M to $130M.” — T. Christopher Uchida .

Q&A Highlights

  • Casualty reserves: Management emphasized niche segments, modest net lines (~$1.2M average), and strong rate to stay ahead of loss costs; reserves for casualty remain conservatively held with no releases .
  • Net earned premium ratio: Expected to bottom in Q3 at “low 30s” due to crop seasonality and full-quarter excess-of-loss costs; sequential dollar growth in NEP still expected .
  • Fronting roll-off: Omaha National portfolio ~$165–$168M; roll-off begins mid-Q3; lower-margin product; pipeline and other growth expected to offset over time .
  • California E&S quake demand: Continued dislocation in admitted homeowners market; E&S residential quake +38% YoY; partnerships (e.g., Cincinnati Financial) funnel E&S business .
  • Cat loss outlook: Year-to-date plus Beryl/Debby imply ~$13–$14M directional cat load; mix includes SCS, flood, continental hurricane .

Estimates Context

  • Wall Street consensus (S&P Global) for Q2 2024 EPS and revenue was not retrievable at time of writing due to SPGI request limits; as a result, formal vs-estimate comparisons are unavailable. Values would typically be sourced from S&P Global; consensus data was unavailable at time of writing.

Key Takeaways for Investors

  • Reinsurance renewal at improved economics and expanded limits should support margin durability; retention changes trade minor savings for more predictable earnings, a favorable risk-reward for multiple expansion .
  • Earthquake and casualty growth are accelerating, providing diversified, higher-return expansion amid California E&S tailwinds and disciplined underwriting controls .
  • Near-term ratio volatility is likely in Q3 from crop seasonality and full-quarter excess-of-loss costs; management telegraphed a trough in NEP ratio before improvement in subsequent quarters .
  • Fronting fee income headwind from Omaha National roll-off (~$168M) begins mid-Q3; management views fronting as lower-margin and expects to backfill with new programs and growth in core lines .
  • Guidance lift to $124–$130M adjusted net income for FY2024 underscores strong execution and upside from reinsurance savings and product growth; implies sustained ROE >20% .
  • AM Best upgrade to A enhances distribution and talent recruitment and should be a medium-term catalyst, particularly for professional lines and niche casualty .
  • FIA acquisition adds a high-quality surety platform with potential for multi-fold growth leveraging Palomar’s capital and distribution, accretive in 2025 and diversifying the earnings base .

Appendix: Additional Data Points

  • Q2 loss detail: CAT losses $3.44M; non-CAT losses $26.99M; total losses $30.43M .
  • Underwriting income: $25.61M (GAAP) and $32.92M (adjusted) in Q2 .
  • Balance sheet: Stockholders’ equity $532.6M; total assets $2.02B (June 30, 2024) .
  • Investment portfolio: Weighted-average duration 3.73 years; cash & invested assets $777.9M .