Palomar Holdings, Inc. current report, 23 June 2020

Full document

Palomar Holdings, Inc. Form 8-K Summary

Filing date: June 23, 2020. Reporting period: Second quarter of 2020 for disclosed events. The filing reports strategic reinsurance actions and the formation of a new surplus lines subsidiary; it does not provide quarterly financial results.

Business Context and Key Financial Information

  • Palomar procured approximately $200 million of incremental California earthquake limit, $300 million of incremental limit for all earthquake zones, and $80 million of incremental windstorm limit.
  • Effective June 1, 2020, reinsurance coverage exhausted at $1.4 billion for earthquake events and $600 million for hurricane events.
  • As of March 31, 2020, modeled gross losses were $836 million for an earthquake equivalent to the 1906 San Francisco event and $835 million for an event equivalent to the 1994 Northridge earthquake.
  • Catastrophe event retention increased from $5 million to $10 million for all perils. Palomar also retained a $3 million vertical co-participation in selected reinsurance layers.
  • The filing states that retention remained within 5% of total stockholders’ equity as of March 31, 2020. Dollar stockholders’ equity, revenue, profit, cash flow, margins, debt, and liquidity figures are not provided.
  • The reinsurance panel includes approximately 90 reinsurers, each rated “A-” or better by A.M. Best or providing collateral.

Material Changes and Strategic Developments

  • Palomar capitalized and obtained regulatory approval for Palomar Excess and Surplus Insurance Company (PESIC), a new Arizona-domiciled surplus lines subsidiary.
  • PESIC is licensed in Arizona across Palomar’s existing lines of business and is pursuing eligibility in other U.S. jurisdictions.
  • PESIC was capitalized with approximately $50 million of initial surplus.
  • The company intends to begin writing surplus lines business nationally, primarily Commercial Earthquake and Commercial All Risk, in the second half of 2020.

Outlook, Management Commentary, and Risks

  • Management expects the expanded reinsurance program to provide capacity to support growth and coverage above the company’s 1-in-250-year peak-zone probable maximum loss.
  • The increased retentions and selected co-participation expose Palomar to greater losses within retained layers, although the company states the retention remains within 5% of stockholders’ equity as of March 31, 2020.
  • PESIC is intended to serve risks that admitted products cannot currently satisfy and to expand Palomar’s surplus lines market opportunity.
  • The filing indicates that a portion of the net proceeds from an offering is intended to further capitalize PESIC; the offering terms and proceeds are not detailed in this filing.

Investor Verification Items

  • Verify the final terms, pricing, and net proceeds of the referenced offering and the amount allocated to PESIC.
  • Assess actual catastrophe exposures and compare modeled losses with available reinsurance limits and retained capital.
  • Confirm PESIC’s surplus lines eligibility in each targeted jurisdiction and the timing of national underwriting commencement.
  • Review subsequent filings for actual second-quarter financial results, reinsurance costs, catastrophe losses, and changes in liquidity or capital.