Palomar Holdings, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing was signed March 9, 2021. Palomar is a specialty property insurer focused on earthquake, wind, flood and related risks, using admitted and excess-and-surplus products. Its newly launched Arizona-domiciled surplus-lines subsidiary began writing nationally in Q3 2020.
Financial results and condition
| Metric | FY2020 | FY2019 |
|---|---|---|
| Gross written premiums | $354.4 million | $252.0 million |
| Net written premiums | $199.3 million | $143.6 million |
| Net earned premiums | $155.1 million | $100.2 million |
| Total revenue | $168.5 million | $113.3 million |
| Net income | $6.3 million | $10.6 million |
| Diluted EPS | $0.24 | $0.49 |
| Underwriting income (loss; non-GAAP) | $(3.9) million | $8.7 million |
| Combined ratio | 102.5% | 91.3% |
| Adjusted combined ratio (non-GAAP) | 100.4% | 63.3% |
| Operating cash flow | $53.6 million | $41.7 million |
- Premium growth was 40.6%; net earned premiums grew 54.7%. Management attributed growth to new business and partnerships, retention, geographic and distribution expansion, and commercial rate increases.
- Losses and loss adjustment expenses rose to $64.1 million from $5.6 million, including $51.0 million of catastrophe losses, mainly from Hurricanes Sally, Laura, Hanna and Zeta. The catastrophe loss ratio was 32.9%; the overall loss ratio was 41.3%.
- Despite catastrophe losses, adjusted combined ratio excluding catastrophe losses was 67.5% (non-GAAP), versus 63.3% in 2019. Adjusted net income fell to $8.9 million from $37.9 million, and adjusted ROE to 3.0% from 24.1%. These adjusted measures exclude specified items and are not GAAP results.
- Investment income was $8.6 million, up 44.1%; net realized and unrealized investment gains were $1.5 million, down from $4.4 million. The fixed-income portfolio book yield declined to 2.27% from 2.90%.
- Cash and cash equivalents were $33.5 million; investments were $422.3 million; total assets were $729.1 million and stockholders’ equity was $363.7 million. Cash and investments available were reported at $456.1 million. The company reported positive operating cash flow and no long-term debt at year-end.
- Gross loss reserves were $129.0 million, versus $16.8 million a year earlier; net reserves were $34.5 million. Reinsurance recoverables totaled $104.7 million, including $94.6 million on unpaid losses.
Material changes and notable items
- Gross written premiums grew 40.6%, while the mix shifted toward commercial business: 40% of GWP was commercial, compared with 29% in 2019. Earthquake remained 56% of GWP; non-earthquake premiums grew 87% and earthquake premiums 18%.
- California and Texas accounted for 48.8% and 19.2% of GWP, respectively. Two program administrators accounted for 54% of GWP, down from 59% in 2019.
- Palomar raised approximately $125.5 million net through January and June 2020 stock offerings. Stockholders’ equity increased from $218.6 million to $363.7 million. The company purchased Hawaii Hurricane policy renewal rights for $7.1 million; renewals and resulting premium growth are uncertain.
- Commercial All Risk moved from admitted to E&S-only underwriting in Q4. The company also secured $25 million of aggregate XOL reinsurance effective April 1, 2021.
- Q4 2020 GWP was $96.1 million, revenue $42.3 million, net loss $1.8 million and diluted loss per share $0.07. Quarterly net income was positive in Q1 and Q2, then negative in Q3 and Q4.
Outlook, risks and contingencies
- The filing provides no specific earnings or premium guidance. Management’s stated strategy is to grow across products and geographies while maintaining underwriting discipline, diversification and reinsurance protection. It believes available resources and operating cash flows will meet liquidity needs for at least the next 12 months and beyond.
- Catastrophe frequency and severity, climate-related changes, model uncertainty, reserve estimation and reinsurance availability or collectability are central risks. The catastrophe program had a $10 million event retention plus selected $1 million co-participations; coverage extended to $1.4 billion for earthquakes and $600 million for hurricanes. Reinsurers’ failure to pay would leave Palomar primarily liable to policyholders.
- COVID-19 had not materially slowed premium growth as of the filing, but management reported increased business-interruption claims. All Risk policies include virus and/or communicable-disease exclusions; DIC policies require physical damage. Claims were being assessed individually. Pandemic effects on customers, markets, investments and reinsurers remained uncertain.
- Other material exposures include California and Texas concentration, reliance on program administrators and brokers, competition, regulatory and rating changes, and investment-market risk. A.M. Best affirmed the group’s A− rating with stable outlook; PESIC also received an A− rating in 2020.
- The company reported no material litigation, no off-balance-sheet arrangements, and no dividends paid in 2020. It does not expect to pay common-stock dividends in the foreseeable future. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification priorities
- Review catastrophe-loss development, claim settlements and reserve adequacy, especially the year-end reserve increase and the material reinsurance recoverables.
- Verify reinsurance treaty limits, reinstatement and aggregate coverage terms, exclusions, counterparty credit quality, and collections on the 2020 catastrophe claims.
- Assess whether premium growth can be sustained profitably, including the E&S launch, commercial-line mix, All Risk transition and renewal-rights acquisition.
- Monitor concentration in California and Texas and the continued dependence on two program administrators for a substantial share of premiums.
- Distinguish reported GAAP profitability from management’s non-GAAP adjusted measures, and evaluate the effect of catastrophe losses, lower investment yields and equity issuance on returns per share.