Palomar Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; filed November 4, 2021. Palomar is a specialty insurer focused on products including earthquake, hurricane, flood, and inland marine insurance. All dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Gross written premiums | $152.3 million | $103.0 million | $385.3 million | $258.3 million |
| Net earned premiums | $64.7 million | $42.0 million | $166.0 million | $116.1 million |
| Total revenue | $67.7 million | $45.0 million | $174.6 million | $126.2 million |
| Net income (loss) | $0.2 million | $(15.7) million | $29.2 million | $8.1 million |
| Diluted EPS | $0.01 | $(0.62) | $1.12 | $0.32 |
| Combined ratio | 102.8% | 157.1% | 82.0% | 99.1% |
Q3 2021 underwriting loss was $1.8 million, versus a $24.0 million loss a year earlier. For the first nine months, underwriting income was $29.8 million, compared with $1.1 million. The Q3 combined ratio remained above 100%, indicating an underwriting loss for the quarter; the nine-month ratio was below 100%.
- Q3 catastrophe losses were $17.5 million, compared with $36.5 million in Q3 2020; catastrophe loss ratios were 27.0% and 86.9%, respectively. Nine-month catastrophe losses were $6.7 million versus $36.5 million.
- Non-catastrophe losses increased to $11.0 million in Q3 and $24.6 million for the nine-month period, reflecting higher attritional loss activity.
- Q3 2021 included $0.2 million of adverse prior-year reserve development. The nine-month period included $2.9 million of favorable prior-year development, mainly from lower-than-expected catastrophe severity on 2020 hurricanes.
- Net investment income was $2.2 million in Q3 and $6.6 million for nine months. Net realized and unrealized investment results were losses of $0.3 million and $0.8 million, respectively, primarily reflecting unrealized equity-security losses.
Balance sheet, liquidity, and cash flow
- At September 30, 2021, total assets were $876.8 million, total liabilities $499.0 million, and stockholders’ equity $377.8 million. Tangible equity, a non-GAAP measure, was $367.3 million.
- Cash and cash equivalents were $41.4 million; fixed-maturity and equity investments totaled $425.4 million. Management cited $467.0 million in cash and investment securities available.
- Loss and LAE reserves were $175.7 million gross, with $129.0 million recoverable from reinsurers on unpaid losses. Total reinsurance recoverables, including paid losses, were $183.5 million.
- The balance sheet presents no conventional borrowings or debt balance. This summary does not assess possible off-balance-sheet or subsidiary-level obligations.
- For the first nine months, operating cash flow was $33.4 million, investing cash flow was $(12.2) million, and financing cash flow was $(13.4) million. Cash, cash equivalents, and restricted cash increased $7.8 million to $41.6 million.
- The company repurchased 239,096 shares for $15.8 million under a $40 million authorization; $24.2 million remained available at quarter-end.
Material changes and management commentary
- Gross written premiums grew 47.9% in Q3 and 49.2% for nine months, driven by business from existing partners, strong retention, expanded distribution, and new partnerships. Inland Marine and E&S subsidiary PESIC grew substantially; Commercial All Risk premiums declined following underwriting changes and the end of admitted writing.
- Reinsurance costs increased year over year. For the first nine months, ceded written premiums rose 51.1%; Winter Storm Uri triggered $7.9 million of additional reinsurance reinstatement expense.
- Other underwriting expenses rose 62.1% in Q3 and 59.5% for nine months, reflecting growth-related payroll, technology, stock compensation, and professional fees; the nine-month figure also included catastrophe-bond costs.
- Palomar reported a $400 million earthquake catastrophe bond effective June 1, 2021. Its stated catastrophe retention was $12.5 million per event, with reinsurance coverage up to $1.68 billion for earthquakes and $700 million for hurricanes.
- Management stated that current liquidity and expected cash sources should cover insurance-subsidiary cash needs for the foreseeable future and that operating cash flows should meet liquidity requirements for at least the next 12 months and beyond. No specific earnings or premium guidance was provided.
Risks, contingencies, and unusual items
- Results are exposed to unpredictable catastrophe frequency and severity, climate-related weather risk, reserve-estimation uncertainty, construction-cost inflation, and potential exhaustion or unavailability of reinsurance. Recoverables also expose the company to reinsurer credit and collection risk.
- Business is geographically concentrated, particularly in California and Texas; California represented 46.8% and Texas 12.5% of nine-month 2021 gross written premiums.
- Two program administrators represented 49% of nine-month 2021 gross written premiums, creating distribution-partner concentration risk.
- COVID-19-related business interruption claims were being investigated and assessed. The company described exclusions or physical-damage requirements in relevant policy forms, while noting broader pandemic, economic, and investment-market uncertainty.
- The company reported ordinary-course legal proceedings and stated their outcomes were not expected to materially adversely affect its financial position. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether the strong year-to-date underwriting result persists as catastrophe losses and attritional claims develop, and how prior-year reserve estimates change.
- Reinsurance recoverability, renewal pricing and terms, and protection available after multiple catastrophe events.
- Drivers of rising acquisition and other underwriting expenses, including the effect of growth, business mix, reinsurance arrangements, and stock-based compensation.
- Premium growth quality and concentration by product, state, subsidiary, and program administrator, including the performance of PESIC and Commercial All Risk changes.
- Investment portfolio sensitivity to interest rates, equity-market changes, and credit deterioration; fixed-maturity unrealized losses were $1.6 million at quarter-end.
- Regulatory limits on distributions from insurance subsidiaries, which can constrain cash available to the holding company.