Palomar Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Palomar is a specialty property and casualty insurer, with significant earthquake business and growing fronting operations. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Gross written premiums | $250.1 | $170.9 | +46.3% |
| Net written premiums | $79.8 | $81.4 | -2.0% |
| Net earned premiums | $83.2 | $76.0 | +9.5% |
| Total revenue | $89.2 | $78.1 | +14.2% |
| Net investment income | $5.1 | $2.6 | +98.5% |
| Income before tax | $22.6 | $19.1 | +18.6% |
| Net income | $17.3 | $14.5 | +19.1% |
| Diluted EPS | $0.68 | $0.56 | — |
| Operating cash flow | $17.4 | $49.2 | Lower |
Gross written premiums rose on increased business with existing partners, retention, broader distribution and new partnerships. Growth was concentrated in fronting premiums, which increased to $91.8 million from $29.8 million. Ceded written premiums rose 90.2% to $170.3 million; the ceded share of gross written premiums increased to 68.1% from 52.4%, largely reflecting fronting and quota-share business and higher reinsurance costs. Consequently, net written premiums declined despite strong gross growth.
Net income included higher investment income and a swing to $0.1 million of realized and unrealized investment gains from $1.3 million of losses. The reported combined ratio was 77.9%, versus 76.5%; the loss ratio rose to 24.8% from 19.7%, while the expense ratio improved to 53.1% from 56.8%. Adjusted combined ratio, a company-defined non-GAAP measure, was 73.3% versus 72.1%. Adjusted net income was $20.4 million versus $18.6 million, and adjusted diluted EPS was $0.80 versus $0.72.
Financial position, liquidity and debt
- At March 31, total assets were $1.441 billion, stockholders’ equity was $404.6 million and tangible equity was $396.7 million. Equity increased from $384.8 million at year-end 2022, primarily due to net income and improved unrealized investment marks, partly offset by repurchases.
- Cash and cash equivalents were $80.3 million; fixed-maturity securities were $554.5 million at fair value and equity securities were $39.4 million. Cash and investments totaled approximately $674.2 million.
- Borrowings were $71.4 million, up from $36.4 million at year-end: $35.0 million under the U.S. Bank revolving facility and $36.4 million through the FHLB. Q1 interest expense was $1.0 million, versus $0.1 million. The company reported compliance with debt covenants.
- Operating cash flow was $17.4 million; investing activities used $33.9 million, while financing activities provided $28.7 million, including $35.0 million of credit-line proceeds and $6.8 million of share repurchases. Cash, cash equivalents and restricted cash ended at $80.4 million.
- Management said available liquidity and expected cash sources were sufficient for foreseeable needs and at least the next 12 months. Insurance-subsidiary dividends are subject to regulatory limits; PSIC could distribute up to $78.2 million in 2023 without approval, while PESIC could not distribute without Arizona approval due to its 2022 statutory net loss.
Material changes, outlook and risks
- Losses and loss adjustment expenses increased 38.1% to $20.7 million. Catastrophe losses were $1.8 million, primarily flood-related, and the catastrophe loss ratio was 2.2%, versus 0.6%. Non-catastrophe losses also increased, particularly in Commercial All Risk, Casualty and Inland Marine. Prior-year adverse development was $3.4 million, mainly from higher-than-expected attritional-loss severity, partly offset by lower catastrophe-loss severity.
- Investments included $40.4 million of gross unrealized losses on fixed maturities, down from $46.7 million at year-end. Management attributed most losses to interest rates, stated it did not intend to sell the affected securities, and concluded it was not more likely than not that it would be required to sell before recovery of amortized cost. The portfolio included $0.9 million of credit-loss allowance.
- The company retained $12.5 million catastrophe-event retention and reported reinsurance limits of $2.15 billion for earthquake, $1.01 billion for Hawaii hurricane and $250 million for continental U.S. hurricane events. It chose not to renew $25 million of aggregate XOL protection after March 31, 2023, citing reduced utility and a plan to pursue alternatives. Subsequent to quarter-end, it secured $187.5 million of incremental XOL limits, effective in stages from April 1 through June 1, 2023. It was also seeking a catastrophe bond offering expected to close in Q2 2023; completion, timing and terms were not assured.
- California generated 52.7% of Q1 gross written premiums; Texas contributed 9.3%. The filing highlights exposure to catastrophe severity and climate-related weather uncertainty, reserve-estimation variability, reinsurance availability and counterparty collectability, inflation, and concentration in key states and distribution partners. Reinsurance recoverables totaled $229.4 million.
- No specific numerical earnings or premium guidance was provided. Management described growth and profitability objectives but cautioned that interim results are not necessarily indicative of full-year results. It stated that ordinary-course legal proceedings were not expected to materially adversely affect financial position. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether rapid gross-premium growth in fronting and quota-share business translates into sustainable net growth and underwriting returns, given the higher ceded-premium share.
- Whether attritional-loss trends and the $3.4 million of adverse prior-year development persist, and whether loss reserves and reinsurance recoverables prove adequate and collectible.
- Final terms, cost and effective coverage of the planned catastrophe bond and new XOL protection, particularly following expiration of the aggregate cover.
- How investment yields, interest-rate-driven unrealized losses and the increased variable-rate borrowings affect earnings, capital and liquidity.
- The effects of catastrophe exposure and geographic concentration, including California’s share of premiums, on losses, reinsurance costs and future growth.