Palomar Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited consolidated results. Palomar is a specialty insurer focused principally on earthquake, hurricane, flood, and other property coverage. Comparisons below are with the same 2020 periods.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Gross written premiums | $129.4m | $83.8m | $232.9m | $155.3m |
| Net earned premiums | $54.2m | $39.3m | $101.3m | $74.1m |
| Total revenue | $57.7m | $43.1m | $107.0m | $81.2m |
| Income before tax | $15.5m | $15.3m | $35.6m | $30.5m |
| Net income | $12.3m | $12.0m | $29.0m | $23.8m |
| Diluted EPS | $0.47 | $0.48 | $1.11 | $0.95 |
| Combined ratio | 76.0% | 68.4% | 68.7% | 66.1% |
Gross written premiums increased 54.4% in Q2 and 50.0% in the first half. Management attributed growth to new business with existing partners, retention, broader distribution, and new partnerships. Average monthly retention was approximately 86% across continuing lines for the first half and above 90% in Hawaii Hurricane.
Q2 underwriting income, a company-defined non-GAAP measure, was $13.0m, up 4.9%; adjusted net income was $13.2m, up 1.5%. For the first half, underwriting income was $31.6m, up 26.1%, and adjusted net income was $32.5m, up 28.2%. These non-GAAP measures are not substitutes for GAAP results.
Financial position and liquidity
- At June 30, 2021, total assets were $829.7m, total liabilities $452.9m, and stockholders’ equity $376.7m. Cash and restricted cash totaled $25.6m; investments totaled $402.2m.
- Management reported $427.8m of cash and investment securities available. The balance sheet lists no debt; no debt balance is reported in the supplied filing text.
- First-half operating cash flow was negative $9.4m, versus positive $24.5m a year earlier. Management attributed the outflow primarily to timing of claim payments and changes in operating assets. Investing activities provided $15.5m; financing activities used $14.3m, including $15.8m of share repurchases.
- Gross loss and LAE reserves were $169.1m, with $145.5m recoverable from reinsurers on unpaid losses and $49.5m recoverable on paid losses. Management cautions reserve estimates are inherently variable and could change materially.
- Fixed-maturity investments had a 2.25% book yield and 3.84-year weighted-average effective duration. Approximately 74.6% were rated A− or better; 0.4% were unrated or below investment grade.
Material changes and unusual items
- First-half reported losses and LAE were $2.8m, down from $5.8m. This included $10.8m of negative catastrophe losses (beneficial net development/recoveries), partly offset by $13.6m of non-catastrophe losses. Favorable prior-year development was $3.1m, primarily from lower-than-expected severity of 2020 hurricane losses.
- Q2 losses and LAE rose to $7.2m from $4.0m, as higher non-catastrophe losses more than offset $1.1m of negative catastrophe losses. Management cited attritional activity in Commercial All Risk, Specialty Homeowners, Flood, and Inland Marine.
- Expense ratios increased: the Q2 combined ratio rose to 76.0% from 68.4%; the first-half ratio rose to 68.7% from 66.1%. Management cited higher acquisition costs, business mix and growth-related payroll, technology, stock compensation, and professional fees.
- Ceded written premiums rose faster than gross premiums, to 39.9% of Q2 GWP and 40.8% for the first half. Winter Storm Uri drove reinsurance reinstatement charges of $3.9m in Q2 and $7.9m in the first half.
- A $400m earthquake catastrophe bond became effective June 1, 2021. The stated catastrophe retention was $12.5m per event, with reinsurance protection up to $1.65bn for earthquake and $700m for hurricane events.
- The company repurchased 239,096 shares for $15.8m in the first half under a $40m program authorized through March 31, 2023; $24.2m remained available at June 30.
Outlook, risks, and contingencies
The filing provides no specific earnings or premium guidance. Management said current liquidity and expected receipts were sufficient for foreseeable needs and that it expects to meet liquidity requirements for at least the next 12 months and beyond. Results are not necessarily indicative of full-year performance.
- Key risks include catastrophe frequency and severity, climate-related weather changes, model and reserve uncertainty, and the possibility that losses exceed reinsurance limits.
- Reinsurance recoverables create counterparty and collection risk; the company reported $194.9m of aggregate recoverables. Reinsurance does not remove Palomar’s primary obligation to policyholders.
- Business is geographically concentrated, especially in California and Texas. Two program administrators accounted for 48% of first-half 2021 GWP, according to the filing.
- COVID-19 may affect demand, policy renewals, claims, investment values, and reinsurer capacity. The company reported business-interruption claims and said it was evaluating them under policy terms and exclusions.
- Insurance-subsidiary dividends are subject to regulatory limits. PSIC could pay no more than $11.3m in 2021 without approval; PESIC could not pay a 2021 dividend without regulatory approval. The company stated it did not intend to pay common dividends in the foreseeable future.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether favorable catastrophe reserve development and reinsurance recoveries are repeatable, and how loss trends develop in the growing book.
- Reinsurer credit quality, collectability and timing of the $194.9m recoverables, and the protection and exclusions in the catastrophe program.
- Drivers of the higher expense and combined ratios, including acquisition costs, reinsurance charges, and growth-related spending.
- Cash-flow conversion and the causes and duration of negative first-half operating cash flow.
- Exposure to California and Texas and reliance on key program administrators and distribution partners.
- Any further COVID-related claims, policy interpretation developments, or investment-market impacts.