Palomar Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021 unless otherwise noted. Palomar is a specialty insurer focused on earthquake, hurricane, inland marine, flood and other property coverage, distributed through agents, program administrators, brokers and insurance partnerships.
Financial performance and position
- Premiums and revenue: Gross written premiums rose 65.0% to $170.9 million. Net written premiums increased 35.2% to $81.4 million and net earned premiums increased 61.6% to $76.0 million. Total revenue was $78.1 million, up from $49.2 million. Ceded written premiums grew 106.5% to $89.6 million; ceded premiums were 52.4% of gross written premiums versus 41.9% a year earlier.
- Profit: Net income was $14.5 million, down 12.6% from $16.6 million; diluted EPS was $0.56 versus $0.63. Pre-tax underwriting income, a non-GAAP measure, was $17.9 million versus $18.6 million. Adjusted net income was $17.6 million versus $19.3 million.
- Underwriting metrics: The GAAP combined ratio was 76.5%, compared with 60.4%; a ratio below 100% generally indicates underwriting profit. Adjusted combined ratio was 72.1% versus 53.3%. Excluding catastrophe losses, adjusted combined ratio was 71.4% versus 73.7%. The loss ratio was 19.7% versus negative 9.4%, while the expense ratio improved to 56.8% from 69.8%.
- Loss experience: Losses and loss adjustment expenses were $15.0 million, versus a $4.4 million benefit in Q1 2021. The current quarter included $1.5 million of adverse prior-year development, primarily from higher-than-expected attritional loss severity; the prior-year quarter included $2.7 million of favorable prior-year development. Catastrophe losses were $0.5 million versus a $9.6 million benefit in Q1 2021.
- Cash flow and liquidity: Operating cash flow was positive $47.8 million, versus negative $13.1 million. Investing activities used $53.6 million, principally for investment purchases. Cash, cash equivalents and restricted cash totaled $46.9 million at quarter-end, down from $50.4 million at December 31, 2021. Cash and investment securities available totaled approximately $533.2 million. Management said liquidity was sufficient for the foreseeable future and expected cash flows to meet requirements for at least 12 months and beyond.
- Investments and equity: Investments totaled $486.3 million, including $444.3 million of available-for-sale fixed maturities and $42.0 million of equity securities. Fixed maturities had $18.3 million of gross unrealized losses at quarter-end, versus $2.7 million at year-end; management attributed most fixed-income losses to interest rates, not issuer credit, and said it did not expect to be forced to sell before recovery. Net income was offset in comprehensive income by $18.5 million of after-tax unrealized security losses, resulting in a $3.9 million comprehensive loss. Stockholders’ equity was $380.4 million, down from $394.2 million.
- Debt: The company had $15.0 million outstanding under its secured FHLB line at a 0.35% overnight rate; there were no borrowings under its separate $100 million U.S. Bank revolving facility. The company reported compliance with credit-agreement covenants.
Material changes and management commentary
- Premium growth reflected new business with existing partners, retention, broader distribution and new partnerships. Fronting premiums contributed $29.8 million; the fronting business launched in Q4 2021 and cedes most premium and risk in return for fronting fees. Management expects to continue writing fronting premiums, but volumes may vary with partnership activity.
- Growth was particularly strong in inland marine and in PESIC, whose share of gross written premiums rose to 39.2% from 22.9%. The increased use of quota-share and fronting arrangements, together with exposure growth, drove ceded premiums up faster than gross premiums.
- Management attributed lower underwriting income mainly to the change from favorable prior-year catastrophe development in 2021 to adverse attritional-loss development in 2022. Higher earned premiums and improved expense ratios partly offset the increase in losses.
- The board authorized a new $100 million share-repurchase program through March 31, 2024, replacing the prior program. Palomar repurchased 219,061 shares for $13.0 million in Q1; $87.0 million remained available.
Outlook, risks and contingencies
- No formal earnings guidance is provided in the supplied filing text. Results for the quarter are not necessarily indicative of full-year results. The company expected to close a catastrophe-bond offering in Q2 2022 to expand catastrophe excess-of-loss coverage, but stated there was no assurance it would close on the expected timeline, on acceptable terms or at all.
- At March 31, catastrophe-event retention was $12.5 million for all perils, with reinsurance coverage up to $1.71 billion for earthquake events and $700 million for hurricane events. The company relies on reinsurers; it remains liable to policyholders if reinsurers fail to pay. Aggregate reinsurance recoverables were $145.8 million.
- Key risks include catastrophe frequency and severity, climate-related weather changes, inflation and construction-cost increases, reserve-estimation uncertainty, interest-rate and investment-market volatility, reinsurance availability and counterparty collectability, and pandemic-related economic effects.
- Business concentration is material: California represented 40.2% and Texas 11.1% of Q1 gross written premiums. Three program administrators accounted for 54% of Q1 gross written premiums, according to the risk-factor discussion.
- Insurance-subsidiary dividends are regulated and can be limited by solvency and other requirements. The filing states that, absent regulatory approval, PSIC could distribute up to $45.7 million, PESIC up to $4.1 million, and PSRE approximately $4.2 million in 2022, subject to applicable restrictions and calculations.
- The company reported ordinary-course legal proceedings that it did not expect, individually or in aggregate, to materially adversely affect its financial position. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether premium growth—especially fronting and E&S growth—translates into durable underwriting returns after ceded premiums, commissions and losses.
- How attritional loss severity and prior-year reserve development evolve, including the adequacy of loss reserves and reinsurance recoverables.
- Whether the planned catastrophe-bond offering closes, and the pricing, coverage and renewal terms of the overall reinsurance program.
- Whether the $18.3 million of unrealized fixed-maturity losses recover, and how interest rates affect investment values, capital and liquidity.
- Exposure to concentrated states and distribution partners, and the potential effect of catastrophe events or a loss of key partnerships.
- Use of capital for share repurchases alongside regulated subsidiary dividend capacity, liquidity needs and the outstanding FHLB borrowing.