Palomar Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Palomar is a specialty insurer focused on earthquake, hurricane, flood, inland marine and related products.
Financial and operating results
- Premiums: Gross written premiums rose 44.9% to $103.6 million; net written premiums increased 43.4% to $60.2 million. Net earned premiums grew 35.2% to $47.1 million. Growth reflected new business through existing partners, retention, expanded distribution and new partnerships.
- Revenue and earnings: Total revenue was $49.2 million, up 29.5%. Net income increased 41.2% to $16.6 million; diluted EPS was $0.63 versus $0.48. Adjusted net income, a non-GAAP measure, was $19.3 million versus $12.3 million.
- Underwriting: GAAP combined ratio was 60.4% versus 63.6%; adjusted combined ratio was 53.3% versus 61.6%. The reported loss ratio was negative 9.4%, reflecting favorable prior-year development and reinsurance recoveries—not an absence of claims. Excluding catastrophe losses, adjusted combined ratio was 73.7%, compared with 61.6%.
- Investment results: Net investment income rose 9.0% to $2.2 million. Net realized and unrealized investment results were a $0.7 million loss, versus a $0.4 million gain, including unrealized losses on equity securities. Other comprehensive income included $6.2 million of net unrealized losses on available-for-sale securities.
- Cash flow and liquidity: Operating cash flow was negative $13.1 million, compared with positive $21.8 million; management attributed the outflow primarily to claims paid exceeding reinsurance recoveries. Cash and restricted cash totaled $23.8 million at quarter-end. Cash plus investments totaled approximately $436.7 million. Management said liquidity and expected cash sources were sufficient for the foreseeable future and at least the next 12 months.
- Balance sheet: Total assets were $825.9 million, liabilities $449.5 million and stockholders’ equity $376.4 million at March 31, 2021. Fixed-maturity securities at fair value were $402.3 million. The filing’s presented balance sheet reports no debt balance.
Material changes and notable items
- Gross written premiums increased 44.9%; Commercial Earthquake and Inland Marine grew strongly, while Commercial All Risk premiums declined 34.2%.
- Reinsurance costs rose: ceded written premiums increased 47.0% to $43.4 million, partly due to exposure growth and Winter Storm Uri. Uri-related catastrophe losses used XOL layers, driving $4.0 million in reinstatement expense in Q1; the company expected similar costs in Q2.
- Losses and LAE were negative $4.4 million, versus expense of $1.9 million. This included $2.7 million of favorable prior-year development, primarily from lower-than-anticipated severity on 2020 hurricane losses, and reinsurance recoveries. Non-catastrophe loss activity increased.
- Other underwriting expenses rose 79.2% to $14.2 million, reflecting growth-related payroll, technology and professional costs, as well as catastrophe-bond expenses.
- Palomar closed a $400 million earthquake catastrophe bond during Q1, effective June 1, 2021. Q1 recorded $1.7 million of net issuance expense after a $1.5 million grant receivable. Additional $25 million aggregate XOL protection became effective April 1, 2021.
- The board authorized a share repurchase program of up to $40 million through March 31, 2023; no shares were repurchased in Q1.
Outlook, commentary and risks
- No specific financial guidance or forecast was provided. Management noted that interim results are not necessarily indicative of full-year results.
- Management reported average monthly premium retention of approximately 90% overall across continuing lines during Q1, and above 90% in Residential Earthquake, Commercial Earthquake and Hawaii Hurricane.
- Key exposures include unpredictable catastrophe frequency and severity, climate-related weather risk, adequacy and collectability of reinsurance, and dependence on catastrophe models and estimates. At March 31, reinsurance recoverables totaled $217.6 million; reinsurer nonpayment could leave Palomar liable to policyholders.
- Business is concentrated geographically and in distribution: California represented 48.8% of Q1 gross written premiums; two program administrators accounted for 49% of Q1 gross written premiums. Loss of key distribution relationships could affect growth.
- COVID-19 may affect demand, claims, investments and operations. The company reported business-interruption claims and said the pandemic’s future economic effects remain uncertain.
- Investment risks include interest-rate, credit and equity-price changes. Fixed-income investments had a 2.24% book yield and 3.97-year weighted-average effective duration at quarter-end; 22.3% of the fixed-maturity portfolio was rated BBB.
- Insurance subsidiaries’ dividends are restricted by regulatory and solvency requirements. PSIC could distribute up to $11.3 million in 2021 without regulatory approval under the described limits; PESIC could not distribute without Arizona approval.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether growth in written premiums converts to sustained earned-premium growth and underwriting profitability as catastrophe and reinsurance costs change.
- How favorable prior-year loss development and catastrophe recoveries affect reported loss and combined ratios in future quarters.
- Q2 and subsequent reinsurance reinstatement costs following Uri, and the protection, cost and availability of the new catastrophe bond and aggregate XOL coverage.
- Recoverability and timing of the $217.6 million in reinsurance recoverables, alongside the company’s liquidity under severe catastrophe scenarios.
- Exposure to California and Texas and continued reliance on two program administrators for a substantial share of premiums.
- Investment portfolio valuation and sensitivity to interest rates, credit spreads and equity-market volatility, including the impact of unrealized losses.
- Any use of the $40 million repurchase authorization and its effect on capital available for growth and claims.