Palomar Holdings, Inc. — Q1 2020 Form 10-Q
Business context and period. Palomar is a specialty property insurer focused primarily on earthquake, wind and flood coverage. This unaudited filing covers the three months ended March 31, 2020, compared with Q1 2019; balance-sheet figures are compared with December 31, 2019. Amounts below are in U.S. dollars unless noted.
Financial and operating performance
- Premiums and revenue: Gross written premiums rose 32.3% to $71.5 million; net written premiums increased 50.4% to $42.0 million. Net earned premiums grew 89.7% to $34.8 million. Total revenue was $38.0 million, up from $22.3 million.
- Profitability: Net income was $11.8 million, versus a $14.4 million loss in Q1 2019; diluted EPS was $0.48 versus a loss of $0.85 per share. Underwriting income, a company-defined non-GAAP measure, was $12.7 million versus a $17.2 million loss. Adjusted net income was $12.3 million versus $8.8 million; adjusted diluted EPS was $0.50 versus $0.52.
- Margins: The loss ratio was 5.4%, expense ratio 58.2%, and combined ratio 63.6%, compared with 1.7%, 192.1%, and 193.8%, respectively, in Q1 2019. The adjusted combined ratio was 61.6% versus 66.7%. The 2019 expense and GAAP earnings comparisons were significantly affected by a $23.0 million stock-based compensation charge related to a management incentive plan modification.
- Investments: Net investment income increased 112.0% to $2.0 million, mainly reflecting a larger portfolio. Net realized and unrealized investment gains in earnings were $0.4 million, down from $2.4 million. Separately, fixed-maturity unrealized losses reduced other comprehensive income by $5.8 million; accumulated other comprehensive income moved from $4.7 million to a $1.1 million loss.
- Cash flow and liquidity: Operating cash flow was $21.8 million, versus $2.5 million in Q1 2019. Investing activities used $66.9 million, primarily for securities purchases; financing provided $35.9 million, including $35.5 million net proceeds from the January offering. Cash, cash equivalents and restricted cash ended the quarter at $24.2 million. Cash and investment securities totaled approximately $320.4 million.
- Balance sheet and debt: Total assets were $443.6 million, liabilities $182.8 million and stockholders’ equity $260.8 million at March 31. Palomar reported no debt; its former $20 million notes were redeemed in May 2019.
Material changes versus the prior comparable period
- Premium growth reflected increased business through existing partners, strong retention, expanded distribution and new partnerships. Commercial All Risk premiums rose 64.7% and Commercial Earthquake premiums 66.1%; Residential Earthquake premiums declined 1.9% as reported, but grew 26.7% excluding the prior-year assumption of $6.6 million of unearned premiums.
- Ceded written premiums rose 13.0%, slower than gross written premiums; ceded premiums were 41.3% of gross written premiums versus 48.3%. Management attributed the decline in the ratio mainly to reduced quota-share cession in Commercial All Risk and growth in earthquake lines not subject to quota-share agreements.
- Net earned premiums grew faster than written premiums. Losses rose to $1.9 million, attributed mainly to higher attritional losses in Commercial All Risk and Specialty Homeowners, alongside changes in quota-share arrangements that increased retained premiums and losses.
- Stockholders’ equity increased from $218.6 million, primarily due to the January 2020 offering and quarterly earnings, partly offset by investment-related other comprehensive losses. The prior-year loss included the one-time $23.0 million stock-compensation charge.
Outlook, commentary and risks
- The filing provides no specific earnings or premium guidance. Management said it believes operating cash flows and available resources are sufficient for liquidity needs for at least the next 12 months and beyond, while noting catastrophe frequency and severity as key uncertainties.
- COVID-19 prompted most employees to work remotely, travel to be suspended, and additional operational and cybersecurity safeguards. Palomar reported increased business-interruption claims. It stated that its all-risk policies have an ISO virus exclusion and that its DIC policies require physical damage from covered perils; it said claims are being investigated and assessed individually. Premium grace periods were implemented across lines and states.
- COVID-19 could affect policy demand and premium payments, business-interruption claims, reinsurance counterparties, investment valuations and income, and operations. At quarter-end, 223 fixed-maturity securities were in an unrealized loss position, with $8.0 million of gross unrealized losses; management attributed these primarily to widening credit spreads and said it did not intend, and was not expected to be required, to sell before recovery. No securities were written down in Q1.
- Palomar retained $5 million per earthquake or wind event and reported up to $1.2 billion of earthquake reinsurance coverage, subject to customary exclusions. Reinsurance does not remove Palomar’s primary obligation to policyholders; counterparty performance, availability and renewal terms remain risks. Management reported statutory capital above applicable risk-based capital requirements and compliance with Bermuda liquidity requirements.
- Other notable exposures include concentration in California and Texas (45.8% and 22.1% of Q1 gross written premiums, respectively), dependence on significant program-administrator relationships, catastrophe-model and reserve-estimation uncertainty, and potential investment credit deterioration. Prior-year reserve development was favorable by $0.3 million in Q1 2020. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether business-interruption claim outcomes, policy interpretations or legislative actions change expected COVID-19 exposure.
- Whether investment marks, credit quality and realized losses evolve from the quarter-end position, and how investment income responds to market conditions.
- Whether loss reserves and reinsurance recoverables remain adequate and collectible, and whether catastrophe coverage renews on acceptable terms.
- Whether premium growth, retention and distribution-partner relationships continue, particularly given geographic and channel concentration.
- How regulatory capital and dividend restrictions affect funds available to the holding company; subsidiary dividends are subject to regulatory limits.