Palomar Holdings, Inc. — Q2 2019 Form 10-Q
Business context and reporting period
Palomar is a specialty property insurer focused primarily on earthquake, wind and flood coverage for individuals and businesses. This unaudited filing covers the quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods. The company completed its IPO on April 22, 2019, and domesticated as a Delaware corporation in March 2019.
Financial and operating results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Gross written premiums | $58.3m | $37.3m | $112.4m | $71.4m |
| Net earned premiums | $23.2m | $18.3m | $41.6m | $36.2m |
| Total revenue | $25.9m | $19.9m | $48.2m | $38.4m |
| Net income (loss) | $6.7m | $6.9m | ($7.7m) | $12.5m |
| Diluted EPS | $0.30 | $0.41 | ($0.40) | $0.74 |
| Combined ratio | 69.2% | 65.1% | 124.2% | 65.8% |
| Adjusted combined ratio | 63.8% | 65.1% | 65.1% | 65.8% |
Q2 underwriting income, a company-defined non-GAAP measure, was $7.2m versus $6.4m. Six-month underwriting loss was $10.1m versus underwriting income of $12.4m. Adjusted net income was $8.0m for Q2 and $16.8m for the six months, compared with $6.9m and $12.5m, respectively, in 2018; these non-GAAP measures exclude specified items.
For the six months, operating cash flow was $16.9m versus $15.2m; investing cash flow was a use of $74.2m, and financing cash flow provided $62.3m. Cash, cash equivalents and restricted cash ended at $14.9m. Total assets were $349.4m, total stockholders’ equity $199.6m, investments $230.4m, and long-term debt was zero at June 30. Cash and investment securities totaled approximately $245.3m. The fixed-income portfolio had a 3.0% book yield and 3.90-year weighted-average effective duration.
Material changes and unusual items
- Gross written premiums rose 56.2% in Q2 and 57.5% year to date, driven by higher policy volumes, expanded products, geography and distribution, new partnerships, and retention. California represented 55.8% of first-half written premiums and Texas 19.1%.
- The six-month GAAP loss primarily reflects a $23.0m noncash stock-compensation charge following modification of the former parent’s incentive plan. Total first-half stock-based compensation expense was $23.3m. Excluding specified items, adjusted combined ratio was 65.1%, versus the reported 124.2% combined ratio.
- The April IPO raised approximately $87.4m net from 6,468,750 shares. The company redeemed its $20.0m floating-rate notes in May, paying a 2% premium and recognizing $1.3m of total charges, including a $0.9m write-off of issuance costs. A one-time $5.1m distribution was made to the former sole stockholder.
- Six-month investment income was $2.4m, and net realized and unrealized investment gains were $2.9m, compared with a $0.4m loss in 2018. The company attributed the improvement principally to higher average invested assets after the IPO and stronger equity markets.
- Following the U.S. domestication, operations became subject to U.S. income tax. Management released $1.7m of federal deferred-tax valuation allowance in Q1, while noting state NOL-related valuation allowance remained.
Outlook, commentary and risks
Management said existing cash receipts, investment proceeds and reinsurance recoveries are expected to meet liquidity needs for at least the next 12 months and beyond. It reported no current plans for material capital expenditures beyond operating needs. No specific earnings or premium guidance was provided, and management cautioned that interim results are not necessarily indicative of full-year results.
The company reported an A.M. Best rating of A− with stable outlook. Its catastrophe program retained $5m per earthquake or wind event and provided earthquake coverage up to $1.05bn, subject to exclusions. Key risks include catastrophe severity and modeling uncertainty; reinsurance availability, recoverability and counterparty credit; concentration in California and Texas and reliance on key distribution partners; investment-market risk; regulatory constraints on subsidiary dividends; and uncertainty in loss reserves. Management noted that reserve estimates are inherently variable and changes could materially affect equity. Ordinary-course legal proceedings were not expected to have a material adverse effect. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether premium growth and retention persist, and how the product and geographic mix affects risk and profitability.
- The recurring expense and dilution implications of equity compensation, and the reconciliation of GAAP results to adjusted measures.
- Reinsurance terms, renewals, exclusions, counterparty quality and collectability, especially under a major catastrophe.
- Loss-reserve adequacy and favorable prior-year development; management cautioned that reserve estimates may change materially.
- Capital and liquidity available within regulated insurance subsidiaries, including limits on dividends to the holding company.
- California and Texas concentration, dependence on major program administrators, and Genstar Capital’s reported 61.6% ownership and governance influence.