Palomar Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Palomar is a specialty property and casualty insurer, with earthquake products among its core offerings, and also writes fronting business. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Gross written premiums | $253.1 | $152.3 | $642.8 | $385.3 |
| Net written premiums | $91.2 | $94.3 | $268.6 | $232.3 |
| Net earned premiums | $77.9 | $64.7 | $234.2 | $166.0 |
| Total revenue | $80.7 | $67.7 | $238.5 | $174.6 |
| Net income | $4.3 | $0.2 | $33.4 | $29.2 |
| Diluted EPS | $0.17 | $0.01 | $1.29 | $1.12 |
| Combined ratio | 94.8% | 102.8% | 82.1% | 82.0% |
| Adjusted combined ratio (non-GAAP) | 90.3% | 100.2% | 77.1% | 78.3% |
- Growth and underwriting: Q3 gross premiums rose 66.2%, while net earned premiums increased 20.4%. For the first nine months, gross premiums rose 66.8% and net earned premiums 41.1%. Growth reflected new business with existing partners, retention, expanded distribution and new partnerships.
- Losses and margins: Q3 catastrophe losses were $12.5 million, mainly from Hurricane Ian, versus $17.5 million a year earlier. Q3 non-catastrophe losses increased to $18.4 million from $11.0 million. Nine-month catastrophe losses were $13.5 million versus $6.7 million; the nine-month loss ratio increased to 25.7% from 18.8%. The nine-month combined ratio was nearly unchanged year over year.
- Reinsurance and mix: Ceded written premiums grew faster than gross premiums: 178.8% in Q3 and 144.5% for the nine-month period. Ceded premiums equaled 64.0% of Q3 gross premiums and 58.2% year to date, reflecting fronting and quota-share growth and higher excess-of-loss costs. Net written premiums declined 3.2% in Q3 but rose 15.7% year to date.
- Investment results: Net investment income increased to $3.7 million in Q3 and $9.5 million year to date, attributed to a larger portfolio and higher yields. Net realized and unrealized investment losses were $2.4 million in Q3 and $8.4 million year to date, primarily from equity securities. Fixed-maturity unrealized losses are recorded in other comprehensive income, not net income.
Financial position, cash flow and capital
- At September 30, 2022, total assets were $1.216 billion, investments were $512.3 million, cash and cash equivalents were $29.5 million, and stockholders’ equity was $367.8 million. Equity was down from $394.2 million at December 31, 2021, principally due to fixed-maturity unrealized losses and share repurchases, partly offset by net income.
- For the first nine months, operating cash flow was $94.5 million, investing cash outflow was $121.4 million, and financing cash inflow was $6.1 million. Cash, cash equivalents and restricted cash decreased $20.8 million to $29.5 million.
- Palomar reported $541.8 million of cash and investment securities available at quarter-end. Management said liquidity and expected cash sources were sufficient for subsidiary outflows in the foreseeable future and that operating cash flows should meet liquidity needs for at least the next 12 months and beyond.
- Borrowings were $26.4 million under PSIC’s secured Federal Home Loan Bank line, at an overnight rate of 2.37%. The separate U.S. Bank revolving facility provides up to $100 million through December 2026 and had no outstanding borrowings. The company reported compliance with debt covenants.
- The company repurchased 399,198 shares for $23.3 million in the first nine months under its $100 million program; $76.7 million remained available. The program runs through March 31, 2024.
Material changes, outlook and risks
- Fronting premiums, launched in late 2021, reached $82.2 million in Q3 and $154.2 million year to date. Palomar said it expects to continue writing fronting premiums for the foreseeable future; volumes may vary with partnership starts and terminations. Texas Specialty Homeowners shifted to a fronting arrangement from June 1, 2022, and the company ceased writing that business outside Texas.
- Nine-month prior-year reserve development was adverse by $1.5 million, mainly due to higher-than-expected attritional and catastrophe loss severity; the comparable 2021 period had favorable development of $2.9 million. Management cautioned that reserve estimates are inherently variable and could materially affect equity.
- Fixed-maturity securities had $54.2 million of gross unrealized losses at quarter-end, compared with $2.7 million at year-end 2021. Management attributed most losses to the interest-rate environment rather than issuer credit quality and said it did not intend, nor was it more likely than not required, to sell the securities before recovery of amortized cost.
- Reinsurance protection included a $12.5 million catastrophe-event retention and stated limits of $2.08 billion for earthquake, $900 million for Hawaii hurricane and $250 million for continental U.S. hurricane events. The filing highlights reinsurer performance and availability as risks; reinsurance does not remove Palomar’s primary obligation to policyholders.
- Key risks include catastrophe frequency and severity, climate-related weather changes, reserve adequacy, reinsurance cost and collectability, inflation in repair and claim costs, investment market and interest-rate volatility, and concentration in California and Texas. The company also identifies reliance on significant program administrators and brokers, competition, cyber and technology risks, and regulatory constraints.
- No specific numerical earnings or premium guidance is provided in the supplied filing text. The filing says pandemic-related business-interruption claims had been acknowledged and adjusted, and management did not expect additional such claims. Ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were judged effective, with no material internal-control changes reported during the quarter.
Important facts for investors to verify
- Whether premium growth—particularly fronting and quota-share business—translates into durable net earned premium and underwriting profitability as ceded costs evolve.
- Subsequent Hurricane Ian claims, reserve development, and the timing and collectability of related reinsurance recoveries.
- Investment portfolio sensitivity to interest rates and equity markets, including the effect of unrealized losses on statutory capital, liquidity and ratings.
- Reinsurance renewal terms, counterparty strength, and the extent to which catastrophe losses could exceed retentions or available protection.
- Capital and liquidity impacts of share repurchases, subsidiary dividend restrictions, and the $26.4 million FHLB borrowing.
- Performance and concentration of distribution partners, and the company’s ability to sustain its A.M. Best financial strength ratings.