Palomar Q1 2025 Earnings Call Transcript

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Operator

Good morning, and welcome to the Palomar Holdings Inc. First Quarter twenty twenty five Earnings Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference line will be open for questions with instructions to follow. As a reminder, this conference call is being recorded.

Operator

I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me here today is Mac Armstrong, our Chairman and Chief Executive Officer. Additionally, John Christensen, our President is here to answer questions during the Q and A portion of the call. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11:59PM Eastern Time on 05/13/2025.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Before we begin, let me remind everyone that this call may contain certain statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our quarterly report on Form 10 Q filed with the Securities and Exchange Commission. We do not undertake any duty to update such forward looking statements.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Additionally, during today's call, will discuss certain non GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U. S. GAAP. A reconciliation of these non GAAP measures to their most comparable GAAP measure can be found in our earnings release.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

At this point, I'll turn the call over to Mac.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Thank you, Chris, and good morning. I'm very pleased with our strong start to 2025 as our first quarter saw sustained gross written premium growth and record adjusted net income. The quarter featured 85% adjusted net income growth, a 69% adjusted combined ratio and a 27% adjusted ROE. Our results demonstrate the continued execution of the Palomar 2X strategic imperative as well as concerted efforts to build a leading specialty insurance franchise with a resilient and diversified portfolio. Our 20% gross written premium growth was driven by both new products like Crop and Casualty as well as our balanced mix of residential and commercial property products.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Importantly, our same store premium growth rate was 37%, demonstrating the strong underlying momentum that exists across our portfolio of specialty products. Beyond our financial performance, we remain focused on executing twenty twenty five strategic imperatives. The first is Integrate and Operate. During the quarter, we further monetized the investments made in 2024 and prior. These efforts were highlighted by the successful onboarding of our new teammates at First Indemnity of America.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

A key component to the long term surety strategy is the receipt of a tealisting, and I am pleased to report that FIA achieved this in the quarter. We also closed the previously announced acquisition of Advanced Ag Protection on April 1 and began integrating their operations and talent into our crop business. The second imperative is Build New Market Leaders Deliberately. The strong growth of the Casualty franchise in the quarter demonstrated traction on this initiative as we continued to deliver very strong growth while maintaining modest net line sizes. Our crop franchise also showed solid growth in what is typically a lighter production quarter, supported by expanded geographic reach and new distribution channels.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

The third imperative is remembering what we like and more importantly, what we don't like. Our commitment to a conservative and well defined risk appetite in the property market not only illustrates our focus on this initiative, but also is delivering profitable growth. We are not chasing premium in volatile property segments like wildfire exposed homeowners or commercial all risk where risk adjusted return targets are not achievable. Instead, we are increasing resource allocation to residential earthquake, Hawaii hurricane and residential builders risk products as market conditions shift. Fourth imperative is continue to generate consistent earnings and the cornerstone of Palomar 2X.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Beyond the record adjusted net income of $51,300,000 in the quarter, we beat earnings for the tenth straight time, a testament to the strength and increasing predictability of our earnings model. As market dynamics continue to shift, our diverse portfolio of residential and commercial products and disciplined capital allocation strategy enable us to maximize risk adjusted returns. Before I offer commentary on our five product categories, I would like to address global economic uncertainty and specifically our view of the impact of tariffs on our business. The insurance business is a defensive sector that is less impacted by tariffs than most other industries, and Palomar is no different than its peers in that regard. However, we are vigilantly monitoring the prospective impact of tariffs across our portfolio and our exposure base.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

We recognize that elevated tariffs and the associated costs of materials will potentially increase severity across certain short tail property products in our book of business, both residential and commercial. As it pertains to crop, we continue to closely monitor prices of soybeans and corn relative to the 2025 crop year prices set by the federal government in February. At current levels, there should be minimal disruption caused by the tariffs. Yield will and always will have a greater impact on the performance of the crop book and as such we continue to focus on yield and employing the risk transfer tools we have to collar the risks associated with swings in yield and price. As it pertains to the casualty book, our limited auto exposure, physical damage and liability alike, limits the exposure to tariffs.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

We believe our casualty book is insulated. A recession and an economic slowdown would have a greater impact on our portfolio property casualty and crop alike in the near term than that of tariffs. A slowdown would reduce exposures in multiple fashions such as project delays for homebuilders, reduce labor on construction projects and lower revenue at real estate brokerages and thereby have a derivative effect on premium, premium retention and loss severity. Consistent with our history, we will assess our book performance and incorporate the changes to loss cost and pricing for each line of business we write. But we take considerable solace in the diversity of our portfolio and the numerous vectors that will help sustain our profitable growth trajectory.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

This quarter, more than perhaps any other, demonstrated the value of the diversity of our portfolio. Beyond the five product categories and the numerous products embedded in them, our portfolio consists of a broad mix of admitted and E and S risks as well as residential, small commercial and large commercial accounts. As discussed in the past, this diversification affords us a unique ability to navigate the P and C market cycle. Turning to the first quarter performance of our core earthquake franchise. We delivered strong results with gross written premium of 23% year over year.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

This growth underscores the strength of our well diversified earthquake portfolio across residential, small commercial and large commercial product offerings. In the first quarter we wrote record new business in our Residential segment, which comprises 57% of our in force earthquake premium. We continue to see stable policy retention and benefit from a 10% inflation guard that has not come under pressure despite the rising costs of homeowners insurance in California. Additionally, new carrier partnerships remain a nice source of new business. The Palisades and Eaton wildfires along with smaller events like the recent earthquake in a remote part of San Diego heightened awareness of natural disasters and the need for insurance driving sustained demand for earthquake coverage.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

While we are seeing pressure in rate on commercial accounts, it is worth noting that our small commercial book, which constitutes approximately 14% of the earthquake book, remains more insulated from competition than large layered and shared accounts. Small commercial accounts saw rate decreases of approximately 5% in the quarter. The large commercial market has experienced more pronounced softening and increased competition, with rate decreases of 7.5% as new capacity enters a segment that has fewer barriers to entry than our residential and small commercial earthquake businesses. We remain confident in achieving mid to high teens earthquake premium growth for the full year of 2025. Our inland marine and other property category grew 29% year over year.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Like the earthquake portfolio, we benefit from a well diversified mix of residential and commercial lines, which enables us to adapt quickly to shifting market dynamics, particularly as large commercial property lines face increased competition. Also, like our earthquake book, we saw strong contributions from our residential lines of business. Notably, Hawaiian Hurricane grew 82% as Laolima was able to write new business and renew policies at rates 26% higher than last year. Additionally, our high value builders' risk book saw very strong growth as we expanded our geographic reach and leveraged an attractive reinsurance structure that increased our capacity. Our small commercial focused builders' risk products that ensure middle market regional homebuilders saw the technical rate stay flat year over year.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

The excess national property and E and S builders' risk product teams are facing pricing pressure from increased competition and a softening market as those two products tend to participate in large layered and shared policies where there are new entrants or existing players looking to take more risk. Commercial all risk is where the rate pressure is the greatest with most renewals down mid teens. As such, we have all but exited that line and in turn meaningfully reduced our continental hurricane PML. Casualty gross written premium grew 113% year over year, driven by strong performance across general liability, E and S casualty, real estate E and O and environmental liability. Recent investments in talent and systems have accelerated premium growth while enabling us to effectively scale and service the business.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Under David Sapia's leadership, the E and S Casualty team is capitalizing on market dislocation and rising rates on average 11% while maintaining disciplined underwriting and low net limits. In the quarter, the average net limit was $913,000 after the utilization of quota share and facultative reinsurance. The Environmental Liability team continues to benefit from a consistent healthy rate dynamic with increases of approximately 5% as we add talent and expand the distribution network of the product. Our professional lines product saw rates plateau this quarter, but the growth opportunities are several, whether it is our successful expansion of real estate E and O beyond California or hiring seasoned underwriters to enhance our miscellaneous E and O practice. We are hiring exceptional professionals across the casualty portfolio and are confident they will sustain our profitable growth.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

We will remain disciplined on attachment points, net lines and keep technical rate increases above loss costs. Surety, the newest addition to our casualty portfolio, is off to a promising start as we integrate FIA and establish our presence in the market. As I mentioned, on April 1, FIA secured a T listing from the U. S. Treasury.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

This will catalyze geographic expansion, the attraction of top talent and the use of our balance sheet to offer larger limits and retain more risk. We're off to a nice start in constructing a surety franchise that will generate $100,000,000 of written premium over time. While contributions in twenty twenty five will be modest, we see surety as a meaningful long term growth opportunity. Turning to our fronting business, premiums declined 43% year over year due to the ongoing headwind from Omaha National. This quarter represents the peak impact of the runoff of that partnership.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

This premium growth headwind will run its course by the end of third quarter. Looking ahead, will continue to add partners selectively but fronting is not our highest strategic priority currently. On the other hand, our crop franchise generated $48,000,000 of written premium during the first quarter, an increase of 25% year over year. Given the seasonal nature of our products, the first quarter premium opportunities are limited and even more so in the second quarter when we expect to book less than 10% of our annual production. We are pleased to generate strong production while maintaining the balanced mix of business in the States we find attractive.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Additionally, we made considerable investments in talent during the quarter that will lead to strong production in the third and fourth quarters of twenty twenty five. We continue to expand the franchise, having added experienced teams in Illinois, Kansas and the Dakotas to further extend our geographic reach. Importantly, with the spring sales season behind us, we remain on track to meet or exceed our $200,000,000 full year target. Separately, the previously announced acquisition of Advanced Ag Protection closed in April. Bringing the Advanced Ag team in house allows us to accelerate and increase the crop market opportunity as it provides scale to our business from a claims handling, servicing and sales and technology standpoint.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

This increased scale will also enable Palomar to recruit more top tier talent. Importantly, we now have a larger foundation to execute our plan of building an industry leading crop business, which I believe will surpass $500,000,000 of premium in the intermediate future and $1,000,000,000 of premium over the long term. Turning to reinsurance. The fourth quarter was active across the organization with a particular focus on the core excess of loss program that incepts on 06/01/2025. ILS securities and cap bonds specifically are a key component of the core excess of loss program.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

We are pleased to secure $525,000,000 of earthquake limit through our sixth and largest Torrey Pines REIT catastrophe bond issuance, exceeding our $425,000,000 target and pricing at the lower end of

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

the indicated

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

range. Cap on pricing was approximately 15% down on a risk adjusted basis. Additionally, we placed a new Lao Lima excess of loss treaty effective June 1 for our Hawaii hurricane business. This coverage was previously part of our core June 1 program, which now is over 95% earthquake only, creating a more attractive structure for reinsurers. The Hawaii treaty also priced at a level favorable to our projections.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

The successful placements of the cap bond and the Laulima treaty will position us to achieve, if not exceed, our original guidance level of flat to down 5%. Beyond the core excess of loss program, we renewed our May 1 Builders Risk Quota Share Treaty with increased capacity and improved economics, reflecting strong reinsurance support and confidence in our underwriting strategy. The added capacity enhances our ability to expand the Builders' Risk portfolio, pursue larger opportunities and strengthen broker relationships in a profitable segment. We also extended our April 1 casualty quota share to October 1 to better align and increase optionality with our broader casualty reinsurance program. As we rapidly grow Palomar, we've continued investing in top talent across the organization.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

During the quarter, we made key hires in our underwriting claims, data and technology and actuarial departments. I'm pleased to highlight Tim O'Donovan, who joins us after over twenty years at Goldman Sachs as EVP of Investments. He will lead the management of our growing and maturing investment portfolio, elevating our strategy, sophistication and ultimately our investment income. Highlighted at our March Investor Day, I remain humbled by the exceptional talent we have and are attracting. They amplify my confidence that Palomar is becoming an industry leading specialty insurer.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

On the heels of the strong start to the year, we are raising our full year 2025 adjusted net income guidance to a range of 186,000,000 to $200,000,000 from our previous range of 180,000,000 to $192,000,000 The midpoint of our guidance implies an adjusted ROE of 23% and puts us in a position to double the adjusted net income of the 2022 Palomar 2x cohort in three years and moreover our 2023 2x cohort in an impressive two year timeframe. With that, I'll turn the call over to Chris to discuss our financial results and guidance assumptions in more detail.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Thank you, Mac. Please note that during my portion referring to any per share figure, I'm referring to per diluted common shares calculated using the treasury stock method. This methodology requires us to include common share equivalents such as outstanding stock options during profitable periods and exclude them in periods where we incur a net loss. For the first quarter of twenty twenty five, our adjusted net income grew 85% to $51,300,000 or $1.87 per share compared to adjusted net income of $27,800,000 or $1.09 per share for the same quarter of 2024. Our first quarter adjusted underwriting income was $51,600,000 compared to $29,200,000 for the same quarter last year.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Our adjusted combined ratio was 68.5% for the first quarter compared to 73% in the first quarter of twenty twenty four. Excluding catastrophes, our adjusted combined ratio was 68.9% for the quarter compared to 69.8% last year. For the first quarter of twenty twenty five, our annualized adjusted return on equity was 27% compared to 22.9 from the same period last year. As a reminder, we do not expect the capital raise in the third quarter of twenty twenty four to fully deployed until the end of twenty twenty five. Our first quarter results continue to demonstrate our ability to achieve our Palomar 2X objective of doubling adjusted net income within an intermediate timeframe of three to five years while maintaining an ROE above 20%.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Gross written premiums for the first quarter were $442,200,000 an increase of 20% compared to the prior year's first quarter. Thirty seven percent growth when excluding runoff business. As previously mentioned, this runoff business will add a $44,000,000 headwind in the second quarter. Additionally, the second quarter is only expected to have modest crop written premium. Net earned premiums for the first quarter were $164,100,000 an increase of 52% compared to the prior year's first quarter.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Our ratio of net earned premiums as a percentage of gross earned premiums was 43.7% as compared to 35.6% in the first quarter of twenty twenty four and compared sequentially to 39% in the fourth quarter of twenty twenty four. The year over year increase in this ratio is reflective of improved excess of loss reinsurance and of higher growth rates of our non fronting lines of business including earthquake that see less premium. For the timing of our core excess of loss reinsurance program renewal and the majority of our crop premiums written and earned during the third quarter, we continue to expect the third quarter to be the low point of our net earned premium ratio, increasing throughout the remainder of the reinsurance treaty year in a similar pattern to last year. While we expect quarterly seasonality in our net earned premium ratio, we continue to expect net earned premium growth over a twelve month period of time. We expect our net earned premium ratio to be around 40% for the year.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Losses and loss adjustment expenses for the first quarter were $38,700,000 comprised of $39,200,000 of non catastrophe attritional losses offset by $05,000,000 of favorable development on prior year catastrophe events. The loss ratio for the quarter was 23.6% made up of an attritional loss ratio of 23.9% and a catastrophe loss ratio of negative 0.3%. Additionally, the attritional results include $3,900,000 favorable development primarily from our Inland Marine and other property business as we continue to hold conservative positions on our casualty reserves. Our results reinforce our approach to the use of reinsurance and our conservative approach to reserving. For the year, we expect our loss ratio to be in the low 30s.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Our acquisition expense as a percentage of gross earned premium for the first quarter was 12.3% compared to 10.5% in last year's first quarter and 10.9% in the fourth quarter of twenty twenty four. This percentage increased as our book of business continues to diversify and aligns with higher net acquisition expense. For the year, we expect this ratio to be similar to last year around 11%. The ratio of other underwriting expenses including adjustment to gross earned premiums for the first quarter was 7.5% compared to 6.8% in the first quarter last year and compared to 7.2% in the fourth quarter of twenty twenty four. As demonstrated by our hires over the last year and in the first quarter, we are committed to investing across our organization as we continue to grow profitably.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

As announced, we continue to invest in our crop organization with the acquisition of Advanced Protection to begin the second quarter. We expect long term scale in this ratio although we may see periods of sequential flatness or increases due to investments in scaling the organization within our Palomar 2X framework. Based on the organizational investments made, I expect this ratio to increase in the second quarter and be higher for the year overall compared to last year. We expect this ratio to be around 8% for the year. Our net investment income for the first quarter was $12,100,000 an increase of 69.1% compared to the prior year's first quarter.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

The year over year increase was primarily due to higher yields on invested assets and a higher average balance of investments held due to cash generated from operations and the August 2024 capital raise. Our yield in the first quarter was 4.6% compared to 4.2% in the first quarter last year. The average yield on investments made in the first quarter continues to be above 5%. We continue to conservatively allocate our positions to asset classes that generate attractive risk adjusted returns. At the end of the quarter, our net written premium to equity ratio was 0.91 to one.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Our stockholders equity has reached $790,000,000 a testament to consistent profitable growth and the capital raise. I would like to make a brief comment on our business from a modeling perspective for the third quarter in addition to our expectations mentioned earlier in my remarks. The third quarter will continue to stand out based on our crop participation increasing to 30%, crops growth and seasonal earning pattern, and the first full quarter of our excess of loss reinsurance placed June 1. For the third quarter, we expect the following. We expect the highest gross earned and net earned premium dollars with the lowest net earned premium ratio.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

We expect the highest loss dollars and highest loss ratio. And we expect our acquisition expense and adjusted other operating expense dollars to continue to be in line with growth expectations, but with the lowest gross earned premium ratio for the year. Overall, we expect the combined ratio to be in the mid to upper 70s including catastrophe losses. The apex of our combined ratio will be in the third quarter primarily due to crop. Turning to guidance, we are raising our full year 2025 adjusted net income guidance to a range of 186,000,000 to $200,000,000 from the previous range of $180,000,000 to $190,000,000 Our guidance includes 8,000,000 to $12,000,000 of additional catastrophe losses as well as many cat losses that we have historically included in our guidance and reflects reinsurance savings realized to date but continues to assume that a core sixone excess of loss reinsurance treaty renews at a risk adjusted rate of flat to down 5% from the expiring 2024 treaty.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Lastly, not only does the midpoint of our guidance imply an adjusted ROE above 20% but also puts us in position to double our 2022 adjusted net income in three years and double our 2023 adjusted net income in just two years. With that, I'd like to ask the operator to open the line for any questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Operator

One moment please while we poll for questions. The first question comes from the line of David Motemaden with Evercore ISI. Please go ahead.

David Motemaden
Managing Director & Sr. Equity Research Analyst - Insurance & Business Services at Evercore ISI

Hey, thanks. I had a question, Mac. I heard you talk about Torrey Pines renewed down 15%. I guess, is there any reason or I guess can you help us think through the flat to down five that you're assuming in your outlook? And I guess what would push that down 15?

David Motemaden
Managing Director & Sr. Equity Research Analyst - Insurance & Business Services at Evercore ISI

I know that's ILS and different than the sixone renewal. But it seems like that's a fairly strong indication that things might come in a little bit better than you guys have expected. So just hoping you could talk a little bit about that.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Yes, Dave. Thanks for the question. It's a good one. And obviously, it's something that we're acutely focused on. You're absolutely right.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

All placements to date have come in better than our forecast of flat to 5%. When we put the flat to 5%, we were still trying to assess the impact of the wildfires in Los Angeles on the global reinsurance market. What we've been able to execute has been superior to that flat to down 5%. And so as Chris mentioned, the guidance that we offered incorporates cap on being down 15%, Lalima being a little bit better than our projections. But then the rest of the core program being, call it, maybe two and a half percent down at the midpoint, or flat to down 5%.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

There's conservatism there. I think we do feel very good about our ability to hit the low end of down five. But it's still a large quantum that needs to be placed. It's over $2,000,000,000 of earthquake limit, and then another, call it, a couple hundred million of excuse me, another hundred million of all perils limit. So long winded way of saying decent amount of conservatism in there.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

We do intend to put an update out following the the closing of the placement around June 1, and, you know, we hope to outperform.

David Motemaden
Managing Director & Sr. Equity Research Analyst - Insurance & Business Services at Evercore ISI

Got it. Thanks. And then maybe just a quick follow-up on that. Could you talk about the thought process around splitting out Laulima separately and renewing that one separately from the core June 1 program?

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Yeah. That's another good question. I think it stems ultimately from our desire for Laulima to be a true stand alone entity that we are the attorney, in fact, manager for and where we are a true fee generator. And so while it's consolidated in the intermediate term, long term, it will be an independent entity that, again, we serve as the attorney and fact manager for, where we do orchestrate the reinsurance, and we're paid fees for the placement of the business and the administration of that business. So it's just part of a broad term long term strategy to have La Lina be a true independent entity.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

It also helps that Hawaii is an uncorrelated diversifying, apparel for catastrophe reinsurers. So this actually gives reinsurers the ability actually to deploy more limit and not feel like they have to pick one versus the other.

David Motemaden
Managing Director & Sr. Equity Research Analyst - Insurance & Business Services at Evercore ISI

Got it. That makes sense. And and and maybe if I could just sneak one more in just on the 23% earthquake growth. So just between residential, it sounds like that came in a bit better, which is encouraging. You mentioned the record new business heightened awareness following the fires.

David Motemaden
Managing Director & Sr. Equity Research Analyst - Insurance & Business Services at Evercore ISI

I guess I'm hoping maybe you could talk more about both the residential side, what sort of growth you saw there as well as the commercial side, which sounds like that's sort of what's keeping you from expecting 20% premium growth there for the year. It sounds like that could be a drag that gets you to mid to high teens.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Well, again, I think we feel very good about mid to high teens. And the 23%, it actually was pretty close between the two, between commercial and residential. It's just that in years past, commercial was growing 40%, fifty % or yes, closer to 40%. So what I would say is we've always felt that having a balanced book of business between residential and commercial. But even if you go a level lower, residential, small commercial and large commercial will allow us to navigate market cycles and lean in to residential when it's opportune and commercial when it's opportune.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

So this year, there is more pressure in kind of larger commercial layered and shared accounts, where residential, there is continued tailwinds, whether it's the awareness, whether it's the CEA continuing to pull back coverage or they're participating in insurers, non renewing their homeowners books or new partnerships that John Christensen and our team have put in place. So I don't want to commercial is a harder market, but there's still opportunity for us to grow. The underlying unit level economics remain very compelling. If you compare commercial metrics like PML to premium and AL premium to where they were six years ago when we went public, it's meaningfully superior. So it's a balanced book market conditions we should be able to play through, and why we feel good about that kind of 20% growth.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

But John, chime in.

Jon Christianson
Jon Christianson
President at Palomar

Yes. Thanks, Dave. One thing I'd add is, particularly on the residential side, we had strong growth in the first quarter through partnerships, but we also had really strong growth in organic new business. So regular kind of day to day production was up meaningfully year over year, and then both on the admitted and the E and S side of the residential franchise. So it wasn't just one pocket of growth, was kind of across the board in all segments.

David Motemaden
Managing Director & Sr. Equity Research Analyst - Insurance & Business Services at Evercore ISI

Understood. Great. Thanks for clarifying that.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Thanks, Dave.

Operator

Thank you. Next question comes from the line of Mark Hughes with Truist Securities. Please go ahead.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Yeah. Thank you. In the past, had nice acceleration. When we think about the casualty book, I know you're ramping up. You've got some new hires and new leadership.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

How much of that acceleration might have been or how would you describe the underlying market growth? Was it faster this quarter or was your ramp just more successful?

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Yeah, Mark. I think I would say it was a little bit of both. Right? So if you if I deconstruct it, you know, we have new underwriters that have distribution followings that have a held book of business that came on in the fourth quarter and in the first quarter. So they were able to catalyze growth across the casualty book, whether it was in real estate E and O, whether it was in environmental and certainly on the E and S casualty side, where David Sapiens brought on a handful of talent.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

So because what that affords us is just breadth and coverage, other the ability to service more policies, the ability to touch more distribution points. And then you have the fact that in the case of E and S casualty, the market is a bit it's a bit dislocated, right? So for us going in and providing a buffer layer, short type limit that's heavily reinsured, like there's market need and appetite for that. So if we can bring more underwriters into under the tent that can offer that product to a broader distribution footprint, we're gonna grow. And so I think that's really what it was.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

It was new underwriters, new distribution, broadening our reach, and broadening their service capabilities. And that's gonna continue this year.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Chris, refresh me on the spread of crop premium from three q to four q. I think you said 10% in Q2, I think you said $50,000,000 so far in Q1. Of the remainder, how does that spread between Q3 and Q4?

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Yes, I'm going talk about it a little bit more on an earned premium basis. And we did have a table in the Investor Day deck that kind of breaks this out. In that deck, we had point out that in the third quarter and fourth quarter, we expect about 65% to 75% of the earned premium in Q3. We expect about 15% to 25% of the earned premium in Q4. That crop premium, let's call it that $200,000,000 that Mac talked about, is really weighted in the second half of the year, specifically, more specifically Q3.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

That is going to have a very dynamic impact on our overall ratios when you look at them from a gross earned premium standpoint. The net earned premium ratio will probably be at the lowest point in third quarter from that earned premium coming in. Similarly, our acquisition expense and other underwriting expense ratio will also be at their low point in that quarter. So overall, crop is changing, call it the seasonality of our model, but overall it's helping our business when you look at it in a twelve month period of time. We're very happy with the way things look, but it is going to have a decent impact on how those ratios look.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

One other thing I'd point out about the crop business is when you look at our expenses, Mac talked about the fact that we did close the acquisition of Advanced Ag on April first of this year, so that is going to add expenses in the second quarter without all the requisite revenue until the third quarter. So, the expense ratio will probably be a little bit higher in the second quarter as we talked about, probably averaging out around 8%, a little bit higher than where we finished last year. Some of that's going to come in a little heavier in Q2 really because now we've got all that staff on board, revenue is not really coming in until Q3. It's something I want to point out for people to think about in their models as well. That's a little bit different than it had been in the past as well, but overall we're very happy with how things look and how things are going to play out throughout the year.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

But happy to give more color on Q3 and Q4 around crop. I feel like we put a lot of good information out there, especially in Investor Day deck. But if you have any other questions, happy to address them.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Okay. And then one final quick one if I might. The commercial quake, the layered and shared, are you seeing competitors take bigger layers, just taking down bigger chunks of exposure? Or same sort of structure, but just competition within the layers?

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Yeah. I would say it's more that latter, Mark, where you're going to see just more competition, MGAs that have got capacity. That large layered and shared account, it's an easy market to enter if you have excess capital. And so we've seen that in particular, not to pick on them, but from London markets and what they're doing on the traditional reinsurers who are we have great relationships with entering the D and F market because it's a way for them to enter in a pretty expedient fashion. So it's increased competition.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

I think that's again why we like having the balanced book of business even within commercial. The small commercial accounts, like, we'll write the full limit, and it's not gonna be bid out. And so it's a circumstance where you can control the relationship a lot more meaningfully than layered and shared where you might be 10,000,000 part of a hundred or 15,000,000 part of 200. So it just gets back to a theme that we are gonna reiterate. We like having multifaceted middle market small commercial business in the property franchise to complement the layered and shared and certainly complement the residential.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

And that's for builder's risk, and that's for earthquake. Yeah. It's for property generally.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Appreciate it. Thank you.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Thank you.

Operator

Thank you. Next question comes from the line of Meyer Shields with KBW. Please go ahead.

Meyer Shields
Managing Director at Keefe, Bruyette & Woods (KBW)

Great. Thanks so much. A couple of really small questions, think. First, Matt, you talked about the commercial all risk program being essentially, I don't remember the exact word, but gone now. Is that a product that you're sort of keeping in the portfolio for if and when market conditions change?

Meyer Shields
Managing Director at Keefe, Bruyette & Woods (KBW)

Or should we assume that this is like other lines of business that you're not interested in?

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Yeah, Meyer, I would say it's a little bit of let's keep our toe in the water. We'll have a modicum of that. And from a premium standpoint, from a PML standpoint, you're less than $20,000,000 of two fifty year PML. So when market conditions, if and when market conditions change, we could indeed go back into that market and take advantage of what will be healthier risk adjusted returns. For now, though, we are better suited focusing our property capital and our cat capital on Quake or Builders' Risk, which I've said time and again, has outperformed the all risk market from a modeled to actual loss standpoint in multiple events, or riding excess national property in non cat exposed regions.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

So we'll keep a toe in the water. But it's definitely standing by and assessing.

Meyer Shields
Managing Director at Keefe, Bruyette & Woods (KBW)

Okay, great. That's helpful.

Meyer Shields
Managing Director at Keefe, Bruyette & Woods (KBW)

Chris, when you talk about expenses for the crop business coming in the second quarter, are those operating or acquisition expenses? I don't know how the MDA part fits.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Yes, those are going be looked more like operating expenses, right? So before, when we model this, it was an acquisition expense that kind of lined up a little bit better with the revenue. So we would have booked the earned premium in the third quarter and we would have booked the acquisition expense in the third quarter. As we've gone down and bought that business and hired that team and brought them on as of the fourone, there's a little bit more of what's called an upfront cost associated with that business. As you know, we write that business or most of that business is actually written in March.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

That team is in place, claims adjusters, service personnel, everyone's there. And so we hired them on Fort 1, where we won't really see that revenue until the third quarter. So that will look like operating expenses. I expect, call it the operating expense ratio to probably be the highest in the second quarter just with that dynamic, but really with that premium really being back ended and kind of bringing that ratio back down to, let's call it, 8% -ish, something similar, a little higher probably than last year, but kind of 8% -ish for the year.

Meyer Shields
Managing Director at Keefe, Bruyette & Woods (KBW)

Okay, fantastic. And then finally, the inland marine reserve releases for which accident years did that show up?

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

We haven't specified which accident years, but it was spread out through the last few. We felt like we've been reserving pretty conservatively. Our actuaries indicated as such, so they were able to take those down. And so it was really called E and S driven. It was the end of the marine builders risk and then also that book is a little bit run off that Matt talked about, that all risk books.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Those books from an attritional standpoint have both been performing very well.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

And I think the other thing that I would add to that, Meyer, is a, they're shorter tail lines, right? And then secondly, we had not touched our mechanical loss pick on those on the in the teeth of meaningful rate increases. So, you know, all risk in '23 and '24, you were looking at, you know, 50%, then 20% rate increases, and we haven't touched our loss pick. So there should have been redundancies and there still is potentially in that book. So like Chris said, healthy amount of conservatism that was in the reserves that has come to fruition for us.

Meyer Shields
Managing Director at Keefe, Bruyette & Woods (KBW)

Alright. Perfect. Thank you.

Operator

Thank you. Next question comes from the line of Pablo Singzon with JPMorgan. Please go ahead.

Pablo Singzon
Pablo Singzon
Executive Director at J.P. Morgan

Hi. Thank you for taking my question. The first one I have is maybe for Chris. It seems like the higher attritional loss ratio was mostly mix driven given the growth in casualty. But maybe you could talk about pockets of your book where you did better or worse from an underwriting perspective or any discrete impacts this quarter to think about?

Pablo Singzon
Pablo Singzon
Executive Director at J.P. Morgan

And relatedly, just where you see the attritional loss ratio trending from here?

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Yes, I'm going to start with the latter part of your question, right. I talked about a lot, I do expect that attritional loss ratio to increase, let's call it without prior period development right around 26% for the quarter. That feels pretty good for me when I think about Q2. When I think about Q3, I do expect it to be higher. I said something potentially getting close to 40% really from all or a significant portion of that crop premium coming in.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

And that crop premium, as you guys know, does have a higher loss ratio than a lot of our business that probably trends closer to 80% than even some of our other attritional lines in the 55% to 60% range. So that heavier weighted, let's call it, of earning premium and losses coming in, in the third quarter will push that loss ratio up in Q3. I do expect it to trend back down in Q4 from there with less of that crop premium coming in. But overall for the year, really thinking about that coming in right around, call it the 30% mark, maybe low 30s when everything kind of plays out with I was hoping for some favorability, but we don't really plan for it. So you saw a little bit of that this quarter.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

So pushing that loss ratio to 23 from probably 26. Overall, when you look at the core pieces of our business, really nothing too exciting on a current year or current accident period standpoint. We're really pretty close to our picks in the marine builders risk, all risk and even on the casualty lines, we're really booking close to our picks. So overall, we feel very good about our picks. We think they are conservative.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

We hope that there is room for releases in future, but right now nothing to really speak of that's call it distinctive to split our lines up or try and carve anything up and feel very good about our position and where we are sitting. One thing I would note, I mentioned this in my prepared remarks that we really aren't touching our casualty reserve at this stage. The only favorability that we're seeing in our loss ratio is coming around our property lines that are, as Mac mentioned, shorter tail.

Pablo Singzon
Pablo Singzon
Executive Director at J.P. Morgan

Okay. Thanks for that, Chris. And then second question maybe for Mac. Mac, you covered the current economic uncertainty in your remarks and yet you actually raised your earnings outlook modestly ex cat and PYD, at least by our math. So maybe if you could speak about the potential pressure points of that outlook.

Pablo Singzon
Pablo Singzon
Executive Director at J.P. Morgan

It seems to me at least that premium growth could be a bigger issue than margins. I'm not sure if you agree, but if it is growth, how much of the industry level headwinds do you think you can overcome by the fact that you're still in the build out phase for most of your business and whether in terms of new lines, geographies and so on?

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Yes. Pablo, thanks for the question. And I think I did it, and it's a good one, in the sense that, yes, we feel very good about margin expansion and the conservatism in our model, whether it be the cat load relative to our wind PML or some of the reinsurance assumptions on the core treaty versus what's been placed. So we do feel comfortable though that we can sustain top line growth because of the numerous growth vectors we have, whether it be the crop business, whether it be the casualty business, or even within casualty, the nascent surety franchise we have. The headwind is going to be commercial property.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

We talked about it. It's it's a competitive environment. Rate pricing is down. But I come back to and this will be a bit of a dead horse today. Like, we also have a nice book of residential property business that is still growing, we should expect to see that help balance the headwind on the commercial side.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

So seasonality aside, and the runoff of that fronting deal, we think that there is a tremendous amount of growth that you'll see in 2025 and beyond because we have so many different vectors. So we'll play through the headwinds. And from a long term perspective, we think that there's great growth prospects still in our future.

Pablo Singzon
Pablo Singzon
Executive Director at J.P. Morgan

Thank you. And maybe you could squeeze in just a little one maybe for Chris. How much of the inland marine and property book has excess national marine? It's basically the portion of the book where you're seeing the most pricing pressure. I just want to get a sense of your exposure there relative to what you're writing in Builders Rest and Hawaii Hurricane, etcetera.

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Yes, I can start and maybe John can add some color on that. But I think from our standpoint, the most pricing pressure in our view is probably come from a large commercial segment. I don't think there's seeing some of the other commentary in the market, feel like we're probably seeing the same type of pressure. But John, anything you would add to that?

Jon Christianson
Jon Christianson
President at Palomar

Yes, I'd say on the topic of Hawaii hurricane, we still have rate flowing through that book in the first quarter and into the second quarter. So I'd agree, the personal lines products that we have that are balanced now with some of the pressure that we see on the commercial side are all very strong and don't see any kind of pressure there.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

But Pablo, what I would offer you is that the excess national property and the large account builders risk, you know, they're they're meaning they're not they're they don't over index the composition of the Inland Marine and other property. It really is balanced when you factor in the small account builders risk, the high value residential builders risk, and then you add in flood to a lesser degree and certainly Hawaiian hurricane. So it's not over indexed by the large account sector.

Jon Christianson
Jon Christianson
President at Palomar

Yeah. And the other thing I'd add just, more so on the personal line side is the valuation increases that we're continuing to push through the book. So we've talked in the past about inflation guards and our very conservative stance relative to the industry as to how push values through those increased values translate into higher premiums. And so that also helps facilitate growth.

Pablo Singzon
Pablo Singzon
Executive Director at J.P. Morgan

Thank you.

Operator

Thank you. Next question comes from the line of Andrew Anderson with Jefferies. Please go ahead.

Andrew Andersen
Andrew Andersen
Equity Research Vice President at Jefferies Financial Group

Hey, thanks. Just on fronting, I think you mentioned this quarter was the peak impact. So I guess is $50,000,000 ish kind of a good way to think about the next few quarters before maybe thinking of any additional activity here?

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

Yes, I can give you the specifics. So the Q1 number was about $48,000,000 The Q2 number or headwind is about $44,000,000 And then Q3, there's still, call it, another $30,000,000 that was still written last year in Q3. So those are, call it, the fronting headwind vectors from this deal that we have running off. Aside from that headwind, I'd say there was still growth in the fronting sector, but overall that still is a decent headwind for the next two quarters.

Andrew Andersen
Andrew Andersen
Equity Research Vice President at Jefferies Financial Group

Okay. And then just on the $200,000,000 of crop premium expectation, is there any headwind or tailwind you're thinking about in terms of commodity pricing embedded within that?

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Yes, Andrew. So the prices were set in February. Commodity prices right now are within a couple of percent of that. So it's I would say we're non plus at these levels by the prices. And as I mentioned in my remarks, we're much more focused on yields.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

And so far, it's encouraging. We are through the sales cycle, the spring sales cycle. And so until the acreage reports are in hand, we won't truly know the premium. But as I mentioned, we feel very good about that $200,000,000 bogey we put out.

Andrew Andersen
Andrew Andersen
Equity Research Vice President at Jefferies Financial Group

Thanks. And just as a refresher, in terms of the loss ratio in 3Q for crop, I guess you would be booking at kind of an average expectation with the actual result being embedded in 4Q. Is that a good way to think about the crop portion?

Chris Uchida
Chris Uchida
Chief Financial Officer at Palomar

I mean, think it's going be a blended of both in the third quarter. There's going to be expectation plus results going through there. We will start seeing that in the third quarter. I think we'll have a lot more clarity in the fourth quarter, but I would not say it's just a pure loss in Q3. Actual results will inform how we book the third quarter.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Thank you.

Operator

Thank you. As there are no further questions, ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to Mac Armstrong for closing comments.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Great. Thanks, operator, and thank you all for joining us today. The year is off to a strong start. Our core Earthquake and In Marine business segments are performing well, and they're successfully navigating the market and delivering solid growth. Our casualty and crop lines are poised to become industry leaders.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

We feel great about the 2025 guidance, and we think that there's a decent level of conservatism in those when you look at the expense flow for cats as well as what we are assuming from a reinsurance standpoint. So ultimately, we are building a portfolio of industry leading specialty businesses that are going to provide consistent, strong performance and resilience through industry cycles. And what that will lead to is consistent earnings and returns over time. We could not be more excited with what the opportunities that we see ahead of us. And I want to thank all of our team for the great efforts this quarter and thank them in advance for what they're going to do for the company and our shareholders rest of this year.

Mac Armstrong
Mac Armstrong
Chairman, Chief Executive Officer & Founder at Palomar

Thank you again, and enjoy the rest of your day.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Executives
Analysts

Key Takeaways

  • Q1 financial results: 85% adjusted net income growth to $51.3 M, a 69% adjusted combined ratio and 27% adjusted ROE on 20% gross written premium growth (37% same-store).
  • Strategic execution: Integrated First Indemnity of America (FIA) with T-listing, closed Advanced Ag Protection on April 1, and focused on conservative risk appetite by exiting volatile property segments.
  • Segment highlights: Casualty GWP +113% with disciplined underwriting (average net limit $913 k); crop GWP +25% ($48 M in Q1) with a $200 M full-year target; earthquake GWP +23% driven by residential and small commercial growth.
  • Reinsurance achievements: Secured $525 M of earthquake limit via Torrey Pines catastrophe bond and favorable Laolima treaty, positioning the core June 1 excess-of-loss program to renew flat to down 5%.
  • Guidance raised: 2025 adjusted net income increased to $186–200 M (23% ROE), reflecting reinsurance savings and continued profitable growth across diversified specialty lines.
AI Generated. May Contain Errors.
Earnings Conference Call
Palomar Q1 2025
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