Palomar Holdings, Inc. (PLMR) Earnings

Management highlights

- Overall Financial and Strategic Position * Delivered 15th consecutive quarterly earnings beat, with Q2 2026 adjusted net income of $63.8 million ($2.36 diluted EPS) up 31% YoY, and adjusted EPS up 34% YoY. * Total consolidated GWP grew 27% YoY to $630.5 million; adjusted combined ratio was 76.7%, and annualized adjusted return on equity was 26.3% (well above the 20% Palomar 2X growth target). * The deliberate diversified portfolio strategy is core to the firm's performance: no single product segment represents more than 33% of GWP, ~50% of the portfolio is property, ~20% of revenue is from lines uncorrelated to traditional P&C cycles, and 52% is written on an admitted basis. The firm prioritizes underwriting profitability over raw premium growth. - Operational and Strategic Milestones * Successfully completed June 1 reinsurance renewal on attractive terms: added $421 million of incremental catastrophe limit, maintained earthquake ($20 million) and U.S. hurricane ($11 million) event retentions, expanded Laulima Hawaii hurricane coverage to $865 million, and secured improved economics for 14 new/renewed property and casualty treaties, limiting balance sheet risk and earnings volatility. * Launched PLMR.Farm, the first new AI-powered crop insurance policy administration platform launched in the industry in over a decade, which will support scalable growth and improve agent and customer experience. * Added two key senior leaders: Sherry Scott as Chief Actuarial Officer (strengthening actuarial and risk management capabilities) and Madison Rogozin as Head of AI, who will lead four high-impact enterprise AI initiatives focused on underwriting, claims, operations, and the PLMR.Farm rollout. - Capital Allocation * Repurchased 368,719 shares for $41 million at an average price of $111 per share during the quarter, reflecting management's view that repurchases are an attractive use of capital. * Board approved initiation of a quarterly dividend of $0.45 per share, with the first payment scheduled for September 2, 2026. The dividend does not constrain organic growth investments under the Palomar 2X strategy, enabled by growing earnings and less capital-intensive contributions from crop and selected casualty lines. * Ended the quarter with $980.9 million in stockholders' equity, with a well-capitalized balance sheet that supports organic growth, capital return, and prudent risk management.

Guidance

- Full-year 2026 adjusted net income guidance was increased to $270 million to $280 million, representing the third upward guidance revision this year. At the midpoint, this implies ~27% YoY adjusted net income growth, more than doubling 2024 adjusted net income in two years, with an expected adjusted return on equity above 20%. - Full-year 2026 crop GWP guidance was raised to more than $400 million, up from the prior outlook of ~$320 million, with management confirming a long-term target of building crop into a $1 billion franchise. - The net earned premium ratio (net earned premium as a share of gross earned premium) is expected to increase to the upper 40s for full-year 2026, with the lowest point in Q3 2026 consistent with historical seasonality, particularly for crop insurance. - Full-year 2026 adjusted acquisition and other underwriting expense ratios are expected to see slight improvements from 2025 levels, with higher ratios in H1 2026 and lower ratios in H2 2026 driven by crop premium seasonality. - The 2026 full-year loss ratio (including catastrophes and prior year development) is expected to land in the mid to upper 30s, with an adjusted combined ratio expected in the mid-70s; Q3 2026 will see the peak for both the loss ratio and combined ratio this year, driven by crop seasonality. - Full-year 2026 guidance includes an expected $8 million to $12 million in catastrophe losses, consistent with prior planning assumptions.

Segment performance

1. Earthquake: Q2 2026 gross written premium (GWP) was down less than 1% year-over-year (YoY); year-to-date GWP is up 1% YoY. Residential earthquake makes up 64% of the earthquake book, delivering strong new business growth, 96%+ premium retention, and stable profitability metrics. Commercial earthquake constitutes 36% of the segment, facing intense competition with average large commercial rate declines over 20%; small commercial earthquake saw low double-digit pricing declines. The segment's overall average annual loss (AAL) to premium ratio remained stable at Q2 2023 levels. 2. Inland Marine and Property: GWP increased 11% YoY. Residential property accounts for 36% of the segment, with strong performance from Hawaii hurricane business and growing residential flood production. Motor truck cargo grew 22% YoY. Builder's risk and construction engineering delivered strong growth, with expansion into technically complex projects like data centers. Large commercial layered/shared property faced 16% rate declines, but the balanced portfolio allows the firm to avoid unattractive business. 3. Casualty: GWP increased 37% YoY, driven by long-term investments in talent, products, distribution and program partnerships. The segment includes seven niche lines with varied pricing dynamics: excess casualty saw 5.8% rate increases this quarter, while real estate E&O declined 3.9%. Portfolio management prioritizes allocation to lines meeting return hurdles, with exposure reduced in transactional liability and cyber this quarter due to inadequate pricing. 84% of casualty reserves are held as IBNR, reflecting a conservative reserving philosophy. 4. Crop: GWP increased 96% YoY, significantly exceeding initial expectations. The segment now contributes to both top-line growth and earnings diversification, and is on track to exceed $400 million in full-year 2026 GWP (up from a prior target of $320 million). Early winter wheat growing challenges in parts of the Great Plains have been mitigated by improved conditions and reinsurance, with 2026 profit expectations remaining within historical norms. The new PLMR.Farm AI-powered policy administration platform launched this quarter. 5. Surety and Credit: GWP increased 236% YoY to approximately $39 million, driven by the full-quarter inclusion of the acquired Gray Surety business. Integration of the acquisition is substantially complete, with current focus on expanding underwriting talent, geographic reach and product capabilities.

Risks & headwinds

- Intense competition in large commercial earthquake and large commercial property markets has led to material rate declines, with some new business pricing falling below the firm's technical pricing thresholds that adequately cover expected losses, reinsurance, expenses and capital costs. - Higher crop growth increases the near-term loss ratio and impacts the consolidated combined ratio, as crop is inherently a higher loss ratio business, and crop losses are recognized earlier than premium. - While reinsurance renewals achieved favorable terms this quarter, catastrophe reinsurance pricing for lower retention layers remains thin, limiting the margin benefit of increasing retentions. - Small commercial surety projects are experiencing delays that create uncertainty around near-century premium timing, though there is minimal rate pressure in the segment.

Analyst Q&A

• Q: David Motormaden (Evercore) asked to unpack the source of favorable casualty reserve development this quarter, including which lines and accident years were impacted. /

  A: Most favorable development came from an older fronted workers' comp program with Omaha National, where Palomar held a risk participation. Management emphasized that the result aligns with the firm's long-standing conservative reserving philosophy, where bad news is recognized upfront, leading to consistent favorable reserve development across property and increasingly casualty lines over the past six quarters. The core reserving approach remains unchanged, with conservative reserves still being booked for all new lines including crop. (239 characters)

• Q: Mark Hughes (Truist) asked how much more rollover of third-party casualty books onto Palomar's paper is remaining, and what the pipeline for future opportunities looks like. /

  A: Two existing programs still have remaining rollover to complete in Q3 and Q4 2026, with growth contributions that will be less pronounced than earlier this year. Management confirmed these opportunities are from long-standing, aligned relationships with best-in-class program administrators, and there continues to be an active pipeline of new opportunities. While the firm applies higher scrutiny to new opportunities in the current market cycle, this growth strategy will remain a complement to organic growth going forward. (310 characters)

• Q: Pablo Sington (JP Morgan) asked if reserve releases are expected to become a growing contributor to earnings to support the Palomar 2X medium-term earnings doubling goal. /

  A: Management noted that the firm's conservative reserving approach (with 84% of casualty reserves and 79% of total reserves as IBNR) makes continued reserve releases likely, but they are not a core driver of the Palomar 2X strategy. The primary drivers of long-term earnings growth are organic expansion of diversified, disciplined underwriting across high-return specialty lines, with reserve releases only a secondary, welcome side benefit of the firm's reserving philosophy. (298 characters)

• Q: Pablo Sington (JP Morgan) asked how management is approaching reinsurance strategy in the current market, between retaining more premium or using cheaper third-party capacity. /

  A: Management takes a line-by-line flexible approach: for casualty, it maintained existing cession percentages to capture higher origination compensation, with the option to increase retention as books mature. For property, it has increased net retention in line with balance sheet growth to improve blended margins. For catastrophe reinsurance, it kept retentions flat because lower layer pricing was too thin to justify taking on additional incremental risk. (291 characters)