Palomar Holdings, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Strong third quarter results: 39% adjusted net income growth, 77% adjusted combined ratio, 21% adjusted ROE. Validates efforts to diversify, reduce earnings volatility, and grow profitably.
• Strategic imperatives:
  • Grow with strong risk-adjusted returns: 32% top line growth in Q3, 38% same store sales growth, driven by Earthquake, Casualty, and Crop books.
  • Navigate market dislocation: Raised $160 million via equity issuance for diversification, acquisition of FIA, and supporting crop business.
  • Provide consistent earnings: Achieved adjusted net income growth despite elevated cat activity.
  • Scale organization: Added key executives like David Sapia, Benson Latham, Althea Garvey.
• Reinsurance: Successfully placed facultative reinsurance treaty for Excess National Property, renewed real estate E&O quota share, and put in place quota share for E&S general liability. Expect catastrophe excess of loss pricing flat to down in 2025.
• Pending acquisition: Expect regulatory approval by year end and close acquisition of FIA in early 2025, with no financial contribution in Q4.

Segment Performance

• Earthquake franchise: Core Earthquake franchise grew gross written premium 19%. Residential Earthquake had strong new business growth and high policy retention; E&S Residential Earthquake grew over 70%. Commercial Earthquake saw solid growth with plateauing rates but attractive metrics. Expected high teens growth for 2024 full year.
• Inland Marine and Other Property: Grew 22% YOY. Excess National Property and Hawaii Hurricane did well; All Risk book contracted. Builder's Risk and Excess National Property had robust growth. Hawaii Hurricane premiums grew 74% due to rate increase.
• Casualty: Premiums increased 91% YOY. Niche classes like real estate errors and omissions, commercial contractors general, etc., saw strong growth. David Sapia joined as Head of E&S Casualty. Loss ratio remained in line with conservative picks, reserves building.
• Fronting business: Experienced 11% decline in premiums due to separation from Omaha National.
• Crop business: Wrote $60 million in premium in Q3, year-to-date over $100 million. Benson Latham joined as Head of Crop. Plan to expand in 2025 with new capital and talent.

Guidance

• Full-year 2024 adjusted net income guidance tightened to $124 million to $128 million, including ~$8 million from Hurricane Milton in Q4. Midpoint represents 35% growth vs 2023 and adjusted ROE >20%. Originally initiated guidance at $110-$115 million, then raised to $124-$130 million, now tightened based on strong performance and including catastrophe losses from Hurricane Milton.

Risks

• Factors affecting forward-looking statements, including market volatilities, catastrophe losses, and regulatory changes.
• Impact of termination of Fronting contract with Omaha National on Fronting group's growth in the next several quarters.
• Potential for actual results to differ materially from forward-looking statements due to various risks, uncertainties, and factors detailed in the quarterly report on Form 10-Q.

Question and Answer

Q: When we think about the quake business for next year, what are the growth prospects next year, especially commercial versus residential?

A: Hey Mark, this is Mac. Overall feel good about earthquake growth prospects. Balanced book of residential (55%) and commercial (45%) quakes. Expect high teens growth next year, maintaining 18%-20% range similar to 2024 but with possible slight shift in residential vs commercial growth.

Q: Some nice improvement in the earned premium ratio. How much of that is mix of business versus pricing for your reinsurance?

A: Yes, thanks, Mark. Driven by rate, mix, and strong performance of excess of loss placement at 6/1 2024. Expect Q3 to be low point of net earned premium ratio, with it moving up from Q3 to Q4 and 2025, driven by growth in net earned premium dollars.

Q: Are the property businesses profitable over time as you've reduced your exposures?

A: Yes, look at across property portfolio. Builder's Risk, Excess National Property, Hawaiian Hurricane have performed well. Flood has been profitable, All Risk book has been disproportionately volatile but limits reduced. Overall, property book has been profitable with some underperformers being monitored.

Q: Is the Crop business a net diversifier for your P&Ls?

A: Yes, Jon Christianson here. Crop is a great diversifier as it's uncorrelated to P&C market cycles and risks like drought. With new capital and talent, expect to expand Crop in 2025 starting 1-1-25.

Q: Looks like this year it'll sort of settle out in the 5 to 6-point of an impact on the combined ratio. What's the expected level that you guys would expect in a given year?

A: Yes, Dave, slightly elevated this year due to severe convective storm and flood losses. All events well within retention. Expect to pull back continental hurricane PML in 2025, bringing cat load to 3-4 points as steady state number.

Q: On the other underwriting expense ratio at 5.9%, what's the sort of run rate underwriting expense ratio?

A: Yes, good question. Crop premium in Q3 artificially pushed underwriting expense ratio down. Expect it to be in mid-6% to 7% run rate. We are investing in talent and scaling organization, so not sacrificing investment for short-term profitability.

Q: How fast is E&S Residential Earthquake growing, and what about the admitted side?

A: E&S Residential Earthquake grew over 70%. Admitted side also growing. Benefiting from migration of risks from admitted to E&S on personal line side. Expect growth to be sustainable with 10% inflation guard and strong policy retention, even in more normal market conditions.

Q: What investments are being made outside of underwriting, especially in claims?

A: Yes, great question. Hired Althea Garvey as Chief Claims Officer. She has over 30 years of experience in claims management, litigating, and running TPAs. Will focus on building in-house claims capabilities and managing TPAs, especially on the casualty side.