Earnings Call Transcript - PLMR Q1 2025

Operator, Operator

Good morning. And welcome to the Palomar Holdings, Inc. First Quarter 2025 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir.

Chris Uchida, CFO

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, Jon Christianson, our President, is here to answer questions during the Q&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 11:59 p.m. Eastern Time on May 30, 2025. 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. Additionally, during today's call, we 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 US GAAP. A reconciliation of these non-GAAP measures to their most comparable GAAP measures can be found in our earnings release. At this point, I'll turn the call over to Mac.

Mac Armstrong, CEO

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 return on equity. 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. 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 our 2025 strategic imperatives. The first is to 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. A key component to the long-term surety strategy is the receipt of a T-listing, and I'm pleased to report that FIA achieved this in the quarter. We also closed the previously announced acquisition of Advanced AgProtection on April 1st and began integrating their operations and talent into our crop business. The second imperative is to build new market leaders deliberately. The strong growth of the casualty franchise in the quarter demonstrated traction on this initiative as we continue 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. 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 our 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. The fourth imperative is to continue to generate consistent earnings and the cornerstone of Palomar 2X. Beyond the record adjusted net income of $51.3 million in the quarter, we beat earnings for the 10th 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'd 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. We recognize that elevated tariffs and the associated cost 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 is 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 color the risk 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. We believe our casualty book is insulated. A recession and an economic slowdown would have a greater impact on our product portfolio, property casualty, and crop alike in the near term than that of tariffs. A slowdown will reduce exposures in multiple facets, such as project delays for homebuilders, reduced 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 revenue growth as it 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. 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 excess and surplus 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&C market cycle. Turning to the first quarter performance of our earthquake franchise, we delivered strong results with gross written premium of 23% year-over-year. 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 cost 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. While we are seeing pressure in rates 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. Like the earthquake portfolio, we benefited 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 Laulima 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 leverage an attractive reinsurance structure that increased our capacity. Our small commercial focused builders risk products that ensure middle market regional homebuilders saw the technical rates stay flat year-over-year. The excess national property and E&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 probable maximum loss. Casualty gross written premium grew 113% year-over-year, driven by strong performance across general liability, E&S casualty, real estate E&O, and environmental liability. Recent investments in talent and systems have accelerated premium growth while enabling us to effectively scale and service the business. Under David Sapia's leadership, the E&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 factored data 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&O beyond California or hiring seasoned underwriters to enhance our miscellaneous E&O practice. We are hiring exceptional professionals across the casualty portfolio and are confident they will sustain our profitable growth. We 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 1st, FIA secured a T-listing from the US Treasury. 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 the Surety franchise that will generate $100 million of written premium over time. While contributions in 2025 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. This premium growth headwind will run its course by the end of the third quarter. Looking ahead, we will continue to add partners selectively, but fronting is not our highest strategic priority currently. On the other hand, our crop franchise generated $48 million 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 a balanced mix of business in the states we find attractive. Additionally, we made considerable investments in talent during the quarter that will lead to strong production in the third and fourth quarters of 2025. 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 million full-year target. Separately, the previously announced acquisition of Advanced AgProtection 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. This increased scale will also enable Palomar to recruit more top-tier talent. Importantly, we now have the larger foundation to execute our plan of building an industry-leading crop business, which I believe will surpass $500 million of premium in the intermediate future and $1 billion of premium over the long term. Turning to reinsurance. The first quarter was active across the organization with a particular focus on the core excess of loss program that incepts on June 1, 2025. ILS securities and cat bonds specifically are a key component of the core excess of loss program. We are pleased to secure $525 million of earthquake limit through our sixth and largest Torrey Pines Re catastrophe bond issuance, seeding our $425 million target and pricing at the lower end of the indicated range. The cat bond pricing was approximately 15% down on a risk-adjusted basis. Additionally, we placed a new Laulima excessive loss treaty effective June 1st for our Hawaii hurricane business. This coverage was previously part of our core June 1st program, which now has over 95% earthquake only, creating a more attractive structure for reinsurers. The Hawaii treaty also priced at a level favorable to our projections. The successful placements of the cat bond and the Laulima treaty will position us to achieve, if not exceed, our original guidance level of flat to net 5%. Beyond the core excess of loss program, we renewed our May 1st 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 1st casualty quota share to October 1st 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. 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 20 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. 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 million to $200 million from our previous range of $180 million to $192 million. The midpoint of our guidance implies an adjusted return on equity of 23% and puts us in 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, CFO

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 methods. 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 2025, our adjusted net income grew 85% to $51.3 million or $1.87 per share compared to adjusted net income of $27.8 million or $1.09 per share for the same quarter of 2024. Our first quarter adjusted underwriting income was $51.6 million compared to $29.2 million for the same quarter last year. Our adjusted combined ratio was 68.5% for the first quarter compared to 73% in the first quarter of 2024. Excluding catastrophes, our adjusted combined ratio was 68.9% for the quarter compared to 69.8% last year. For the first quarter of 2025, 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 2024 to be fully deployed until the end of 2025. 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%. Gross written premiums for the first quarter were $442.2 million, an increase of 20% compared to the prior year's first quarter, 37% growth when excluding run-off business. As previously mentioned, this run-off business will add a $44 million 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 $164.1 million, an increase of 52% compared to the prior year's first quarter. 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 2024 and compared sequentially to 39% in the fourth quarter of 2024. 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. With the timing of our core and 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 12-month period. We expect our net earned premium ratio to be around 40% for the year. Losses and loss-adjusted expenses for the first quarter were $38.7 million comprised of $39.2 million of non-catastrophe attritional losses, offset by $0.5 million 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 $3.9 million of 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. 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 2024. This percentage increased as our book of business continues to diversify and aligns with higher net acquisition expenses. For the year, we expect this ratio to be similar to last year around 11%. The ratio of other underwriting expenses including adjustments 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 2024. 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. As announced, we continue to invest in our crop organization with the acquisition of Advanced AgProtection to begin in the second quarter. We expect long-term scale on 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 $12.1 million, an increase of 69.1% compared to the prior year's first quarter. 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 position to asset classes that generate attractive risk-adjusted returns. At the end of the quarter, our net written premium to equity ratio was 0.91:1. Our stockholders' equity has reached $790 million, a testament to consistent profitable growth and the capital rates. 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 1st. 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. 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. Turning to guidance. We are raising our full year 2025 adjusted net income guidance to a range of $186 million to $200 million from the previous range of $180 million to $190 million. Our guidance includes $8 million to $12 million 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 excess of loss reinsurance treaty renews at a risk-adjusted rate of flat to down 5% from the expiring 2024 treaty. Lastly, not only does the midpoint of our guidance imply an adjusted ROE above 20%, but it also puts us in a position to double our 2022 adjusted net income in three years and double our 2023 adjusted net income in just two years.

Operator, Operator

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, CEO

Great. Thanks, operator. And thank you all for joining us today. The year is off to a strong start. Our core earthquake and inland 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. We feel great about the 2025 guidance and we think that there is 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 for the rest of this year. Thank you again and enjoy the rest of your day.

Operator, Operator

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