Business Overview A Diversified Specialty Insurance Portfolio
Palomar Holdings, Inc. (NASDAQ:PLMR) is a specialty insurance company that has carved out a unique niche in the property and casualty (P&C) insurance market. Founded in 2014, the company has quickly emerged as a leading provider of innovative insurance products, leveraging its data-driven underwriting approach and technology-driven business model to deliver consistent growth and superior risk-adjusted returns.
Palomar Holdings, Inc. was founded in 2014 when it acquired Palomar Specialty Insurance Company (PSIC) from Pacific Indemnity Company. The company was originally incorporated under the laws of the Cayman Islands in October 2013 before implementing a domestication to become a Delaware corporation in March 2019.
PSIC, Palomar's primary operating subsidiary, was formed in February 2014 and is an admitted insurer licensed to write business in 44 states as of December 31, 2024. In August 2014, the company incorporated Palomar Specialty Reinsurance Company Bermuda Ltd. (PSRE), a Bermuda-based reinsurance subsidiary that provides reinsurance support exclusively to PSIC and PESIC. Palomar Insurance Agency, Inc. (PIA) was incorporated in August 2015 to underwrite specialty insurance products on behalf of third-party insurance companies.
In 2020, the company received regulatory approval for and capitalized Palomar Excess and Surplus Insurance Company (PESIC), an Arizona domiciled surplus lines insurance company licensed to write business on a nationwide basis across Palomar's existing lines of business. During 2023, the company formed Palomar Underwriters Exchange Organization, Inc. (PUEO), a Delaware incorporated management company that provides services by serving as the attorney-in-fact to Laulima Exchange, a Hawaii domiciled reciprocal exchange.
The company's journey has involved navigating the insurance regulatory environment in the states in which it operates, including requirements around capital and surplus, investments, and dividend limitations. Palomar has also had to compete in a highly competitive specialty insurance market, differentiate its product offerings, and establish relationships with retail agents, program administrators, and wholesale brokers to distribute its policies.
Today, Palomar offers a diversified portfolio of specialty insurance products focusing on five key areas: Earthquake, Inland Marine and Other Property, Casualty, Fronting, and Crop. The company's Earthquake business, which includes both residential and commercial offerings, has been a key driver of its growth, making Palomar the third-largest earthquake insurer in the United States. The Inland Marine and Other Property segment has also seen significant traction, with the company's Builders Risk, Hawaii Hurricane, and Excess National Property products contributing to its success.
Financial Performance Consistent Growth and Profitability
Palomar's financial performance has been impressive, with the company delivering consistent growth in both top-line and bottom-line metrics. In 2024, the company reported gross written premiums of $1.54 billion, representing a 35.1% increase from the previous year. This growth was driven by strong performances across all of Palomar's product lines, with the Casualty and Crop segments being the standout performers.
The company's net income for 2024 stood at $117.6 million, reflecting a 48.4% year-over-year increase. Palomar's adjusted return on equity (ROE) for the year was an impressive 22.2%, underscoring the company's ability to generate attractive risk-adjusted returns for its shareholders.
Financials
Palomar's financial strength is further evidenced by its robust balance sheet, with a debt-free capital structure and a sizable investment portfolio that provides a steady stream of investment income. As of December 31, 2024, the company's stockholders' equity stood at $729 million, up from $471.3 million a year earlier, reflecting the company's ability to consistently grow its capital base.
For the fiscal year 2024, Palomar reported annual revenue of $1.54 billion, annual net income of $117.6 million, annual operating cash flow of $261.2 million, and annual free cash flow of $252.6 million. The most recent quarter (Q4 2024) saw revenue of $373.7 million and net income of $41.3 million, representing a 23% year-over-year growth in gross written premiums, or 39% growth excluding runoff business.
Palomar has experienced significant growth since its inception, increasing gross written premiums from $16.6 million in its first year of operations to $1.5 billion for the year ended December 31, 2024, reflecting a compound annual growth rate of approximately 57%. The company has been profitable since 2016, with net income growth since then reflecting a compound annual growth rate of 43%.
The company's combined ratio, a key measure of underwriting profitability, was 78.1% for the year ended December 31, 2024, indicating strong underwriting performance. Palomar's annualized return on equity was 19.6% for the same period, demonstrating its ability to generate attractive risk-adjusted returns for shareholders.
Liquidity
The company maintains a strong liquidity position, which is crucial for meeting its obligations and supporting its growth initiatives. While specific liquidity metrics were not provided, it's important to note that Palomar's debt-free capital structure and growing stockholders' equity contribute to its overall financial flexibility.
Reinsurance Program Prudent Risk Management
Palomar's success is underpinned by its comprehensive reinsurance program, which helps the company manage its exposure to catastrophe events and mitigate the impact of large losses. The company's reinsurance strategy involves a mix of excess-of-loss, quota-share, and property-per-risk coverage, with the goal of limiting its net loss before tax from a single event to $20 million, or approximately 2.7% of its total stockholders' equity.
In addition to traditional reinsurance arrangements, Palomar has also utilized the insurance-linked securities (ILS) market, securing multi-year, indemnity-based reinsurance coverage through the issuance of catastrophe bonds. This diversified approach to risk transfer has enabled the company to maintain a conservative risk profile while providing the necessary capacity to support its growth aspirations.
Competitive Landscape and Growth Opportunities
Palomar operates in a highly competitive specialty insurance market, facing off against national specialty insurers, regional players, and state-managed entities. However, the company's differentiated product offerings, data-driven underwriting approach, and technology-enabled business model have allowed it to carve out a strong competitive position.
Going forward, Palomar sees ample opportunities for growth, both within its existing product lines and through the introduction of new offerings. The company's Crop and Casualty segments, in particular, are poised for significant expansion, with the Crop business aiming to become one of the top ten crop premium writers in the U.S. by the end of 2025.
Additionally, the company's recent acquisition of First Indemnity of America (FIA), a New Jersey-based surety bond provider, is expected to further diversify Palomar's product portfolio and offer additional avenues for growth.
Product Segments
Palomar operates through five main product segments:
1. Earthquake: Offers Residential and Commercial Earthquake products on both admitted and excess and surplus (E&S) lines basis. The Residential Earthquake products insure against home damage, contents, appurtenant structures, and temporary housing costs following an earthquake. The Commercial Earthquake products focus on providing coverage for benign commercial risks where the business interruption exposure is typically less than 15% of the total insured value.
2. Inland Marine and Other Property: Includes products such as Inland Marine, Hawaii Hurricane, Commercial All Risk, Excess National Property, Residential Flood, and other miscellaneous property products. These products are written on both admitted and E&S lines, directly and through program administrators.
3. Casualty: Provides products on an admitted and E&S basis, primarily focusing on niche segments of the Casualty market including Real Estate Agent Errors and Omissions, Excess Liability, and Environmental Liability coverages. The company launched its E&S Casualty product at the end of 2024, focusing on Primary Excess Construction and Excess Liability lines of business.
4. Fronting: Offers reinsurers, insurance companies, and managing general agents the ability to utilize Palomar's licensed admitted and E&S insurance companies to design and operate customized insurance programs.
5. Crop: Comprises primarily multi-peril crop insurance offered in connection with the U.S. Department of Agriculture's Risk Management Agency, as well as Livestock and Private Product Crop solutions.
Geographic Markets and Distribution
Palomar operates primarily in the United States, with 43% of its 2024 gross written premiums coming from California. The company distributes its products through retail agents, program administrators, wholesale brokers, and partnerships with other insurance companies.
Management and Corporate Governance
Palomar's management team has decades of insurance industry experience across specialty underwriting, reinsurance, program administration, distribution, and analytics. The company's insurance subsidiaries, PSIC and PESIC, have an A rating from A.M. Best.
Future Outlook and Guidance
Palomar has consistently beaten expectations, reporting record gross written premium and adjusted net income for the full year 2024. The company has provided guidance for the full year 2025, with adjusted net income expected to be in the range of $180 million to $192 million. The midpoint of this guidance represents growth of 39% compared to 2024 and implies an adjusted ROE greater than 20%, meeting their Palomar 2x objective.
For 2025, Palomar expects:
- Net earned premium ratio to increase from 36.5% in 2024, with a low point in Q3 due to increased crop insurance participation.
- Loss ratio to be in the low 30s, including catastrophe losses, with the highest point in Q3 due to the crop business.
- Adjusted combined ratio to be in the mid to upper 70s.
The 2025 guidance includes $8 million to $12 million of catastrophe losses in addition to normal attritional losses.
Risks and Challenges
While Palomar's performance has been impressive, the company is not without its risks and challenges. As a specialty insurer, Palomar is exposed to the inherent volatility of the insurance industry, with its results potentially impacted by the frequency and severity of catastrophic events, changes in regulatory environments, and shifts in market conditions.
The company's heavy concentration in California, which generated 43.4% of its gross written premiums in 2024, also exposes it to state-specific risks, such as changes in insurance-related laws and regulations, as well as the potential for large-scale natural disasters.
Furthermore, Palomar's reliance on a select group of brokers and program administrators for distribution could pose a risk if these relationships were to be disrupted or if the company is unable to maintain its competitive edge in attracting and retaining these key partners.
Conclusion A Specialty Insurance Leader Poised for Continued Growth
Palomar Holdings has emerged as a specialty insurance powerhouse, leveraging its data-driven underwriting expertise, innovative product offerings, and technology-enabled business model to deliver consistent growth and superior risk-adjusted returns. With a diversified portfolio of specialty insurance products, a prudent reinsurance strategy, and a strong financial profile, the company is well-positioned to capitalize on the numerous growth opportunities within the P&C insurance market.
As Palomar continues to execute on its strategic initiatives, including the integration of its recent acquisition and the expansion of its Crop and Casualty businesses, investors can expect the company to maintain its trajectory of consistent growth and profitability, solidifying its position as a leading player in the specialty insurance space.