Palomar Q4 2024 Earnings Report

Palomar EPS Results

• Actual EPS: $1.37
• Consensus EPS: $1.24
• Beat/Miss: Beat by +$0.13
• One Year Ago EPS: N/A

Palomar Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Palomar Announcement Details

• Quarter: Q4 2024
• Date: 2/12/2025
• Time: After Market Closes
• Conference Call Date: Thursday, February 13, 2025
• Conference Call Time: 12:00PM ET

Palomar (NASDAQ:PLMR), a specialty insurance company, provides property and casualty insurance to residential and businesses in the United States. The company offers personal and commercial specialty property insurance products, including residential and commercial earthquake, fronting, commercial all risk, specialty homeowners, inland marine, Hawaii hurricane, and residential flood, as well as other products, such as assumed reinsurance. It markets and distributes its products through retail agents, wholesale brokers, program administrators, and carrier partnerships. The company was formerly known as GC Palomar Holdings and changed its name to Palomar Holdings, Inc. The company was incorporated in 2013 and is headquartered in La Jolla, California.

Palomar Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Good morning, and welcome to the Palomar Holdings Inc. Fourth Quarter and Full Year twenty twenty four 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 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, 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 Christiansen, 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 02/20/2025.

[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, Chief Financial Officer at Palomar]

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 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, Chief Financial Officer at Palomar]

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

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

Thank you, Chris, and good morning. I'm eager and very pleased to discuss our outstanding fourth quarter and 2024 results. The across the board success of the quarter and full year is a testament to the hard work of our exceptional team. The Palomar team more than effectively executed the four strategic objectives that we outlined to start the year, sustain our strong and profitable growth, manage dislocation and diversification, deliver predictable earnings and scale our organization. As a result, we delivered 23% gross written premium growth, 39% when excluding runoff lines of business, 48% adjusted net income growth inclusive of $8,000,000 catastrophe losses and an adjusted return on equity of 23% in the fourth quarter.

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

Importantly Q4 twenty twenty four is the ninth straight quarter that we have beaten expectations. Our strong execution is also seen in our full year 2024 results, which included record gross written premium and adjusted net income. Gross written premium growth of 35%, forty three % on the same store basis, adjusted net income growth of 43% and adjusted ROE of 22%, even when saddled with the short term drag of the capital raised in August of this year. As it relates to our capital, our stockholders' equity increased 55 year over year, 30% when excluding the equity issuance. From an operational perspective, the accomplishments in 2024 were several and meaningful, highlighted by our acquisition of the surety company First Indemnity of America or FIA, which closed at the start of 2025 and our upgrade to A excellent by A.

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

M. Best, but I'm most excited by the significant additions made to the Palomar team. Twenty twenty four saw us recruit respected industry professionals including but not limited to a Chief Operating Officer, Chief People Officer, Chief Claims Officer, Head of Crop and Head of E and S Catast. These achievements enabled us to reach our Palomar 2x target of doubling 2021 adjusted underwriting income in three years, the shorter end of our intermediate timeframe. 2024 was a banner year for Palomar.

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

At this point, I would like to touch on the devastating Los Angeles wildfires. I personally like to pass along my sympathies to all those impacted including our employees, trading partners, families and friends. This has been a historic catastrophe for our region and state and we're focused on doing our part to help our customers and communities through this challenging time. As a reminder, we do not write homeowners insurance in California as we can find our residential property exposure in the state to monoline earthquake and flood policies. Similarly, the majority of our commercial property exposure in California is a commercial earthquake or difference in condition policy that does not cover wildfire.

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

We do have builders risk and builders owner package products that have exposure to fire losses. Fortunately, our losses from the Eaton and Palisades fires are very modest and within the scope of our 2025 guidance in ordinary course attritional losses. We have indirect exposure through our residential earthquake franchise, slightly less than 1% of our residential earthquake book is in the Eaton And Palisades burn zones. We are working closely with our insureds and producers to quickly cancel and refund those policies that have been impacted by the fires and unfortunately no longer need our coverage. Our focus is to help our insureds in their time of need.

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

Due to the recency of the event, it's hard to forecast what the medium and long term market impact will be. That said, it is amplifying the dislocation and challenges in the California homeowners market as well as heightening the awareness of natural disasters in our state. We've seen a modest uptick in residential earthquake new business to start the year and suspect the dislocation in the homeowners market will lead to further attrition out of the California Earthquake Authority as member companies call back their exposure to California. This could prove a tailwind for our residential earthquake business. As it pertains to reinsurance, it is also hard to handicap the market impact as the losses seeded in the reinsurance market are likely to be from a concentrated group of seedings.

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

Wildfires may slow the pace of rate decreases at Palomar and the broader market experienced on January 1. That said, recent activity in the catastrophe bond market suggests that this event has not diminished investors' appetite for single payroll exposure like earthquake. As long as this market dynamic continues, it would likely prove advantageous to Palomar. I will touch more upon our reinsurance pricing expectations toward the end of my remarks. Turning to the fourth quarter performance of our five product categories, I will start with our earthquake franchise.

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

Exiting 2024 as the third largest writer of earthquake insurance in North America, we are a category leader. In the quarter, our core earthquake franchise grew gross written premiums 20%. Our balanced approach of riding both residential and commercial earthquake insurance allows us to play through market cycles and optimize capital allocation in soft or hard markets. Specifically, this strategy enables us to preserve our overall margin in a climate of rate softening in the commercial earthquake market. For example, our residential earthquake product features a 10% inflation guard offering a strong cushion against inflation and a consistent rate increase as policies are renewed annually.

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

Whereas in the quarter, our commercial earthquake products experienced an average rate decrease of approximately 5%. This dynamic is likely to persist throughout the year, but the California wildfires could reduce the pace of rate decrease. That said, as mentioned on previous calls, the portfolio profitability, theoretical loss and aggregation metrics for the earthquake franchise are strong as at any point in our history, a reflection of this balanced book approach. As we look to 2025, the prospects of our earthquake franchise remain strong and we are confident the earthquake premiums will grow in the mid to high teens for the full year. Our inland marine and other property category, which consists of seven distinct property products grew 36% year over year.

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

Over the course of 2024, we are investing in talent and geographic expansion selectively while simultaneously reducing exposure to the more volatile classes of business in this category. Strong premium growth contributors during the quarter were our Builders' Risk, Excess National Property and Hawaii hurricane lines of business. Overall, this category delivered exceptional results from a nutritional loss perspective. The low loss ratio was a function of a multi year effort of significant rate increases and underwriting changes that combined with moderate weather activity hold aside Hurricane Milton. The loss ratio was not negatively impacted by softening commercial property rates.

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

Commercial property pricing is showing a moderate downward trend like that we are seeing in commercial earthquake. Importantly, we remain steadfast and holding firm on key terms and conditions as rate declines at a low single digit clip. Like our earthquake products, the in the marine and other property portfolio is balanced by a mix of residential and commercial lines. The rate increases we are getting from our Hawaiian hurricane and residential flood products are helping offset the rate softening in the commercial property market. Our Casualty segment saw another period of significant growth with premium increasing 112% year over year.

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

Strong performers in the Casualty Group included contractors GL, Real Estate E and O, Miscellaneous Professional Liability and Environmental Liability. The quarter also saw a nice contribution from our new E and S Casualty team headed by David Sapia. The group was able to take advantage of a hard new market in segments like primary and excess construction liability insurance. Casualty now represents 15% of our total portfolio and we remain focused on conservative underwriting within targeted niche markets. Our approach includes prudent risk management tactics such as shorter tail liability focus, modest line sizes, avoidance of high severity exposures and conservative reinsurance.

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

At the end of the quarter, our casualty books average gross limit was $2,400,000 and our average net limit was $1,100,000 Casualty books loss ratio remained in line with our conservative loss pick and reserves continue to grow. Notably, over 80% of our casualty reserves are IB and R meaningfully higher than the industry average, which one would expect for a nascent franchise like ours. In terms of pricing and rate adequacy, we are seeing strong rate increases in excess of loss costs across the casualty book. Environmental liability rates increased by 8%. E and S casualty and excess liability rates climbed 7% to 12%.

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

And contractors GEO accounts with auto coverage SAR rates increased just below 20% for the quarter. Our casualty franchise is well positioned for profitable growth in 2025. Turning to our fronting business, this was the first full quarter where we experienced a complete effect of our separation from Omaha National, the fronting group's premium declined 33%. We are pleased with the growth of our existing partners and the prospects of our newer relationships. We continue to bet opportunities and have a healthy pipeline of potential partnerships.

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

Fourth quarter was the first quarter with Benson Latham was leading the charge for Palomar Crop. During the quarter, talented professionals in marketing and claims joined the Crop team, bolstering the efforts made over 2024 to build the foundation for a much larger business. Our fast growing Palomar Crop franchise delivered 15,700,000 in premiums in the seasonally low fourth quarter and $116,000,000 in premiums for our first full year in the business. Importantly, the underwriting results were strong as the top line growth with an estimated underwriting gain on MPCI or multi payroll crop insurance of approximately 20%. These results affirm our risk selection approach and moreover our intention to increase our risk participation over time.

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

To that end, we finalized our 2025 reinsurance treaty putting in place quota share and stop loss programs. We will retain 30% of the subject matter premium going forward as compared to 5% on the expired treaty. I have every confidence that we are building the industry leading crop business to Palomar and continue to believe Palomar crop will eclipse $500,000,000 of premium in the intermediate future. We aim to be among the top 10 crop premium writers in The U. S.

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

By the end of twenty twenty five with projections exceeding $200,000,000 in premium for the year ahead. Lastly, we closed on our acquisition of FIA at the start of 2025. FIA's results will be included in the Casualty Product Group for the immediate future. Surety is an attractive market segment that like crop insurance is not correlated to the P and C cycle and one that we believe can be an important growth vector for Palomar over the longer term. While FIA's contributions will be modest in 2025, we believe surety will be a meaningful market segment over time.

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

Quickly turning to reinsurance, we are active on January 1 across the Portfolio with successful placements in our earthquake crop, which are discussed in casualty groups. First off, we renewed our commercial earthquake quota share about $155,000,000 of incremental excess of loss limit to support the growth of the earthquake book until the main excess of loss renewal on June 1. These treaties were priced at risk adjusted decreases of approximately 15%. On the casualty front, we renewed two treaties at either expiring or improved economics. We also put in place two new treaties for our casualty group.

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

They are both well received with strong support from blue chip reinsurers who already support Palomar and other lines of business. Despite the industry's losses from the wildfires, we remain cautiously optimistic on the prospects of our six-one renewal as we have seen leading indicators such as recent cap on issuances and secondary market pricing that suggest strong appetite from investors for single payroll exposures like earthquake. Looking ahead to 2025, we have four strategic initiatives. First, integrate and operate. We must monetize the investments that we have made throughout 2024.

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

Second, we will build new market leaders deliberately. Our crop and casualty lines have strong leadership in the capital support necessary to become market leading franchises, but we will not overextend our appetite and risk management approach in the short term. Execute deliberately in 2025 to have an entrenched franchise in 2029. Third, we must remember what we like and more importantly what we don't like. This is a natural migration from the grower we want mantra.

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

We will stick to our conservative and well defined appetite in the market and focus on the profitable growth the product portfolio affords us. Fourth, continue to generate consistent earnings and with the addition of new talent, find new sources of earnings growth while preserving a healthy reserve base. As we execute our strategic initiatives, I'm confident in our ability to build on 2024 success and maintain steady growth and returns. While last year's performance was exceptional, it's only the beginning. Our heritage products alongside newer offerings like crop casualty and surety provide strong visibility for long term growth and above market returns.

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

We are well positioned to execute our Palomar 2X strategy in 2025. Our full year 2025 adjusted net income guidance is a range of $180,000,000 to $192,000,000 including the cat load that Chris will discuss in more detail. The range assumes our core sixone excess of loss reinsurance treaty renews at a price of flat to down 5% from the expiring 2024 treaty. As the market is still digesting the impact of the wildfires on the reinsurance market, we are taking what we believe is a conservative approach certainly when compared to what we saw at January 1. The midpoint of our guidance implies an adjusted ROE of 23% and puts us in a position to double the adjusted underwriting income of the 2022 Palomar 2x cohort in three years.

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

With that, I'll turn the call over to Chris to discuss our financial results in more detail.

[Chris Uchida, Chief Financial Officer at Palomar]

Thank you, Matt. Please note that during my portion when referring to any per share figure, I'm referring to per diluted common share as 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 when we incur a net loss. For the fourth quarter of twenty twenty four, our adjusted net income was $41,300,000 or $1.52 per share compared to adjusted net income of $28,000,000 or $1.11 per share for the same quarter of 2023, representing adjusted net income growth of 47.5%. Our fourth quarter adjusted underwriting income was $41,000,000 compared to $29,300,000 for the same quarter last year.

[Chris Uchida, Chief Financial Officer at Palomar]

Our adjusted combined ratio was 71.7% for the fourth quarter compared to 68.8% in the fourth quarter of twenty twenty three. Excluding catastrophes, our adjusted combined ratio was 66.1% for the quarter compared to 68.8% last year. For the fourth quarter of twenty twenty four, our annualized adjusted return on equity was 23.1% compared to 25.1% for the same period last year. The fourth quarter adjusted return on equity continues to validate our ability to maintain top line growth with a predictable rate of return above our Palomar 2x target of 20%. As a reminder, we do not expect the capital raised in the third quarter of twenty twenty four to be fully deployed until the end of twenty twenty five.

[Chris Uchida, Chief Financial Officer at Palomar]

Gross written premiums for the fourth quarter were $373,700,000 an increase of 23% compared to the prior year's fourth quarter, '30 '9 percent growth excluding runoff business. Looking at our five key specialty insurance products, it's important to remember the seasonality of our crop segment given the majority of the premium is written and earned in the third quarter of each year with only modest premium in the second and fourth quarters. Net earned premiums for the fourth quarter were $144,900,000 an increase of 55% compared to the prior year's fourth quarter. For the fourth quarter of twenty twenty four, our ratio of net earned premiums as a percentage of gross earned premiums was 39 compared to 33.9% in the fourth quarter of twenty twenty three and compared sequentially to 34.3% in the third 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 rate of our non fronting lines of business, including earthquake that seed less premium.

[Chris Uchida, Chief Financial Officer at Palomar]

These results include a full quarter of our excess of loss reinsurance placement that started June 1. While the dollars associated with this placement are higher to facilitate continuing earthquake growth, the risk adjusted rate online is lower than the previous year. With the timing of our excess of loss reinsurance, majority of our crop premium 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 with increasing throughout the remainder of the reinsurance treaty 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. Losses and loss adjustment expenses for the fourth quarter were $37,200,000 comprised of $29,100,000 of non catastrophe attritional losses and $8,100,000 of catastrophe losses primarily related to Hurricane Milton.

[Chris Uchida, Chief Financial Officer at Palomar]

The loss ratio for the quarter was 25.7% made up of an attritional loss ratio of 20.1% and a catastrophe loss ratio of 5.6%. As Mac discussed, we believe this quarter's results were a testament to our continued effort to de risk our portfolio over the past few years. Our results reinforce our conservative approach to reserving. We continue to hold conservative positions on our casualty reserves, while the same conservative approach on our more seasoned E and S property lines has played off favorably for the quarter and year. Our acquisition expense as a percentage of gross earned premium for the fourth quarter was 10.9 compared to 10.5% in last year's fourth quarter and sequentially to 10.5% in the third quarter of twenty twenty four.

[Chris Uchida, Chief Financial Officer at Palomar]

This percentage increased sequentially primarily from lower seeding commission from crop and fronting. The ratio of other underwriting expenses including adjustments to gross earned premiums for the fourth quarter was 7.2% compared to 6.9% in the fourth quarter last year and compared sequentially to 5.9% in the third quarter of twenty twenty four. As demonstrated by our hires over the last year, we are extremely committed to investing in all facets of our organization as we continue to grow profitably. We continue to expect long term scale in this ratio, while we may see periods of sequential flatness or increases as we continue to invest in scaling the organization within our Palomar 2x framework. Our net investment income for the fourth quarter was $11,300,000 an increase of 61.3% compared to the prior year's fourth quarter.

[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 during the three months ended 12/31/2024, due to cash generated from operations and the capital raise. Our yield in the fourth quarter was 4.6% compared to 4.1% in the fourth quarter last year. The average yield on investments made in the fourth quarter was 5.3%. We continue to conservatively allocate our percentage asset classes that generate attractive risk adjusted returns. At the end of the quarter, our net written premium to equity ratio was 0.8821.

[Chris Uchida, Chief Financial Officer at Palomar]

Our stockholders' equity has reached $729,000,000 a testament to consistent profitable growth and the capital raise. For the full year, our strong top line performance continue to translate to the bottom line. Our adjusted net income grew 43% to $133,500,000 Our adjusted EPS grew 38% to $5.09 Our adjusted combined ratio was 73.7% in above a loss ratio and expense ratio of 26.451.7% respectively, resulting in an ROE of 22.2%. Our adjusted underwriting income grew 35% to $134,100,000 positioning us to achieve our Palomar 2x objective from 2021 in three years. Adjusted underwriting income, excluding overhead, was $229,000,000 versus an initial milestone of $220,000,000 presented at Investor Day in 2022.

[Chris Uchida, Chief Financial Officer at Palomar]

Turning to our 2025 adjusted net income guidance, we are initiating with a range of $180,000,000 to $192,000,000 The midpoint of our updated guidance range represents adjusted net income growth of 39% and an adjusted ROE greater than our Palomar 2x objective of 20%, including the capital raise in August. This range includes $8,000,000 to $12,000,000 of catastrophe losses in addition to mini cat that we continue to include in our guidance. As we look to fully deploy the capital raise last summer throughout 2025, we will increase our participation in certain lines of business as we continue to build a top tier specialty insurer. Our growth and participation expectations will add seasonality to our operating ratios and results while we continue to grow our earnings. The third quarter will continue to stand out based on our crop participation increasing to 30% compared to 5%, crops seasonal premium earning pattern and the first full quarter of our excess of loss reinsurance placed June 1.

[Chris Uchida, Chief Financial Officer at Palomar]

We expect our net earned premium ratio to increase in 2025 from 36.5% in 2024 with a low point in the third quarter. We expect our loss ratio for the year to move up off of 2024 and end in the low 30s, including catastrophe losses. The apex of our loss ratio and combined ratio will be in the third quarter of the year, primarily from Prop. As our loss ratio naturally increases, some of the increase will be offset by an improving expense ratio. Overall, we expect our adjusted combined ratio to be in the mid to upper 70s for the year, continuing to show consistent and profitable earnings growth.

[Chris Uchida, Chief Financial Officer at Palomar]

With that, I'd like to ask the operator to open the line for questions. Operator?

[Operator]

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.

[Jon Paul Newsome, Managing Director at Piper Sandler Companies]

Congratulations on the quarter. Just maybe almost a modeling question. You talked about the reinsurance expectations. Just to be clear in my mind, is this you're actually assuming some improvement in pricing for reinsurance over the course of the year? Or are you using sort of a steady state view of reinsurance in the guidance?

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

Hey, Paul. Yeah, thanks. Good question. So the way we've built the guidance range is it's plus or minus 0% to 5%. So it's the low end of the guidance would imply to flat renewal and the high end of the guidance would be a plus or minus 5% down.

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

We did have some excess of loss renew favorably for us down 15% at oneone and that also was the equivalent reduction on a commercial earthquake quota share. But while the market is taking stock of the wildfire exposure, we felt it was prudent to be a bit conservative and not assume that the rate decline would be as meaningful as what we saw at oneone. And furthermore, we've got close to $3,000,000,000 renewing at the June 1 versus closer to $400,000,000 or a tenth of that that renewed or via the quarter share or excess of loss at oneone.

[Jon Paul Newsome, Managing Director at Piper Sandler Companies]

So as a local in California, do you have any thoughts on how this whole thing might shake out? And I'm wondering if you think there's some opportunities that might happen for Palomar as that market seems quite disrupted.

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

Yes, Paul, thanks for that question. Yes, it is a disrupted market. I think speaking to the residential side, you're going to continue to see California become increasingly E and S and not just in the high value segment, but in what had been traditionally more kind of standard. With respect to Palmar and opportunities that emanate from this disruption, I would say it's going to be consistent with kind of the third strategic comparative of '25 as just knowing what we like and growing where we want. So we think there'll be opportunity potentially in the residential earthquake, driven mostly by continued reduction of CEA participating insurers exposure.

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

And then potentially more in the short and immediate term, heightened awareness caused by the event. And then commercially, I think we're probably will see some opportunities in builders risk, both like high value residential builders risk and other commercial builders risk kind of mid market size opportunities. But it's not an instance where you will see us go into homeowners or start writing traditional commercial multi payroll. We'll stick to our netting and five pockets of dislocation that will be there in California in our core franchises.

[Jon Paul Newsome, Managing Director at Piper Sandler Companies]

Appreciate the help as always. Thank you.

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

Thanks, Paul.

[Operator]

Thank you. Our next question comes from the line of Peter Crittenden with Evercore ISI. Please proceed with your question.

[Analyst]

Hi, good afternoon. Thanks for taking my question. On the expectations for six point one, I was wondering if you could tell us a little bit more about how that feeds into the outlook. I know you just discussed there's some potential conservatism following the down 15 you guys saw at oneone. And so I'm just hoping you could help me think about how much your outlook is levered to the sixone pricing assumption, I.

[Analyst]

E, how much could this outlook change should sixone pricing come in materially better? Thanks.

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

Yes. I mean, I think excess of loss reinsurance is our largest expense. And so, if it comes in below 5%, like it will not be inconsequential. Now remember, it's seven months of the year that will be impacted by it. But and we are also buying more excessive loss limits to support our growth.

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

But that would certainly be a boon to the results if it comes in below 5%. The one thing we're looking at is post the wildfires, the activity in the capital market, in particular, secondary pricing of our own bonds and some recent issuances. And they are still trending more like oneone. But as I said just a moment ago, we've got close to $3,000,000,000 of limit that is renewing or going to be bought. So we would rather over deliver and under promise.

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

But Chris, I don't know if you want to offer just some color around that.

[Chris Uchida, Chief Financial Officer at Palomar]

Yes. Just to give a little more details, we provided this before, but at the sixonetwenty four renewal, our total excess of loss spend or cost of risk transfer was about $262,000,000 As Mac mentioned, we will obviously be increasing that because we buy for growth and generally we only buy one time a year. So when we buy sixonetwenty five, we're buying for another twelve months. So think about that in your considerations. But mathematically, if you want to think about it and look at it, you can look at that $262,000,000 that we spent last year due, call it, some sort of 5% savings on that.

[Chris Uchida, Chief Financial Officer at Palomar]

And even with the growth, that would probably be on a low end of what the potential savings would be and apply that to the seven months

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

of the year.

[Chris Uchida, Chief Financial Officer at Palomar]

The remainder of twenty twenty five.

[Analyst]

Yes, great. Okay. Thank you. That's really helpful. And then for my follow-up question around top line growth, I'm wondering if you could talk about how elastic demand for earthquake insurances to homeowners pricing, should we expect a headwind to earthquake growth given presumably large homeowners increases in California following the fires?

[Analyst]

And any other commentary you have on views of growth in 2025 would be helpful. Thank you.

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

Sure, Peter. So I think as it relates to earthquake, good question. The residential earthquake market is still very underpenetrated in California. So that's why you see like we have at the start of the year an uptick in new business sales because of heightened awareness. I think we are watching the impact of rising homeowners costs.

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

January, our retention from a policy perspective and premium perspective We're in line, if not slightly above the trailing 18 average. So we haven't seen it manifest itself yet. I think the one thing that will counter potentially the increasing cost to carry a home is just going to be the number of non renewed homeowners policies that are inside the CEA. You look at the CEA's participating insurer base, it's State Farm, it's USAA, They constitute in totality probably 65% of the market. And so if they are just following the logic of what they are permitted to do non renewing 10% of their book, that's a lot of policies that we have the chance to compete on in the residential earthquake market.

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

So again, we think that affords us a decent ability to maintain high teens growth in Quake. It's Also worth reiterating that while we have high 80s in policy retention, you do have an inflation guard of 10%, which is basically a cushion for the rising cost of materials, plus a slight price increase. So that gives us a bit of conviction on sustaining that high teens growth rate as well. And then I guess on just your other question, I think it's just one thing I would highlight is overall growth. We have a great portfolio of specialty market products now.

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

And, Frontine obviously has been the laggard. And if you just look at the growth in the fourth quarter, if you just take Frontine out, it was 45%. And Earthquake was the low end of twenty percent, everything else was above that. So we feel good about our growth prospects in 2025% and even with the headwind that we're seeing on the fronting franchise, generally speaking.

[Analyst]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Mark Hughes with Chula Securities. Please proceed with your question.

[Mark Hughes, Analyst at Truist Securities]

Yes. Thank you. Good afternoon. Chris, so Mark, the earned growth, I think you suggest that will keep moving up until you buy the new XOL and then that will step down in the third quarter. So 39% this quarter should step up the next two and then drop down to kind of what range would you say in 3Q for this year?

[Chris Uchida, Chief Financial Officer at Palomar]

Hey, Mark. Thanks. Great question. Yes. So it was 39% for Q4.

[Chris Uchida, Chief Financial Officer at Palomar]

Like you said, I would expect it to move up a small amount in Q1 and I would Q1 or Q2 will kind of represent the high point. Q2 might be a little bit flatter to Q1. So I'd probably say something in the $40,000,000 to $41,000,000 range for Q1 and something maybe a little bit higher than that in Q2. Q2 will have the first full month of XOL. We are still expecting stronger growth.

[Chris Uchida, Chief Financial Officer at Palomar]

So we do expect to buy more excess of loss reinsurance to cover that. That will you'll get one month of that expense. So I think that will probably flatten out that ratio a little bit. The one thing or the one new dynamic that you're going to see a little bit more of in Q3 is really going to be driven by the crop and how much we're going to participate there. This year, we were 5% participant.

[Chris Uchida, Chief Financial Officer at Palomar]

For 2025, we are going to be a 30% participant. So that shift will be relatively dynamic for that interim premium ratio, right? It's going to push obviously the dollars up, but it's going to continue to push that ratio down, right? There's growth there and then there's still a factor where we're still seeding off 70% of that business. So that's going to push that ratio down.

[Chris Uchida, Chief Financial Officer at Palomar]

The other impact of that is it's going to impact the combined ratio for that quarter as well, right? The crop business, while very stable, does have a little bit of a higher loss ratio to it. So the loss ratio for Q3 will also be a little bit higher. There will be some savings on the expense ratio side, right? That higher net earned premium will lower the other underwriting expense ratio and also the acquisition expense ratio.

[Chris Uchida, Chief Financial Officer at Palomar]

So even all in, I still expect the higher loss ratio and then overall just a higher combined ratio in the third quarter because of that dynamic with excessive loss and with the crop participation. But like you said, net earned premium ratio low point in Q3. It's probably going to be in the low 30s again, but then we'll start moving up from there in Q4 of this year.

[Mark Hughes, Analyst at Truist Securities]

So from low 40s in Q1, Q2 and back into low 30s, would you say maybe low to mid 30s for Q3?

[Chris Uchida, Chief Financial Officer at Palomar]

I would probably color it with low 30s. I think that dynamic that you're going to see in crop is going to be it's going to move a lot. So but overall, this is where I think about it for average for the year, I would still expect high 30s for the year. It's just that Q3 is going to stand out and look a little more seasonal with all that or not all, but the majority of the crop written and earned premium coming in that quarter. As you're aware, a lot of it is actual policies are actually written in March of the year, but because of the acreage reports not coming in until June, July, we will not recognize that written or earned premium until the third quarter.

[Chris Uchida, Chief Financial Officer at Palomar]

And so that's why that dynamic is in play.

[Mark Hughes, Analyst at Truist Securities]

On the commercial quake, are you seeing it sounds like prices are going down. Are you seeing appetite from kind of carriers that just do a lot of property willing to just take more exposure to Quake? Is that one of the dynamics here? Or is it just prices are going down and Quake is getting caught up in that in commercial property?

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

Hey, Mark. Yes, that's a good question. I would say that we have seen the all risk market back into kind of large layered and shared commercial earthquake, not that has not been as pronounced on the small commercial quake side. And so it's still an attractive market when you look at the underlying profitability, whether it's the AAL to premium metrics, the PML to premium metrics. And so there's frankly a little bit of slack that can be given there.

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

But it's not one where rates are being precipitously declined. It's more kind of again high single digits and it's more pronounced in large layered and shared accounts. John, anything you want to add?

[Jon Christianson, President at Palomar]

Yes. I agree. And while certain segments of the commercial earthquake market are accommodating some rate decreases, we're still seeing really strong integrity in the terms and conditions associated with the forms of that commercial earthquake product. So it is not a kind of an across the board dynamic and happy to report that the forms and coverages are holding up.

[Mark Hughes, Analyst at Truist Securities]

If I might ask one question. Mac, if you take a step back and you think about the strong growth you're anticipating for 2025, obviously, nice inflection, your three year Palomar 2x certainly accelerated the initial five year guidance. For this year, what is working so well in the model that you feel comfortable giving that kind of guidance if you had to pick? I mean, you've talked about 10 things that are working really well. But if you have to take a step back and say, oh, this is where it's really clicking for us.

[Mark Hughes, Analyst at Truist Securities]

Could you talk to that?

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

Yes, sure. I think it's a few things. You're absolutely right. It's across the portfolio and it starts with earthquake. And earthquake, especially in a property cat reinsurance market that is flat to slightly down, that provides scale and we're also continuing to grow.

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

So you're getting margin improvement there. We made a call in 2023 in a very hard property cat reinsurance market to lean in and grow and increase our share. And I think now we'll see reap the fruit of our labor there. Secondly, on the other side of the property book, we have had considerable rate increases and considerable enhancement to underwriting, while reducing the volatile exposure from Continental Hurricane, for instance. And so I think what we're left with in the other property franchise is a fast growing book of consistent performing non or limited cat exposed business like Builders' Risk and Excess National Property.

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

And then what's amplifying that is as the books have gotten seasoned, we're taking on a little bit more of risk on a net basis. So I think those are two big contributors on the property side. The Casualty side is growing nicely. We're not touching our reserves. We're growing those reserve base considerably, while not seeing a large amount of claims come into the fold and really being heavily weighted to IV and R when you look at the total ultimate.

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

So there, it's good growth in conservative underwriting and a modest risk participation that's being kind of just a steady contributor. Crop is the other one that gives us a little bit of conviction based on the historical results and based on our ability to risk select that if we take more risk going from 5% to call it 30% that does afford some operating leverage and scale there too. So it's really across the portfolio, but I'd say you're probably most levered on the property side and then you're taking a little bit more risk in some of these lines that are getting seasoned.

[Mark Hughes, Analyst at Truist Securities]

Appreciate that. Thank you.

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

Thank you.

[Operator]

Thank you. Our next question comes from the line of Andrew Anderson with Jefferies. Please proceed with your question.

[Andrew Andersen, Equity Research Vice President at Jefferies Financial Group]

Hey, good morning. The 8%

[Andrew Andersen, Equity Research Vice President at Jefferies Financial Group]

to 12% cat guide for the year, I think this is the first year that you've given a full year cat guide. Can you help us think about how you arrived at that estimate?

[Chris Uchida, Chief Financial Officer at Palomar]

Yes. Thanks, Andrew. Good question. So the eight to 12 is call it a new metric like you pointed out. Excuse me, we felt it was important to include that as we continue to grow and get more comfort about how we've been managing the book.

[Chris Uchida, Chief Financial Officer at Palomar]

When you look at our portfolio of business, we have really done a great job of making underwriting changes to hopefully minimize the exposure we have to U. S. Catastrophes. And so when you look at our AAL and compared to where we were a couple of years ago, that has continued to shrink. We continue to make more changes to that throughout 2024.

[Chris Uchida, Chief Financial Officer at Palomar]

So we felt comfortable giving a number that was a little bit less than what we incurred for 2024, but we feel in the range of everything that we've done with the book a good number to provide. The one thing I'd point out, so that let's call it $8,000,000 to $12,000,000 is probably about a one to two points of loss ratio for the year. We still continue to budget for mini cats or smaller PCS events in our portfolio. Those could be SCS events, those could be small flood events. Those are probably still about two to three points of loss ratio for the year.

[Chris Uchida, Chief Financial Officer at Palomar]

So all in, we're probably talking three to four, three to five points of mini cats and cats in our overall loss ratio for the year. So all those factors come together as kind of how we put together an $8,000,000 to $12,000,000 number for the year as we look at our cat losses and think that it's a good estimate. We think we've done a lot to help shape the portfolio so that we can achieve that. And we think that the book has been performing well and within that range.

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

I think just to give a little bit of anecdotal support to this. Our wind, continental hurricane, two fifty year PML is now going to be closer to $80,000,000 with the predominance of that coming from our builders risk book as opposed to all risk property. And our builders risk book compared to modeled estimates has significantly outperformed. For instance, in Milton, the model losses were a few million dollars. We don't have any claims.

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

So it gives us even more confidence based on the complexion of the AAL and modeled estimate loss that our cat load is appropriate.

[Andrew Andersen, Equity Research Vice President at Jefferies Financial Group]

Thank you for the detailed answer there. On fronting, I don't know if you can maybe help us frame 2025 if perhaps there's some new programs coming online or kind of steady state as you exit 2024 and maybe this is a single digit decline in 2025. What is a good way to think about fronting?

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

Yes. I mean, I think it's going to be disproportionately impacted for the next two quarters by the loss of the Omaha National deal and then it's probably flattish to slightly up on a same store basis. We are we have a pipeline, but candidly, Andrew, like if you look at across our portfolio and we're allocating our capital towards its crop, its quake, its other property and certainly now surety and the casualty book. So it's going to be a bit of a laggard for the year.

[Andrew Andersen, Equity Research Vice President at Jefferies Financial Group]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question.

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

Great. Thanks so much. I guess, first question on crop. Is there a sense that you can communicate in terms of where you'll be exposed, which state, which commodities?

[Jon Christianson, President at Palomar]

Yes. Hey, Maher, it's John Christiansen. We are if you think about kind of in the crop world, you think of Group one and Group two states. Group one being kind of the core corn and soybean producers in the Upper Midwest. We write a lot around those states and with every year going into this year, we expect to write more in those kind of core Upper Midwest states where you see a lot of corn and soybeans.

[Jon Christianson, President at Palomar]

And so I would not necessarily say our footprint is dramatically different than where you'd see a lot of corn and soybean production. So it ends up being in the Midwest, as well as kind of the states around those core Upper Midwest states. Where you will not see exposure on the West Coast, you will not see exposure on the East Coast, predominantly down the center of the country.

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

Okay, perfect. That helps a lot. Is the reduced reinsurance that you're expecting for crop this year, is that less government reinsurance or less private reinsurance?

[Jon Christianson, President at Palomar]

That is we are reducing the quota share to the private reinsurance market. And so that's what the government interaction will be roughly the same in total in terms of what we seed to the government through the SRA, the Standard Reinsurance Agreement, where we are taking greater share is after that. So we're taking greater share from the private market and we are now moving to a combination of quota share and stop loss and that structure of having a combination of quota share and stop loss will be fairly durable as we continue to grow this business. And so while the complexion may slightly change in terms of the risk participation, I would expect for the foreseeable future there will be a combination of quota share and stop loss.

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

Okay, great. That's helpful. And then final question I guess for Mac. I understand that you've got the inflation guard in residential earthquake. Is there anything you can do now so that you can respond faster if tariffs have a bigger and more sudden impact than normal inflation?

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

Yes. Well, we certainly can modify the Inflation Guards,

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

because they

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

are an underwriting rule. So they are not required to be approved by the Department of Insurance, in which any state in which we're operating. So we can constantly look at the under and we do as we look at our portfolio from a reinsurance portfolio management standpoint, we look at the ITV and the estimated replacement costs. So we can bump up inflation guards. And in fact, it went to 10 from five to three years ago when inflation started to rear its head.

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

Is there room for an inflation guard on the commercial earthquake?

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

I mean, it's more it's not as automated from an underwriting standpoint. So we are constantly looking at ITV at every renewal and doing an updated valuation. So, yes, it's just not an underwriting rule that is processed when the policy is automatically up for renewal.

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

Okay, perfect. Thank you so much.

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

Thanks, Maher.

[Operator]

Thank you. Our next question comes from the line of Pablo Singzon with JPMorgan. Please proceed with your question.

[Pablo Singzon, Executive Director at J.P. Morgan]

Hi, thank you. Mac, in thinking about the incremental limit that you might buy as part of the June Epsilon renewal, would it be fair to assume growth that is consistent with the mid to high teens growth you expect for earthquake?

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

Yes, Pablo, that's correct.

[Pablo Singzon, Executive Director at J.P. Morgan]

Okay, perfect. And then second question, so Casualty and Inland Marine are clearly still ramping up and then Casualty specifically I think premiums more than doubled from '24. Can you provide some perspective on the quantum and length of time you expect excess growth in these lines to last just given market conditions and what you're doing internally in the company?

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

Yes. So what I would say is the in LaMarine and Other Property, you're going to have certain segments that are going to be nice continual growth drivers that will probably be high 20s and the 30s like Hawaii and hurricane, where you have policies that are renewing up 22% to twenty five percent and an inflation guard just for recent rate activity and rate approval. Within the circumstance of builders risk, we continue to expand our geographic footprint, similarly what we're doing in excess national property. But at the same time, there are some that businesses that are decreasing like the commercial all risk. So I would say that product is probably going to grow faster than Quake, but not disproportionately.

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

So casualty, we just continue to we've made big pushes in hiring over the course of 2024, whether it be in the environmental practice, certainly in E and S casualty with David Zapia growing. So that's going to be after crop, grower in the product suite. And because a lot of it is you've got talented underwriters that have come over and they have books of business, they have long standing track records, they have reinsurance support. So we expect to have considerable submission flow.

[Pablo Singzon, Executive Director at J.P. Morgan]

Okay. That makes sense. And last one for me, maybe for Chris. Putting aside the specific impact on see the premiums combined ratio and I suppose holding premium dollars constant, how much incremental dollar underwriting income do you expect from the crop book as you move your participation up from 5% to 30%?

[Chris Uchida, Chief Financial Officer at Palomar]

Yes, we haven't provided specific guidance on a line of business basis, but I think that's a business that operates, let's call in the low 90s type combined ratio. You look at that and Max said that we could probably get to potentially $200,000,000 I'd say most of that is going to be recognized in 2025. Some of that will flow between years, some will go into a little bit of 2026, but I'd say, let's call it 90% of that would probably be recognized in 2025. So using those factors, our 30% participation, I think you can kind of do a little bit of math there and guess a little bit of maybe if there's if we're below that, above that where we go. But overall, as Mac talked about, we're very committed to the cross line business.

[Chris Uchida, Chief Financial Officer at Palomar]

We think that could be $500,000,000 at some point in time in the intermediate future in that three to five year timeframe. So we're excited about the prospects there.

[Pablo Singzon, Executive Director at J.P. Morgan]

Yes. And what's the give up on the seating or fronting side there like mid single digits, right? So you essentially earn more underwriting income, but then you give up, I don't know, five to seven points in seating. Is that the correct math?

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

Yes, that's well good.

[Chris Uchida, Chief Financial Officer at Palomar]

Yes, I was going to say it's definitely got a lower, let's call it, override or fronting fee associated with it than typical lines just because of the low margin nature to it. So I would say you're probably getting from a margin standpoint, if that's like low single digits 2.5%, three %, you're probably getting hopefully triple that when you take underwriting risk in a good year or a normal year, I should say.

[Pablo Singzon, Executive Director at J.P. Morgan]

Yes. Thank you. That's clear. Thank you.

[Operator]

Thank you. And we have reached the end of the question and answer session. I'll turn the floor back to Mr. Mac Armstrong for closing remarks.

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

All right, terrific. Well, thanks everyone. Just to wrap up, we hope you got the sense that we are really building a unique specialty insurance franchise. Our record results in 2024, we feel are just the beginning. The growth vectors we have are mirrored and the core earthquake and property businesses continue to profitably grow.

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

The exceptional talent we've added over the last eighteen months affords us even more confidence that we will execute in 2025. So I couldn't be more excited about the future holds for the company. I want to thank our team and employees for all that they do and continue to do. And then lastly, we hope to see you all March 20 in New York at our twenty twenty five Investor Day. So thanks so much and hopefully we'll see you in the Big Apple.

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

Take care.

[Operator]

Thank you. And ladies and gentlemen, this concludes today's conference.

[Operator]

You may disconnect your lines.

[Operator]

Thank you for your participation.

Participants

Executives

• Chris Uchida, Chief Financial Officer
• Mac Armstrong, Chairman, Chief Executive Officer & Founder
• Jon Christianson, President

Analysts

• Jon Paul Newsome, Managing Director at Piper Sandler Companies
• Analyst
• Mark Hughes, Analyst at Truist Securities
• Andrew Andersen, Equity Research Vice President at Jefferies Financial Group
• Meyer Shields, Managing Director at Keefe, Bruyette & Woods (KBW)
• Pablo Singzon, Executive Director at J.P. Morgan