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Palomar gets boost from investors after solid reinsurance renewal

Investors have responded favorably to the news that Palomar Holdings met its June 1 reinsurance goals, pushing the insurer's stock price to its highest level in almost two months.

The La Jolla, Calif.-based carrier, which specializes in commercial and residential earthquake insurance, announced after the market closed on May 30 that it had increased its reinsurance limit to $2.68 billion. In an added bonus for investors, the insurer increased its full-year 2023 adjusted net income guidance to between $88 million and $92 million from the previous range of $86 million to $90 million.

The response from investors was positive: Palomar's share price jumped 15.61% after the announcement to $54.63 by market closure on May 31, its highest point since closing at $55.07 on April 13. The stock gave back some of its gains in the latter part of the week ending June 2 but still finished up 13.26%. The S&P 500 Insurance index rose 1.51% for the week to 560.92, while the S&P 500 gained 1.83% to 4,282.37.

Investors had concerns coming into the June 1 renewals over possible volatility in Palomar's reinsurance from a higher-than-expected attachment point of $30 million to $40 million and continuing price discipline in the reinsurance market, said KBW analyst Meyer Shields. Shields said those concerns were addressed in the press release the company published on May 30.

"[Reinsurance] price increases were in line with what [Palomar] disclosed, and on top of that, the attachment point was $17.5 million," Shields said in an interview. "So, it was a 40% increase from the previous point, but much, much better than worst-case scenarios that people had been imagining."

Shields added that the guidance increase was "a little unusual" because it assumed no future catastrophes. "Maybe that'll happen, maybe not," the analyst said.

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Overall, Palomar's share price was up about 20% during the first half of 2023. It peaked in late February after reporting solid fourth-quarter and full-year 2022 results.

The company's reinsurance placement "is a testament to the proactive and deliberate underwriting changes that we have implemented over the last few years designed to reduce our risk profile and deliver more predictable results," Palomar Chief Risk Officer Jon Knutsen said in the May 30 press release.

Investors' concerns were also fueled by reports that the California Earthquake Authority was having trouble placing its reinsurance, Piper Sandler analyst Paul Newsome said in a note. There were fears that Palomar would have the same problems since approximately half of its business is earthquake insurance, but those fears were unfounded, Newsome said.

"Palomar management has substantial experience in reinsurance brokerage and that experience appears to have paid off," Newsome said.

That experience dates back to 2014 when the company was founded by CEO Mac Armstrong, who had been president of Arrowhead General Insurance Agency Inc., a managing general agency, prior to that. KBW's Shields said Armstrong realized there wasn't a "sophisticated" earthquake insurance product in the market and went about creating one.

"Think of it as a technologically driven earthquake product where pricing was very granular in terms of construction material and distance from fault lines, and a lot of very observable components that simply hadn't been used because there just wasn't a lot of interest in anybody underwriting earthquake," Shields said. "And, obviously, part of that strategy is going to be extensive use of reinsurance."

Among the companies the California Earthquake Authority cites as earthquake insurers in the state, Mercury General Corp. climbed 2.50% for the week, Allstate Corp. ticked up 0.63%, and Progressive Corp. edged up 0.77%.

While earthquake coverage remains its dominant line of business, by 2020, Palomar had added lines of business that include wind exposure, according to Shields. The company maintained an extensive tower of reinsurance, but Shields said there wasn't protection against multiple recurring events.

However, that is exactly what happened in the third quarter of 2020 when the company incurred pretax catastrophe losses of between $34 million to $38 million, net of reinsurance, caused by hurricanes Hanna, Isaias, Laura and Sally.

"Maybe it was a painful lesson, but they learned that [they] needed to make sure that in the aggregate, losses are protected," Shields said. "What people really liked was the fact that even though what they're writing is ostensibly incredibly volatile, they were able to limit the net volatility to shareholders."

Palomar did not respond to a request for further comment.