Palomar(US:PLMR)2025-08-05 21:28PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited condensed consolidated financial statements for Palomar Holdings, Inc. as of June 30, 2025, reflect significant growth in total assets to $2.83 billion from $2.26 billion at year-end 2024, driven by increases in investments and premiums receivable, with net income rising to $89.5 million from $52.1 million year-over-year for the six months ended June 30, 2025, fueled by a 49.5% increase in net earned premiums and strong investment income, and total stockholders' equity increasing to $847.2 million from $729.0 million over the same period Condensed Consolidated Balance Sheets | Balance Sheet Highlights | June 30, 2025 (Unaudited, $ thousands) | December 31, 2024 ($ thousands) | | :--- | :--- | :--- | | Total Investments | $1,174,993 | $987,715 | | Total Assets | $2,832,491 | $2,262,220 | | Total Liabilities | $1,985,294 | $1,533,190 | | Total Stockholders' Equity | $847,197 | $729,030 | Condensed Consolidated Statements of Income and Comprehensive Income | Income Statement Highlights (Q2) | Three Months Ended June 30, 2025 ($ thousands) | Three Months Ended June 30, 2024 ($ thousands) | | :--- | :--- | :--- | | Gross Written Premiums | $496,288 | $385,184 | | Net Earned Premiums | $179,958 | $122,285 | | Total Revenues | $203,311 | $131,069 | | Net Income | $46,528 | $25,729 | | Diluted EPS | $1.68 | $1.00 | | Income Statement Highlights (YTD) | Six Months Ended June 30, 2025 ($ thousands) | Six Months Ended June 30, 2024 ($ thousands) | | :--- | :--- | :--- | | Gross Written Premiums | $938,452 | $753,262 | | Net Earned Premiums | $344,029 | $230,151 | | Total Revenues | $377,945 | $249,603 | | Net Income | $89,450 | $52,111 | | Diluted EPS | $3.24 | $2.04 | Condensed Consolidated Statements of Changes in Stockholders' Equity - Total stockholders' equity increased from $729.0 million at December 31, 2024, to $847.2 million at June 30, 2025, primarily driven by net income of $89.5 million and a decrease in accumulated other comprehensive loss15 Condensed Consolidated Statements of Cash Flows | Cash Flow Summary | Six Months Ended June 30, 2025 ($ thousands) | Six Months Ended June 30, 2024 ($ thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $208,061 | $88,252 | | Net cash used in investing activities | ($212,698) | ($45,003) | | Net cash provided by (used in) financing activities | $5,413 | ($47,082) | | Net change in cash | $776 | ($3,833) | Notes to Condensed Consolidated Financial Statements - The company operates as a single segment in the property and casualty insurance business, and its financial statements include the accounts of Laulima Exchange, a variable interest entity for which the company is the primary beneficiary2526 - The company completed the acquisition of First Indemnity of America Insurance Co. (FIA) on January 1, 2025, and substantially all assets of Advanced AgProtection, LLC (AAP) on April 1, 2025, both accounted for as business combinations9092 - For the six months ended June 30, 2025, the company experienced favorable prior year loss development of $10.8 million, primarily due to lower than anticipated severity of attritional losses, compared to $2.4 million of favorable development in the same period of 20245455 - The company's catastrophe event retention is $20 million for earthquake events and $11 million for continental hurricane events and all other perils, with the XOL reinsurance structure providing protection up to $3.53 billion for earthquake events82 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discussion highlights a 24.6% increase in Gross Written Premiums (GWP) for the first six months of 2025, driven by strong growth in Casualty and Crop lines, which offset a decline in the Fronting business, with net income growing 71.7% year-over-year for the six-month period, supported by higher net earned premiums and a favorable loss ratio, while maintaining a strong balance sheet with sufficient liquidity from operations and access to credit facilities, and announcing a new $150 million share repurchase program Results of Operations For the six months ended June 30, 2025, GWP grew 24.6% to $938.5 million, and net income increased 71.7% to $89.5 million compared to the prior year, primarily organic growth driven by a 116.2% increase in Casualty and a 114.3% increase in Crop premiums, while Fronting premiums declined 39.8% due to a partnership termination in 2024, and the combined ratio improved to 76.1% from 78.0% year-over-year, reflecting underwriting profitability | Key Metrics (Six Months Ended June 30) | 2025 ($ thousands) | 2024 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Gross Written Premiums | $938,452 | $753,262 | 24.6% | | Net Earned Premiums | $344,029 | $230,151 | 49.5% | | Net Income | $89,450 | $52,111 | 71.7% | | Adjusted Net Income | $99,837 | $59,775 | 67.0% | | Combined Ratio | 76.1% | 78.0% | (1.9) pts | | Adjusted Combined Ratio | 70.9% | 73.0% | (2.1) pts | | Gross Written Premiums by Product (Six Months Ended June 30) | 2025 ($ thousands) | % of GWP | 2024 ($ thousands) | % of GWP | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Earthquake | 277,929 | 29.7% | 240,759 | 32.0% | 15.4% | | Casualty | 238,932 | 25.5% | 110,539 | 14.7% | 116.2% | | Inland Marine and Other Property | 219,098 | 23.3% | 170,329 | 22.6% | 28.6% | | Fronting | 114,810 | 12.2% | 190,727 | 25.3% | (39.8)% | | Crop | 87,683 | 9.3% | 40,908 | 5.4% | 114.3% | | Total | $938,452 | 100.0% | $753,262 | 100.0% | 24.6% | - The decrease in Fronting premiums was caused by the termination of a large fronting partnership in the third quarter of 2024134152 - For the six months ended June 30, 2025, the company experienced favorable catastrophe loss development of $0.6 million, compared to $6.8 million in catastrophe losses in the same period of 2024, while non-catastrophe losses increased due to premium growth in attritional lines like Casualty and Inland Marine160161 Reconciliation of Non-GAAP Financial Measures The company provides several non-GAAP measures to offer insight into underlying business performance, with Adjusted Net Income at $99.8 million for the six months ended June 30, 2025, up from $59.8 million in the prior year, an Annualized Adjusted Return on Equity of 25.3%, and an Adjusted Combined Ratio of 70.9%, an improvement from 73.0% in the prior year, which excludes items like transaction expenses and stock-based compensation | Reconciliation to Adjusted Net Income (Six Months Ended June 30) | 2025 ($ thousands) | 2024 ($ thousands) | | :--- | :--- | :--- | | Net Income (GAAP) | $89,450 | $52,111 | | Net realized/unrealized gains on investments | (5,968) | (3,034) | | Expenses associated with transactions | 2,841 | 472 | | Stock-based compensation expense | 10,092 | 7,789 | | Amortization of intangibles | 2,054 | 779 | | Expenses associated with catastrophe bond | 2,661 | 2,483 | | Tax impact | (1,293) | (825) | | Adjusted Net Income (Non-GAAP) | $99,837 | $59,775 | | Reconciliation to Adjusted Combined Ratio (Six Months Ended June 30) | 2025 | 2024 | | :--- | :--- | :--- | | Combined Ratio (GAAP) | 76.1% | 78.0% | | Impact of transaction expenses | (0.8)% | (0.2)% | | Impact of stock-based compensation | (2.9)% | (3.4)% | | Impact of amortization of intangibles | (0.6)% | (0.3)% | | Impact of catastrophe bond expenses | (0.8)% | (1.1)% | | Adjusted Combined Ratio (Non-GAAP) | 70.9% | 73.0% | Liquidity and Capital Resources The company's primary liquidity sources are premiums and investment income, with operating activities providing a strong cash flow of $208.1 million for the first six months of 2025, and the company maintains access to a $100 million revolving credit facility with U.S. Bank and an FHLB line of credit, with no outstanding borrowings on either as of June 30, 2025, and a new $150 million share repurchase program was approved in July 2025, enhancing capital management flexibility - Cash flow from operations was $208.1 million for the first six months of 2025, a significant increase from $88.3 million in the same period of 2024, driven by net income and changes in operating assets and liabilities202 - The company has a $100 million revolving credit facility and access to FHLB advances, with no borrowings outstanding on either facility as of June 30, 2025209210212 - On July 31, 2025, the Board of Directors approved a new share repurchase program authorizing up to $150 million of common stock through July 31, 2027207 Investment Portfolio As of June 30, 2025, the investment portfolio's fair value was $1.17 billion, with the vast majority ($1.11 billion) in fixed maturity securities classified as available-for-sale, and the portfolio is high-quality, with an average rating of 'A1/A', and the book yield increased to 4.81% from 4.59% at year-end 2024, with a weighted average effective duration of 4.13 years | Investment Portfolio Composition (Fair Value, $ thousands) | June 30, 2025 | % of Total | | :--- | :--- | :--- | | Corporate and other | $582,835 | 52.4% | | Mortgage/asset-backed securities | $474,848 | 42.6% | | U.S. Governments | $20,338 | 1.8% | | U.S. States, Territories, and Political Subdivisions | $18,372 | 1.7% | | Special revenue | $16,973 | 1.5% | | Total available-for-sale | $1,113,366 | 100.0% | - The fixed income investment portfolio's book yield increased to 4.81% as of June 30, 2025, compared to 4.59% as of December 31, 2024216 Reinsurance The company utilizes a robust reinsurance program to reduce exposure to catastrophe losses and limit earnings volatility, including a mix of traditional reinsurers and insurance-linked securities (ILS) via catastrophe bonds, with catastrophe event retention of $20 million for earthquake events and $11 million for hurricane and other perils as of June 30, 2025, and reinsurance coverage for earthquake events extending up to $3.53 billion - The company's catastrophe event retention is $20 million for earthquake events and $11 million for hurricane events and all other perils221 - The company utilizes $1.2 billion of multi-year indemnity-based reinsurance coverage for earthquake events through catastrophe bonds issued via Torrey Pines Re Ltd220 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate risk and credit risk associated with its investment portfolio, managed by investing predominantly in a diversified portfolio of high-quality, investment-grade fixed maturity securities, with the fixed maturity portfolio having an average rating of 'AA-' and approximately 69.9% rated 'A-' or better as of June 30, 2025 - The company's main market risks are equity price risk and interest rate risk from its investment portfolio225 - Credit risk is managed by investing in high-quality securities, with the fixed maturity portfolio having an average rating of 'AA−' and 69.9% rated 'A−' or better as of June 30, 2025227 Item 4. Controls and Procedures Based on an evaluation as of June 30, 2025, the company's CEO and CFO concluded that disclosure controls and procedures were effective, and the assessment of internal control over financial reporting for the quarter excluded the recently acquired operations of FIA and AAP, which are in the process of being integrated - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report229 - The company excluded the recently acquired operations of FIA and AAP from its assessment of internal control over financial reporting for the quarter, with plans to include them in future periods230 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in legal proceedings that arise in the ordinary course of business, and management believes that the outcomes of these matters will not have a material adverse effect on the company's consolidated financial position - The company states that it is party to ordinary course legal proceedings which are not expected to have a material adverse effect on its financial position233 Item 1A. Risk Factors The company outlines numerous risks, with a primary focus on its exposure to unpredictable and severe catastrophe events, particularly due to its business concentration in California, and other significant risks include reliance on third-party reinsurance, potential inadequacy of loss reserves, intense competition, extensive regulation, and potential failures of information technology systems, while economic risks such as inflation and recession, and the performance of its investment portfolio, are also highlighted as key concerns - A primary risk is the company's exposure to unpredictable and severe catastrophe events, such as earthquakes and hurricanes, which could eliminate earnings and stockholders' equity236239 - The business is significantly concentrated in California, which generated 32% of gross written premiums for the first six months of 2025, creating heightened exposure to California-specific loss activity and regulatory changes271 - The company relies on third-party reinsurance and may be unable to purchase it on acceptable terms in the future, also facing counterparty risk if reinsurers fail to pay claims236242252 - The company faces risks from its recent acquisitions of FIA and AAP, including challenges with integration and the possibility of not realizing anticipated benefits294 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None384 Item 5. Other Information On July 31, 2025, the Board approved a new Equity Award Retirement Policy allowing for continued vesting of certain equity awards for qualifying retirees, and in June 2025, several executive officers, including the CFO, President, and Chief Legal Officer, entered into Rule 10b5-1 trading plans for future sales of company stock, with an updated form of executive employment agreement also approved in January 2025 - On July 31, 2025, the Board of Directors approved an Equity Award Retirement Policy that allows employees who meet age and service requirements (age 58+ with 5+ years of service, totaling at least 65) to be entitled to continued vesting of RSUs and prorated vesting of PSUs upon a qualified retirement387388 - In June 2025, CFO Chris Uchida, President Jon Christianson, and Chief Legal Officer Angela Grant each entered into Rule 10b5-1 trading plans to sell shares of company stock, with sales permitted to begin in September 2025390391392 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Form of Executive Employment Agreement, certifications by the principal executive and financial officers pursuant to the Sarbanes-Oxley Act, and Inline XBRL data files