Palomar(PLMR) - 2025 Q4 - Annual Report

Catastrophe Risk and Reinsurance - The company has incurred significant losses from catastrophe events multiple times in its history, with the unpredictability of such events posing a risk to earnings and stockholders' equity [127]. - The company's reinsurance coverage currently exhausts at $3.1 billion for earthquake events and $100 million for continental U.S. hurricane events, with a retention of $20 million for earthquake events and $11 million for hurricane events [131]. - As of December 31, 2025, the company had $468.7 million of aggregate reinsurance recoverables, indicating reliance on reinsurance for risk management [133]. - The company closed a $525 million catastrophe bond in Q2 2025, effective June 1, 2025 through June 1, 2028, to enhance its reinsurance coverage for earthquake events [143]. - The company may face increased costs or limitations in purchasing reinsurance during hard market cycles, which could adversely impact its business and results of operations [142]. - The company is exposed to risks from unpredictable catastrophe events, including those caused by climate change, which could limit its ability to underwrite new insurance policies [124]. Competition and Market Position - The company faces intense competition in the insurance industry, which may result in pricing pressure and reduced underwriting margins [124]. - The company faces intense competition from larger specialty insurance companies and public enterprises, which may result in pricing pressure and reduced underwriting margins [170]. - Increased competition in the insurance industry may arise from new entrants and federal regulatory reforms, potentially affecting pricing and business retention [172]. Financial Performance and Risk Management - The reserve for losses and loss adjustment expenses is based on estimates and assumptions, which may prove inadequate, potentially impacting net income and stockholders' equity [134]. - The company relies on third-party data for risk modeling, which may lead to materially higher actual losses if estimates are incorrect [149]. - The company’s risk management approach relies on subjective variables and models that may not accurately predict actual outcomes, introducing uncertainty into loss estimates [151]. - The concentration of business in California exposes the company to greater regulatory and economic risks compared to insurers with a more diversified premium base [160]. - The company’s written premium in future years could be materially adversely affected if actual renewals of existing policies do not meet expectations [174]. Growth and Expansion - The company’s employee base has approximately doubled in the last twelve months, indicating significant growth and potential challenges in managing this expansion [181]. - Recent acquisitions include Gray Surety in January 2026 and FIA and AAP in 2025, which are part of the company’s strategy to expand its business [182]. - The company faces risks related to the evaluation and integration of acquired businesses, which could impact financial performance and operational efficiency [183]. Economic and Regulatory Environment - Economic downturns, particularly in California, could adversely affect the company’s financial condition and results of operations [196]. - The company is subject to extensive regulations that may adversely affect its ability to achieve business objectives and could result in penalties for non-compliance [224]. - U.S. insurance subsidiaries must maintain risk-based capital at required levels to avoid regulatory actions, including supervision or liquidation [228]. - The Bermuda subsidiary is subject to the Economic Substance Act 2018, which may require changes to business operations to comply with regulations [229]. Investment Risks - The company’s investment portfolio performance is subject to various risks, including interest rate fluctuations and credit quality considerations [199]. - The company faces risks from potential investment losses due to economic downturns, which could lead to impairments in the fixed income portfolio [207]. - The company may need to sell investments to meet liquidity requirements, which could result in significant realized losses depending on market conditions [210]. - The estimated fair value of the company's fixed maturities was $1.2 billion, with a 100-basis point increase in interest rates potentially causing a 3.8% decline in value [454]. - The company's fixed maturity portfolio has an average rating of "AA−," with approximately 71.3% rated "A−" or better, indicating a focus on high credit quality investments [452]. Cybersecurity and Compliance - Increased regulatory scrutiny around cybersecurity incidents could exacerbate potential harm to the company's business and reputation [217]. - The company is required to comply with cybersecurity regulations, which mandate the establishment and maintenance of a cybersecurity program [238]. - Compliance with the Sarbanes-Oxley Act and Dodd-Frank Act has increased regulatory demands and operating costs for the company [255]. - The company incurs significant costs as a public company, including legal and accounting expenses, which divert management's time from revenue-generating activities [253]. Legal and Tax Risks - The company faces risks associated with litigation, which could have an adverse effect on its business and financial condition [247]. - Changes in tax laws could negatively impact the company's results of operations and profitability by increasing tax expenses [241]. - The use of credit scoring in pricing and underwriting is subject to legal and regulatory scrutiny, which could decrease profitability if restrictions are enacted [248]. Dividend Policy - The company does not intend to declare and pay cash dividends in the foreseeable future, relying on its insurance subsidiaries for any potential dividends [244].