Riverwater Partners, an investment management company, released its “Small Cap Strategy” Q3 2025 investor letter. A copy of the letter can be downloaded here. The Small Cap Core Strategy reported solid results for the quarter but did not keep pace with the sharp rally, thus lagging the benchmark. The market’s preference for lower-quality companies persisted in the quarter and contributed significantly to the benchmark’s outperformance. On the other hand, the strategy remains focused on higher-quality compa ...

Core Insights - Palomar Holdings reported Q3 CY2025 revenue of $244.7 million, exceeding analyst expectations by 10.2% and reflecting a year-on-year growth of 64.8% [1][6] - The company's non-GAAP profit was $2.01 per share, which was 24.8% above consensus estimates [1][6] Financial Performance - Adjusted operating income reached $67.14 million, representing a 27.4% margin and a year-on-year growth of 74.4% [6] - Operating margin improved to 27.4%, up from 25.9% in the same quarter last year [6] - Market capitalization stands at $3.39 billion [6] Business Strategy and Growth - Management attributed strong performance to product diversification, disciplined underwriting, and robust premium growth across various product lines [3][5] - The company plans to integrate the Gray Casualty and Surety Company acquisition and expand specialty lines, with a focus on strategic partnerships and technology investments [4] - The goal is to double adjusted net income every 3 to 5 years, maintaining a strong return on equity [4] Product Diversification - All major product groups, except for fronting, experienced double-digit premium growth, with new lines like crop and surety contributing significantly [7] - The residential earthquake franchise grew by 11% year-on-year, supported by new business production and high policy retention [7] - Crop insurance premiums doubled year-on-year due to favorable market conditions and new talent, while builders risk products also saw strong expansion [7] Risk Management - The company maintains a conservative reserving approach, particularly in its casualty business, with over 80% of reserves held as incurred but not reported (IBNR) [8]

Financial Data and Key Metrics Changes - The company reported core net operating earnings of $2.69 per share, a 16% increase from $2.31 per share in the prior year period [7] - The annualized core operating return on equity for the third quarter was 19% [4] - Net investment income increased by 5% year-over-year, attributed to higher interest rates and increased balances of invested assets [7][8] Business Line Data and Key Metrics Changes - Underwriting profit in specialty property and casualty insurance businesses grew 19%, with a combined ratio of 93, improving by 1.3 points from the prior year [15] - Gross and net written premiums in specialty property and casualty businesses decreased by 2% and 4% respectively compared to the previous year [15] - In the specialty financial group, the combined ratio was 81.1, which is 11.2 percentage points better than the comparable period in 2024 [22] Market Data and Key Metrics Changes - Average renewal pricing across the property and casualty group increased by approximately 5% in the third quarter [15] - The property and transportation group achieved a combined ratio of 94.1, improving by 2.7 points from the comparable 2024 period [16] - The specialty casualty group reported a combined ratio of 95.8, which is 3.7 percentage points higher than the 92.1 reported in the comparable period in 2024 [19] Company Strategy and Development Direction - The company aims to maintain a disciplined underwriting approach while seeking growth opportunities in specialty property and casualty businesses [12] - There is a focus on evaluating acquisitions and maintaining a pipeline of startups that could become new business units [13] - The company expects to generate significant excess capital throughout 2025 and into 2026, allowing for potential acquisitions, special dividends, or share repurchases [10] Management Comments on Operating Environment and Future Outlook - Management expressed optimism regarding the recovery in multifamily investments and expects higher rental and occupancy rates by the end of 2026 [9] - The company anticipates premium growth to rebound in 2026, driven by startups and underwriting actions taken in specialty casualty businesses [14] - Management noted that while some loss ratio trends have improved, others, particularly in social inflation-exposed businesses, remain stable [30] Other Important Information - The company returned $66 million to shareholders through regular quarterly dividends and announced a special dividend of $2 per share [10] - The company has declared $54 per share or $4.6 billion in special dividends since the beginning of 2021 [10] Q&A Session Summary Question: Why were there no buybacks in the quarter? - Management indicated that they become active in buybacks when the stock is trading at a significant discount to its value and have retained capital for future opportunities [25] Question: Can you elaborate on pricing trends in the P&C side? - Management stated that a 5% price increase is still exceeding prospective loss ratio trends, with a diverse portfolio mitigating risks [28] Question: What is the outlook for crop premium and pricing? - Management suggested that trade aspects are reflected in futures prices, leading to stable or potentially increasing premiums for crops [39] Question: Is there an impact from new participating insurance companies on crop premiums? - Management believes the impact is marginal, with new entrants likely taking on less desirable business [47]

Core Insights - AM Best has commented that the Credit Ratings of Palomar Holdings, Inc. and its member companies remain unchanged following the announcement of Palomar's acquisition of The Gray Casualty & Surety Company, expected to close in the first half of 2026 [1][12] Credit Ratings - Palomar has a Long-Term Issuer Credit Rating of "bbb†(Good), while its subsidiaries, PSIC, PESIC, and Palomar Re, have a Financial Strength Rating of A (Excellent) and Long-Term ICRs of "aâ€(Excellent) with a stable outlook [2] - FIA has an FSR of A- (Excellent) and a Long-Term ICR of "a-†(Excellent) with a positive outlook [2] - Gray has an FSR of A- (Excellent) and a Long-Term ICR of "a-†(Excellent), which have been placed under review with positive implications following the acquisition announcement [3] Acquisition Details - Post-acquisition, Gray will operate independently under new management and is expected to benefit from synergies with Palomar [4] - The acquisition will be funded through cash on hand and a bank loan, with expected financial leverage having a neutral impact on the ratings [4] Business Operations - Palomar writes various risks, with earthquake coverage being a significant part of its portfolio, alongside inland marine/other property, casualty, fronting, and crop businesses [5] - The group consistently reports profitable results due to diligent underwriting strategies and is expanding into the surety space, particularly through the acquisition of Gray, which has a larger footprint in the contract surety segment across the U.S. [5]

Core Insights - Palomar reported better-than-expected Q2 2025 results, with non-GAAP earnings per share at $1.76, surpassing the $1.67 estimate, and GAAP revenue of $203.3 million, reflecting a 55.1% year-over-year increase [1][2] - The company raised its full-year adjusted net income guidance to $198–208 million for 2025, up from a previous estimate of $186–200 million [13] Financial Performance - Non-GAAP EPS increased by 40.8% year-over-year from $1.25 in Q2 2024 [2] - Net earned premiums rose to $180.0 million, a 47.2% increase from $122.3 million in Q2 2024 [2][5] - The adjusted combined ratio remained stable at 73.1%, while the annualized adjusted return on equity was reported at 23.7% [2][9] Business Segments and Growth - The casualty segment saw significant growth, with gross written premiums increasing by 113% year-over-year, now comprising over a quarter of total gross written premiums [3][5] - Crop insurance gross written premiums surged from $2.2 million to $39.5 million year-over-year, indicating strong expansion [5] - Earthquake insurance, while slower in growth, is expected to see mid- to high-teens growth for FY2025 [8] Diversification Strategy - Palomar is diversifying its offerings beyond earthquake coverage, focusing on product expansion and geographic reach [4][10] - The earthquake segment's contribution to gross written premiums decreased to 29.8% from 35.1% in Q2 2024, reflecting a broader portfolio [6] Strategic Initiatives - The acquisition of Advanced AgProtection has expanded the crop business's geographic reach [10] - The company successfully renewed its reinsurance program with an adjusted rate decrease of approximately 10% year-over-year, reducing exposure to large events [11] Technology and Operational Efficiency - Investments in technology and analytics are enhancing underwriting and operational scale, although they incur additional costs [12]