Palomar Holdings, Inc. Common stock 2026 Q2 Earnings Call

Thank you, Chris, good morning, everyone. We delivered another strong quarter highlighted by record-adjusted net income, our 15th consecutive earnings beat, and the third increase to our full-year adjusted net income guidance. Gross written premium increased 27% year-over-year. Adjusted net income grew 31%. Adjusted earnings per share grew 34%. Our adjusted combined ratio was 77%, and our adjusted return on equity was 26%. These results demonstrate our ability to execute in a dynamic insurance market while maintaining discipline in underwriting and capital allocation. Our diversified portfolio remains one of Palomar's greatest strengths, we believe it truly is one of one within the specialty insurance market. No single product group represented more than one-third of gross written premium during the quarter. Approximately half of our portfolio is property business.

Nearly 20% is generated from lines of business that are not correlated to traditional P&C market cycles, and 52% of the book is written on an admitted basis. The deliberate diversification strategy we have executed over the past half-decade bolstered and enhanced our business model and financial results. It has translated directly into strong, profitable growth and an industry-leading ROE that has proven durable through all market cycles. The combination of admitted and E&S products, residential and commercial property lines, niche casualty businesses, and the growing contribution from crop and surety allows us to navigate changing market conditions. As portions of the commercial property market continue to soften, the breadth of our portfolio provides stability and opportunities to deploy capacity into areas where risk-adjusted returns remain attractive.

We believe this unique mix of business differentiates Palomar and is a key reason we have consistently generated profitable growth and maintained best-in-class financial metrics throughout varied market cycles. Now let's turn to the performance of our product groups. For the earthquake franchise, year-to-date written premium is up 1% year-over-year. During the quarter, gross written premium was down less than a percentage point. As said before, the continued strength in residential earthquake is offsetting ongoing pressure in the commercial earthquake business. Residential earthquake, which represents approximately 64% of the earthquake book, continues to serve as a stable and predictable foundation for both the franchise and Palomar overall. New business production was very strong in the quarter, with both new business premium and policy count increasing year-over-year from the second quarter of 2025. Premium retention exceeded 96%, and renewal policies continue to include a 10% inflation guard.

We continue to closely monitor the inflation guard and price elasticity and are encouraged by the residential book's strong premium and policy retention. In commercial earthquake, which now constitutes 36% of the earthquake premium, market conditions remain highly competitive. Average rate decrease in the book was more than 20%, with decreases more pronounced in large commercial layered and shared business. In addition to the rate pressure on renewals, large commercial new business pricing is under even greater pressure. In certain instances, we are seeing new business account prices below what we consider technical pricing levels, pricing that adequately compensates for expected loss load, reinsurance cost, acquisition and underwriting expenses, and capital requirements. While these conditions remain challenging, we hope pricing at these levels is indicative of market approaching a bottom.

We are optimistic the pace of rate declines could moderate but not dissipate in the large account space over the remainder of 2026. Small commercial earthquake, which we define as less than $40 million of total insured value, is not experiencing the magnitude of rate degradation that the large commercial layered and shared market has. Although the market remains quite competitive. During the quarter, pricing declined in the low double digits. As the business we write is predominantly admitted and we generally insure the full policy limit, we maintain greater control over renewals and therefore are slightly more insulated from the rate environment of the layered and shared large commercial segment. While competition continues to pressure new business, we remain disciplined in our underwriting. We will not pursue business that does not meet our return thresholds.

Looking at the profitability metrics of the earthquake book, specifically the AAL to premium ratio, the overall portfolio ended the quarter at the same level as that at the end of the second quarter of 2023. Importantly, the residential earthquake book's metrics have remained stable over the last three years, while the commercial earthquake book increased and then subsequently declined by approximately 30% over the same period. This consistency underscores the benefits of our balanced approach to portfolio management and reflects our discipline in allocating capacity across the franchise. Overall, the strength and spread of risk of the book, as well as what we are seeing in the third quarter to date, provide confidence that we will achieve our previously stated outlook for premium growth in the earthquake book this year. The story for our inland marine and property group is very similar to that of our earthquake book.

We saw strong performance from our residential and admitted property products and intense competition in layered and shared large account business, where rates in the quarter were down 16%. The diversity within the inland marine and property group also allows us to lean into markets generating compelling returns and walk away from business in areas lacking attractive economics. Gross written premium for inland marine and property increased 11% year-over-year, driven by strong performance in admitted builders risk, construction engineering, residential property, and motor truck cargo. Residential property, which is 36% of our inland marine and property franchise, performed well, led by Hawaiian hurricane, which continues to benefit from limited competition, rate adequacy, and the forthcoming earn-in of our approved 12% rate increase. Importantly, Laulima, the reciprocal we manage and use to write Hawaii hurricane business, purchased its own reinsurance and maintains $1.5 million event retention.

This limits our direct balance sheet and earnings exposure to a Hawaii hurricane, which certainly helps manage the potential impact of an El Niño-driven wind season. Additionally, our residential flood partnership with Neptune generated solid growth while improving our geographic spread of risk. Although still a relatively small contributor today, we believe it further strengthens our residential property portfolio. Our motor truck cargo program grew 22% and is well-positioned to maintain that growth level in the second half of the year as it just received approval for a 13% increase on policies written in California, its largest state. We continue to invest in our builders risk franchise, adding underwriting talent in Texas and New York to broaden our reach and product offerings.

This led to another strong quarter in construction engineering, for which we expanded the range of technically complex projects we support, including data centers during the course of construction. Our builders risk book remains well diversified across admitted and E&S products, residential and commercial exposures, and projects ranging from smaller local developments to technically complex engineered risks. Supported by our experienced underwriting team and enhanced reinsurance capacity, we believe our builders risk book is well-positioned to drive profitable long-term growth. Additionally, we have brought on a new leader to build out our home builders practice, which is currently limited to a single state in Texas. The addition of a seasoned professional should allow us to establish a national home builders presence. While competitive pressure persists in the large commercial property market, we are disciplined and are not chasing growth.

The luxury of the balanced property portfolio admitted in E&S, residential and commercial, allows us to be steadfast in our appetite and underwriting discipline. We will source and invest in attractive long-term opportunities and prioritize underwriting profitability over premium growth. Turning to casualty, our portfolio of seven niche lines and selected third-party administered programs grew gross written premium 37% year-over-year. This growth is a function of the investments we have made in new products, systems, underwriting talent, distribution relationships, and select program partnerships over the past several years. Underpinning this performance is our portfolio management strategy. We manage the business as a collection of distinct specialty lines, each with its own underwriting objectives, profitability targets, and growth expectations. Additionally, each line has its own market pricing dynamics.