Palomar Holdings, Inc. Reports Second Quarter 2019 Results

/EIN News/ -- LA JOLLA, Calif., Aug. 12, 2019 (GLOBE NEWSWIRE) -- Palomar Holdings, Inc. (NASDAQ:PLMR) (“Palomar” or the “Company”) reported net income of $6.7 million, or $0.30 per diluted share, for the second quarter of 2019 compared to net income of $6.9 million, or $0.41 per diluted share, for the second quarter of 2018.

Adjusted net income⁽¹⁾ was $8.0 million, or $0.36 per diluted share, for the second quarter of 2019 as compared to $6.9 million, or $0.41 per diluted share, for the second quarter of 2018. Adjusted net income for the second quarter of 2019 excludes certain expenses related to the Company’s initial public offering (“IPO”), tax restructuring, stock-based compensation, and $1.3 million of expenses associated with the retirement of debt, including the tax impact of those expenses. There were no adjustments to net income for the second quarter of 2018.

Second Quarter 2019 Highlights

• Gross written premiums increased by 56.2% to $58.3 million compared to $37.3 million in the second quarter of 2018
• Net income of $6.7 million compared to net income of $6.9 million in the second quarter of 2018
• Adjusted net income⁽¹⁾ increased by 15.4% to $8.0 million compared to $6.9 million in the second quarter of 2018
• Total loss ratio of 2.8% compared to 4.0% in the second quarter of 2018
• Combined ratio of 69.2% compared to 65.1% in the second quarter of 2018
• Adjusted combined ratio⁽¹⁾ of 63.8%, compared to 65.1% in the second quarter of 2018
• Annualized return on equity of 17.8%
• Annualized adjusted return on equity⁽¹⁾ of 21.2%

(1) See discussion of “Non-GAAP and Key Performance Indicators” below.

“We are pleased with our second quarter results, highlighted by gross written premium growth of 56.2%, year over year, driven by strong performance across all of our product lines.  Additionally, we successfully renewed $470 million of our core reinsurance program at June 1, 2019 and purchased $200 million of incremental limit at the top of our reinsurance tower, expanding our coverage for earthquake events up to $1.05 billion.  We continue to pursue what we believe is a substantial market opportunity while maintaining a thoughtful and conservative risk transfer strategy. Our retention remains at $5.0 million per earthquake or wind event, which not only provides loss protection but also strong visibility into our earnings,” commented Mac Armstrong, Chief Executive Officer and Founder.  “Our core products continued to demonstrate high retention, improving pricing trends, and strong new business activity. In addition, we maintained our focus on developing innovative products that address underserved markets and saw increasing contributions from several of our newer product offerings including our recently launched Inland Marine and Assumed Reinsurance divisions.  Looking forward, we believe we are well positioned for growth as we continue to scale our existing lines of business, introduce new products and expand our geographic footprint.”

Underwriting Results
Gross written premiums increased 56.2% to $58.3 million compared to $37.3 million in the second quarter of 2018.  Net earned premiums increased 27.0% compared to the prior year’s second quarter. This increase was primarily due to the increase in gross written premiums offset by ceded written premiums under reinsurance agreements.  Underwriting income⁽¹⁾ was $7.2 million resulting in a combined ratio of 69.2% compared to underwriting income of $6.4 million and a combined ratio of 65.1% during the same period last year. The second quarter combined ratio includes expenses related to the Company’s IPO, tax restructuring, stock-based compensation, and $1.3 million of expenses associated with the retirement of debt. Excluding those items the Company’s adjusted combined ratio⁽¹⁾ was 63.8% in the quarter compared to 65.1% in the same period in 2018.  Additionally, the Company’s adjusted net income⁽¹⁾ during the quarter increased by 15.4% to $8.0 million compared to $6.9 million in last year’s second quarter.

Investment Results
Net investment income increased by 103.4% to $1.5 million compared to $0.7 million in the prior year’s second quarter. The year over year increase was primarily due to interest income generated by the proceeds received in Company’s IPO.  Funds are generally invested conservatively in high quality securities, including government agency, asset and mortgage-backed securities, municipal and corporate bonds with an average credit quality of "AA." The weighted average duration of the fixed-maturity investment portfolio, including cash equivalents, was 3.90 years at June 30, 2019. Cash and invested assets totaled $245.3 million at June 30, 2019. During the second quarter, the Company recognized realized and unrealized gains of $0.5 million related to its investment portfolio as compared to $0.3 million in last year’s second quarter. 

Tax Rate
The effective tax rate for the three months ended June 30, 2019 was 21.1% compared to 0.0% for the three months ended June 30, 2018. The change in the effective tax rate for the three months ended June 30, 2019 compared to the prior-year period was due to the tax restructuring of the Company prior to the IPO, resulting in all operations of the Company being taxable in the U.S.  Prior to the tax restructuring the Company’s Bermuda operations were not subject to U.S. tax, thus the overall effective tax rate was lower in 2018.

Stockholders’ Equity and Returns
Stockholders' equity was $199.6 million at June 30, 2019, compared to $96.3 million at December 31, 2018. For the three months ended June 30, 2019, the Company’s annualized return on equity was 17.8% which compares to 32.1% for the same period last year. Over the same period, annualized adjusted return on equity decreased to 21.2% from 32.1%. The decrease in adjusted return on equity was due primarily to the proceeds from the Company’s IPO increasing the average stockholders’ equity balance during the period.

Conference Call
As previously announced, Palomar will host a conference call August 13, 2019, to discuss its second quarter 2019 results at 12:00 p.m. (Eastern Time). The conference call can be accessed by dialing 1-877-423-9813 (domestic) or 1-201-689-8573 (international) and asking for the Palomar Second Quarter 2019 Earnings Call. A telephonic replay will be available approximately two hours after the call and can be accessed by dialing 1-844-512-2921, or for international callers 1-412-317-6671 and providing the access code 13693238. The telephonic replay will be available until 11:59 pm (Eastern Time) on August 20, 2019.

Interested investors and other parties may also listen to a simultaneous webcast of the conference call by logging onto the investor relations section of the Company’s website at http://ir.palomarspecialty.com/.  The online replay will remain available for a limited time beginning immediately following the call.

About Palomar Holdings, Inc.
Palomar Holdings, Inc. is the ultimate parent and insurance holding company of its operating subsidiaries, Palomar Specialty Insurance Company and Palomar Specialty Reinsurance Company Bermuda Ltd. Palomar is an innovative insurer that focuses on the provision of specialty property insurance for residential and commercial clients.  Palomar’s underwriting and analytical acumen allow it to concentrate on certain markets that it believes are underserved by other insurance companies, such as the markets for earthquake, wind and flood insurance. Based in La Jolla, California, the company is an admitted carrier in 26 states. Palomar Specialty Insurance Company has an A.M. Best financial strength rating of “A-” (Excellent) FSC VIII. To learn more about us, visit www.palomarspecialty.com.

Non-GAAP and Key Performance Indicators
Palomar discusses certain key performance indicators, described below, which provide useful information about the Company’s business and the operational factors underlying the Company’s financial performance.

Underwriting revenue is a non‑GAAP financial measure defined as total revenue, excluding net investment income and net realized and unrealized gains and losses on investments. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of total revenue to underwriting revenue in accordance with GAAP.

Underwriting income is a non‑GAAP financial measure defined as income before income taxes excluding net investment income, net realized and unrealized gains and losses on investments and interest expense. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of income before income taxes to underwriting income in accordance with GAAP.

Adjusted net income is a non‑GAAP financial measure defined as net income excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook, net of tax impact. Palomar calculates the tax impact only on adjustments which would be included in calculating the Company’s income tax expense using the effective tax rate at the end of each period. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of net income to adjusted net income in accordance with GAAP.

Return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. 

Adjusted return on equity is a non‑GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of return on equity to adjusted return on equity in accordance with GAAP.

Loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses, to net earned premiums.

Expense ratio, expressed as a percentage, is the ratio of underwriting, acquisition and other underwriting expenses net of commission and other income to net earned premiums.

Combined ratio is defined as the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.

Adjusted Combined ratio is a non‑GAAP financial measure defined as the sum of the loss ratio and the expense ratio calculated excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of combined ratio to adjusted combined ratio in accordance with GAAP.

Tangible stockholders’ equity is a non‑GAAP financial measure defined as stockholders’ equity less intangible assets. See “Reconciliation of Non‑GAAP Financial Measures” for a reconciliation of stockholders’ equity to tangible stockholders’ equity in accordance with GAAP.

Safe Harbor Statement
Palomar cautions you that statements contained in this press release may regard matters that are not historical facts but are forward-looking statements. These statements are based on the company’s current beliefs and expectations. The inclusion of forward-looking statements should not be regarded as a representation by Palomar that any of its plans will be achieved. Actual results may differ from those set forth in this press release due to the risks and uncertainties inherent in the Company’s business. The forward-looking statements are typically, but not always, identified through use of the words "believe," "enable," "may," "will," "could," "intends," "estimate," "anticipate," "plan," "predict," "probable," "potential," "possible," "should," "continue," and other words of similar meaning. Actual results could differ materially from the expectations contained in forward-looking statements as a result of several factors, including unexpected expenditures and costs, unexpected results or delays in development and regulatory review, regulatory approval requirements, the frequency and severity of adverse events and competitive conditions. These and other factors that may result in differences are discussed in greater detail in the Company's filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, and the Company undertakes no obligation to update such statements to reflect events that occur or circumstances that exist after the date hereof. All forward-looking statements are qualified in their entirety by this cautionary statement, which is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Investor Relations
1-619-771-1743
investors@palomarspecialty.com

Source: Palomar Holdings, Inc.

Summary of Operating Results

The following table summarizes the Company’s results for the three months ended June 30, 2019 and 2018:

		Three months ended
		June 30,									Percent
		2019			2018			Change			Change
		($ in thousands)
Revenue:
Gross written premiums		$	58,346		$	37,342		$	21,004		56.2	%
Ceded written premiums			(24,632)			(26,674)			2,042		(7.7)	%
Net written premiums			33,714			10,668			23,046		216.0	%
Net earned premiums			23,208			18,279			4,929		27.0	%
Commission and other income			721			629			92		14.6	%
Total underwriting revenue(1)			23,929			18,908			5,021		26.6	%
Losses and loss adjustment expenses			643			732			(89)		(12.2)	%
Acquisition expenses			8,971			7,450			1,521		20.4	%
Other underwriting expenses			7,165			4,339			2,826		65.1	%
Underwriting income(1)			7,150			6,387			763		11.9	%
Interest expense			(639)			(434)			(205)		47.2	%
Net investment income			1,483			729			754		103.4	%
Net realized and unrealized gains on investments			493			255			238		93.3	%
Income before income taxes			8,487			6,937			1,550		22.3	%
Income tax expense			1,789			3			1,786		NM
Net income		$	6,698		$	6,934		$	(236)		(3.4)	%
Adjustments:
Expenses associated with IPO and tax restructuring			50			—			50		NM
Stock-based compensation expense			306			—			306		NM
Expenses associated with retirement of debt			1,297			—			1,297		NM
Tax impact			(349)			—			(349)		NM
Adjusted net income(1)		$	8,002		$	6,934		$	1,068		15.4	%
Key Financial and Operating Metrics
Annualized return on equity			17.8	%		32.1	%
Annualized adjusted return on equity(1)			21.2	%		32.1	%
Loss ratio			2.8	%		4.0	%
Expense ratio			66.4	%		61.1	%
Combined ratio			69.2	%		65.1	%
Adjusted combined ratio(1)			63.8	%		65.1	%
NM- Not Meaningful

(1)- Indicates Non-GAAP financial measure- see above for definition of Non-GAAP financial measures and see below for reconciliation of Non-GAAP financial measures to their GAAP equivalents.

Condensed Consolidated Balance sheets

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except shares and par value data)

		June 30,			December 31,
		2019			2018
		(unaudited)
Assets
Investments:
Fixed maturity securities available for sale, at fair value (amortized cost: $202,437 in 2019; $122,949 in 2018)		$	208,061		$	122,220
Equity securities, at fair value (cost: $21,563 in 2019; $27,188 in 2018)			22,368			25,171
Total investments			230,429			147,391
Cash and cash equivalents			14,405			9,525
Restricted cash			476			399
Accrued investment income			1,310			734
Premium receivable			33,878			18,633
Deferred policy acquisition costs			19,077			14,052
Reinsurance recoverable on unpaid losses and loss adjustment expenses			13,202			11,896
Reinsurance recoverable on paid losses and loss adjustment expenses			3,427			2,666
Prepaid reinsurance premium			22,467			18,284
Prepaid expenses and other assets			9,127			5,863
Property and equipment, net			886			947
Intangible assets			744			744
Total assets		$	349,428		$	231,134
Liabilities and stockholders' equity
Liabilities:
Accounts payable and other accrued liabilities		$	9,732		$	9,245
Reserve for losses and loss adjustment expenses			14,630			16,061
Unearned premiums			103,394			79,130
Ceded premium payable			16,927			10,607
Funds held under reinsurance treaty			1,729			720
Income and excise taxes payable			3,322			—
Deferred tax liabilities, net			58			—
Long-term notes payable			—			19,079
Total liabilities			149,792			134,842
Stockholders' equity:
Preferred stock, $0.0001 par value, 5,000,000 and 0 shares authorized as of June 30, 2019 and December 31, 2018, respectively, 0 shares issued and outstanding as of June 30, 2019 and December 31, 2018			—			—
Common stock, $0.0001 par value, 500,000,000 shares authorized, 23,468,750 and 17,000,000 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively			2			2
Additional paid-in capital			179,189			68,498
Accumulated other comprehensive income (loss)			4,922			(563)
Retained earnings			15,523			28,355
Total stockholders' equity			199,636			96,292
Total liabilities and stockholders' equity		$	349,428		$	231,134

Condensed Consolidated Income Statement

Palomar Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)

(in thousands, except shares and per share data)

		Three Months Ended
		June 30,
		2019			2018
Revenues:
Gross written premiums		$	58,346		$	37,342
Ceded written premiums			(24,632)			(26,674)
Net written premiums			33,714			10,668
Change in unearned premiums			(10,506)			7,611
Net earned premiums			23,208			18,279
Net investment income			1,483			729
Net realized and unrealized gains on investments			493			255
Commission and other income			721			629
Total revenues			25,905			19,892
Expenses:
Losses and loss adjustment expenses			643			732
Acquisition expenses			8,971			7,450
Other underwriting expenses (includes stock-based compensation of $306 and 0, respectively)			7,165			4,339
Interest expense			639			434
Total expenses			17,418			12,955
Income before income taxes			8,487			6,937
Income tax expense			1,789			3
Net income			6,698			6,934
Other comprehensive income, net:
Net unrealized gains (losses) on securities available for sale for the three months ended June 30, 2019 and 2018 respectively			3,298			(91)
Net comprehensive income		$	9,996		$	6,843
Per Share Data:
Basic earnings per share		$	0.30		$	0.41
Diluted earnings per share		$	0.30		$	0.41
Weighted-average common shares outstanding:
Basic			21,975,962			17,000,000
Diluted			22,105,009			17,000,000

Underwriting Segment Data

The Company has a single reportable segment and offers primarily earthquake, wind, and flood insurance products. Gross written premiums (GWP) by product are presented below:

		Three Months Ended June 30,
		2019					2018
		($ in thousands)
					% of					% of
		Amount			GWP		Amount			GWP
Product
Residential Earthquake		$	29,987		51.4	%	$	19,872		53.2	%
Specialty Homeowners			8,646		14.8	%		7,579		20.3	%
Commercial Earthquake			8,085		13.8	%		4,382		11.7	%
Commercial All Risk			7,288		12.5	%		2,982		8.0	%
Hawaii Hurricane			2,675		4.6	%		2,012		5.4	%
Flood			1,271		2.2	%		515		1.4	%
Other			394		0.7	%		—		—	%
Total Gross Written Premiums		$	58,346		100	%	$	37,342		100	%

Reconciliation of Non‑GAAP Financial Measures

For the three months ended June 30, 2019 and 2018, the Non-GAAP financial measures discussed above reconcile to their respective GAAP measures as follows:

Underwriting revenue

		Three Months Ended
		June 30,
		2019			2018
		(in thousands)
Total revenues		$	25,905		$	19,892
Net investment income			1,483			729
Net realized and unrealized gains on investments			493			255
Underwriting revenue		$	23,929		$	18,908

Underwriting income

		Three Months Ended
		June 30,
		2019			2018
		(in thousands)
Income before income taxes		$	8,487		$	6,937
Net investment income			1,483			729
Net realized and unrealized gains on investments			493			255
Interest expense			(639)			(434)
Underwriting income		$	7,150		$	6,387

Adjusted net income

		Three months ended
		June 30,
		2019			2018
		(in thousands)
Net income		$	6,698		$	6,934
Adjustments:
Expenses associated with IPO and tax restructuring			50			—
Stock based compensation expense			306			—
Expenses associated with retirement of debt			1,297			—
Tax impact			(349)			—
Adjusted net income		$	8,002		$	6,934

Annualized adjusted return on equity

		Three Months Ended
		June 30,
		2019			2018
		($ in thousands)
Annualized adjusted net income		$	32,008		$	27,736
Average stockholders’ equity:		$	150,773		$	86,528
Annualized adjusted return on equity			21.2	%		32.1	%

Adjusted combined ratio

		Three Months Ended
		June 30,
		2019			2018
		($ in thousands)
Numerator: Sum of losses, loss adjustment expenses, underwriting, acquisition and other underwriting expenses, net of commission and other income		$	16,058		$	11,892
Denominator: Net earned premiums		$	23,208		$	18,279
Combined ratio			69.2	%		65.1	%
Adjustments to numerator:
Expenses associated with IPO and tax restructuring		$	(50)		$	—
Stock based compensation expense			(306)			—
Portion of expenses associated with retirement of debt classified as other underwriting expenses			(897)			—
Adjusted combined ratio			63.8	%		65.1	%

Tangible Stockholders’ equity

		Period Ended
		June 30,			December 31,
		2019			2018
		(in thousands)
Stockholders' equity		$	199,636		$	96,292
Less: Intangible assets			(744)			(744)
Tangible stockholders' equity		$	198,892		$	95,548