Palomar Personalized a Fast-Growing Insurance Industry – A Buy?

Palomar Holdings (NASDAQ: PLMR) isn’t your typical insurance company. Although you may be familiar with home and auto insurance, Palomar provides insurance coverage in what it identifies as unserved markets – markets where there is little competition from the more traditional old insurance companies.

Palomar specializes in providing earthquake, wind and flood insurance to companies and individuals. It has done a great job identifying underprivileged markets and creating insurance products for them while maintaining their profitability. Because of this focus on underprivileged markets, Palomar is able to cater to customer needs that might not otherwise be met. With strong growth in earnings, Palomar has rewarded shareholders since it went public in April 2019.

Investors may be concerned about a rise in stock prices today, and they may be concerned about the impact of climate change and the active hurricane season in the Atlantic. However, a strong focus on prudential underwriting practices – including reinsurance coverage to protect against excess liability – is one way the company is protecting itself from disaster. Due to the unique nature of this business and its effectiveness in underwriting policies, Palomar is a company that you want to add to your portfolio.

Image source: Getty Images.

Providing insurance to disadvantaged markets

In 2014, Palomar realized there was a problem with the earthquake insurance products available at the time – while coverage was widely available to companies, residents wishing to purchase earthquake coverage found their options were limited and expensive. Earthquake insurance was the company’s main insurance product early on, as most of its business came from California. By the end of 2019, Palomar had grown to become the fifth largest provider of earthquake insurance coverage in the state.

Palomar continued to look for disadvantaged markets, such as Hurricane Insurance in Hawaii. The company witnessed the largest growth in its commercial products that include all risks, commercial earthquakes and specialty homeowners’ products, with total written premiums increasing by 83.8%, 55.1% and 30.4% respectively this year compared to the first half of 2019. More in that period, it formed These products are about 46% of the company’s total written premiums. (Residential earthquake coverage still makes up the bulk, at 41%, but that’s down from 53% last year.)

The company uses proprietary modeling techniques to analyze data at the postal code level, rather than setting prices on broad regional pricing areas. By balancing automation with human expertise, Palomar is able to take on more complex risks, enabling it to serve new markets.

Palomar finds herself indirectly competing with national insurers such as American International Group, Chubb and State Farm, along with specialist property insurers such as Zephyr Insurance and GeoVera Holdings. It also competes with publicly managed institutions such as the California Earthquake Authority and the National Flood Insurance Program. However, due to the strategic focus in disadvantaged markets, Palomar has few direct competitors.

The company has done a great job expanding its product lines to increase written premiums while diversifying the risks in its insurance book. Palomar has managed to do all of this while maintaining solid pooled ratios – a key metric in the insurance industry.

The strong ratios combined with high retention rates bode well for this insurance provider

The combined ratio is used to measure profitability and operating performance. The combined ratio is the sum of operating costs and insurance claims divided by total premiums. Less than 100% means the company is making an underwriting profit, while a percentage over 100% means the company is spending more on claims and operating expenses.

From 2017 to 2019, Palomar recorded strong combined ratios of 92.9%, 71.6% and 91.3% – indicating that the company has done an effective job of underwriting policies in disadvantaged markets while ensuring that these policies are profitable. During the first two quarters of 2020, Palomar’s overall percentage was 66.1%.

The excellent retention rates were also strong. In the most recent quarter, the company reported an 88% retention rate, highlighting rates of over 92% in its residential earthquake and all-hazards and Hawaiian tornadoes products. The high retention rates across the various product lines show that customers are happy with the insurance coverage offered, which is a good sign.

Risk management is the key to Palomar’s future success

With a price-earnings ratio of 47.63, Palomar appears to be quite pricey. However, the valuation may be warranted, as Palomar has done an active job in growing its top and bottom line profits by expanding the types of insurance it provides over the years.

Palomar was able to increase gross written premiums to $ 288.7 million in the subsequent 12 months, up 140% since 2017. This has helped grow net profit, with revenues and net income in the subsequent 12 months reaching $ 146.3 million and 42.1 million. Dollars – at a compound annual growth rate of 29.3% and 99.1%, respectively, since 2017.

The biggest risk to Palomar is that climate change could increase the frequency and intensity of extreme weather events. Severe and unpredictable catastrophic risks can reduce profits and limit future underwriting, hurting bottom line. In fact, the company recently issued a directive that it expects catastrophic losses of between $ 34 million and $ 38 million in the third quarter due to four hurricanes that made landfall in the United States.

Because of the natural disaster risk facing Palomar, it uses reinsurance coverage – a form of insurance for insurers – that protects it from excess liabilities due to a catastrophic event. This risk shift is an important component of Palomar’s strategy to focus on creating insurance products with attractive pricing dynamics and an appropriate risk-to-return profile, and is essential if it is to achieve higher growth while expanding its products.

A high growth insurance company

Palomar is a large insurer in underprivileged markets and has created products that are in great demand from consumers – commercial and residential alike – as evidenced by the growth in gross written premiums. The company has done a great job of diversifying while maintaining constant compound ratios while hedging risks with reinsurance coverage.

While the company faces risks due to potential catastrophic events, including continued hurricane activity in the Atlantic this fall, it has maintained a conservative insurance track record while managing to grow its top and bottom line earnings. Palomar might be worth looking into your wallet.

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