The insurance analyst here with Raymond James. Good to see many of you continuing on with your interest in this breakout, this presentation room. You know, this is the 47th annual Institutional Investors Conference, and one of the reasons why I think the conference has been successful through the years is, as analysts, we try and rotate through different ideas, different companies to give a different perspective on the sector we follow, as opposed to just the same lineup of companies that we follow every year.
It is really. You know, this is under that category, here's a new company for you, Palomar. You know, I've been following Palomar for years from a distance, but not as a publishing analyst. I had the opportunity, they invited me to their investor day last year in early spring and got to listen to a story.
I met with them again in California later in the spring and walked away with really a level of appreciation that surprised me about the story. I went on a whim and decided to invite them to the conference this year, voilà, here they are.
Because this is their first time at the conference, I thought it would be appropriate to have Mac start us off and give us just the boilerplate summary of the company, its history and where they are today and the outlook.
Terrific. Well, first off, Greg, thanks for having us. We're thrilled to be here at the Raymond James Conference. you know, yeah, I guess this is a long time coming. It's the 47th, but this is our seventh year now as a public company.
The company was formed in 2014 by myself, Chris Uchida, our CFO, joined shortly thereafter. It was really premised around creating at that time, a specialty property insurer with an initial focus on the earthquake market. Really the thesis was there was a market that was dislocated and in need of product innovation. Fast-forward to where we are today, that thesis remains.
We are now a specialty insurer in the truest sense of the word, with five distinct specialty product categories in which we write both on an admitted and an E&S basis. What we continue to try to do is find markets that are somewhat dislocated or in need of innovation, and usually that's in the form of data-driven or technology-driven innovation.
We divide our business into five product categories, the largest of which is earthquake, our heritage line. We then write in the marine and other property products, and that's a host of other property products, including flood, builder's risk, Hawaiian hurricane. We're actually our reciprocal manager. We write casualty business.
It's niche casualty segments like real estate E&O, environmental liability, all of which what we're trying to do is write short gross and net limits, either attaching at a primary or an excess basis to kind of really contain the volatility and exposure to social inflation and such. Crop is our fourth line. It's our second, I guess, youngest line.
Again, an interesting market where we can use data analytics to enhance our risk transfer strategy and ultimately embed that with strong service and technology to support our nation's farmers. The last category is the newest one, which is surety and credit.
We bought a surety business, a year ago, in the first quarter of 2025. Just recently closed on a second surety acquisition, in January of this year. We're organizing it into 5 distinct product categories, and really what we're trying to do is build a specialty franchise that can navigate any market cycle, whether it be a hard or a soft market or having products that are somewhat agnostic to the traditional P&C market, in the case of crop and surety. That's a little bit of Palomar 101, and happy to go deeper where you see fit.
Well, I think, your last couple of comments are spot on, in cycle management and where we are in the pricing cycle. As many of people in this room are aware, there's been some pretty, bold headlines around what's happening in property cat in terms of, pricing pressure there.
Maybe it's not really manifesting itself in other lines of the marketplace. You mentioned your five business units. Maybe talk about the different nuances of how the market pricing is working its way through those lines of business.
Yeah, Greg, I think that you said the term, and I'll steal it from you. It really is nuanced. If you look at our earthquake franchise, you know, we purposely built the business to have balance, and when I say balance, it's a combination of residential and commercial exposure. That's been exported into all of our property franchise.
I think what that really affords us the ability to do is play through market cycles. Residential earthquake business is predominantly an admitted line. Your rates are approved by the regulator that right now is providing us great stability. We have what's called an Inflation Guard, which says that at every renewal, the price goes up by 10% commensurate with the exposure.
That is giving us embedded growth and offsetting the pressure that we're seeing in commercial earthquake, where you're seeing rate decreases in the mid-teens. I think if you look across our portfolio, you're gonna have pockets of stability, property and casualty alike.
You're gonna have some areas of pressure, and that's really allowing us to lean into segments where there is opportunity and stability or dislocation, and also pull back in areas where it's not hitting the requisite risk-adjusted return.
If I just to give a little specificity to that, like right now, in builder's risk, we are leaning into more towards admitted builder's risk or single structure risk, where we can write the totality of the limit and not be subject to pricing pressures that you're seeing in large account E&S business.
In casualty, we're seeing opportunities in healthcare liability and pulling back in professional liability where there remains pricing pressure. We're purposely building a portfolio of products that, again, can navigate any market cycle. We'd all prefer a hard market, right now with what we're facing, we feel good about the mix and our ability to, you know, continue to profitably grow as we pull back or lean into other markets.
That's an excellent summary. I think, you know, when I was going through your numbers, your recent numbers, I was struck by the growth you've reported in a couple of the segments. Obviously, the crop and surety stand out. The casualty also stood out to me.
Yeah.
You know, as you know, the headlines around casualty is, it's almost like feast or famine, right? You know, certain lines of liability are no-go zones, and other lines of liability have promise. Maybe walk us through how you navigate those challenges.
Yeah, it's an excellent question, and I'm happy to talk through it. First off, with the casualty business, you know, we are somewhat fortunate in that we're not weighed down by legacy experience, and or legacy books that are underperforming. We do have the luxury of very experienced talent that's leading the casualty practice for us.
What we're really trying to do is write niche segments within the casualty market. Real estate E&O is an example. Real estate agency, you know, excuse me. Contractors liability, both primary and excess. Ultimately, across all of the seven niche categories within the casualty market, and mind you, we're not writing transportation and avoiding wheels business. Like, we have a very conservative risk appetite, and we have a very well-informed risk appetite.
Our average gross line is $3 million. Our average net line is less than $1 million. We are attaching either at a primary or an excess basis, first layer excess, excuse me, buffer layer attachment, which again insulates us from big shock losses.
When you overlay the attachment, the short limits, and then buttress that with large quota shares and facultative reinsurance, we're ultimately taking an approach of, hey, let's walk before we run as we go into some of these newer casualty lines, especially when even when there is an opportunity to get rate, like healthcare liability, or where there is some competition, like in the circumstance of real estate agency E&O.
Our whole business model is architected now around minimizing volatility in the earnings base. With casualty, that's what we're trying to extend the franchise, but also not deviate from that minimization of volatility.
Excellent. The other, I wanted to spend a second, talking about the crop too-
Yeah
because that's a market I think there, it's really concentrated and a couple, you know, a couple big hands have controlling market share, and then you're coming along and gradually building a presence there. Talk to me, talk to us about your approach in crop and how you're defining your niche there.
Yeah. It's really excited about what we're doing in crop. I think, you know, despite us being known more as a property franchise and now as a diversified specialty franchise, our management team has extensive history in the crop space. Our president and our chief risk officers started their career in the crop space. We've also hired a leader in Benson Latham, who's built 2 AIPs.
He built ProAg and sold that, and then ultimately was part of the team that built CRS at Validus. It became part of AIG. The combination of experience plus our familiarity or Benson's experience plus our familiarity with the market really has allowed us to go in with credentials.
Those credentials allowed us to become 12 AIPs in the market, approved insurance providers. Our approach has really been around differentiation through service, valuing capabilities, and technology. We've got off to a good start. Our near term or intermediate term objective is to get that to half a billion dollars of business, and our long-term objective is to get that to $1 billion.
We finished last year just under $250 million, and we've said this year we think we can grow that 30%. We're off to a good start. You know, the one thing, unlike maybe other segments of the market, you know, going and writing crop, like, you're not burning your way in by price, right? You have to differentiate through service and technology. The federal government sets the prices, so we're winning because we're providing a good service, and we have long-standing relationships in the market.
Excellent. The other area that the newest addition or the newer addition would be the surety business.
Yeah.
Just why don't you spend a second talking to us about that?
With surety, we're very excited about that new product category. Up until last year when we bought a smaller surety in New Jersey, all of our growth had been organic. That remains our primary vehicle to profitable growth. We also recognize there are certain markets that ultimately are better to buy than build, and surety was one.
In looking at that market, we saw the appealing economics, but we also recognized that it is a different underwriting process, it's a different claims handling process, and it's a different regulatory environment. We did choose to buy not one, but buy two assets, most recently with the Gray Casualty & Surety acquisition closing in January.
I think what we are most excited about is that we brought on an exceptional team, who is capable of building, not a top 30 writer, but a top 20 and a top 15 writer. In doing so in concert with Palomar, most notably bringing our balance sheet behind it. You know, Gray had, what, Chris, about $130 million of surplus, somewhere in that vicinity.
Yep
...and a, and a T-listing that allowed them to write $20 million. If we can get T-listed, and stack all three of our companies behind it, we can open up the aperture and write more federal business, also give them resource to go into new markets where we may have existing distribution, and ultimately, really allow them to extend what they've been doing well for the last decade plus, but give them, frankly, a bigger platform to do it. But, you know, you should view us more as a builder than a buyer, but surety was a class that it just made all the sense in the world for us to buy.
You know, it's interesting when you talk about these different levers that you've been able to successfully pull to drive growth. One of the broader themes that's affected a number of the specialty insurance companies is the perception that there's a slowdown in the organic revenue growth or total revenue growth rate. Obviously, inorganic can lead to episodic changes.
Yeah
in that. It seems like you have a well-defined strategy for growth as we think about the next 3-5 years. I think, you know, as I think about your story and your company, I mean, if you're able to deliver on growth and sustain your margins, I think that's gonna be a big recipe for value creation. Pulling it all back and then looking at your overall overriding growth strategy, is your objective to grow at 2x the market? Talk to us about how you're linking the 3-5-year plan.
Yeah. We about three years ago, at our first investor day, not the day that you were nice enough to attend, Greg, but we introduced the concept of what we call Palomar 2X. Palomar 2X is it's a strategic imperative that's premised around doubling the adjusted net income of the business organically, while maintaining an ROE of 20% plus. We've been able to achieve that over really since its introduction. We say we wanna do it in an intermediate timeframe. That could be two years, it could be three years, it could be five years, but somewhere in that window.
The first three cohorts that we applied Palomar 2X to, we accomplished in three years, two years, and two years, and we just gave guidance for 2026 with that implies doubling 2024 in a two-year period of time. I think it's important to point out, though, and I'm gonna let Chris expound upon it, that it's net income growth. It's not top line growth for top line growth's sake.
We have not only the green shoots of products that afford gross written premium growth, but we have levers that we can pull to help us drive net income at a faster rate. 'Cause if you look at 2025, gross written premium grew at a nice clip, but the bottom line grew at a faster clip.
That's what we wanna see. We wanna continue to see that leverage and scale. Maybe, Chris, you wanna talk about some of those levers that allow us to do so?
Yeah, no, Palomar 2X is about doubling adjusted net income. We've always said, and Mac talked about it, that we can double adjusted net income without needing to double the top line. We can double adjusted net income or increase adjusted net income at a greater rate than we need to grow the top line. We can do that through multiple levers within our model, the key one being reinsurance and limits, right?
We write a lot of cat limit, and right now there's a soft market in the cat world. When we see that soft market play through the primary, we also see that come through the reinsurance market. That is adding some bottom-line scale to that and some underwriting profit there. Another piece of the business that we use is we talked about casualty, we talked about crop.
Those are lines of business that are newer to us. Whenever we start a new line of business, we use a heavy amount of reinsurance to protect our balance sheet and leverage the reinsurance market. Usually we're ceding off, let's call it 70% of that business to the reinsurers. That is definitely true for crop, where last year we were only taking 30%.
As those lines of business grow, we expect to expand our participation as our capital base grows. This year with crop, a good example, we were taking 50% of that business. As we grow, our balance sheet, we're able to take more of our own cooking or eat more of our own cooking through the underwriting results.
At that time, we will be converting fee income into underwriting income, and the typical fee on that type of business is gonna be somewhere around five points on that earned premium. The typical underwriting income is probably gonna be around 10-15 points. We can double or triple our margin on that same premium base, as we continue to grow our balance sheet. The other piece of that is always gonna be operating expenses, right?
As we continue to grow, we are developing more internal teams, which has a lower acquisition expense. We're also building infrastructure and talent to help grow that business. As we continue to scale the organization, we expect more operating leverage through our operating expenses as we continue to grow. I'd say the last piece of our model, is investment income.
Investment income is something that has always been a smaller component of our overall adjusted net income. As we get into lines like casualty that do have a longer tail to them, we expect to be able to leverage our investment portfolio a little bit longer, match the duration of those losses, into, call it a longer duration investment portfolio. We have multiple tools within our toolkit to grow, excuse me, the bottom line at a greater rate than the top line.
Yeah. Oh, if I could just add two things, Greg, Chris described them very well, but I think it's important to point out on those levers, we will be very deliberate in how we pull them. Their stroke of the pen changes, right? These are annual reinsurance contracts that drive them. You know, we've locked in our casualty treaties at January 1, and they're in place till 27.
I think it's important to point out, like, where those levers we look at being pulled in the shorter term are gonna be more in property and short tail business. The casualty won't be something that's an overnight where we flip a switch and we start taking a lot more. Just lastly on the investment side, our investment leverage is very modest. It's 1.5 times. If you compare that to a lot of our peers, we're probably a multiple below. Sorry, Greg.
No, no, don't, that. As part of the leverage piece of the story, operating leverage revenue and expenses, I'm sure there's a technology component to this. I think you mentioned in some of your answers before. It's very topical right now. I mean, AI is like consuming all the oxygen in the room as it relates to insurance brokers. It hasn't really touched your space yet, but it's coming.
Why don't we... There's two aspects to it, right? I guess the first aspect is, you know, the opportunity set for you, best use cases of how you're deploying new technology, how it's driving efficiencies, and I guess the other piece is, are there parts of your business that could be at risk from AI? You know.
I think, you know, AI is certainly a strategic focus of every organization and ours being one. What I would say is if you look at the history of insurance and certainly property insurance, we've been using complex statistical models to price our risk and transfer our risk since certainly since we've been in business and we were incorporated. I think what AI affords us the ability to do is enhance those models and enhance the underwriting efficacy to either preserve or improve margins.
For instance, in earthquake, we've been using a point solution that is supplementing the data that we receive with an application and either affirming it or enhancing it, which is allowing us to price risk more appropriately and hopefully get paid more for it by our reinsurers. I think, you know, with as it pertains to property and our property cat book, like we've been using AI and we're using point solutions to enhance it.
There's certainly a lot of different initiatives that we have underway that are designed around process optimization, that's claims workflows, it's underwriting workflows, it's obviously customer service and the like, and then our developers are using it too.
You know, there's a lot of pilots that we have right now, we have two specific use cases where it's enhancing our underwriting efforts, and I ultimately believe will be our returns. You know, as the question talks about potential disintermediation, I think what you'll likely see is incorporation of AI will become table stakes in the terms of just the ability to take business and process it.
I think it could become table stakes for making sure that the information that you have is on par with your peers and competitors. I do take some solace in that, an insurance company, it is heavy asset base, and there is regulatory requirements. I think it, you know, this halo term, it would apply to an insurer. Yeah, I think it applies to an insurer.
Makes sense. related to that, I know some of your peers talk about, being first to market with a quote, you know, turnaround time of quote as a, as a critical advantage, I kind of view the potential of AI to, you know... You talk about table stakes. To be game-changing, right?
Yeah.
If everyone can turn around a quote a lot quicker, what's the advantage then in the marketplace? Maybe talk to us about what you see in your relates to your book.
Well, I mean, again, you know, we write a fair bit of residential business, that's already happening, right? You know, I can give you an earthquake quote or a flood quote or a Hawaiian hurricane quote in a matter of seconds. It's straight through processed.
That's when we wanna have tools, it's data information that's enhancing the underwriting to make sure that we can scrape and appropriately price a risk based on the true attributes of it. I think in personal lines, that's already there. It's gonna be additive. I think it's where it's gonna be more pertinent is commercial business. SME or even large accounts.
I think one of the areas that we're trying to figure out is how do we improve underwriter workflow ingestion, managing their desks, and I think that's where that will become of increasing importance to turn around quotes, especially if you're working with a wholesaler, which is a good portion of our commercial production plan, to make them efficient at their job. You know, we already commit to 24 hours, but we can get faster, and we will get faster.
Yeah. Just a couple minutes left here, you know, if I think about one of the potential risks to the company, it would be an earthquake situation, you know, apparently earthquakes don't happen anymore in California because we haven't had a material one in a long time. It begs the question, you talk about technology, you talk about data sets and analytics, and it's just like how do we know on the outside? I've asked you guys this before.
Yeah
I'm gonna ask you again. How do we know on the outside that you're appropriately reflecting the risk in the way you set up your reinsurance structure, the way you're setting up your reserves, et cetera?
Yeah. It's a great question and it's, you know, it's the one question that truly keeps me up at night. You know, what happens with the large earthquake? Really more than this, like, how do we keenly and acutely know our portfolio? We have a comprehensive reinsurance treaty that buys well above the 250-year probable maximum loss.
We have a $20 million retention on close to a $1 billion capital base. We have prepaid reinstatement. We have all the bells and whistles of a sophisticated reinsurance tower to make sure that we are there to capitalize on what will be a big opportunity post-event.
What we need to be as a management team, acutely focused on is just making sure we don't go through the top of a $3.6 billion tower. That's where our analytics team is constantly looking at both deterministic and stochastic modeling, incorporating multiple third-party vendor tools, applying our own rules and data sets to them, and then also using traditional measures like COPE underwriting, like spider ratios, damage ratios, and things of that sort, to manage our aggregates and make sure we're not concentrated in one zone versus another.
Again, be there for post-event because when there is an event, like Chris and I talk about, an earthquake that goes a little bit up the way of our reinsurance tower is a good thing for us because it's a voluntary product and you'll see a surge in demand and you'll be able to see rates go up.
Yeah. with the excellent returns, the growth you've generated, or organic remains a primary source, but there's inorganic. I think it's a good. You know, we're just a couple minutes left here. It's a good opportunity to come back to sort of the capital management framework of the company. you've done such a good job, you know, so far. How do you think about capital management going forward in the context of the opportunities that you have?
Yeah. I think, Greg, it's a great question, and it's one that Chris and I are wrestling with, especially in this day when we feel that the stock has not been rewarded for the execution, but also even the strong guidance that we gave this year. Ultimately, we want to invest in the business, and we think we have the capital on hand to invest in the business and opportunistically buy back the stock or explore M&A. You know, we will continue to invest in organic growth.
We have a $150 million buyback in place that prior to the start of this quarter, we'd only burned up around $35 million-$38 million of. That's another tool that we have. Ultimately, you know, we'll start to think about how do we continue to generate strong shareholder returns and ROEs, and if there's ways to enhance those capital returns with dividends or something along those line, that's something we may explore too.
Excellent. Excellent summary. I think, probably an appropriate time to just close out, give you an opportunity to, you know, have a couple final remarks 'cause I think you have laid out a pretty good vision of growth and opportunity for your company. Give you a couple minute, a minute here to close it out.
Yeah. Terrific. What I would say in closing is we really do feel that we are building a specialty franchise that is a one of one. It's a unique, distinct portfolio that is purposely constructed to navigate any market cycle. We think that we are well-positioned to face a softening property cat market. We think we are well-positioned to play through any softening market environment, especially with the growth of crop and now surety.
I think lastly, you know, Chris always says it, so I'm gonna steal his line, like Palomar 2X is a mindset. It's a strategic imperative of ours, and the goal is to double the adjusted net income in an intermediate timeframe, call that 3-5 years, while maintaining 20% ROE.
We haven't flinched from saying that's our goal. Until we do, you should assume those are the returns that we're targeting and we think we can achieve.
Excellent. We're at the 30-minute mark. Management's gonna be going down to Cordova Six for a breakout session. Thank you everyone for attending. Palomar management, thank you for being here this year. We appreciate you.
Thank you for having us, Greg. Really appreciate it.