By Michael Loney

Feb 14 - (The Insurer) - Palomar Holdings sees increased opportunity in residential earthquake business due to the Los Angeles wildfires, according to its CEO.

Palomar CEO Mac Armstrong noted on an investor call that Palomar does not write homeowners' insurance in California, with its residential property exposure in the state confined to monoline earthquake and flood policies.

Similarly, the majority of its commercial property exposure in California is a commercial earthquake or difference-in-condition policy that does not cover wildfire.

“We do have builder's risk and builders owner package products that have exposure to fire losses. Fortunately, our losses from the Eaton and Palisades fires are very modest and within the scope of our 2025 guidance and ordinary course attritional losses,” he said.

“We have indirect exposure through our residential earthquake franchise as slightly less than 1% of our residential earthquake book is in the Eaton and Palisades burn zones. We are working closely with our insurers and producers to quickly cancel and refund those policies that have been impacted by the fires and unfortunately no longer need our coverage.”

In the medium and long term, Armstrong suggested that the wildfires are “amplifying the dislocation and challenges in the California homeowners' market as well as heightening the awareness of natural disasters in our state”.

“We've seen a modest uptick in residential earthquake new business to start the year and suspect the dislocation in the homeowners market will lead to further attrition out of the California Earthquake Authority as companies pull back their exposure to California,” he said.

“This could prove a tailwind for our residential earthquake business.”

Coming out of 2024, Palomar is the third-largest writer of earthquake insurance in North America. Its core earthquake franchise grew gross premiums 20% in the fourth quarter to $146.8 million, and 20% for the year to $522.9 million.

Palomar reported Q4 2024 adjusted net income of $1.52 per diluted share, surpassing the $1.23 analyst consensus and up from $1.11 in Q4 2023.

The combined ratio worsened slightly to 75.9% from 74.2% while gross written premiums increased 23.3% to $373.7 million in Q4.

'"CAUTIOUSLY OPTIMISTIC" ON JUNE 1ST RENEWAL PROSPECTS'

Discussing reinsurance buying, Armstrong said the wildfires may slow the pace of rate decreases that Palomar and the broader market experienced on January 1st.

“That said, recent activity in the catastrophe bond market suggests that this event has not diminished investors' appetite for single-peril exposures like earthquake,” he added. “As long as this market dynamic continues, it would likely prove advantageous to Palomar.”

Armstrong said that Palomar renewed its reinsurance placements for earthquake and crop at 1.1.

Palomar renewed its commercial earthquake quota share with about $155mn of incremental excess of loss limit to support the growth of the earthquake book until the main excess of loss renewal on June 1st.

These treaties were priced at risk-adjusted decreases of approximately 15%, Armstrong said.

“On the casualty front, we renewed two treaties at either expiring or improved economics. We also put in place two new treaties for our casualty group. They are both well received with strong support from blue-chip reinsurers who already support Palomar and other lines of business,” he said.

Armstrong continued: “Despite the industry's losses from the wildfires, we remain cautiously optimistic on the prospects of our 6.1 renewal as we have seen leading indicators such as recent cat bond issuances and secondary market pricing that suggest strong appetite from investors for single-peril exposures like earthquake.”

Armstrong said that Palomar has “close to $3bn of limit that is renewing or going to be bought” at 6.1.

CFO Chris Uchida noted that at the June 1st 2024 renewal Palomar’s total excess of loss spend or cost of risk transfer was about $262mn.

'CALIFORNIA TO BECOME INCREASINGLY E&S'

When asked by an analyst to elaborate on how the California market will shake out in light of the wildfires, Armstrong noted that it is a disrupted market.

“Speaking to the residential side, you're going to continue to see California become increasingly E&S and not just in the high-value segment but in what had been traditionally more kind of standard,” he said.

In addition to the residential earthquake opportunity from the expected continued reduction of CEA participating insurers exposure, Armstrong said Palomar also will probably see some opportunities in builder's risk.

“You look at the CEA's participating insurer base, its State Farm, its USAA. They constitute in totality, probably 65% of the market. And so if they are just following the logic of what they are permitted to do, non-renewing 10% of their book, that's a lot of policies that we have the chance to compete on in the residential earthquake market,” he said.

“So we think that affords us a decent ability to maintain high teens growth in quake,” he said.

Opportunity in crop and surety

Palomar Holdings in November announced the hire of Benson Latham from Great American as head of crop.

“We aim to be among the top 10 crop premium writers in the U.S. by the end of 2025 with projections exceeding $200 million in premium for the year ahead,” Armstrong said.

He added that the Palomar crop franchise delivered $15.7 million in premiums in the seasonally low fourth quarter and $116 million in premiums in its first full year in the business, he added.

Palomar finalised a 2025 reinsurance treaty for crop, putting in place quota share and stop-loss programs.

“We will retain 30% of the subject matter premium going forward as compared to 5% on the expired treaty. I have every confidence that we are building an industry-leading crop business to Palomar and continue to believe Palomar crop will eclipse $500mn of premium in the intermediate future.”

Palomar also at the start of this year closed its acquisition of Northeast regional carrier First Indemnity of America Insurance, marking its entry into the surety market. The acquired firm’s results will be included in the casualty segment.

“Surety is an attractive market segment that, like crop insurance, is not correlated to the P&C cycle and one that we believe can be an important growth vector for Palomar over the longer term. While FIA's contributions will be modest in 2025, we believe surety will be a meaningful market segment over time,” Armstrong said.