Palomar (PLMR) Q4 2025 Earnings Call Transcript

Image source: The Motley Fool.

DATE

Feb. 12, 2026 at 12 p.m. ET

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Mac Armstrong
• President — Jon Christensen
• Chief Financial Officer — Chris Uchida

Need a quote from a Motley Fool analyst? Email pr@fool.com

TAKEAWAYS

• Full-year gross written premium -- $2 billion, representing 32% growth and a record annual level for Palomar (NASDAQ:PLMR).
• Full-year adjusted net income -- $216.1 million, reflecting a 62% increase, with performance above the initial guidance midpoint by $30 million (16%).
• Full-year adjusted return on equity -- 25.9%, surpassing both the stated Palomar 2x target and the prior year's 22.2%.
• Fourth-quarter adjusted net income -- $61.1 million, a 48% increase from a year earlier.
• Fourth-quarter gross written premium -- $492.6 million, up 32% compared to the previous year.
• Fourth-quarter net earned premiums -- $233.5 million, a 61% rise over the prior year.
• Fourth-quarter adjusted combined ratio -- 73.4%, compared to 71.7% for the same period last year.
• Fourth-quarter loss ratio -- 30.4%, reflecting higher attritional losses mainly from casualty and crop growth, partially offset by favorable development from property lines.
• Fourth-quarter net investment income -- $16 million, up 41.3% due to higher asset yields and average invested balances.
• Earthquake segment -- Declined 2% year over year, due to a one-time prior-year headwind; residential retention rate reached 97% for the admitted product, with residential policies now 58% of segment premium.
• Commercial earthquake rates -- Down 15% year over year in the fourth quarter, with competition expected to persist into 2026.
• Inland marine & other property segment -- Grew 30% year over year for the quarter, driven by builders risk, Hawaiian hurricane, and record flood production.
• Commercial property underwriting -- All risk, excess national property, and E&S builders risk realized loss ratios under 25% in the quarter.
• Casualty segment -- Achieved 120% annual gross written premium growth in the fourth quarter, with the book ending at 20% of company premium.
• E&S casualty rate environment -- Q4 saw excess policy rates increase in the low teens percentage range, with primary rates up mid to high single digits.
• Health care liability segment -- Technical rates increased nearly 35% and segment cited as most dislocated market underwritten by Palomar.
• Average net line size in casualty -- Remained below $1 million (E&S casualty average at $700,000) with approximately 80% of reserves held as IBNR.
• Crop segment written premium -- $248 million for 2025, exceeding both initial and revised guidance, with $40 million written in Q4.
• Crop retention -- Increased from 30% to 50% net of SRA as of Jan. 1, 2026, with stop-loss reinsurance used similarly to prior year.
• Gray Surety acquisition -- Closed Jan. 31, 2026 at an estimated price of $311 million, financed with a $300 million term loan at SOFR plus 1.75%; expected to be modestly accretive in 2026 and to scale in 2027.
• Reinsurance renewals -- Four quota shares renewed Jan. 1 at improved economics, with commercial earthquake and two earthquake XOL treaties renewed more than 15% lower on a risk-adjusted basis.
• 2026 adjusted net income guidance -- Range of $260 million to $275 million, midpoint implies 24% growth, adjusted return on equity above 20%, and midpoint assumes $10 million catastrophe loss load plus a 10% rate decrease on June 1 XOL reinsurance.
• 2026 loss ratio expectation -- Mid to upper thirties percent, reflecting increased crop retention and business mix evolution.
• 2026 adjusted combined ratio guidance -- Anticipated to be in the mid-70s percent.
• 2026 written premium reporting change -- Five categories: earthquake, inland marine and other property, casualty, crop, and surety and credit; fronting business reclassified accordingly.

RISKS

• Commercial earthquake rates declined 15% year over year and management expects persistent "pressure" and elevated competition through 2026, potentially constraining premium growth.
• Crop segment loss ratio operates in the low nineties percent, raising overall company loss ratio as crop retention rises to 50%.
• Fourth-quarter loss ratio increased to 30.4% from 25.7% year over year, led by higher attritional losses in casualty and crop business.
• Acquisition expense ratio and other underwriting expense ratio rose sequentially and versus prior year, driven by business mix and continued investment.

SUMMARY

Palomar closed 2025 with record premium and significant bottom-line outperformance, setting new guidance that signals another year of double-digit earnings growth and continued ROE strength. Acquisition of Gray Surety expands product breadth, immediately adds scale to surety, and introduces a new premium category reported in 2026. Management is repositioning business mix toward greater crop retention and away from stand-alone fronting, expecting the mix shift to lift loss ratios, while forecasting offsetting scale benefits in operating expenses. Reinsurance renewals yielded materially lower risk-adjusted rates, and additional price improvements are anticipated by midyear. Strategic technology investment in artificial intelligence is being deployed organization-wide to drive operational efficiency, positioning the company for continued execution of the Palomar 2x objective.

• In fourth quarter 2025, residential earthquake premium retention remained high and offsetting commercial price weakness, contributing to expectations of modest segment growth and margin expansion in 2026.
• Management underscores that new underwriting hires are integrated with conservative line strategies and robust reinsurance use, limiting near-term risk while building future growth capacity.
• Full integration of recent acquisitions completed, with newly created Palomar Casualty and Surety adding scale, management strength, and geographic diversity to the surety business.
• Net investment income rose 56% full-year, boosted by both increased invested balances and higher yields on new purchases exceeding 5% in the quarter.
• Expense ratios, while up for the quarter, are cited by management as a function of investment for scalable growth, with anticipated long-term efficiencies as the organization matures.
• Management's guidance contemplates significant catastrophe loss assumption and continued use of conservative reserving, maintaining an 80% IBNR ratio in key lines.

INDUSTRY GLOSSARY

• E&S (Excess & Surplus): Insurance products written outside standard admitted markets, typically for higher-risk or complex exposures; often subject to less regulatory rate/form oversight.
• IBNR (Incurred But Not Reported): Claim liabilities reflecting expected future payments for claims that have occurred but have not yet been reported to the insurer.
• SRA (Standard Reinsurance Agreement): The mechanism defining loss sharing terms between crop insurers and the U.S. government.
• XOL (Excess of Loss): Reinsurance structure covering an insurer’s losses above a specified retention, limiting overall loss exposure per event or risk.
• D&O (Directors & Officers): Liability insurance protecting company directors and officers against legal claims from actions in managing an organization.
• E&O (Errors & Omissions): Liability insurance for professionals to protect against claims of inadequate work or negligence.
• Fronting: Arrangement where an insurer issues policies on behalf of another underwriting entity for a fee, typically transferring most or all of the underwriting risk.
• Attritional losses: Smaller, routine insurance claim losses, as opposed to catastrophic losses.

Full Conference Call Transcript

Mac Armstrong, our Chairman and Chief Executive Officer. Additionally, Jon Christensen, our President, is here to answer questions during the Q&A portion of the call. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11: 59 p.m. Eastern Time on 02/19/2026. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans, and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our quarterly report on Form 10-Q filed with the Securities and Exchange Commission. We do not undertake any duty to update such forward-looking statements.

Additionally, during today's call, we will discuss certain non-GAAP measures which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to their most comparable GAAP measure can be found in our earnings release. At this point, I will turn the call over to Mac. Thank you, Chris, and good morning, everyone. I am excited to review our strong fourth quarter and full year results. In 2025, we delivered record levels of gross written premium

Mac Armstrong: and adjusted net income as well as strong broad-based profitable growth. For the full year, Palomar grew gross written premium 32%, increased adjusted net income by 62%, and achieved an adjusted return on equity of 26%. We also meaningfully exceeded our initial full year adjusted net income guidance of $180,000,000 to $192,000,000, finishing the year at $216,000,000. We beat earnings every quarter of the year, resulting in four upward revisions to our outlook as performance continued to strengthen and exceed expectations. At the start of 2025, we outlined four strategic imperatives: integrate and operate; build new market leaders deliberately; remember what we like and do not like; and generate consistent earnings.

I am proud to report that we executed across all four efforts in all four quarters. We scaled our newer verticals in casualty and crop while maintaining underwriting discipline. Discipline. We purposefully built a balanced book of both admitted and E&S, residential and commercial, property and casualty products, to ensure consistent results in any market cycle. We added outstanding talent across all our departments, including underwriting, investment, claims, data, and actuarial, growing our team to over 500 exceptional professionals. Finally, we successfully integrated two specialty franchises, First Indemnity of America and Advanced Ag Protection, and in January, announced the closing of our third acquisition, Gray Casualty and Surety,

Operator: now Palomar Casualty and Surety.

Mac Armstrong: The myriad achievements of 2025 enabled us to reach our Palomar 2x target of doubling adjusted net income for both the 2022 and 2023 cohorts. A significant and impressive milestone that underscores the strength of our execution. We exit 2025 with a national footprint, with offices and team members located across the country. We are attracting the best talent in the industry. Our people and 2025's accomplishments give us strong confidence in our ability to sustain Palomar 2x. Turning to the fourth quarter specifically, our strong performance marked a fitting close to an exceptional 2025.

The quarter was highlighted by record adjusted net income and robust top and bottom line growth, with gross written premium increasing 32% and adjusted net income growing 48% across our differentiated and diversified portfolio. As I said, our specialty product suite is designed to perform consistently through market cycles and generate attractive returns, a strength demonstrated by an adjusted combined ratio of 73% and a 27% adjusted return on equity. Collectively, these results highlight the growth, durability, balance, and quality of our franchise. Turning to our business segments. Our earthquake franchise declined 2% year over year, levels slightly lower than our previously stated expectation for low single-digit growth in the fourth quarter.

Our year-over-year results were muted by a one-time headwind from a large unearned premium in 2024. Adjusting for this one-time benefit in 2024, we would have delivered growth in the quarter. As we have discussed, our earthquake book consists of residential and commercial policies written on an admitted and E&S basis. This balance allows us to successfully optimize our earthquake risk-adjusted returns and navigate any market condition. In the fourth quarter, the commercial earthquake book continued to face pressure with rates off 15%. Competition remained elevated, and we believe this environment could persist through much of 2026. We remain disciplined in our underwriting, but also note that the commercial book is still generating attractive returns.

Conversely, our residential earthquake book, which ended the year at 58% of the total earthquake premium, continued to perform in line with expectations. During the quarter, we saw year-over-year growth in new business written and a premium retention rate of a healthy 97% for our admitted flagship

Operator: product.

Mac Armstrong: As we have said before, the 10% inflation guard on our residential earthquake policies affords our book compelling operating leverage into a softening property catastrophe reinsurance market. In addition, we are encouraged by our pipeline of high-quality residential earthquake partnerships that could bolster growth in 2026 and in 2027. The softening reinsurance market combined with growth of the residential earthquake book should allow us to absorb the primary rate pressure in the commercial market. Overall, we expect our earthquake book to deliver modest premium growth and margin expansion in 2026, even with commercial pressure persisting.

Our inland marine and other property group grew 30% year over year in the fourth quarter, driven by strong performance from our admitted and E&S builders risk book and Hawaiian hurricane products as well as record production in our flood book stemming from the early success of our Neptune Flood partnership. Like our earthquake business, the mix of residential and admitted offerings provided balance to the group, allowing us to offset pressure in certain E&S commercial lines. For instance, we have pending rate increases of more than 10% for our Hawaii hurricane truck cargo book in California, whereas our large E&S builders risk accounts are seeing rate decreases in the low single digits.

Like commercial earthquake, the underwriting performance and profitability in commercial property was very strong in the quarter. All risk, excess national property, and E&S builders risk each had a loss ratio below 25%. The strong underwriting results in commercial property are driving further investment in talent and geographic expansion. During the quarter, we added professionals in Texas and the Northeast to support profitable growth of the commercial side of the group. Additionally, we recruited Matt Themes to launch and lead our new construction engineering practice. Matt is a long-tenured expert in this dynamic space, which we believe represents a significant market opportunity.

With our strong track record in builders risk, the growth in our balance sheet, our A rating from AM Best, and expanded reinsurance capacity, we believe now is the right time to enter this market and supplement our property franchise with a book of large, complex infrastructure projects such as bridges,

Operator: roads,

Mac Armstrong: and data centers. Consistent with our disciplined approach to new lines, we will begin with modest net line sizes supported by robust reinsurance. Our casualty business delivered 120% year-over-year gross written premium growth in the fourth quarter. The casualty book ended 2025 at 20% of the total gross written premium for the company. Fourth quarter results were driven by strong momentum in E&S casualty, primary and excess contractors general liability, and environmental liability. The E&S general liability segment of the casualty book, both excess and primary, continues to see a healthy rate environment. In Q4, rates on excess policies increased on average in the low teens, while primary rates were up mid to high single digits.

Our professional lines remain in a stable pricing environment, with certain areas showing selective improvement, such as miscellaneous professional liability, private company D&O, and real estate agents E&O. We are also encouraged by the early traction in health care liability, which is probably the most dislocated market we currently underwrite, with technical rates increasing approaching 35%. In the fourth quarter, we added to our already strong team of casualty underwriters, which should open new geographies and distribution sources, and ultimately drive growth. We remain conservative in managing our casualty exposure and reserves.

Our disciplined focus on low and short attachment points combined with the use of both facultative and quota share reinsurance should limit volatility in the casualty book and allow the portfolio to season in a controlled manner. Through the fourth quarter, the average net line size across casualty remained below $1,000,000, with E&S casualty, our largest line of casualty business, averaging $700,000. Our reserving approach in casualty remains conservative and unchanged. It is grounded in continuous evaluation of loss development, attachment structures, and portfolio mix. As previously discussed, approximately 80% of our reserves are held as IBNR, well above industry norms. This conservatism underpins balance sheet strength and reinforces confidence in the stability and predictability of future results.

Our crop franchise generated $248,000,000 of written premium in 2025, exceeding our original $200,000,000 expectation and our most recent revised guidance of $230,000,000. Our performance was driven by strong execution and the successful recruitment of top-tier talent as we expanded into attractive states and products. The broader footprint also drove higher-than-expected fourth quarter production, with $40,000,000 of premium written. Importantly, this incremental business is diversifying from spring season MPCI, providing a nice complement to the portfolio. From an underwriting standpoint, 2025 was a good year for our crop book, as we generated a loss ratio under 80% and still hold a conservative reserve base as we sit here today.

Given the experience of our team, the short-tailed nature of the risk, and the growth of our balance sheet, effective 01/01/2026 we increased our retention to 50% net of the SRA. We will support and protect our retention with stop-loss reinsurance consistent with last year. On a prospective basis, we expect crop premium to grow more than 30% in 2026 and remain on track to achieve our intermediate-term target of $500,000,000 in premium and our long-term target of $1,000,000,000 in premium. As previously discussed, fronting is no longer a focus of the business. We still continue to support our existing relationships, but we are not devoting capital towards an earnest pursuit of new fronting partnerships.

We simply believe we can achieve better risk-adjusted returns in all other products. As a result, we are reconstituting our product groups, and fronting will no longer be a standalone category. Our existing and any future fronting partnerships will be categorized in alignment with the underlying class of business starting in 2026. For instance, our cyber fronted program will be in the casualty product group, and our Texas homeowners fronted program will be in the inland marine and other property product group. Following the closing of the Gray Surety acquisition, surety and credit will become the fifth product category we report on going forward.

As a frame of reference, pro forma for the acquisition of Gray Surety and Credit would have constituted 6.5% of Palomar's total premium in 2025. Gray Surety significantly strengthens our surety franchise, adding management expertise, systems, scale, and geographic reach, complementing our existing operations and accelerating their path toward building a market leader in an attractive sector. We believe surety and credit will serve as a stable long-term growth driver for Palomar while providing meaningful diversification to our book and earnings base. Turning to reinsurance. The fourth quarter was both eventful and productive, and completed two new placements. We renewed four quota share treaties on 01/01, all at improved economics.

Key highlights of the quota share activity included a commercial earthquake quota share that renewed approximately 15% down on a risk-adjusted basis and our primary and excess casualty quota share that saw a nice improvement in the expiring ceding commission. As it pertains to excess of loss reinsurance, we placed the Assurant XOL and renewed two earthquake excess of loss treaties. The earthquake placements renewed more than 15% lower on a risk-adjusted basis. Looking ahead to the 06/01 renewal, market conditions remain favorable for reinsurance buyers, and we are confident in further pricing improvement across our property cat program. Our diversified portfolio delivered strong top- and bottom-line results in the quarter and the full year.

While I am very proud of our results and the execution over the past year, I am even more excited about the many opportunities that lie ahead. The success of 2025, the momentum in the business, and our team's collective enthusiasm for the year ahead are reflected in our 2026 earnings guidance: adjusted net income of $260,000,000 to $275,000,000

Chris Uchida: dollars

Mac Armstrong: The guidance midpoint implies approximately 24% adjusted net income growth and an adjusted return on equity greater than 20%. The midpoint of our guidance assumes a $10,000,000 catastrophe load and a decrease of 10% on our excess of loss property catastrophe reinsurance renewal on June 1. To help us deliver on these opportunities, we are implementing four strategic imperatives for 2026. One, leverage our scale to enhance profitable growth. Two, curate a one-of-one distinct portfolio.

Jon Christensen: Three,

Mac Armstrong: deepen our position in existing markets and unlock new opportunities. And four, integrate, optimize, and execute. To support these imperatives, we are strategically deploying AI across our organization. Current initiatives underway are focused on enhancing our underwriting workflow, portfolio optimization, process automation, and operational efficiency. These efforts involve the use of both third-party tools and internally developed agentic solutions that should allow us to increase productivity and scale our organization. If we execute our plan and these imperatives, we will achieve our Palomar 2x in 2026 and beyond. With that, I will turn the call over to Chris to discuss our financial results and guidance assumptions in more detail.

Chris Uchida: Thank you, Mac. Please note that during my portion, when referring to any per share figure, I am referring to per diluted common share as calculated using the treasury stock method. This methodology requires us to include common share equivalents, such as outstanding stock options, during profitable periods and exclude them in periods when we incur a net loss. For the fourth quarter of 2025, our adjusted net income was $61,100,000, or $2.24 per share, compared to adjusted net income of $41,300,000, or $1.52 per share, for the same quarter of 2024, representing adjusted net income growth of 48%.

Our fourth quarter adjusted underwriting income was $62,300,000, an increase of 52% as compared to $41,000,000 for the same quarter last year. Our adjusted combined ratio was 73.4% for the fourth quarter compared to 71.7% last year. For the fourth quarter of 2025, our annualized adjusted return on equity was approximately 26.9% compared to 23.1% for the same period last year. Our fourth quarter results continue to validate our ability to sustain profitable growth while maintaining returns well above our Palomar 2x target of 20%. Gross written premiums for the fourth quarter were $492,600,000, an increase of 32% to the prior year's fourth quarter.

Net earned premiums for the fourth quarter were $233,500,000, an increase of 61% compared to the prior year's fourth quarter. For the fourth quarter of 2025, as expected, our ratio of net earned premiums as a percentage of gross earned premiums increased to 48.2% compared to 39% in 2024, and compared sequentially to 43.4% in the third quarter of 2025. Losses and loss adjustment expenses for the fourth quarter were $70,900,000, comprised of $72,900,000 of attritional losses, including $700,000 of favorable development, and $2,100,000 of favorable catastrophe loss development largely from Hurricane Milton. Favorable development was primarily from our short-tail property lines of business. The loss ratio for the quarter was 30.4% compared to 25.7% in the prior year quarter.

Losses for the quarter were driven primarily by higher attritional losses associated with growth in our casualty and crop business, partially offset by favorable development. We continue to hold conservative positions on our reserves. Favorable development is a result of our conservative approach to reserving upfront, allowing us to release reserves later. This quarter is a good example of this, as we had conservatively reserved for Hurricane Milton as well as a few other smaller events where we are seeing modest reserve release.

Our acquisition expense as a percentage of gross earned premiums for the fourth quarter was 13% compared to 10.9% in last year's fourth quarter, and compared sequentially to 10.8% in the third quarter of 2025, a little higher than expected driven by mix of business for the quarter resulting in higher commission and lower ceding commission. The ratio of other underwriting expenses, including adjustments, to gross earned premiums for the fourth quarter was 8.1% compared to 7.2% last year and 7.9% in the third quarter of 2025. As demonstrated by our continued investment in talent, technology, and systems, we remain committed to scaling the organization profitably.

We continue to expect long-term scale in this ratio, although we may see periods of sequential flatness or increases due to investments scaling the organization within our Palomar 2x framework. Our net investment income for the fourth quarter was $16,000,000, an increase of 41.3% compared to the prior year's fourth quarter. The year-over-year increase was primarily due to higher yields on invested assets and a higher average balance of investments held during the quarter due to cash generated from operations. Our yield in the fourth quarter was 4.8% compared to 4.5% in the fourth quarter last year. The average yield on investments made in the fourth quarter was above 5%.

At the end of the quarter, our net written premium to equity ratio was slightly above 1:1. Our stockholders' equity has reached $942,700,000, a testament to our consistent profitable growth. Looking at our full year 2025 results, our strong top-line performance continued to translate to the bottom line. Our gross written premium increased 32% to $2,000,000,000, while our net earned premiums increased 57% to $802,600,000. Our adjusted combined ratio for the full year was 72.7% compared to 73.7% in 2024, resulting in adjusted underwriting income of $208,900,000, growth of 63%, reflecting strong underwriting performance and continued operating leverage. Our net investment income for the full year was $56,000,000, an increase of 56% compared to 2024.

All of this coming together, our full year 2025 adjusted net income grew 62% to $216,100,000, our adjusted diluted earnings per share grew 54% to $7.86, resulting in an adjusted return on equity of 25.9% compared to 22.2% in 2024. It is also worth noting that our final 2025 results are $30,000,000, or 16%, ahead of the midpoint of our initial guidance provided this time last year of $186,000,000, equivalent to an additional $1.10 per share for our shareholders. Our Palomar 2x philosophy continues to show in our results.

Our 2025 adjusted net income more than doubled, technically 2.3 times, from 2023 in two years off of our goal of three to five years, with an ROE well above our target of 20%. Palomar 2x is a nice segue to our 2026 guidance. We are initiating our 2026 adjusted net income guidance with a range of $260,000,000 to $275,000,000, including $8,000,000 to $12,000,000 of catastrophe losses and incorporating the recently closed acquisition of Gray Surety. The midpoint of the range implies 24% adjusted net income growth and doubling our 2024 adjusted net income in just two years. From a modeling perspective, we expect many of the trends we have been sharing to continue in 2026.

Our 2025 full-year net earned premium ratio was 44.9%. We expect that ratio to increase into the upper forties for 2026. On a gross earned premium basis, our full-year 2025 acquisition expense ratio was 12.1%, and our adjusted other underwriting expense ratio was 8%. We expect improvements in both ratios for 2026. Our full-year 2025 loss ratio was 28.5%, favorable to our original expectations. With that as a reference, we expect our loss ratio, including catastrophes, to be in the mid to upper thirties for 2026. Our full-year 2025 adjusted combined ratio was 72.7%. We expect our adjusted combined ratio for 2026 to be in the mid-70s.

These expectations reflect our expected growth, business mix, and use of capital as we build our specialty insurance platform. We continue to expect quarterly seasonality in our operating results driven primarily by crop. We believe our 2025 results provide a strong framework to model the business seasonality going forward. I would like to spend a moment on our Gray Surety acquisition to provide some context on our surety business for 2026. We closed the Gray Surety acquisition on 01/31/2026 at an estimated purchase price of $311,000,000 financed with a $300,000,000 term loan and cash on hand.

The current interest rate on the term loan is SOFR plus 1.75%, with the ability to improve the spread depending on our total debt to capitalization ratio. Given the interest expense from the term loan and the timing of the deal, we expect the addition of Gray Surety to be modestly accretive in 2026 before scaling in 2027. Pro forma for Gray, the unaudited written premium for our surety would have been approximately $110,000,000 in 2025. As Mac mentioned, given our investment in the surety space and the reduced emphasis on fronting, we will be changing our written premium categories in 2026.

For 2026, our written premium categories are earthquake; inland marine and other property; casualty; crop; and surety and credit. Fronting will be redistributed into these five product categories. Plan on providing a revised breakdown of our 2025 written premium in these categories in our next investor deck. With that, I would like to ask the operator to open the line for any questions. Operator?

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. It may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Pablo Singzon with JPMorgan. Please proceed with your question.

Chris Uchida: Hi. Good afternoon. First question, just on the higher retention on crop

Operator: will you be able to size how much that will contribute to earnings next

Pablo Singzon: year versus what you earned in 2025?

Chris Uchida: Yes. No, I think crop is a great example of the diversification of our business and use of capital as we start retaining more. We have talked about before that crop is a lower-margin business than some others, but also very stable, providing a very consistent earnings base. Generally speaking, it is going to have a combined ratio in the low nineties, so say 92%. So for every, call it, $100,000,000 and 10 points that we keep, that is adding another $8,000,000, let us say, of pretax income to the bottom line.

Pablo Singzon: Got it. Thanks, Chris. And then second question, the 10% reduction in reinsurance costs you are assuming, is that on a risk-adjusted basis, or is that absolute dollars you are talking about?

Mac Armstrong: That is on a risk-adjusted basis, Pablo. Yes. So that is just assuming that if you have like-for-like exposure, it would be down 10%. So when we think about the forecast, we are assuming growth in quake this year. We said there is modest growth for earthquake and there also would be some exposure expansion, which would lead to us buying more limit.

Jon Christensen: Got it.

Pablo Singzon: Okay. Thank you.

Jon Christensen: Thank you.

Operator: Our next question comes from the line of David Motemaden with Evercore ISI. Please proceed with your question.

Jon Christensen: Hey. Thanks.

Mac Armstrong: David, in your prepared remarks, you had talked a bit about a few new hires that you have made here in the fourth quarter as well. You guys made a few more even before that.

David Motemaden: I am specifically interested on the underwriting side and the underwriting teams that you are adding. Is there any rule of thumb to think about

Mac Armstrong: how much growth you guys are expecting

David Motemaden: those teams to contribute in 2026, 2027 if we think about just gross premium written?

Mac Armstrong: Yes, David, thanks for the question. It is a good one. Let me start by saying you are absolutely right. We have added some really strong talent to our organization over the course of 2025. And as we sit here in 2026, we continue to recruit and add really strong underwriters. It is across both the casualty and the property franchise. When we gave our guidance, there is certainly an assumption around contributions from those various new hires. But it really depends on the market that they are going into.

A strong addition to our builders risk franchise in Boston opens up several million dollars or a few more million dollars of potential production there, versus someone like Matt Themes who joins us on the construction engineering side, where it is a much larger TAM and much larger exposures. But I think, overarchingly, the most important point to mention is for all of the new hires, we are not expecting them to burn their way into a market or overextend themselves. We want to walk before we run, and that is something that we have done from when we started the business.

And what that means is when they go into a market, whether as a property underwriter or a casualty underwriter, they are going to have a comprehensive and robust reinsurance solution supporting them. And then they are also going to have modest gross and net line sizes that they are deploying while we build traction. There is a lot of infrastructure that needs to be built out, so we do not want to open up the proverbial floodgate to not be able to service and underwrite the business effectively. So it is also very moderate in terms of distribution.

I will just close with, as an aside, for instance, we did write an interesting construction engineering risk, one of Matt's first. The gross line was $76,000,000. Our net was $4,000,000 on it. That is because of the strong reinsurance relationships we have. We were able to use an existing facility, and then we were also able to buy facultative reinsurance. I think the fact that you have that type of strong reinsurance support, both facultative and treaty, is a reflection of the quality of the underwriters and their experience.

Jon Christensen: Got it. Great.

David Motemaden: Thanks. That is encouraging. For

Mac Armstrong: I guess, just another one on the earthquake growth.

David Motemaden: Is there any way you can just help us think through? It sounds like

Mac Armstrong: commercial was down just in terms of gross premiums written.

David Motemaden: Residential was growing. Could you just break that out, how much the residential book grew in the fourth quarter and how you are thinking about that within the modest growth that you outlined in 2026?

Mac Armstrong: Yes, David. So what I would offer you is, as I mentioned, residential quake is approaching about 60% of the book. It has strong policy retention, and it is writing good new business. So I think residential quake is what we hope would be high single digits to double digits growth, and then the commercial is going to be obviously continuing to see some pressure, especially in more large commercial business, where rates were down 15%. I would say from a rate deceleration standpoint, the rate decreases, we expect them to hover at this level for certainly the next several quarters.

So I think that is what I would offer you: residential quake is going to grow and should offset the deceleration in the commercial. Most importantly, we should see margin expansion. The fact is that property cat pricing should allow us to really scale the residential quake and then absorb the softening on the primary rates in the commercial side. Got it. Yes. And it sounds like the XOL pricing at down 10 is actually not as good as you guys were able to get on some of the stuff that you renewed here recently. But maybe just one more if I could, for Chris. So heard you on the loss ratio being in the

David Motemaden: mid to upper thirties. I am sort of looking at that versus the 31% accident year loss ratio excluding cats

Mac Armstrong: in 2025. So it feels like that is

David Motemaden: getting a little bit worse than, I think, the old rule of thumb, which was

Mac Armstrong: two to four points deterioration a year. So I am wondering if you could just unpack

David Motemaden: that a little bit. You know, is it mix? Is it higher picks?

Mac Armstrong: You know, it would be helpful if you could just unpack that a little bit.

Chris Uchida: Yes. I think the simplest answer is going to be that there is no change in our picks. I think we have said this a lot of times that we are going to continue to reserve conservatively upfront, react to bad news quickly, and do good news slowly and deliberately. That has proven true throughout this year where we were able to have some favorable development. If you go back to this time last year, we were expecting a low-thirties loss ratio for this year. I think this year was probably a little bit better than we expected. Crop contributed to that. Crop was a little bit favorable to where we expected.

So maybe our loss ratio was a little bit better. But overall, when I think about that two to four points, I feel like this is right in line with that expectation. Let us say we were, call it, 31, 32. We are at four points. We are at 36. Right? The other thing you have to think about is that we are expecting some still really strong growth from crop. The other assumption we are changing there is we are going to be taking 50% of that book versus 30% this year. So that, while adding profit to the bottom line, does move the ratios a little bit.

We have talked about it a lot, and I just talked about it a little bit, that crop does operate at a higher combined and a higher loss ratio. Mac said it was better than 80%. Even an 80% loss ratio, that is higher than 31 or 32. So if you are

Mac Armstrong: taking

Chris Uchida: call it 20 points more of that, if you are at 30 and taking 20% more or, you know, about 66% more of the losses plus higher growth, it is going to influence the loss ratio. But overall, when you think about it, and the reason we are not saying that our combined ratio is going to jump at the same rate, is we do expect to see some scale or leverage in the operating expenses. So when we talk about right now our low-seventies combined ratio for the year and kind of getting into the mid-seventies for 2026, I think that is taking all those factors into account.

Yes, the loss ratio is going to go up as expected and as we have talked about. You are going to see some savings potentially on the expense side, but overall, we are going to be mid-seventies combined ratio with a growing diverse book of business delivering consistent profitability to the marketplace. That is something we have talked about for the last two or three years, continuing to do, and that is what we plan on doing. Overall, we feel like we are in a good spot. Loss ratio is doing exactly what we expected. And overall, the book is performing very well.

Mac Armstrong: And, David, if I could just come back to the one point you made on the reinsurance, yes, 10% is the assumption. It is a little bit lower risk-adjusted decrease than what we saw in the first quarter. But that is for the midpoint of the guidance. So there is certainly an opportunity to outperform that 10% down, but I think that is the right level for us to assume at 06/01. Thanks, guys. Thank you.

Operator: Thank you. Our next question comes from the line of Matt Carletti with Citizens. Please proceed with your question.

Pablo Singzon: Hey. Thanks. Good morning. Mac, I appreciate your comments on the casualty book. It was really helpful. Can you maybe just kind of zoom out, and as we look at the book today, maybe year-end 2025, broad strokes, how much of the book is in excess and primary GL? How much is professional lines exposures? Whatever the big buckets are that you think of, could you help us with that? And then secondarily, how much of that is directly written by Palomar, and is any of it done through some sort of program or delegated authority arrangement?

Mac Armstrong: Yes, Matt. Thanks for the question, and excited to talk about the casualty franchise because it really is performing well and has been a nice success story. The predominance of the book is going to be what we call E&S casualty, which would be GL, kind of niche segment GL. Then there is some professional lines, but, again, the majority of it is going to be excess and primary general liability. We are not writing wheeled business for the majority of cases.

We do have a small amount of wheeled business that is in our contractors primary contractors GL, but on the whole, it is going to be niche categories of GL and then professional liability that is going to be more E&O or health care liability, which is a new example. That is the one that we got into earlier this year. I think it is important to just talk about, overarchingly, on the casualty side, we remain very disciplined, whether that is in our reserving, with 80% of the total reserve as IBNR. We have several lines of business on the liability where 100% of the reserve is IBNR. Our casualty reserve is only 16.4% of our surplus.

Our limits are very conservative. Our average net limit is $1,000,000. Our largest net line would be $2,300,000, and our largest line of business, as I pointed out, which is our E&S casualty, is $700,000 on a net basis. I think the other fact that is worth highlighting here is just the underwriting approach, and it is going to be really focusing on writing, if it is excess, buffer layers. We are avoiding social inflation. So if we get a pop, it is not a circumstance where it is a surprise and there is a nuclear verdict and we were attaching 20 excess of 100 and we get hit.

We are going to be attaching excess of one, or we write in the primary one. So it confines the volatility in that book. I should have started with this. The talent we have is exceptional. These are professionals that have been in this business for decades in the case of David Sapia, Frank Castro, and Jason Porter, our casualty leaders. I think it is also important to point out that we do have program business. Right now, although it is a little more than half, our programs, those leaders are involved in the underwriting of those programs, setting underwriting rules, helping the claims administration and adjudication.

So it is really the philosophy that we had in property where we work with the program administrator in builders risk or earthquake, and we also write it internally. It affords the sharing of ideas. It affords the ability to access market segments that you could not potentially do on a direct basis. So we think it is a very good model. The last thing I would say about the casualty business, if you look at how we use reinsurance, we view that as a terrific validation of the underwriting. We buy both treaty and FAC.

Jon Christensen: And so FAC reinsurance underwriters are looking at an individual risk

Mac Armstrong: and pricing them with us. Treaty underwriters are looking at the portfolio. As I mentioned, we had several quota shares renew at 01/01. Two of them were for programs. Two of them were for internal casualty. All of them had improved economics. So, again, I think our casualty execution has been exceptional, and I think our approach is well established and thoughtful.

Jon Christensen: Thank you. That is super helpful. I appreciate all the color.

Operator: Thank you. Our next question comes from the line of Andrew Andersen with Jefferies. Please proceed with your question.

Mac Armstrong: Hey. Good afternoon. Just on the reinsurance update. The quake that you mentioned that was renewed, was that commercial quake? And did you purchase any incremental limit this year? Hey, Andrew. Yes. Good questions. So the quota share that renewed was for commercial earthquake. We did have a commercial earthquake quota share renew, and then we bought incremental limit that is for all of the quake book. But it was a very modest amount. Most of the incremental limit will be procured at 06/01. Then we had one existing layer that renewed at 01/01. Again, those were all down in the 15% range.

Chris Uchida: Gotcha. And maybe bigger picture here, as

Mac Armstrong: the cycle in some of the lines softens,

Chris Uchida: it does not seem like there is any constraint on capital here. But how would you kind of rank capital deployment opportunities across organic, increased retention, share repurchases, and opportunistic

Mac Armstrong: tuck-in deals, which you have some history of doing. Yes. I think, overarchingly, opportunistic is the right term. Today, share buybacks look pretty compelling, as we scratch our heads inside our conference room. But nonetheless, we still want to grow organically, and we think we have multiple ways to grow the book organically, and we also think we have the capital base to do so. Certainly as the balance sheet has grown, it does afford us the opportunity to increase our retentions, like we are doing in crop. It is certainly something we can look at on cat retentions, probably more specifically for earthquake cat retentions as that approaches at 06/01.

For our property business, our inland marine and other property business has performed really well. So I think our desire is to potentially put out larger lines in selected classes, both admitted and E&S builders risk and excess national property. I think it is a combination. Ultimately, opportunistic M&A, we are proud that we bought three great businesses over the last fifteen months. But that really will be more opportunistic. I think you should be thinking about organic growth, leveraging the scale of the organization, the balance sheet,

Operator: potentially

Mac Armstrong: take more of our own cooking, and then also think about opportunistic capital management through selective buybacks and repurchases. Thank you.

Jon Christensen: Thank you.

Operator: Our next question comes from the line of Mark Hughes with Truist. Please proceed with your question.

Mac Armstrong: Yes. Thank you. On the commercial quake, you said you expect competitive pressure to continue through 2026.

Mark Douglas Hughes: How does it look sequentially? The down 15, is it continuing to decline sequentially, or has it stabilized at a low level, and then you just have some tough comps?

Mac Armstrong: Yes, Mark. That is a good question. I think we started to see commercial quake pricing really soften in the second quarter of 2025. We think we are still a couple quarters to go there, and then hopefully the comps lead to a deceleration. I think the other thing too is one dynamic where you have the all-risk players potentially retaining more of the quake, they will start to, as they get through a twelve- to fifteen-month period of that, start to get to a point where they are managing capacity and overall limits and aggregates. So I think that will help stabilize some.

But our view, when we talk about this year of having modest growth in earthquake, is that pressure will persist in 2026, certainly in a more pronounced fashion for commercial quake. And then on the crop, your retention moving up to 50%. If things go as planned, does that continue to move up, or is

Meyer Shields: 50 tied again?

Mac Armstrong: Well, I think it is a good lever to have to be able to pull. If you talk to Benson Latham, who has been in the crop business for a very long time, he would tell you the way to make money in crop is to retain more of it. You will make more money over the long term doing that. That is something that we do see as, again, a potential lever. The one thing that we want to be mindful of is just capital allocation. While crop is not an overly capital-intensive line, the growth we are having is pretty strong. As I said, we are targeting over 30% growth.

So the combination of growth and an increase in retention could start to put a little more pressure on how much capital we have allocated. That is something that we will watch. But that is really once we get beyond that half-billion-dollar threshold, Mark. In the interim, we can continue to increase our retention and grow the book, and then we will take stock at what is the right risk transfer structure from there.

Jon Christensen: Thank you. Thank you.

Operator: A reminder, if anyone has any questions, you may press 1 on your telephone keypad to join the queue. Our next question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.

Paul Newsome: Thank you.

Operator: Thanks for the call.

Jon Christensen: I was hoping you could maybe expand upon

Paul Newsome: a question I am getting from investors, which is

Peter B. Knudsen: sort of inevitably, as the business mix moves away from earthquake, as well as takes increasing retentions, do you inevitably end up with returns on equity that are less, given that you essentially have less

Chris Uchida: reinsurance leverage?

Peter B. Knudsen: Or is the model such that you have more balance in that regard? I am not really even talking about 2026. I mean, just as you think out longer term, is that what we should be thinking about in terms of how the business delivers returns?

Mac Armstrong: Yes. Hey, Paul. I will offer my views. I will start with saying we continue to believe that Palomar 2x is achievable for the intermediate future. Based on the guidance we are giving, we will double our adjusted net income from 2024 in two years while maintaining ROE that is above 20%. We think that is sustainable, maybe not doubling it every two years, but certainly maintaining ROE that is over 20%. That is with the changing complexion of the book. You have to remember, we still have earthquake as our largest or top two largest line. We are now adding surety, which has very attractive margins as well. That is a sub-80 combined ratio book.

This is not a circumstance where we are all of a sudden going to become a 12% ROE business and a 95% combined. Until we say otherwise, we are going to be generating an ROE that is in excess of 20%, and we are going to be growing our bottom line at a very attractive rate. I think the guidance that we gave this year is illustrative of that, and I think the investments that we are making in the business afford us the ability to sustain those parameters.

Chris Uchida: A couple things I would add to that just for clarification. Remember, as we diversify and as the portfolio grows, we are able to leverage our capital base a little more efficiently versus earthquake, which is very capital intensive. As we get to diversify the base and use our capital a little more efficiently, that helps the ROE. The thing we do not talk about a lot, but when you talk about thinking out years, is also our investment leverage. We have a very low investment leverage. As our retention increases and our portfolio diversifies, investment leverage will also come into play. We will be able to use that as part of our earnings growth as well.

Mac Armstrong: Yes. Just to echo what Chris is saying, if you just look at, I think that is important to point out too, the sustainability with these margins. Our net reserves as a percentage of surplus is under 30%, and our investment leverage is 1.43%. Compare those to industry averages, you should feel like there is a fair bit of operating leverage in the model.

Jon Christensen: That is great.

Peter B. Knudsen: Second question, just on the fronting business. Is the thought that, without additional fronting operations, essentially, the C served stability out of that unit, prospectively? Because I think we are at the point, I think, where we have lapped the one fronting arrangement that went away. Is that kind of the baseline thinking there?

Mac Armstrong: Yes, Paul, I think our thinking is just fronting is not a strategic focus for us. The premium has declined, as you pointed out. As a result, it is really just not a meaningful reflection of

Jon Christensen: the

Mac Armstrong: operating results of the business and the organizational focus. I think the other thing that is just worth pointing out is the fronting market has evolved to where it is really not a risk-free, fee-generative business. Almost all fronting deals that we see are participatory fronts, and so if they are going to require us to take 20% of risk, it is not a circumstance where we are comfortable. We would rather support a handful of friendly relationships that we have and focus our capital and resources on programs, but also, most importantly, internal efforts.

So, yes, I think it is just the evolution of the fronting market combined with our strategic focus that has led us to this decision to collapse it into the appropriate product categories.

Jon Christensen: Makes sense to me. As you know, I

Peter B. Knudsen: I agree with you. Yes. Yes.

Mac Armstrong: I think you have told me once you are picking up nickels in front of a steamroller. So

Paul Newsome: Was a lost on it.

Jon Christensen: Thank you.

Operator: Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question.

Meyer Shields: Great. Thanks so much. Mac, one quick question on the guidance, and I apologize if I missed this. What are the cat excess of loss attachment points that are embedded in the 2026 guide?

Mac Armstrong: Yes. Hey, Meyer. Good question, and we did not offer it, but we will. It assumes the retentions remain at the same levels as expiring. So a wind retention in around $5,000,000, and earthquake just several million dollars above that.

Jon Christensen: Yes. Okay. Alright. That is a good place to start from. With regards to the engineering,

Meyer Shields: does that require new distribution relationships, both in general and with regard to data centers?

Jon Christensen: Well, it

Mac Armstrong: can leverage existing distribution relationships, but it does bring new ones to bear, and that is why we hired Matt. Matt actually was at Willis Towers Watson before he joined us and has a longstanding history of writing with the traditional alphabet houses here. But then there will also be a lot of wholesale-produced business, which is kind of our bread and butter for commercial property. So it is a combination of the two.

Jon Christensen: Hey, Meyer. This is Jon. One of the things to think about with regard to distribution with what Matt brings on in the engineered space is, up until he came on board in the fourth quarter, we were covering all corners of that builders risk market, from small single-family homes all the way through commercial property, with the exception of engineered risk. So now, as we think about the way that we face our distribution, we really come with a full solution across that inland marine department to be able to service all major components of builders risk in the U.S. market.

Meyer Shields: Okay. Thanks, Jon. That is very helpful. And then one last question. I just wanted to get a sense of current and maybe planned retentions on the casualty quota share.

Mac Armstrong: So the casualty quota shares, we renewed that and kept our retentions flat year over year. That is at 01/01, so it is kind of locked in for the next twelve months. We can write up to a $10,000,000 limit within that treaty. The average net, though, is going to be, typically our average gross limit is going to be three, and the average net will be less than $1,000,000.

Meyer Shields: Okay. Understood. Thanks so much.

Peter B. Knudsen: Thanks, Meyer.

Operator: Thank you. And we have reached the end of the question and answer session. I would like to turn the floor back over to Mac Armstrong for closing remarks.

Mac Armstrong: Thank you, operator, and thank you, everyone. I appreciate your time and support of Palomar. As I close the earnings call, I want to thank our incredible team here at Palomar. Your execution and work in 2025 was

Pablo Singzon: was

Mac Armstrong: exemplary. As evidenced by the strong guidance for 2026, we feel great about our prospects, and we look forward to sharing our success with our investors in 2026 and beyond. Have a great day. We will speak to you soon.

Jon Christensen: Thank you. And this concludes today's

Operator: conference, and you may disconnect your line at this time.

Jon Christensen: Thank you for your participation.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has positions in and recommends Palomar. The Motley Fool has a disclosure policy.