AM Best, the global credit rating agency, has revised the outlook to stable from positive and upgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb” (Good) from “bbb-” (Good) of Palomar Holdings, Inc., the insurance holding company and its subsidiaries.
The subsidiaries include Palomar Specialty Insurance Company (PSIC), Palomar Excess and Surplus Insurance Company (PESIC), and Palomar Specialty Reinsurance Company Bermuda Ltd. (Palomar Re).
They have all received an upgraded Financial Strength Rating to A (Excellent) from A- (Excellent) and the Long-Term ICRs to “a” (Excellent) from “a-” (Excellent).
AM Best explained that the ratings are driven by Palomar’s very strong balance sheet strength, limited business profile, and appropriate enterprise risk management (ERM).
Palomar’s recent strong operating performance compares favourably to composite averages, reporting net income in the last five calendar years, and achieving comparatively greater profitability in more recent years.
Other drivers include a combined ratio based on GAAP reporting well below 90 over the last three years, which has improved the five-year average to the mid-80s, and strong return measures.
In recent years, management has actively evaluated and culled the portfolio to ensure adherence to strict underwriting standards, resulting in a comparatively favourable loss experience, though balanced by an elevated expense ratio.
Palomar recorded material premium growth, primarily driven by quake coverage. Management also has considerable experience underwriting other areas of premium growth, including general and excess casualty, as well as professional liability. AM Best expects strong performance despite the growth of ancillary lines of business.
According to Best’s Capital Adequacy Ratio (BCAR), Palomar’s overall balance sheet strength is supported by the strongest level of risk-adjusted capitalisation expected to be maintained in future periods. The balance sheet is supported by equity growth in most years, solid liquidity, and positive operating cash flows.
AM Best notes that loss reserve development has been somewhat inconsistent, and reported deficiencies have not had a material impact on the results.
Palomar has elevated reinsurance dependency due to its catastrophe-exposed risk profile, using excess of loss and quota share arrangements strategically to mitigate potential volatility.
The firm underwrites several risks through its admitted and non-admitted entities, primarily focusing on earthquake coverage in California, inland marine, commercial all-risk, and excess property/casualty products.
Palomar’s distribution strategies leverage several channels including retail agents, wholesale brokers, programme administrators and carrier partnerships.
AM Best concludes that, while growth has been significant, an appropriate ERM programme partially mitigates potential volatility.
