With other carriers exiting California earthquake insurance landscape, and the state’s market of last resort raising rates, insurer Palomar Holdings sees an opportunity to double down and grow its quake risk book.
“The dislocation in the earthquake market, whether it be a function of rising reinsurance costs, reductions in claims paying capacity and coverage at the CEA (California Earthquake Authority), or the exodus of homeowners markets from California, is becoming more pronounced,” said CEO Mac Armstrong. “This continues to afford Palomar the opportunity to both grow and optimize its book of business.”
Armstrong told analysts during its second quarter earnings call that California earthquake remained a “core franchise” for the insurer, growing 24% for the quarter. He added that residential earthquake book grew 20% and its commercial earthquake book grew 29%.
Palomar said it its is backing quake growth with a just recently purchased $550 million reinsurance limit that he argues provides “ample capacity for our growth” and exceeds its s 1:250-year peak zone probable maximum loss.
Armstrong said that Palomar is structuring its reinsurance program specifically for earthquake expansion while keeping the insurers’ probable maximum loss to $100 million.
“At that level, we feel that it is a sustainable where we can maintain a manageable reinsurance expense,” he told analysts, adding that a 20 point increase in reinsurance costs would be targeted at growing the quake book.
“It obviously was up meaningfully. And I think it's one thing that I'd point out is if you look at the relative cost of all-peril and wind reinsurance versus earthquake, it's double. So we're focusing more of our cat dollars on earthquake.” Armstrong said.
Growing its quake risk book in the current environment make sense, even though Palomar is also growing its risk and reinsurance expense, said president Jon Christianson.
“The disruption that we've seen to date in that homeowners market in California has not translated into anything unusual with our residential earthquake book,” he told analysts,. “Our book has been very predictable, and our partnerships remain very strong in the state of California. So we have not seen anything that would indicate a disruption to a very predictable and profitable line of business for us.”
Palomar reported s adjusted earnings of 86 cents per share for the second quarter , compared to Wall Street expectations of 83 cents per share. The insurers said that revenue rose 25.4% to $274 million from a year ago; analysts expected $302.16 million.
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