Palomar Q4 Earnings Surge but DeepValue Warns of Unsustainable Growth Amid Cyclical Tailwinds

What happened

Palomar Holdings reported strong fourth-quarter 2025 results, with net income rising 61% year-over-year to $56.2 million and adjusted net income reaching $61.1 million, driven by premium growth and low catastrophe losses. However, the DeepValue master report highlights that these results benefit from unusually benign catastrophe activity and favorable reinsurance costs, which are cyclical and may not persist. The company's strategic shift toward higher-risk lines like crop and casualty has increased net retention, exposing it to potential normalization in loss ratios as weather patterns or reinsurance markets adjust. Despite the impressive headline numbers, underlying expenses are rising faster than premiums, and the stock trades at a premium valuation of 19.5x EPS, embedding optimistic assumptions. This context suggests that while operational performance is robust, it masks vulnerabilities that could surface in less favorable conditions.

Implication

Palomar's Q4 beat underscores its growth trajectory but does not mitigate core risks such as rising net exposure and dependence on soft reinsurance cycles, which could tighten. At current valuations, the stock prices in continued high growth, leaving little margin for error if loss ratios revert toward industry norms or crop/surety integrations falter. The reinsurance market, while currently favorable, is pro-cyclical, and any hardening could increase costs or retentions, pressuring underwriting margins. Execution challenges in scaling new lines and acquisitions add complexity, potentially leading to reserve surprises or expense overruns. Therefore, existing holders might consider trimming on strength, while new investors should wait for a pullback below $110 or clearer evidence of sustained underwriting discipline through a tougher loss environment.

Thesis delta

The Q4 results confirm Palomar's ability to capitalize on favorable conditions, but they do not alter the fundamental thesis that valuation is stretched and growth is reliant on cyclical tailwinds. If anything, the performance reinforces concerns about sustainability, as earnings quality remains tied to low catastrophe losses and reinsurance softness that may not last. No shift in the POTENTIAL SELL rating is warranted; instead, monitoring loss ratios and June 2026 reinsurance renewals becomes even more critical to assess downside risks.