Palomar's Q4 2025 Earnings Meet Guidance but Reveal Creeping Loss Ratios and Heightened Execution Risks

What happened

Palomar's Q4 2025 earnings call confirmed full-year adjusted net income of $212 million, aligning with the raised $210–215 million guidance, driven by mid-teens premium growth in casualty and crop lines. However, the loss ratio edged up to 33%, surpassing the ~30% target due to normalized catastrophe activity and early crop losses, signaling potential mean reversion from historically benign conditions. Management highlighted progress on scaling crop premiums toward $500 million and integrating the Gray Surety acquisition, but glossed over the decline in ceded premium percentage, which increases net retention and balance sheet exposure to volatile risks. Other underwriting expenses continued to rise faster than premiums, pressuring operating leverage and underscoring the complexity of rapid expansion. The call maintained an optimistic tone but failed to adequately address cyclical reinsurance risks and the sustainability of underwriting margins in a tougher loss environment.

Implication

The Q4 results validate Palomar's growth narrative but expose early cracks in underwriting discipline, with loss ratios drifting above targets and net risk mounting due to lower ceded premiums. While crop and surety expansions provide diversification, they introduce integration challenges and depend on favorable reinsurance markets, adding layers of execution risk. The stock's premium valuation of 19.5x P/E assumes sustained high growth and low loss ratios, leaving it vulnerable to repricing if catastrophe activity normalizes or crop losses accelerate. Upcoming catalysts like the June 2026 reinsurance renewal and Gray Surety integration will be critical tests of Palomar's risk management and economic moat. Given the crowded bullish sentiment and lack of margin of safety, existing holders should consider trimming, and new investors should wait for a pullback below $110 or clearer proof of underwriting resilience.

Thesis delta

The earnings call reinforces the DeepValue report's bearish thesis, confirming that loss ratios are beginning to mean revert and net risk is increasing, which could pressure earnings and multiples. No material shift in the investment call is warranted; the 'Potential SELL' rating holds, but investors must monitor reinsurance renewals and acquisition integration more closely for early warning signs of further deterioration.