Palomar adds $187.5m of quake XOL, cancels agg on lower hurricane exposure

Palomar Insurance Holdings, the speciality California-headquartered insurer that offers largely catastrophe exposed property products, has added an additional $187.5 million in earthquake excess-of-loss reinsurance to support continued growth of its business.

At the same time, Palomar has revealed that it elected to non-renew its aggregate reinsurance coverage, citing less utility with this layer of protection as the company has been pulling-back a little on its US hurricane exposures.

Palomar has secured certain excess of loss (XOL) reinsurance treaties that are designed to support and provide incremental limit for its earthquake line of business.

Approximately $187.5 million of incremental XOL reinsurance limit has been secured across a syndicated panel of Palomar’s long-term reinsurer trading partners.

The earthquake reinsurance treaties will incept between April 1st 2023 and June 1st 2023, providing Palomar with coverage through June 1st 2024.

“We are pleased with the continued and incremental support from our long-time reinsurance partners as we successfully secured approximately $187.5 million of additional XOL limit to support our growth in what remains a very attractive market for earthquake insurance,” Mac Armstrong, Chairman and Chief Executive Officer of Palomar explained. “Importantly, the market for our reinsurance was orderly and the pricing was in-line with the expectations that we outlined on our fourth quarter earnings call. This limit affords us the ability to both grow and optimize our earthquake book of business and execute on our Palomar 2X strategic plan.”

The earthquake XOL reinsurance will serve as additional capacity to support the ongoing expansion of Palomar’s business.

But, on the other side of it, the company has been pulling-back on its US hurricane exposure, which means the aggregate reinsurance treaty it had put in place for the last few years is no longer as useful to the company.

Armstrong further explained, “Delivering predictable earnings remains a strategic priority for our team. To achieve this, we have been executing a multi-year strategic plan designed to reduce volatility in our book of business and most notably contract our exposure to continental U.S. hurricane risk.

“The reduction in our continental hurricane exposure not only makes a positive impact on our risk profile but also diminishes the utility of our current aggregate XOL reinsurance treaty. As such, we opted to non-renew our aggregate cover.”

Of course, alongside the change to Palomar’s exposure profile, the current pricing for aggregate reinsurance could also have been a driver here, making the treaty less attractive, given its utility has lessened somewhat.

But Palomar’s CEO pointed to the potential to add back an alternative form of aggregate reinsurance protection against multiple severe events, which could potentially include adding an aggregate tranche in Palomar’s next catastrophe bond, which might prove a more efficient way to secure frequency protection, if issued as part of the next in its series of Torrey Pines cat bonds.

Armstrong said on the aggregate reinsurance, “While there were compelling coverage offers from existing reinsurers, we will pursue alternative forms of risk transfer that provide protection from multiple severe events. I would like to personally thank all our reinsurance partners for their support as we continue to build Palomar into a premier specialty insurance company.”