Initiated 2026-09-28 · Price $123.99 (close 2026-09-25, stockanalysis.com) · Mkt cap $3.25bn · Financials / specialty P&C insurance · Model: verified

Rating: Hold — Conviction: Low

Palomar is compounding fast: Q2 gross premium +27%, adjusted ROE 26%, and 2026 adjusted net income guidance raised to $270–280mm. But earnings quality is slipping: commercial earthquake rates fell more than 20%, and growth comes from lower-margin crop, casualty and acquired surety. The stock looks cheap only on adjusted earnings, which exclude stock pay, intangible amortization and cat-bond costs. On GAAP it trades at ~16.7x trailing EPS and 3.3x book. The model's base case sits below the price, which rules out a Buy. Reported underwriting is still well inside the model's fade, so not a Sell. Conviction is Low.

Model value range vs price
Bear $40.08Base $104.95Bull $186.92Price $123.99

Business overview

Palomar writes specialty property and casualty insurance, mostly in the US. Q2 2026 gross written premium was $630.5mm:

Palomar reinsures heavily: Q2 net written premium was 52% of gross. It carries $3.92bn of earthquake limit above a $20mm retention. Earnings turn on three things: earthquake and layered-property pricing, the mix shift toward lower-margin lines (the loss ratio was 33.9% in H1 against 24.7% a year earlier), and reinsurance cost.

Competition

Bull case

  1. Diversification compounds. Casualty GWP rose 36.8%, crop guidance went to more than $400mm (from ~$320mm), and Gray Surety GWP rose 236% in its first full quarter. The "Palomar 2X" plan aims to double earnings while keeping ROE above 20%. Plays out if casualty and surety keep growing faster than earthquake shrinks. Model: npe_growth
  2. Underwriting discipline holds. Management expects a mid-70s adjusted combined ratio for 2026 and renewed 14 treaties at "better or existing economics". It says it will "sacrifice premium for profitability". Plays out if earthquake pricing bottoms, as the CEO suggests, and cat losses stay near the $8–12mm guide. Model: combined_ratio
  3. Float earns more. Net investment income rose 49% in Q2, to a ~5.0% annualized yield on a portfolio that grew 25% in H1. Plays out if the 10Y stays near 5%. Model: investment_yield, ia_growth

Bear case

  1. Earthquake and property pricing keep falling. Property is ~50% of the book. Commercial earthquake is already down more than 20% and layered property 16%, and management calls some new business sub-technical. Plays out if 2027 reinsurance and primary rates fall again. Model: npe_growth
  2. The mix gets worse. Crop runs at ~100% net combined ratio. Casualty is unseasoned (84% IBNR) and growing 37%. The GAAP combined ratio already rose 7.7 points, to 83.8% in H1. Plays out if casualty develops adversely as it seasons. Model: combined_ratio
  3. Tail and reinsurance risk. One large California earthquake would test the reinsurance tower and reprice it. The 0.38 beta does not capture that. Model: cost_of_equity

Valuation & balance sheet

Metric (definition) Current Own history (range or 5y avg) Peers Source, as-of
P/B (book $37.46/share, June 2026) 3.31x (P/TBV ~4.4x on $744mm tangible book) $15.37–$35.54 BVPS FY2022–FY2025 KNSL 3.70x · RLI 2.92x · SKWD 1.92x stockanalysis.com, 2026-09-28; Q2 release
Forward P/E (stockanalysis consensus, adjusted) 11.4x (12.2x on guidance midpoint $275mm ÷ 27.06mm) GAAP trailing 16.7x KNSL 15.5x · RLI 20.9x · SKWD 10.5x stockanalysis.com, 2026-09-28
Combined ratio (GAAP / adjusted) 83.8% / 76.3% H1 2026 76.1% / 70.9% H1 2025 n/a (unverified) Q2 2026 release
ROE (TTM, GAAP) 22.2% adjusted 26.3% Q2 annualized KNSL 30.3% · RLI 25.2% · SKWD 17.3% stockanalysis.com, 2026-09-28

Model-implied value range (from model-summary.json; insurer module, residual income and justified P/BV, midpoints): Bear $40.08 · Base $104.95 · Bull $186.92 per share, i.e. implied returns of −67.7% / −15.4% / +50.8% vs $123.99. These ranges show how the bull and bear drivers translate into value; they are not price targets.

Balance sheet:

Model note: tier full, status built, verification verified (LibreOffice recalculation matched all 2,846 formula cells). No assumptions without basis. Scenario consistency is OK on all 14 rows; S4's effect was corrected from + to ± after the model showed the cost-of-equity drag outweighs the yield gain.

Scenario stress test

Reasoned from the bull/bear drivers above. The model column comes from the scenario overlays (Base case + shock).

Scenario Effect Mechanism Magnitude Model Δ value vs Base ($/sh)
S1 Fast equity crash − Risk-premium spike; mostly fixed-income portfolio; no operating channel Low −$5.13
S2 Slow bear / recession − Builder's risk and commercial exposures shrink, yields fall, surety losses rise. Much milder than Base − Bear ($64.87) because the bear case is a pricing and reserve cycle, and recessions do not cause earthquakes or crop losses Low −$5.79
S3 Rapid rate shock ± Higher reinvestment yields vs a higher cost of equity; AOCI mark not modeled Med −$12.70
S4 Slow rate grind ± Higher reinvestment yields roughly offset by a higher cost of equity Low −$0.96
S5 Soft-landing cuts ± Lower yields vs a lower cost of equity Med +$10.57
S6 Recession-driven cuts − Yields fall and the insured base shrinks Low −$3.66
S7a Credit liquidity shock − Risk-off; bond marks proxied in a higher cost of equity Med −$14.07
S7b Slow default cycle − Contractor defaults hit the Gray surety book; portfolio credit losses Low −$2.90
S8 Stagflation − Replacement-cost inflation on property and builder's risk, and casualty loss trend, outrun pricing Low −$6.46
S9a Dollar spike 0 No material effect, not modeled; domestic insurer Low $0.00
S9b Dollar slide 0 No material effect, not modeled Low $0.00
S10 Melt-up + Risk appetite lowers the cost of equity Med +$11.94
S11 Energy supply shock − Motor truck cargo and crop input costs; small Low −$0.36
S12 Mega-cap/AI derating 0 No material effect, not modeled; fixed-income portfolio, no tech exposure Low $0.00

No scenario moves base value by more than ~14%, so nothing is labelled High. Currently active/on watch per the playbook: S3 is partially active per state.md, and the macro log records all three legs crossed (10Y 5.17% on 2026-09-25). S8, S10 and S11 are on watch.

Model value change vs Base, by scenario
S7a Credit liquidity shock−$14.07S3 Rapid rate shock−$12.70S8 Stagflation−$6.46S2 Slow bear / recession−$5.79S1 Fast equity crash−$5.13S6 Recession-driven cuts−$3.66S7b Slow default cycle−$2.90S4 Slow rate grind−$0.96S11 Energy supply shock−$0.36S9a Dollar spike$0.00S9b Dollar slide$0.00S12 Mega-cap/AI derating$0.00S5 Soft-landing cuts+$10.57S10 Melt-up+$11.94

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