Palomar Holdings' Q3 Outperformance: A Strategic Catalyst for Long-Term Investors?

In the third quarter of 2025, Palomar Holdings, Inc. (NASDAQ: PLMR) delivered a performance that has sparked renewed interest among investors. With net income surging to $51.5 million, or $1.87 per diluted share, and adjusted net income rising 70% year-over-year to $55.2 million, the company has demonstrated robust earnings momentum according to its Q3 2025 results. This outperformance, coupled with a strategic acquisition and a valuation that appears undervalued relative to its growth trajectory, raises the question: Is Palomar Holdings positioned to deliver sustained value for long-term investors?

Earnings Momentum: A Foundation for Growth

Palomar's Q3 results reflect a combination of disciplined underwriting and favorable market conditions. Gross written premiums jumped 43.9% to $597.2 million, while net earned premiums grew by 66.0%. These figures underscore the company's ability to scale its operations without compromising profitability. The adjusted combined ratio of 74.8%-a key metric for insurers-improved from 77.1% in Q3 2024, indicating better control over loss costs and expenses.

The company's underwriting discipline is further highlighted by its underwriting income of $49.2 million, driven by a 25.6% annualized adjusted ROE. Such metrics suggest that Palomar is not merely benefiting from a one-time surge in premiums but is building a sustainable model. As stated by a report from Seeking Alpha, the company's ability to exceed Wall Street's revenue and earnings estimates by 64.8% and 24.8%, respectively, has reinforced investor confidence.

Strategic Acquisitions: Diversifying the Portfolio

Palomar's acquisition strategy has emerged as a critical catalyst for its growth. In October 2025, the company announced the acquisition of The Gray Casualty, a move designed to strengthen its presence in the surety and crop insurance markets. This acquisition aligns with Palomar's long-term goal of diversifying its revenue streams and reducing reliance on any single line of business.

The Gray Casualty's expertise in surety-a niche but stable insurance segment-complements Palomar's existing crop insurance operations. As noted by a report from Stock Titan, the integration of this acquisition is expected to enhance Palomar's long-term profitability and provide a buffer against sector-specific volatility. Additionally, the company has raised its full-year 2025 adjusted net income outlook to $210 million–$215 million, a 6% increase from its previous guidance, reflecting optimism about the synergies from this and other strategic moves.

Valuation Sustainability: A Balancing Act

While Palomar's financial performance is impressive, its valuation metrics present a nuanced picture. The company currently trades at a P/E ratio of 19.89, which, as InvestingPro notes, is relatively low given its 53% year-over-year revenue growth and 22% ROE. This suggests the stock may be undervalued, particularly when compared to peers in the specialty insurance sector.

However, risks remain. Attritional losses rose to 31.5% of earned premiums in Q3 2025, up from 20.2% in the prior year. While this increase is partly attributable to a shift in premium mix, it highlights the need for continued underwriting rigor. Additionally, the adjusted combined ratio excluding catastrophes widened to 74.0% from 67.6%, a trend that could pressure margins if loss ratios continue to rise.

Palomar's balance sheet offers some reassurance. With $1.3 billion in cash and invested assets and $112.7 million remaining under its share repurchase authorization, the company has the financial flexibility to navigate near-term challenges. Share repurchases in Q3 totaled $37.3 million, signaling management's confidence in the stock's intrinsic value.

Conclusion: A Strategic Play for Patient Capital

Palomar Holdings' Q3 outperformance is not an isolated event but part of a broader strategy to build a diversified, high-margin insurance platform. The acquisition of The Gray Casualty and the company's strong underwriting metrics position it to capitalize on long-term trends in specialty insurance. While valuation risks exist-particularly around attritional losses-the company's financial strength and disciplined approach to growth make it an intriguing candidate for long-term investors.

As the insurance sector faces ongoing volatility, Palomar's ability to balance aggressive expansion with operational discipline will be key. For now, the numbers suggest that the company is on a path to sustained profitability, provided it can maintain its current trajectory.