U.S. Markets open in 2 hrs 22 mins

This insurance company's stock just exploded on its IPO debut

Brian Sozzi
Editor-at-Large

It may not be as sexy as offering expensive ride-hailing services to drunk 20-somethings after Sunday brunch, but selling hurricane, wind and flood insurance could be a nicely profitable business.

And subsequently, it could make for one heck of an initial public offering. Specialty insurance seller Palomar Holdings (PLMR) skyrocketed as much as 28% on its first day of trading on the Nasdaq Composite on Wednesday.

“It [our business] may not be as glamorous [as Uber, Pinterest] but I do think our business offers some pretty compelling fundamentals in terms of our return on equity, our growth and the fact we have an innovative model in the world of property and casualty insurance,” Palomar founder and CEO Mac Armstrong told Yahoo Finance.

Armstrong founded Palomar in 2014 after amassing years of experience in the insurance industry. He quickly put together a team of veteran insurance executives in an effort to carve out a niche dominated by behemoths such as Warren Buffett’s Berkshire Hathaway.

So far, so good.

What does Palomar do

Palomar is a specialty insurance company that writes premiums for wind, hurricane and floods. The bulk of its business — 67% — is written for hurricane coverage. It’s licensed in 25 states, but not in Florida, the storm capital of the U.S. Armstrong said the pricing dynamics in the Florida market remain unattractive.

Where Palomar gets its advantage from versus the bigger players is through more tailored insurance plans for homeowners. Further, the company’s flood insurance offers up to $5 million in total property coverage compared to most plans at $250,000.

Armstrong isn’t kidding around on Palomar’s strong fundamentals.

Palomar’s gross premiums written almost doubled to $154 million in 2018 versus 2016, according to its prospectus. Net income spiked to $18.2 million last year from $3.8 million the year prior. Return on equity has climbed nicely since 2016 to 20.9%.

The company’s client retention rate for all its products averaged 84% last year, also quite healthy in such a competitive industry.

Armstrong said Palomar is now focused on introducing new products and underwriting premiums in new states.

Why an IPO

“For us, this was a primary capital infusion into the business and our objective was to really continue to execute on the plan we have had the past five years and use the cash to grow the business,” Armstrong said.

There is life beyond the buzzy tech unicorn IPO, people. And it’s your job to find potential winning opportunities such as Palomar.

A lot could be said for profitability... no offense, Uber and Lyft.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

Read more