Palomar Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Palomar Holdings, Inc. 2nd Quarter 2023 Earnings Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference line will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded.

Operator

I would now like to turn the conference call over to Mr. Chris Ichida, Chief Financial Officer. Chris, please go ahead, sir.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate your participation in our Q2 2023 earnings call. With me here today is Mac Armstrong, our Chairman and Chief Executive Officer. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11 Within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans and prospects.

Speaker 1

Such statements are subject to a variety of risks, uncertainties and other factors that GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U. S. GAAP. A reconciliation of these non GAAP measures to their most comparable GAAP measure At this point, I'll turn the call over to Mac.

Speaker 2

Thank you, Chris, and good morning, everyone. I'm very pleased with the strong results of Palomar's Q2. Our team successfully executed our Palomar 2X strategy of profitable growth, Even in the teeth of elevated catastrophe activity and historically hard reinsurance market that significantly impacted the insurance industry. In the quarter, we focused our capital and resources towards targeted segments of our book of business like earthquake, in the marine and casualty to maximize our risk adjusted returns, While we continue to reduce exposure to segments of our book that add volatility to our results. This prudent approach resulted in gross written premium growth of 25%.

Speaker 2

When excluding the drag from run up and deemphasized products, this growth rate was an even more impressive 44%. Importantly, we delivered an adjusted return on equity of 21.3% in the Beyond the strong financial results, the quarter featured several noteworthy accomplishments that position us well for near and long term success. Namely, we've successfully placed our sixone reinsurance program in line with our expectations and subsequently raised our adjusted net income guidance for the full year. We hired a team of professional liability underwriters to extend our Casualty franchise and attractive niches like real estate E and O. And lastly, in July, we received a revised positive outlook of our rating from A.

Speaker 2

M. Best. Over the course of the Q2, we made incremental progress in 2023's identified strategic objectives, sustaining profitable growth, managing the dislocation in the global insurance market, enhancing earnings predictability and scaling the organization. Looking forward, we will continue to execute these imperatives, but look to convey their progress to 5 key lines Business that will drive the value of Palomar over the medium term. Those lines of business are earthquake, inland marine and other property, Casualty, fronting and crop, our newest product.

Speaker 2

So with that, I'd like to walk through each business beginning with our earthquake franchise, In line with the Q1 and our commercial earthquake group grew 29%. The dislocation in the earthquake market, Whether it be a function of rising reinsurance costs, reductions in claims paying capacity and coverage at the CEA or the exodus of homeowners' market California is becoming more pronounced, which continues to afford Palomar the opportunity to both grow and optimize its book of business. During the quarter, we saw commercial accounts renewed at a risk adjusted increase of 24%, which was a 25% sequential increase from the prior quarter. Additionally, our E and S Residential Earthquake business grew 75% year over year. At the end of the second quarter, E and S policies Due to the total of 8.8 percent of in force California residential earthquake premium.

Speaker 2

We expect this environment to remain a tailwind for our business through the second This year and into next year. Lastly, in the quarter, we entered into a partnership with USAA who will now offer our residential earthquake products in California. This new arrangement not only expands our reach, but also validates our residential earthquake franchise. Turning to inland marine and other property products, In the marine experienced growth of 54% year over year through a combination of rate increases and new underwriters allowing us to expand our regional and distribution footprint. Builders Risk, our largest in marine product saw 7% to 10% rate increases and expanded its quota share support, allowing us to write larger limits without taking on disproportionate risk as well as add incremental seating commission.

Speaker 2

Our excess property lines are 10% rate increases and over year over year growth as it builds the niche of non cat exposed property business. Importantly, both these products are core to our strategy of maximizing our margins and using prudent risk management to achieve favorable loss ratios. As it pertains to other property products such as commercial always, Hawaii hurricane and flood, we're hyper focused on exposure management and contracting the existing book where necessary. In the case of commercial all risk, we made a significant progress reducing our Continental Hurricane PMI to $100,000,000 Separate led to a 45% reduction premium year over year. However, commercial all roads policies that remain on our books renewed at an average increase of 60% and allowing us to recoup the rising cost of reinsurance.

Speaker 2

Turning to our casualty business, we grew this segment 92% year over year highlighted by strong premium growth professional liability. During the quarter, we integrated our tuck in acquisition, Xeo Insurance Services and a group of experienced underwriters and claim professionals to help extend the real estate E and O and miscellaneous professional liability franchises. Taking a surgical approach to the build out of the casualty business that involves hiring underwriting talent with longstanding history and expertise in targeted niches and geographies. From an underwriting standpoint, the Casualty Books loss performance continues to remain stable. Our focus on limit management and avoiding severity exposed risks has enabled this performance.

Speaker 2

Our thoughtful underwriting approach was validated with approved terms and conditions at the renewal of our 41 casualty quota share treaty. Turning to Palomar Front, we grew this business at a strong pace, delivering 82% growth over the prior year. During the Q2, 2 of our front programs renewed their reinsurance with incremental capacity support, a demonstration of their quality and sound underwriting performance. While our growth from Frontine is favorable, we want to reiterate our strategic approach to Frontine detailed last quarter. The goal of our funding effort is to provide services to a select With MGA's carriers and reinsurers, while we can gain experience on the lines of business to further our diversification in the specialty markets.

Speaker 2

We closely manage the compliance, oversight, reinsurance and collateral of our 7 front team partners. This is a focus and strategic approach. We maintain a risk participation on selected partners with the current maximum participation of 5%. Our approach has allowed us Quickly assess and limit our counterparty exposure to potentially fraudulent letters of credit and transactions arranged by Vestu. Fortunately, our exposure is limited to a single counterparty and is immaterial.

Speaker 2

Our foray into the crop market was via fronting arrangement with advanced Ag Protection and leading crop MGA. As I mentioned last quarter, this is a partnership that we are particularly excited about. At this time, we are finalizing a strategic investment in Advanced Ag Protection that further aligns our organizations and our prospects' ability to meaningful presence in crop insurance. 2 members of our executive John Christiansen and John Knutson have extensive experience in the crop market. Upon consummation of the deal, John Christiansen will join the Board of Directors of Advanced Ag Protection.

Speaker 2

Palomar is now one of only 13 approved insurance providers with access to the $20,000,000,000 insured crop marketplace. We expect to generate Crop written premium in the Q3 and that Crop insurance will be a significant contributor to our growth in 2024 as we generate a combination of both And underwriting income. Our goal is for Crop to prove the core pillar of Palomar 2x. Turning to our reinsurance program. As announced in June, we successfully completed our 6 one core reinsurance program renewal.

Speaker 2

Pricing was in line with our expectations and we're able to preserve event retentions and exhaustion points at historic levels that we view as sacrosanct. Our retention of $17,500,000 remains less than 1 quarter's earnings and less than 5% of the company's surplus. Coverage now exhausted $2,680,000,000 for earthquake events, $900,000,000 for Hawaii hurricane events and $100,000,000 for all Continental United States hurricane events. The $550,000,000 of incremental The reinsurance limit procured over the course of 2023 provides ample capacity for our growth in the subject business line as well as coverage to a level exceeding Palomar's 1 in 2 50 year Importantly, our XOL program is in place until June 1, 2024. The Reinsurance placement combined with our strong first half results led to the recent upgrade of Palomar and our subsidiaries to a positive outlook by A.

Speaker 2

M. Best. Lastly, we are updating our 2023 adjusted net income guidance to $89,000,000 to $93,000,000 This updated guidance reflects catastrophe losses incurred in the 1st and second quarter of approximately $4,000,000 With that, I'll turn the call over to Chris to discuss our results in more detail.

Speaker 1

Thank you, Mac. Please note that during my portion, when referring to any per share figure, I'm referring to per diluted common shares calculated using the treasury stock method. This methodology requires us to include common share equivalents such as outstanding stock options during profitable periods and exclude them in periods where we incur a net loss. As a reminder, beginning the Q4 of 2022, we have modified our definition of adjusted net income, diluted adjusted EPS and We have modified the current and prior period figures accordingly. For the Q2 of 2023, our net income was $17,600,000 or $0.69 per share compared to net income of $14,600,000 or $0.57 per share for the same quarter last year.

Speaker 1

Our adjusted net income was $21,800,000 or $0.86 per share compared to adjusted net income of $22,400,000 or $0.87 per share for the same quarter of 2022. Our 2nd quarter adjusted underwriting income was $23,100,000 compared to $24,800,000 last year. Our adjusted combined ratio was 72.2% for the Q2 compared to 69.1% in the Q2 of 2022. For the Q2 of 2023, our annualized adjusted return on equity was 21.3% compared to 23.7% for the same period last year. The Q2 adjusted return on equity is further validation of our ability to maintain top line growth with a predictable rate of return above our Palomar 2x target of 20%, even during a quarter with very active severe convective storms and in a historically hard reinsurance market.

Speaker 1

Gross written premiums for the Q2 were $274,300,000 an increase of 25.4% compared to the prior year's Q2. Excluding deemphasized and current runoff products, our written premium growth rate was 44% for the quarter. Net earned premiums for the Q2 were $83,100,000 an increase of 3.5% compared to the prior year Q2. For the Q2 of 2023, our ratio of net earned premiums as a percentage of gross earned premiums was 34.3% compared to 50.8% in the Q2 of 2022 and compared sequentially to 37% in the Q1 of 2023. These results reflect the expected decrease due to our growth of lines of business that use quota share reinsurance, including fronting and the increased cost of our Losses and loss adjustment expenses for the Q2 were $17,900,000 including $2,200,000 of catastrophe losses from severe convective storms during the quarter, slightly offset by favorable prior year catastrophe development.

Speaker 1

The loss ratio for the quarter was 21.5 percent comprised of an attritional loss ratio of 18.9% and a catastrophe loss ratio of 2.6%. Based on our year to date loss ratio of 23.2%, we expect a loss ratio of 21% to 24% for the year, including the catastrophe loss from the first half of the year. The expected range excludes large catastrophe events in the second half of the year, but includes many catastrophes and aligns with how we provide our adjusted net income guidance. Our acquisition Expense as a percentage of gross earned premium for the Q2 was 10.8% compared to 18.1% in the Q2 last year and compared sequentially to 11.4% in the Q1 of 2023. Additional ceding commission and fronting fees continue to drive the improvement.

Speaker 1

The ratio of other underwriting expenses, including adjustments to gross earned premiums for the Q2 was 6.9% compared to 8.5% in the Q2 last year and compared sequentially to 6.8% in the Q1 of 2023. Continued improvement compared to last year and in line with our go forward sequential expectations as we invest in underwriting through people and operations. We continue to expect long term scale in this ratio. Our net investment income for the Q2 was $5,500,000 an increase of 76.5% compared to the prior year's Q2. The year over year increase was primarily due to higher average balance of investments held during the 3 months ended June 30, 2023, due to cash generated from operations and a mix shift of invested assets from lower yielding investment Assets into higher yield and investment assets with a similar credit quality.

Speaker 1

Our yield in the second quarter was 3 point 1% compared to 2.61% in the Q2 last year. The average yield on our investments made in the 2nd quarter remains above 5%. Our commercial real estate exposure in our investment portfolio is minimal, less than 3% of our portfolio and does not include any direct loan. We continue to conservatively allocate our positions to asset classes that generate attractive risk adjusted returns. During the quarter, we repurchased 164,000 shares of our stock for a total of $8,700,000 under our 2 year $100,000,000 share repurchase program.

Speaker 1

As of the end of the quarter, we had $50,000,000 of our authorized share repurchase remaining and we will continue to use opportunistically as we view our share prices undervalued. At the end of the quarter, our net written premium to equity ratio was And opportunistically buy back shares. As Mac mentioned, we are updating our 2023 adjusted net income guidance range $89,000,000 to $93,000,000 an increase from $88,000,000 to $92,000,000 This range includes approximately $4,000,000 of net catastrophe losses incurred during the first half of the year, but does not include additional catastrophe losses for the remainder of the year. On a gross earned premium basis, We expect our net earned premium ratio and acquisition expense ratio to continue to decrease in the second half of twenty twenty three from the levels reflected in our second quarter results. After our recent successful reinsurance placement, our net earned premium ratio should be at its lowest point in the 3rd quarter, the first Full quarter under the new reinsurance placement.

Speaker 1

Additionally, based on the current market, our effective tax rate for the year may remain elevated between 22% Before opening the call for questions, I would like to note that John Christiansen, President of Palomar With that, I'd like to ask the operator to open the line for any questions. Operator?

Operator

Thank you. We'll now be conducting a question and answer session. Our first question is coming from Traci Ben Gigi from Barclays. Your line is now live.

Speaker 3

Thank you. Good morning or good afternoon. Your attritional loss ratio of 18.9% was below Your guide of 22% to 24% for 2023, could you unpack that a little bit?

Speaker 1

Yes. Thanks, Tracy. That's a good question. When we look at our loss ratio for the quarter, obviously, we're happy with the results. The overall loss ratio was 21.5%.

Speaker 1

If you Put back in the prior period development, that loss ratio moves up a little bit to 22.3% for the quarter, which I would say is in the low range of the guidepost we gave out of 22% to 24%. Binny cats for us were elevated this quarter, causing us To put those losses or severity and magnitude of those events caused us to put some of those losses into catastrophes as you saw that loss ratio For the quarter being about 2.6%. So overall, we feel good about those results. The loss ratio was a little bit better. I So still better than expected, but overall everything is in line with how we feel about the year.

Speaker 1

I think the one thing you'll notice on the prepared remarks, we did We've decreased the bottom of the range for the full year. We went to 21% to 24%, reflecting what we've seen in the first half of the year, but still expecting Those loss ratios to improve in the latter half of the year and then into Q1 next year.

Operator

Tracy, this is Mac. Tracy, this is Mac.

Speaker 3

Tracy,

Speaker 2

Go ahead. This is Mac. I think pricing is contributing to that. I think it's also part of our concerted efforts to Run off certain segments of the book. And that's why I know one of the things that you were focused on was the growth.

Speaker 2

We grew 44% in the areas that we are investing in and we're thrilled with that. But one of the benefits of running off Some of these lines are deemphasizing, some of these lines like all risk is that it does improve the loss ratio. Even in the second quarter, All risk, which declined close to 40% year over year, it still had $1,000,000 of cat And it has a higher attritional loss than certainly the 21% that we blend out to. So one of the positives and one of the reasons why we are running off some of these Books that have higher volatility, is that they also have higher loss ratio. So that's also a meaningful contributor to why the loss ratio It was what it was this quarter and why we think, and Chris has always said, we expect it to continue to go down somewhat over the course of this year and certainly into 2020

Speaker 3

Okay. My next question, I'd like to talk about the durability of your fronting program In light of higher reinsurance costs and increased market concern about reinsurance counterparty risk, particularly on collaterals?

Speaker 2

Yes. So I'd be happy to do so, Tracy. And it's a timely and smart question. We're seeing strong growth from Targeted front team partners. We have, as I mentioned in my remarks, we have 7 of them.

Speaker 2

So we take a rifle shot approach, which allows us to manage these partners Closely and frankly, collaboratively, it's more like an underwriting relationship. So it's a pillar and segment where we're seeing Nice considerable growth, but that percentage of the premium that it can constitute is not the same from adjusted net income. So it's a nice segment It allows us to be disciplined and prudent with new partners and who we bring on. We can be very selective. I think the one thing that certainly with the shakeout of what's happening in the Frontier market broadly with Vestu, Our exposure is immaterial.

Speaker 2

We're able to get in front of this really quickly and we understand not just our exposure but our remedies And those remedies are several. I think for us, we continue to Look closely at how we manage these programs and how the industry will Shake out to our reinsurance programs for our Frontier Partners renewed with increased support and consistent economics in the Q2. We also had one successfully renewed at the 1st part of the Q3, Septin and July 1. So I think there will be consequences. I think for us though, we it's probably a net positive for Palomar because 1st and foremost, we're an underwriting organization.

Speaker 2

We're already seeing submissions From program submissions from MGAs that are looking for potentially a new fronting partner, we're also in seeking potentially more stable fronting We've also seen submission flow uptick in a few casualty lines from MGA backed Rather, renewals coming away from MGAs that have potential collateral exposure to us, just in the open market With our casualty segment. So all in all, we won't deviate from our fronting strategy. If anything, our blended strategy and our targeted strategy is affirmed And I think it also overall validates our models of reinsurance excuse me as an underwriting organization.

Speaker 3

Thank you.

Operator

Thank you. Next question today is coming from Mark Hughes from Truist Securities. Your line is now live.

Speaker 4

Yes. Thank you. Good afternoon. The earned premium, you had alluded to the Top line growth, you certainly were influenced this quarter by the runoff and deemphasized lines. What should the earned premium growth be given kind of your mix of fronting Underwritten business, how should the earned premium trajectory be?

Speaker 2

Well, Chris can chime in, Mark. This is Mac. And what I would say is that you look at Those kind of 5 segments that we've talked about, we see very strong sustained growth in earthquake. It's growing 20%. I think that's A good rule of thumb for that line.

Speaker 2

And then I think when you look at casualty in the marine, there is Considerable growth. Front team, it's hard to say it's going to sustain a 90% growth rate, but what we like is There is embedded growth with most of our partners here. Some are kind of hitting their critical mass and steady state. But that's all right for us because there's still A nice earned premium ramp for us. So long winded way of saying, I think the growth is going to continue to be strong.

Speaker 2

Expecting it to be 44% might be a bit ambitious, but we feel like that it's a healthy growth vector when you look at the underlying Like in the marine, casualty and obviously quake.

Speaker 1

Yes. And Matt talked about the top line growth of the written premium and obviously that will influence How the grocer and premium grows. I talk about this a lot that the with the change in the mix of business with a lot of fronting and This is the quota share and with the increased excess of loss costs that we will see for the 1st full quarter in Q3 that the net earned premium ratio We'll continue to decrease. It was 34% in the second quarter. It's going to get into the low 30s for Q3 And potentially a little bit in Q4 as well, right?

Speaker 1

So I just want to make sure people think about that as they model it because the excess of lot of reinsurance costs that we've talked about before It was up about 30%, which is as expected as we modeled into our guidance, but I want to make sure people are thinking about that and modeling it correctly when When they think about our net earned premium ratio and the results that we're going to see in the second half of the year, right? Q3 will be the Lowest point of that and then we'll start to scale more as we continue to grow the business, but the excess of loss cost is flat and in place until, sixone of 2024.

Speaker 4

When you look at the renewals that are coming up, you're describing about a 20 point differential between What would have been other than the deemphasizing runoff business, what's going to be the marginal impact in Q3 and Q4? If it was 20 points in Q2, how much of these risk management adjustments going to impact the second half?

Speaker 2

I think it's probably it's markets in and around The difference between maybe 10 to 14 points overhang of the growth. The homeowners business will be out by the Q3. The all risk is over the course of the year.

Speaker 4

Okay. So

Speaker 2

if we look at all rents, what we're really trying to solve for is getting the PML Down to $100,000,000 and it's basically there. And at that level, we feel that it is a Sustainable level where we can maintain a manageable reinsurance expense. Obviously, it was up meaningfully and I think it's one thing that I'd point out is if you look at the relative cost of all peril and wind reinsurance versus earthquake, it's double. So we're focusing more of our cat dollars on earthquake. For wind, we want to get it down to $100,000,000 in hurricane PML.

Speaker 2

And I think at that point, we And justify our retention, it's a $4,000,000 AAL at that level, and it has minimal severe convective storm exposure. So that means that there is an opportunity for us to take rate and optimize that book and get it to grow, but that's really not going to start until the Q1 of

Speaker 4

2024. Then finally, the commercial quake business, better pricing, but a little bit of deceleration at the Top line, desalers from very strong growth to strong growth. Anything noteworthy there?

Speaker 2

No, that Mark, it's and John Christians can chime in. But I would say, I mean, through 30% or 29% in the quarter, We want to be mindful of where reinsurance costs were going to shake out and that would inform the PML. And frankly, We want to make sure that we could procure the incremental $550,000,000 of reinsurance support to support the growth that we're seeing. What I'll tell you right now is our metrics have never been better. The capacity in the market is dwindling.

Speaker 2

So, we feel very good about sustaining strong growth in commercial earthquake. But John, anything you'd add?

Speaker 5

Yes. No, I agree with all that. I think we've seen now many quarters in a row of that strong rate appreciation in the commercial earthquake segment. And as we look forward to the next few quarters, there's no signs that would suggest that it would decelerate.

Speaker 2

Great. Thank you. Thanks, Mark.

Operator

Thank you. Next question is coming from David Motomagen from Evercore ISI. Your line is now live.

Speaker 6

Hi, thanks.

Speaker 7

Just a question on the crop Opportunity, it sounds like you think that will start coming in, in the Q3. I guess, how big do you think that has Yes, the potential to be as another growth lever that we haven't really seen here in the first half. And then how should we think about the profitability profile of that business versus your existing business?

Speaker 2

Dave, yes, this is Mac. And again, I'll let John speak to this. I think there are a few things that I would want to get Across you is, for this year, it's really a startup. We will generate some premium In the Q3 and in the second or the second half of the year, but it's more fronted. So it's really going to be a fee generation Product.

Speaker 2

For 2024, we think it can be a meaningful premium. It's a $20,000,000,000 market. We're one of 13 Approved insurance providers. We have terrific in house expertise and a terrific distribution partner in Advanced Ag Protection. We are optimistic that it can become a large contributor to premium In due time, but in 2024, like it has a chance to be high double digit millions of premium.

Speaker 2

Yes.

Speaker 5

And with regard to the profitability aspect of the question, it is a historically profitable line. And importantly, it's uncorrelated with our existing core lines. And it has a short tail and a combined exposure period with strong reinsurance support back in it. So from a profitability standpoint, we feel it pulls in nicely with the other lines of business that we have.

Speaker 2

I think the one thing that I would add to that, David, I should have brought this up. Next year, we expect we'll take risk on it, but you're talking about just call it conservatively a 10% participation. So it's still going to be a nice balance of fee and underwriting income like we've done with all of our new products. So we're not going to deviate from that strategy. So Nice fee income stream, as well as a nice underwriting income component to it.

Speaker 2

So it may end up being like An 8% to 10% margin in that year.

Speaker 7

Got it. Understood. That's helpful. And then just on the vest The one counterparty where you have exposure, was that something where it just it sounds like it's immaterial in size. Was that something where you just absorbed the what you had reinsured?

Speaker 7

Or is that something where You just replaced the LOC in question.

Speaker 2

So it's for a prior It's sort of 3 d period that has expired. And so we're looking at just what's in trust and what would be our exposure if it goes beyond trust. So if it goes beyond the trust, which we have full control of, that's where our exposure would be. And again, it's Ariel, for everything that's in place right now, Vistu is there's nothing Vistu is not an issue. They're not a reinsurer.

Speaker 7

Got it. Thanks. And then maybe just finally, it sounds like capacity It's definitely not been an issue for the 7 programs, the existing programs. But just wondering on like the future growth of adding New program partners, is there just have you seen a slowdown in the conversations that you've been having with capacity providers? It sounds like MGAs want to partner with you guys, but are you able to secure the capacity on the back end for newer partners?

Speaker 2

No, I mean, I think for us we've been we've had successful reinsurance renewals. We're being very selective in talking to potential new fronting partners. Ultimately, we view these front team partners as people that we're going to take a risk on at some point in time. So we Hold them to a different standard than maybe other markets do. So as a result, we are getting a lot of inbounds.

Speaker 2

We expect that we will add to them in time, but it's going to be a very deliberate addition. But I would say, on the deals with what's been in the press for the last week or few weeks, we're seeing a lot more inbounds. But selectivity has not changed. If not, increased.

Speaker 7

Yes, understood. Thank you.

Speaker 2

Thanks, Dave.

Operator

Thank you. Our next question is coming from Andrew Anderson from

Speaker 8

Just with regards to the fronting program, Mac, I'm not sure if I heard you mention cyber, but Seems from like industry pricing surveys, it's kind of softening a bit. Can you just kind of talk about the appetite there for the fronting program with regards to cyber?

Speaker 2

Sure, Andrew. Yes. Cyber is one of our large partners in the front end arena. And That was the renewal that I referred to that was early 3rd quarter, so it's a 7.1. And so that was successfully placed with great capacity support.

Speaker 2

We have taken modest risk participation there. We have for the last 2 years. Yes, we're watching the pricing. I think for that program, it's one or that product and that We really do view that like we are the underwriter here. And so while it's only a low, mid single digits Participation, we manage it like something that we're taking 30%, 40%, 50% of.

Speaker 2

So on the whole, rates are Certainly down from where they were 2, 3 years ago, but we feel good about the performance. We feel great about the reinsurance support. They got the ability to grow From a revenue perspective or from a premium perspective, so the premium capital has increased. So on the whole, I think it's a line of business that is Well, it certainly requires increasing diligence because of the market conditions, but it's a great partnership.

Speaker 8

Okay. And on the Casualty business, you mentioned an uptick in submissions there. Should we really just think of that as some of the real estate E and O or is it Perhaps some different lines and can you remind us if that's going to largely be on the E and S entity, which looked like the growth was a little bit slower in this quarter?

Speaker 2

Yes, Andrew. Good question on the casualty side. We're pleased with the growth there. It's 92% And it's now approaching it's 4 plus percent of the book. We're being deliberate here though too.

Speaker 2

We are using the E and S company For the predominance of it, we do have a handful of GL business that's on the admitted company and that Tends to be focusing on kind of small to mid market commercial contractors, call it $5,000,000 to $20,000,000 in annual receipts and Predominantly low and moderate hazard stuff. So think about like trade contractors or general contractors that are Schools, we really are trying to avoid classes that have severity on the admitted side or high severity exposure. What I will say is like on the professional lines where that's mostly E and S, it's growing really nicely, but also deliberately. It's targeted Niches that we're going into. Real Estate A and O is the one you highlighted.

Speaker 2

But when we brought on some underwriters in the quarter, a lot of them they spent the quarter ramping up. And now we're starting to see them leverage their expertise, leverage their distribution relationships. Garrett Vanderkamf, who oversees our professional lines, When I were talking recently about a collection agency, E and O program, that he's already starting to write With one of his underwriters that just is just coming on and has nice potential to be a great supplement to the E and O franchise, but very targeted and Thank you.

Operator

Thank you. Next question today is coming from Pablo Singzon from JPMorgan. Your line is now live.

Speaker 6

Hi, thank you. So my first question is on guidance. You increased it twice over the past several months. I was hoping you could impact those changes a bit here. To what extent was the updated guidance based on your first half performance and to what extent is the reflection of what you think will happen in the second half of the year?

Speaker 2

Pablo, I think it's a combination of the 2. It's a good question and thanks for asking it. What I would say is, the first Guidance raise was potentially was a little bit of a delay off of Q1, but we want to see where reinsurance pricing Shookout. And so that informed the raise that we did in June. This quarter, on the heels of Q2, we raised guidance again to reflect The results in the Q1, but also what we expect to see in the first half or the second half of the year.

Speaker 2

Chris pointed out, he's taken down the loss ratio range. So that's informing it. We're also again, the business that we're running off Has you could argue that certainly some of it was unprofitable and certainly with the reinsurance low that we're seeing on When business, it would have been unprofitable on a prospective basis if we had catch it on. So long winded way of saying It's a combination of the 2, but we feel like there's great momentum in the business and our goal is You know, beating race, that's our operative focus.

Speaker 6

Okay. And then second question maybe for Chris. I heard what you said about expense ratios going down on a gross basis, right? But if you look at the expense ratio against net earned premiums, I think this The Q1 over the past 4 or 5 where it actually went up year over year and that's probably more a function of net earn going down. Do you see that trend persisting through the second half because of what you described right, essentially the reinsurance cost Kicking in, will that essentially inflate the expense ratio on a net basis as well for the second half of the year?

Speaker 1

Yes. So you pointed it out well, Pablo, right? When you think about the expense ratio, even the loss ratio on a net earned basis, It is severely impacted by the excess of loss, right? I don't think that we my view is the combined ratio doesn't do a good job of measuring those ratios when you have an excess loss load like we do and seeing the excess of loss load going up by close to 30%, like we've talked about, is going to impact that with really No overall change in potentially the expense ratio or the loss ratio. So it's kind of why we take it out, especially on the expenses.

Speaker 1

We think about it on a gross basis. You can Model a little bit easier, you can look at it. And so when I look at the acquisition expense ratio, I see that continuing to tick down because of the mix change, whether it be And the same with the expenses, right? It's a little bit flatter, which we talked about. And so it feels like everything is heading the right direction.

Speaker 1

When I look at it on a gross basis, it takes out the noise of the excess of loss. And that's why when we talk about the gross earned premium Joe, and think about that. We talk about that separately, so that you guys can think about how the excess of loss is going to impact it. And that's going to go 34 Down to the low 30s in the second half of the year. That's how we think about it, but you're absolutely right.

Speaker 1

The modeling impact of those ratios And call it being a little bit higher this quarter is impacted by the excess of loss costs. And so like I said, that cost is going to be Higher in Q3, which is going to be the 1st full quarter with that loaded in.

Speaker 2

I think the other thing to add Pablo and Chris described it well. Just a reminder, we brought on a lot of underwriters in the Q2, great talent And claims professionals alike that will generate a return whether it be top line or improving the bottom line through cost containment and loss management. But that will take a little bit of time. So, there was a decent amount of some cost, not some cost, but cost that should generate a return Certainly 24.

Speaker 6

Okay. And then last question for you, Max. So I heard your comments about Disruption in the California market, that should be an opportunity for you to grow earthquake. I guess the question is just Given what's happening, right, like in the amount of disruption, is there a risk that the market gets overly disrupted where For whatever reason, the uptick of earthquake insurance goes down, right? And I'm thinking of like massive withdrawals capacity, like More people going to the fear plan, for example.

Speaker 6

Like if the disruption reaches that level, is that still good for your earthquake business?

Speaker 2

Yes, Pablo and I'll let John Christensen offer this too. The disruption in the earthquake market, the homeowners I think it remains good for our business, whether it be the non renewing policies that may have had an earthquake endorsement or Standalone companion policy attached to it. We get to compete on that, whether it be the CEA taking their deductibles up to 15% On anything over $1,000,000 of coverage A or reducing the amount of, covered C, which is your personal property. Those are all good dynamics for us. And I don't think we've reached a point where there's a precipice that we've gone beyond.

Speaker 2

I think this is just A bit of kind of a slow burn change in the California market that we are going to be benefiting from.

Speaker 5

Dan, I'd add with the disruption that we've seen to date in that homeowners market in California, it has not translated Anything unusual with our residential QuickBooks, our book has been very predictable and our partnerships remain very strong in the State of California. So We've not seen anything that would indicate a disruption to a very predictable and profitable line of business for us.

Speaker 6

Okay. And even with the homeowners pricing going up double digits, it seems like from what you're saying, there's still appetite for earthquake insurance as a rider to the basic homeowners product. Is that fair?

Speaker 2

That's fair. Yes. I mean, again, our buyers tend to be mass affluent that have a lot of equity value in their home. So they're protecting an asset. And we have not seen people reduce coverage.

Speaker 2

We offer Multiple deductible options that hasn't deviated where they move their deductible up to manage the expense. So we look at that, but if you look at just A, the continued growth 20% in residential quake, but also the increasing take up in E and S, which frankly E and S on E and S Whereas EQ policy costs more on a per dollar basis or per dollar insurance basis, than the admitted side, I think that's a reflection of the appetite.

Speaker 6

Okay. Thank you.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Mac Armstrong for any further or closing comments.

Speaker 2

Thank you very much, operator, and thanks to all who joined this morning. We appreciate your participation, Certainly, your questions and as well most of all your continued support. As always, I want to thank the great team here at Palomar for their diligent work And all that we accomplished this quarter and all the work that was done to further expand the franchise in the new specialty segments and further extend the Palomar 2x strategic initiative. Listen, we are growing where we want to. We are hitting our ROE targets And our earnings targets and we're raising guidance.

Speaker 2

We'll look to continue to do this. But I think what we have in front of us is really exciting and we are going to continue to Build an industry leading franchise. So thanks very much and speak to you next quarter.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your line at this time

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Key Takeaways

  • Palomar delivered strong Q2 results with 25% gross written premium growth (44% ex–runoff lines) and an adjusted ROE of 21.3% despite elevated catastrophe activity and a hard reinsurance market.
  • The company raised full-year adjusted net income guidance to $89M–$93M, reflecting first-half performance and expected lower loss ratios in the second half of the year.
  • Targeted specialty segments drove expansion, including earthquake up 29% (commercial) and 75% (E&S residential), inland marine up 54%, casualty up 92%, and fronting up 82%.
  • Palomar renewed its June 1 reinsurance program with $17.5M retention and higher exhaustion points, while AM Best upgraded the outlook to positive.
  • Strategic initiatives included hiring a professional liability underwriting team, partnering with USAA on residential earthquake, and entering crop insurance via a fronting arrangement with Advanced Ag Protection.
AI Generated. May Contain Errors.
Earnings Conference Call
Palomar Q2 2023
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