Palomar Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Palomar Holdings First Quarter 2024 Earnings Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference line will be opened for questions with instructions to follow. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr.

Operator

Chris Yuchuda, Chief Financial Officer. Please go ahead, sir.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me here today is Mac Armstrong, our Chairman and Chief Executive Officer. Additionally, John Christiansen, our President is here to answer questions during the Q and A portion of the call. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11:59 p.

Speaker 1

M. Eastern Time on May 10, 2024. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward looking statements 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. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements.

Speaker 1

Such risks and other factors are set forth in our quarterly report on Form 10 Q filed with the Securities and Exchange Commission. We do not undertake any duty to update such looking statements. Additionally, during today's call, we will discuss certain non 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.

Speaker 1

GAAP. A reconciliation of these non GAAP measures to their most comparable GAAP measure can be found in our earnings release. At this point, I'll turn the call over to Mac.

Speaker 2

Thank you, Chris, and good morning. During the Q1 Palomar celebrated its 10th birthday and this quarter is a terrific illustration of how much we've accomplished in our young history. We produced another quarter of profitable growth and again demonstrate our ability to grow where we want while delivering predictable earnings. 5 product categories generated gross written premium growth of 47.2% with especially strong contributions from our crop and casualty products. Likewise, we delivered net earned premium growth of 30% in that Q1, a nice increase from the 14% growth we achieved in the Q4 of 2023.

Speaker 2

Crop casualty and certain other property lines combined with our market leading earthquake franchise drove adjusted net income growth of 36% and adjusted return on equity of 22.9%. Another exciting result of our financial performance this quarter is our stockholders' equity surpassed $500,000,000 moving us into A. M. Best Financial Size Category 10. This level should help us open new market segments, distribution channels and attract talent.

Speaker 2

The year is off to a strong start and we are on track to achieve the Palomar 2x goal of doubling our adjusted net income over a 3 to 5 year period. This goal was first introduced at our Investor Day in June 2022, which means we are tracking towards the shorter end of the timeframe objective. We remain steadfast in our commitment to maintain profitable growth with best in class risk adjusted returns. 1st quarter puts us well on our way to attaining this objective in 2024 and beyond. Before I dive into our results, I'd like to point out that this quarter and going forward, we will provide performance commentary, including but not limited to gross written premium conditions on our 5 product categories: earthquake, inland marine and other property casualty, fronting and crop.

Speaker 2

We believe this will help our investors better understand how our portfolio of businesses are performing as we move forward. Starting with the earthquake franchise, we grew premium 13% in the Q1 of 2024. It is important to point out that the Q1 of 2023 benefited from a non recurring premium transfer that came over in conjunction with the strategic carrier partnership. Excluding this one time benefit, our earthquake book grew 18% on a same store basis. Are confident that earthquake premiums will grow in the high teens to 20% in 2024.

Speaker 2

Our confidence stems from several factors, most notably a residual earthquake partnership with Cincinnati Financial consummated in the Q4 of 2023 that did not go live until April, as well as new partnerships, 1 residential and 1 commercial that should increase production in the second half of the year. The earthquake market remains stable and attractive from a pricing perspective. Commercial rates increased 11.6% this quarter as compared to 18.9% in the 4th quarter. The 8% to 9% inflation guards of residential earthquake policies are now providing the cushion above inflationary levels and provide annual increases regardless of market condition. While rate increases have moderated from 2023 levels, our key portfolio metrics, average annual loss and 250 year probable maximum loss to premium ratio are at all time best levels.

Speaker 2

This should translate into strong net earned premium growth as the cost of excess of loss reinsurance moderates from previous levels over the near term. Looking forward, we remain positive on the growth and profitability prospects of our earthquake franchise. Our inland marine and other property products business grew 46% year over year driven by our excess national property, Hawaii hurricane and Builders Risk line of business. While growth in this product set has accelerated from the pace that we saw in recent quarters, I wanted to reiterate this is the category that best typifies our grow where we want mantra and where we are judiciously managing and in certain cases reducing our exposure. Specifically, we are not adding limit in continental hurricane prone areas and reducing our balance sheet exposure in Hawaii as we transition our policies to our Laulima reciprocal exchange.

Speaker 2

Builders Risk, our largest in the marine product had 16% same store growth in the quarter. Our excess national property line saw approximately 178% year over year growth and 6% rate increases in the quarter as our teams build a portfolio of non cat exposed property business. For both builders risk and excess national property, we hired experienced regionally focused underwriters that we believe will sustain the growth in these lines of business for 2024. All risk business grew 21%, while increasing rates 18%, down from 36% in the prior quarter. Flood written premium grew 18% year over year in the Q1.

Speaker 2

The growth was somewhat muted by new business moratoriums throughout the quarter in California due to the heightened rain and flood activity. Importantly, catastrophe losses associated with the major floods in California in January were in line with the estimate provided on last quarter's call. Hawaii hurricane premiums grew 30% in the Q1, a combination of rate increases, our inflation guard and new business written on Laulima paper. Importantly, our policyholders are embracing Laulima with approximately 92% of policies converting from Palomar Specialty Insurance Company in the quarter. It is worth reiterating that the migration of policies to Laulima transitions our business model from one that is risk bearing to one that is fee generative.

Speaker 2

Once complete, we will all but eliminate balance sheet exposure to hurricane losses in Hawaii. Our casualty product set saw robust growth in the Q1 as premiums increased 327% over the previous year. Strong performing lines in the quarter were commercial contractors, general and excess liability, real estate errors and omissions and miscellaneous professional liability. Excess liability particularly stood out as the investments made in Talend distribution over the course of 2023 allowed the book to grow 5 fold year over year and 65% sequentially. Our contractors general liability book had close to an identical sequential growth rate at 64%, while growing 3 75% year over year.

Speaker 2

Our professional liability line grew premiums 81% year over year while seeing a 28% sequential increase. Our strong growth in casualty products, which still comprise less than 15% of our total book, remains anchored in a conservative approach to our underwriting targeted niche segments of the market. We employ prudent risk management tactics such as modest gross and net line size, avoidance of heavy bodily injury and other high severity exposure and conservative reinsurance to call our loss potential in the classes we write. Additionally, we continue to see decent rate increases across the casualty book. Our professional liability products saw a blended increase of 6.5% with real estate and errors and omissions rates increasing 10.6%.

Speaker 2

The excess liability book was up 6.7% and the contractors general liability book saw an increase of 9.9%. While there are certain pockets of our casualty book that are softer from a pricing perspective, private company D and O was up 2.4%, continue to believe our rates are staying ahead of loss costs. For the quarter, the casualty books loss ratio remained in line with our conservative loss picks. As the predominance of the book is less than 2 years old, we are focused on building a sizable reserve base that we believe will develop favorably over time. Our front team business modestly grew premiums 3% year over year in the Q1.

Speaker 2

Growth in the quarter was impacted by a few things. First, our CyberFront team program continued to see heightened competition and soft pricing net as its average renewal decreased 6.7%. 2nd, 2 new partnerships were slower to ramp than initially forecast. Lastly, while our pipeline is strong, we did not add any new clients this quarter. As a reminder, we take a very selective approach securing our front team partner portfolio to ensure comprehensive management of the programs and no surprises.

Speaker 2

We do expect to bring on new frontier relationships in the second half of the year, but this product set will experience slower growth in 2024 than the others. Conversely, our newest product group Crop had a very strong start to 2024, writing $38,700,000 of premium in the Q1. Our success in market acceptance are a function of our expertise in our strong partnership with Advanced Ag Protection. We successfully married Palomar's data driven risk management underwriting model with Advanced Ag Protection's long standing market relationships, technology and customer service to assemble an attractive and geographically diverse book this quarter. As a reminder, for 2024, our crop business is a participatory front where we are taking 5% risk.

Speaker 2

The expectation is that we will take a more meaningful risk participation in 2025. Production exceeded our expectations and we are now forecasting more than $125,000,000 of premium in 2024, up from the previous guidance of more than 100,000,000 dollars Also crop written premium is seasonal, so you should not expect much in the way of written premium next quarter. We are pleased with the traction to date and are confident that we will generate meaningful net earned premium in the years ahead. Turning to reinsurance, the Q1 is lighter in activity. That said, we were still engaged on several placements including our June 1 core excess of loss placement and 2 quota share treaties, casualty and builders risk.

Speaker 2

We are pleased that the ceding commission on the casualty quota share renewed a slightly better terms in expiring and we enhanced the treaties terms and conditions. We also improved the economics on our builders risk quota share while increasing our growth and net line capacity. We are mid to 6.1 core XOL placement as well as marketing Torrey Pines Re, our 5th catastrophe bond. We are encouraged by the progress to date on both key endeavors. As we discussed last quarter, we had 2 earthquake treaties renewed on January 1 at at risk adjusted decreases of approximately 5%.

Speaker 2

As we sit here today, certain layers of our core tower are bound and the implied risk adjusted is directionally similar to the earthquake treaties renewed on January 1. While most of the placement is still outstanding, we are encouraged with the results so far. It affords us confidence that we'll meet or beat the 5% price increase embedded in our full year 2024 guidance. To conclude, we are encouraged by the trends in our business and are raising the guidance range for our full year 2024 adjusted net income to $113,000,000 to $118,000,000 from $110,000,000 to $115,000,000 And to reiterate, our guidance does assume a 5% risk adjusted increase on our 6.1 core excess of loss program. Lastly, the midpoint of our guidance implies an adjusted ROE above our Palomar 2x target of 20%.

Speaker 2

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 your per diluted common share as 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 when we incur a net loss. For the Q1 of 2024, our adjusted net income was $27,800,000 or $1.09 per share compared to adjusted net income of $20,400,000 or $0.80 per share for the same quarter of 2023. Adjusted net income and earnings per share growth of 36%.

Speaker 1

Our first quarter adjusted underwriting income was $29,200,000 compared to $22,200,000 last year. Our adjusted combined ratio was 73% for the Q1 compared to 73.3% in the Q1 of 2023. Excluding catastrophes, our adjusted combined ratio was 69.8% for the quarter compared to 71.2% last year. For the Q1 of 2024, our annualized adjusted return on equity was 22.9% compared to 20.7% for the same period last year. The Q1 adjusted return on equity continues to validate our ability to maintain top line growth with a predictable rate of return above our Palomar 2x target of 20%.

Speaker 1

Gross written premiums for the Q1 were 368 point $1,000,000 an increase of 47.2% compared to the prior year's Q1. Along with breaking out crop, we also regrouped our written premium to align with our 5 key specialty insurance products: earthquake, inland marine and other property, casualty, fronting and crop. It is important to remember the seasonality of our crop premium. Based on our current expectations, the majority of our crop premium will be written in the Q3 of each year with only modest premium in the second and fourth quarters. The $38,700,000 of crop premium written in the Q1 should represent about 30% of the premium expected for the year.

Speaker 1

Net earned premiums for the Q1 were $107,900,000 an increase of 29.6% compared to the prior year's Q1. For the Q1 of 2024, our ratio of net earned premiums as a percentage of gross earned premiums was 35.6% compared to 37% in the Q1 of 2023 and compared sequentially to 33.9% in the Q4 of 2023. The year over year decrease is reflective of our growth in fronting and lines of business that use quota share reinsurance and the increased cost of our excess of loss reinsurance program that renewed last June. With the mix of business maturing and our excess of loss reinsurance program in place, our net earned premium ratio has continued to increase from its low point in the Q3 of 2023. Based on our assumption that the excess of loss reinsurance costs will increase modestly, on a risk adjusted basis, we expect our net earned premiums ratio to follow a similar pattern as last year.

Speaker 1

We expect a slight decrease in the net earned premium ratio for the Q2 with the low point of this ratio in the 3rd quarter, the 1st full quarter of our June 1 reinsurance renewal. From there, we expect the ratio to increase through the treaty year, similar pattern to what we have seen over the current treaty year. Losses and loss adjustment expenses for the Q1 were $26,800,000 comprised of $23,400,000 of non catastrophe attritional losses and $3,400,000 of catastrophe losses from flood activity. The loss ratio for the quarter was 24.9% compared to a loss ratio of 24.8% a year ago. For the Q1, our attritional loss ratio was 21.8% and our catastrophe loss ratio was 3.1%.

Speaker 1

We continue to expect our loss ratio to be approximately 21% to 25% for the year. Our acquisition expense as a percentage of gross earned premium for the Q1 was 10.5% compared to 11.4% in the Q1 last year and in line with the Q4 of 2023. Additional seating commission and funding fees continue to drive the year over year improvement. With our growth and mix of business, we expect this ratio to be flat for the full year with some potential for improvement. The ratio of other underwriting expenses including adjustments to gross earned premiums for the Q1 was 6.8%, the same as the Q1 last year and compared sequentially to 6.9% in the Q4 of 2023, in line with our expectations as we continue to invest in our organization as we continue to grow.

Speaker 1

We continue to expect long term scale in this ratio, while we may see periods of sequential flatness as we continue to invest in scaling the organization. Our investment income for the Q1 was $7,100,000 an increase of 39.4% compared to the prior year's Q1. The year over year increase was primarily due to higher yields on invested assets and a higher average balance of investments held during the 3 months ended March 31, 2024 due to cash generated from operations. Our yield in the Q1 was 4.2% compared to 3.4% in the Q1 last year. The average yield of investments made in the Q1 was 5.6% compared we continue to conservatively allocate our positions to assets that generate attractive risk adjusted return.

Speaker 1

There were no shares repurchased during the quarter. While the previous plan has expired, as a matter of good corporate governance, we will be authorizing a new share repurchase program. At the end of the quarter, our net written premium to equity ratio was 0.94:one. Our stockholders' equity has reached $501,700,000 a testament to our profitable growth. As Mac mentioned, we are raising our full year 2024 adjusted net income guidance to range to $113,000,000 to $118,000,000 implying 23.5 percent adjusted net income growth at the midpoint of the range.

Speaker 1

It's important to remember that our loss estimate and guidance include our expectations of mini cat, such as severe convective storm activity. For the year, we expect our loss ratio to be approximately 21% to 25%, including our estimate of Mini Catch, which represented approximately 2 to 3 points of our expected loss ratio. With that, I'd like to ask the operator to open the line for any

Operator

Our first question is from Paul Newsome with Piper Sandler. Please proceed with your question.

Speaker 3

Good morning. Congrats on the quarter.

Operator

Is it fair to say

Speaker 3

that as we look out past 24 that the attritional loss ratios should continue to rise? I think that was the answer in the past, but I just wanted to confirm that was still the case.

Speaker 1

Hi, Paul. Thanks for the comments. Yes, no, good point. We still expect the attritional loss ratio to continue to tick up throughout 2024 and then obviously into 2025 as well as the overall mix of business does change and we continue to grow in lines like property in the marine and special property, casualty and also crop. Those lines will have attritional losses associated with them.

Speaker 1

And so we expect that to tick up moderately. Again, we don't expect that to go from, let's call it, 21% this quarter to 40% next quarter. This is going to just go up moderately maybe a point or 2 a quarter.

Speaker 2

Yes. Paul, this is Mac. I would agree. The only thing that I would add is, like Chris said, it won't swing wildly because of our use of quota share in our balance risk participation in the lines that he referenced. And then our earthquake business, we still feel like it's going to grow 18% to 20% this year.

Speaker 2

So it's not going to meaningfully under index the growth. And that provides a nice anchor with its attritional loss ratio of 0.

Speaker 3

Great. And could you maybe big picture, give us your most recent thoughts on the competitive environment for sort of specialty commercial and E and S. There's lots of talk in the last several weeks because of the mixed data that came out of from the stamp data from E and S. And I know that's a very simple way to look at growth in E and S, but your thoughts would be great just as an update your most recent thought of what you think you're seeing out there from a competitive perspective?

Speaker 2

Yes, sure, Paul. I would say, the term that I would use broadly to describe the market right now, and this was a year ago probably would have leaned more on the property side. But now I would say it's broad based and that there's rate integrity in the market. I would say that there is discipline in pricing. You're still seeing rate increases in property that may not be at the same level that you were seeing a year ago when it was more severely dislocated.

Speaker 2

And then in casualty and as I highlighted, we did see consistent rate increases really with the exception of cyber and the private company D and O component of our NPL that was up and in excess of loss costs. So I would say that there is rate integrity in the market and there is stability there. The other thing as it pertains to the E and S side, what we are writing on the E and S, on our E and S company is traditionally E and S business and we are not seeing flows out into the admitted side. And I think what I would say or specifically point out like for earthquake for instance, Our residential book has always been admitted business, but commercial earthquake since before Palomar's formation has always been an E and S product. And even if you can write it on an admitted basis, you do it with the filing that basically mirrors the E and S market from a coverage flexibility and a rating flexibility.

Speaker 2

So as it pertains to our book, we are not seeing flows out of E and S into the admitted market. And I think we're seeing rate integrity.

Speaker 3

Right. Maybe a little bit trivial, but any impact you see from that little earthquake we had on the East Coast and either from a product interest perspective or anything else that we might happen from there? I just got the question this morning.

Speaker 2

Yes, yes. We jokingly call those marketing events. And so and there's actually an earthquake in the Inland Empire, California densely populated part of the state, about 4.3 magnitude, enough to be on the cover of the newspapers and the evening news and enough for people to feel it. So we like those because it drives awareness and it does lead to a little bit of a tick up in new business sales. An earthquake in New York is we don't write a lot in New York, so but that does garner some media attention, so that's not a bad thing.

Speaker 3

Good. Appreciate the help as always. Thank you.

Speaker 2

Thanks, Paul.

Operator

Our next question is from Mark Hughes with Truist Securities. Please proceed with your question.

Speaker 4

Yes. Thank you. Good morning. Good morning, Mark. The net earned premium ratio, do you think it will bottom out?

Speaker 4

I think last year's Q3 is 33%. Will it would one anticipate that or maybe a little bit better this year, maybe 34?

Speaker 1

Hi, Mark. No, that's a great question. I think as we indicated in the prepared remarks, we are still expecting an increase in our reinsurance costs as we go into the sixone renewal. I think there are some favorable wins out there, but right now in our guidance and our expectations, we are still expecting a slight increase there. So with that type of mechanic and you kind of know the stair step that you see with our excess of loss and how that plays out due to net earned premium, I would expect that, let's call it Q2 net earned premium ratio would might go down a little bit from where it was in Q1.

Speaker 1

But then as you pointed out, Q3 should still be the low point of our net earned premium ratio based on our current assumptions. I think last year it was low 30s. I would expect a similar trend to play out in Q3 of this year as well. But similarly, over that the next treaty year, I would expect very similar pattern to what you saw in our net earned premium ratio this year, really obviously dependent on what that renewal looks like. But in our model, we have a slight increase.

Speaker 1

So I would expect slightly lower net earned premium ratio compared to last year, very close to what you saw this year or over the last 3 years, excuse me.

Speaker 4

Okay. And then when we think about 2025, should that be migrating up a little bit, offsetting some of the higher losses?

Speaker 2

Yes. Mark, this is Mac. I would say so some of that's going to be driven frankly by crop. So crop right now is really more of a participatory front as we describe it with the 5% risk participation. Going forward in 2025, we will take it more meaningful.

Speaker 2

So that would help drive it up. If reinsurance pricing starts to decelerate or decline, that would be a driver of it. So you should expect decent net earned premium growth this year and that ratio potentially to tick up in 25% because our risk participation in lines like crop and maybe a selected group of casualty business that is beginning to mature and season more, that will help inform that as well.

Speaker 4

Yes. And when you think about when you say it's going to step up 5%, what's the trajectory on that? If it all goes as planned, what's the next step?

Speaker 2

I'm sorry, the 5% for crop, is that what you're asking?

Speaker 1

Yes. Yes.

Speaker 2

I would say 15% to 20% type participation. We're bullish on the prospects for that line and think we can build a very meaningful franchise there. And for what it's worth, it was a very modest amount of premium that we wrote in 2023, but it was a very profitable book.

Speaker 4

Yes, exactly. The commercial quake,

Speaker 5

is that how much

Speaker 4

is that tied to just broader commercial property supply and demand or capacity and demand. Is there a separate dynamic within commercial quake or does that tend to parallel the broader market?

Speaker 2

I think earthquake is a unique line. For commercial earthquake, especially layered and shared business, you need to have that coverage for to satisfy a large commercial loan. I think you're riding in areas where people are very mindful of protecting assets that have considerable equity value. So I don't think it mirrors the broader property market, especially because it is the tried and true layered and shared market where you have multiple participants on a singular risk. If you have a $500,000,000 property schedule, you're not going to have one Quaken share.

Speaker 2

You're going to have $10,000,000 to $15,000,000 So because of that nature, I think it's pretty nuanced. And it does follow the cost of reinsurance to some degree, reinsurance pricing in the primary market, but not in the sense of coverage and participants.

Operator

Thank you. Appreciate it.

Speaker 5

Thanks, Mark.

Operator

Our next question is from Peter Knudsen with Evercore ISI. Please proceed with your question. Hi, good morning. My first question is on mid year renewals. I believe you mentioned an increased expectation of costs in the prepared remarks.

Operator

But I'm just wondering if you could expand a bit on those updated views and how that's shaping up?

Speaker 2

Yes, happy to do so. Thanks for the question. What I would say is, again, our guidance for the year, the start of the year and what we just affirmed assumes a call it 5% increase in the cost of reinsurance. We are in the midst of our placement right now and we are encouraged by the prospects of, as I said, beating that number. We did renew 2 small treaties at January 1 that were down plus or minus 5%.

Speaker 2

We have found some coverage in early April that incepts at 6.1, but is bound and covered and that is down plus or minus down 5%. So that constitutes roughly 10% to 15% of the total towers. So there's a lot more to do. So we want to be conservative in what we are assuming. But all indications, including with what we are hearing in the initial price up that we put out in the market on our cap bond is feels gives us confidence that we will certainly achieve that level if not exceeded.

Operator

Okay. Yes, great. Thank you. That's helpful. My second question is around the strong acceleration in the casualty growth.

Operator

I know you mentioned a little bit of the lines and the rate that was driving that. But I'm hoping you could talk a little bit more about the current market in some of those lines and how you guys are feeling about rate and loss trend in that space? And then also if you're expecting that same strong growth to continue?

Speaker 5

Thanks. Sure.

Speaker 2

We do expect to see good growth from casualty throughout the year. We've made considerable investments in casualty from most importantly a talent and leadership perspective. People like Ty Robin, Brian Puschik and Garrett Vanikiv have come across with great pedigrees and great followings and great experience in the market. So we are investing in them from a system standpoint, from a balance sheet standpoint, from incremental underwriting resources and want to build a meaningful franchise in these niche market segments. So what we I would say right now though is we are going into the market and we are doing so in a meaningful fashion, but also a conservative fashion, conservative from a risk selection standpoint, whether we are avoiding severity exposed classes on the general liability side or the professional liability side, it limits management.

Speaker 2

Whether our max gross line is $5,000,000 net is $2,000,000 When you think about nuclear verdicts that are in the $100,000,000 range like that a $5,000,000 gross line doesn't materially swing our balance sheet or our earnings base for that matter. And then we have a lot of different underwriting controls. Again, that's informed by the strong leadership that we have in place. Where we sit right now, we feel that we are getting adequate rate to cover our loss costs. Our general casualty book was up 9.9%.

Speaker 2

We think that's against loss costs, that's probably 4% to 5%. Excess liability was up 6.7%. I think that's a similar type of loss cost. It's not to say again, as I mentioned earlier that all lines in casualty are getting the same level of rate or have that term rate integrity. Financial lines are tough and we do not write a lot of that, but we do write some private company D and O inside of our miscellaneous professional liability suite and that's not getting the rate that we'd like.

Speaker 2

We have to be mindful of how much we exposure we have there. I think the last thing that I would say is, when you look at our loss picks, we think they're conservative. They were just vetted by our reinsurance panel at 61 or excuse me, at 41 with the renewal, and we got improved terms and conditions and improved pricing there. So I think that's a validation. I think the greatest validation is our loss picks meaningfully above the historical results of these underwriters that we brought on.

Speaker 2

So I know that's a lot, but what I would say is we do feel good about our casualty strategy, the niche focus, feel exceptional about the leadership we have helping us execute upon that. And we don't think that we will reserve, relieving excuse me, releasing reserves anytime soon. So we're going to be conservatively building a reserve base.

Operator

That's really helpful color. Thanks so much. Thank you. Our next question is from Matt Carletti with Citizens JMP. Please proceed with your question.

Speaker 6

Hi, thanks. Good morning.

Speaker 2

Good morning, Matt.

Operator

Matt Oso.

Speaker 5

Good morning.

Speaker 7

I was hoping to ask a high level question on your residential quake book, particularly thinking like California and other areas where the homeowners market has gotten super tight and rates have gone up a bunch. What have you seen in terms of retention in that resiquake book kind of as that's happened? My thought process is being like people are paying a ton more for homeowners. How sticky have you seen retentions change at all? Or they feel in the wallet get a little tight and maybe retentions are sliding a little bit?

Speaker 2

Yes, Matt, that's a great question. I'm pleased to say that our retention has been consistent. It's always been a mid to high 80s level. And we have been able to continue to grow the Kuwait book by taking share, by having great partnerships. But I would say that new home sales right now and increasing homeowners premiums is a headwind.

Speaker 2

It's no question that it is. But because of our franchise, because of our partnership strategy and also because of the changes at the California Earthquake Authority, we've been able to sustain this kind of high teens, mid teens growth in residential quake. We're optimistic and we've been studying it as rates come down and new home sales in more earthquake exposed areas pick up again, and the inventory starts turning over a bit more, that could be turned from a headwind into a tailwind. I'm just not going to call win. I'm not there are a lot of people that are focused on when rate changes are going to happen.

Speaker 2

We're going to just play with the current market as it is and hope that when rate changes come, it provides a nice tailwind for us.

Speaker 5

Great. Thanks, Matt. Appreciate it.

Speaker 2

Thank you, Matt.

Operator

Thank you. Our next question is from Andrew Anderson with Jefferies. Please proceed with your question. Hey, good morning. On fronting, a little bit lower growth in the quarter, you mentioned some partnerships were slower to ramp.

Operator

I think you had previously pointed to for full year perhaps growth in fronting index and growth of overall company. Is that still the case?

Speaker 2

Yes, Andrew, good question. Thanks for asking it. I think it's not the case. I think it's going to under index the growth. So the good thing is we have a portfolio of products in 5 different categories, some are firing in all cylinders, some are indexing the growth rate.

Speaker 2

I would say fronting is the one that is now under indexing. A few of our new partnerships are slower to ramp. There is a little bit of rate headwinds in one of our larger relationships that I brought up. We have a pipeline and we do expect to add to our portfolio of fronting partnerships, but it's going to slow. Its growth is going to look more like the Q1 than it will be broader growth rate of the company.

Operator

Got it. Okay. And then on earthquake, it sounds like high teens 20% -ish for full year. If I think about the expense ratio here, does the mix of product between residential and commercial have an impact on the expense ratio? Is one lower than the other?

Speaker 2

Historically, residential earthquake had been a bit of a higher margin. The cost of acquisition is might be a little bit lower. But right now in this market, just because of the rates, the increases that we've seen in commercial earthquake, the underlying like unit level economics are almost at parity. So a residential earthquake policy or commercial earthquake policy in 2024 are going to have the same margins.

Speaker 1

Yes. One follow-up on that. When you look at our acquisition expense ratio on a gross basis, right, I think 10.5% for the quarter, we expect that to be pretty flat for the year, right? So overall mix of business, whether it be residential earthquake, commercial earthquake or even changes in the fronting dynamic, we don't expect to have a material impact on that ratio as we go forward.

Speaker 5

Thank you. Thanks, Peter.

Operator

Our next question is from Meyer Shields with KBW. Please proceed with your question.

Speaker 5

Great, thanks. Good morning. A bunch of like quick questions if I can. First, I know Cincinnati is targeting higher net worth homeowners. And I'm wondering, does that translate into maybe writing a company in residential earthquake on non admitted paper?

Speaker 2

Maher, I apologize. We lost you for a second. Would you mind repeating that question? I heard the second half on non admitted paper, but you didn't hear the first part.

Speaker 5

Yes, no problem at all. So I know Cincinnati is looking to grow it high net worth homeowners. And I'm wondering whether that affords you the opportunity to write the earthquake on non admitted paper.

Speaker 2

Yes, I'm sorry. It is on a non admitted basis. So we are writing that as an E and S policies and a company to their high net worth E and S offering in California.

Speaker 5

Okay, perfect. On crop, I think Chris said that 30% of the written premiums come in the Q1 and the balance in the 3rd. Is that a normal run rate or when you're ramping up, should we see higher percentages in the Q1 than this year?

Speaker 8

Hey, Maher. It's John Christianson. For the next few years, we'd expect that to be fairly consistent. And so you'll see the Q3 be by far the largest quarter of Britton and Pringling. The 2nd largest will be the Q1 and then there'll be a little bit in the second and the fourth quarter, but really the Q3 is going to be where you'd expect to see the largest premium share for the years now.

Speaker 5

Okay, perfect. And I know the retained premiums are going to be really, really low, but there are different approaches that a lot of the crop insurers take in terms of booking profitability for that line of business. In other words, waiting until, let's say, the Q4 before taking the commodity ratio on the retained book below 100. How is Palmar planning on, I guess, booking that line?

Speaker 1

Yes, it's a good question. The 3rd quarter premium that we booked will have little bit of a catch up effect with it. A lot of that premium is originated earlier and then we wait for the acreage reports to come in, which generally will be started coming in June ish, but mostly in July. And so at that point in time, we will book all of the written premium and then there will be a slight catch up of earned premium, which actually comes with a combined ratio. So there will be some earning of it in the Q3 as well and then throughout the remainder of the year as most of that does end at the end of the year.

Speaker 1

So we will be booking most of written premium, but then some of those call the profitability through the 3rd and the 4th quarter for that book of business.

Speaker 8

Yes, Meyer, I'd say that we'll look similar to others in the market in terms of how we the timing of when those profits are taken in or recognized. Usually the modeling becomes clear at the end of Q3 and into Q4, which gives you more confidence on the loss ratio for you.

Speaker 5

Okay, perfect. And last question, and I'm not exactly sure how to ask this, but Mac, you talked about being bigger and how that should allow for growth on more accounts. Is there any way of, I don't know, ball parking of describing the relevance of the higher size category?

Speaker 2

Yes. Meyer, I think it's hard for us to quantify right now. We had Ken, we just we had a commercial underwriting meeting a week or 2 ago, and our underwriters were pleased that with the increase in financial size quarter, it's probably most relevant for our environmental team and our professional liability team. But then they immediately ask when are we going to get an A rating. So that might be more impactful.

Speaker 2

So I would love to say, it's a lot like what it was in 2020 when we got up over $250,000,000 and that opened up a few different distribution channels that we couldn't see previously. Now it's just more about insured appetite and the credit rating requirements for certain larger accounts. So can't quantify it right now. I think it's going to open up a lot, and I think it will definitely help from a recruiting standpoint. But, I'd love to give you a dollar number, I just can't right now.

Speaker 5

Okay, fair enough. Thank you so much. Thanks, Meyer.

Operator

Thank you. Our next question is from Pablo Singleton with JPMorgan. Please proceed with your question.

Speaker 6

Hi, good morning. Maybe for Mac or Chris, you mentioned about 5% price increase on reinsurance embedded in the guidance. What dollar benefit would you get if prices go up by say only 4% or 3%? I know the dollar cost of Exo will also depend on exposure to structure, but holding all that constant, how much dollar savings do you get if reinsurance pricing is more favorable than what you're assuming?

Speaker 1

Yes, that's a great question. When you look at our book, we've talked about it before that the cost of risk transfer at last June 1 was about $230,000,000 right. So we will be buying more excess of loss reinsurance to cover the increase in our exposure. So let's say our exposure went up 10%, let's call it $250 ish million $253,000,000 that we're going to be spending, right? We're expecting some sort of rate increase.

Speaker 1

Right now, we're saying 5% on top of that. So you kind of do that math. So you just kind of work it backwards if you got a 1% savings on $250,000,000 at $2,500,000 over the full treaty year.

Speaker 6

Yes.

Speaker 1

So from our standpoint, that's probably the right way to think about it when you go in. Now I'm not saying that's our exposure change or anything like that, but just when you want to do the math and you want to It's

Speaker 2

a good rule of thumb.

Speaker 1

That $230,000,000 is probably the right base to think about what our opportunity is or what our potential additional cost is going to be at the next renewal.

Speaker 6

Yes. All that makes sense. And then second question, just thinking about the business mix change, I think, Chris, you had said on this call about 1 to 2 points deterioration in the attritional per quarter. My memory might be rusty, but it seems like that might be a tad faster than what you said before. Is that because attritional lines are growing faster?

Speaker 6

And then as a follow-up to that, I think in the 2022 Investor Day, you guys had given all in combined ratio guidance for earthquake and let's just call

Operator

it non

Speaker 6

earthquake. Do those like margin does that margin guidance still stand in as we think about the mix here?

Speaker 1

Yes, that's a good question. Yes, I think maybe one to two points is, I would say a little bit conservative. I think if we get up to the midpoint of our range of 21% to 25%, which is in that 23% range. We feel good about where it is for the full year. I think it does move around on a quarterly basis.

Speaker 1

You guys are very familiar with the insurance business. Obviously, we don't control the losses. So if it swings up a point or 2 points in a quarter, it doesn't mean anything is going wrong. It's just naturally the way things go and it can also go the other direction, 1 or 2 points down. But overall, we're very comfortable where things are going.

Speaker 1

We are seeing very good strong growth in our lines of business that do have attritional. That's going to be the Inland Marine and Special Property. That's going to be some casualties. So everything is going the way we expected, strong growth there. When I look back and think about Investor Day, I would have to I'm going off a lot of memory here, but it does feel pretty consistent with how we've lined up.

Speaker 1

We haven't made significant changes to any of our quota shares. We started taking a little bit more on some of those, but not what I'd call a material variation from what we shared with Investor Day. And some of that thesis at Investor Day was maintaining the same participation. And so that is still, I would say, a lever we have to pull over time. Then we can start as our balance sheet grows, we can start taking more and more on some of those lines, which will obviously help profitability or the bottom line continue to grow because these are profitable lines of business where we are, I would say, sharing a lot of that margin with the reinsurers that over time we will start putting on our balance sheet.

Speaker 1

That's not going to happen all next year, but I'd say over a 5 to 10 year horizon, more and more will start coming on to our balance sheet, which will help continue to grow that bottom line.

Speaker 2

And Pablo, the thing that I would add is, we still feel very good about a sub-seventy 5 combined even if that loss ratio moves up 1 or 2 points like Chris was describing.

Speaker 6

Yes. That makes sense. And then last for me, you had referenced better ceding commissions on the casualty quota share. But then you also said that I think as a percentage of gross earned, you think acquisition expenses stay flat. So it doesn't seem like that benefit on the seating, is that meaningful, right?

Speaker 6

Is that the correct read? I mean, it didn't move the overall number, I guess, that's a more appropriate thing to say. Is that fair?

Speaker 2

Yes. I mean, I think it's just a matter of business mix, right? Earthquake and the other property casualty is only 14% of the business and what was in that quota share probably constitutes about 40% of that number. So that's, call it, 5% of that overall did see slightly improved ceding commission. It's just business mix.

Speaker 6

Yes. Okay. Thank you.

Operator

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mac Armstrong for any closing comments.

Speaker 2

Well, thank you, operator, and thank you to all who joined us this morning. We appreciate your participation, your questions, and most of all, your continued support. To conclude, we're off to a strong start to the year and I would be remiss if I didn't thank our team at Palomar for their continued dedication and hard work, which is ultimately the driving force behind our terrific results and success, not just this quarter, but these past 10 years. I remain confident in the growth trajectory of our business combined with our continued focus and our ability to deliver predictable earnings and returns. As an aside, in addition to our 10 year anniversary, we recently celebrated our 5th year as a public company.

Speaker 2

And so I want to thank our investors for support these last 5 years. We will continue to work in earnest on your behalf and we'll drive shareholder value. Thank you very much. Have a nice day and speak to you next quarter.

Powered by Quartr
Earnings Conference Call
Palomar Q1 2024
00:00 / 00:00