Q4 2019 Earnings Call
Good morning, and welcome to the Palomar Holdings incorporated fourth quarter and full year 2019 earnings conference call. During today's presentation, all parties will be and they listen only mode.
Following the presentation. The conference lines will be open for questions with instructions to follow at that time as a reminder, this conference call is being recorded.
I'd now like turn the conference over to Mr., Chris You Cheetah Chief Financial Officer. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate your participation in our fourth quarter and full year 2019 earnings call.
With me here today as Mac Armstrong, our Chief Executive Officer founder.
As a reminder, a telephonic replay of this call will be available on the Investor Relations section over website through 11 59 PM Eastern time on February 26 2020.
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.
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 and indicated or implied by such statements such risks and other factors are set forth and our most recent periodic report and our prospectus filed in New Jersey Exchange Commission January 10 20.
20.
We do not undertake any duty to update such forward 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 an isolation or as a substitute for results prepared in accordance with U.S. gap.
A reconciliation of these non-GAAP measures to the most comparable GAAP measure it can be found in our earnings releases.
At this point I'll turn the call over to back.
Thank you Chris good morning, everyone.
Over the course of 2019, Palomar execute on its mission to build a diversified book, especially property business.
We remain focused on developing a suite of distinctive and flexible products, the liberty and easy to use and scalable platform that incorporates an analytics driven underwriting and risk transfer framework.
Also this past quarter in a four year 2019 demonstrate the we're making progress in our mission and that our products are well received by the market.
Before we go into the quantitative high for the quarter end the year <unk> blocking to perspective on 2019 as it wasn't momentous year.
So that could accomplishments include expanding our geographic footprint into 20 cents days.
Consummating multiple new carrier partnerships, including the largest in our history launching two new divisions of the company in the marine and assumed reinsurance.
Making significant investments in our human capital with the normal hired our chief risk officer, and SPP people in town.
Procuring a 345 million of incremental reinsurance limit to prudently support our growth.
And lastly, our initial public offering in April which catalyze several growth drivers of the business.
Turning to our results gross written premiums grew 16% year over year for the fourth quarter and 63% year over year for the full year 2019.
Importantly, we generated strong growth across our expanded product portfolio not just from a few standouts.
73% year over year growth of our earthquake products during the fourth quarter demonstrates that our earthquake franchise continues to gain traction and that we increasingly play a leadership role in the market segment.
Our non earthquake products grew 59% year over year, the fourth quarter.
Further proving that our product development strategy is exportable to other segments of the specialty property market.
As a company we remain focused on developing differentiated products.
Sure acute market needs and I'm pleased to report that the contribution from our newest product lines getting you to grow.
Specifically, our residential flood program with 140% year over year in the fourth quarter, while our recently launched it liberating department continued to expand its geographic footprint product offerings and distribution network.
Overall premiums for a non earthquake products represented 30% of total gross written premiums during the quarter.
In many cases these products are in markets that are multiple times larger than the addressable earthquake market and offer significant runway for future growth in broadening of our premium base.
Additionally, we generated solid growth across both commercial and personal lines exiting 2019, with the mix of 29% commercial 71% personal lines.
Track of rate environment, and expanding distribution network like 235% growth year over year, the fourth quarter for commercial lines offerings.
Our commercial lines experienced an average deposit renewal rate increase of 11.2% during the fourth quarter compared to 9% in the third quarter.
Accelerated rate increases was most pronounced in our commercial earthquake line of business, which saw a deposit renewal rate increase of 13.8% versus 9.2% in Q3.
Personalized offerings exhibited continued momentum and grew 46% year over year in the fourth quarter.
We believe that there's no stronger endorsement of the unique value that we offered to our distribution partners and ultimately the ensures that our strong premium retention rates average monthly premium retention across all lines of business was 89% during the quarter up sequentially from 87% in the third quarter and compared to 82% during the fourth quarter 28.
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Notably we saw retention rates above 92% for all risk blind hurricane in residential earthquake business during the fourth quarter.
The composition of our book of business minimizes our exposure to Attritional loss it provides considerable or any visibility.
However, we will experience some measure of loss on a quarterly basis, even when there isn't a major quick or hurricane and why.
Fortunately our commitment to manage the loss exposure through market selection underwriting and risk transfer can find attritional loss.
During the fourth quarter, we had loss and loss adjustment expense of $2.2 million.
And Chris will provide more detail on the losses shortly.
But I will point out that even with a modest amount of loss or loss ratio was 5.6% for the full year 2019.
Paired to a loss ratio of 9% for the full year 2080.
During his commitment to predictable profitable underwriting, we're able to achieve a full year adjusted combined ratio of 63.3% and an adjusted our we have 24.1%.
We believe these results reflect the uniqueness in capital efficiency of our model as we were able to achieve that our OE with the conservative net written premiums having stockholders' equity ratio a 0.66.
Risk management is a central pillar of our model and the completion of our January one reinsurance renewal reflects our dedication to balancing the growth of our portfolio with conservative reinsurance protection.
As previously disclosed we renewed approximately 300 million of our core reinsurance program at rates flat to modestly up one of the exposure adjusted basis and purchased 145 million of incremental limit to support the continued growth of our existing and new products.
As of January 1st our reinsurance program provides coverage up to 1.2 billion for California earthquake events.
This coverage allowed the company to maintain a cushion above the one or 250 year peak zone probable maximum loss and significantly exceed simulated losses from any recorded historical that.
Our per event retention remains $5 billion through may 31st 2020.
Looking ahead, we enter 2020 committed to our ongoing growth initiatives as previously mentioned, reaching an ambassador exercise category eight last year unlock new distribution sources for commercialized products and your carrier partners just for a personalized products.
With the primary proceeds from our January 2020 follow on offering we're now in proximity to achieve 250 million surplus and they invest an exercise category nine which should further unlock new growth opportunities.
Our product suite remains relevant and attracted to the market, we're adding new states of operation and broadening our product offerings in existing ones.
We continue to invest in technology that offers distribution partners more streamlined access to our products and improves our ability to drive scale in our business. We are invigorated by the prospects of 2020 and believe that we can grow adjusted net income between 33 and 40% for the full year.
With that I'd now like to turn the call over to Chris for more detailed review of our financial results.
Thank you Matt.
Please note that during my portion when referring to any per share figure I'm, referring to per diluted common share as calculated using the treasury stock method.
For the fourth quarter of 2019, our net income was $10.9 million or 45 cents per share compared to net income of $4.1 billion or 24 cents per share for the same quarter in 2018 for the full year of 2019, our net income was $10.6 million or 49 cents per share compared to net.
Income of $18.2 billion or $1.70 cents per share in 2018.
For the fourth quarter of 2019, our adjusted net income was $11.5 million or 48 cents per share compared to adjusted income of $4.6 million were 27 cents per share for the same quarter of 2018.
Fourth quarter 2019, adjusted net income excludes expenses related to the company stock offerings stock based compensation and the tax impact of those expenses.
The fourth quarter of 2018 adjustments exclude the expenses associated with the company's IPO and tax restructuring.
Full year of 2019, our adjusted net income was $37.9 million or dollar 73 cents per share compared to adjusted net income of $19.8 million dollar 17 per share in 2018.
Gross written premiums for the fourth quarter were $73.3 million, representing an increase of 68.4% compared to the prior years fourth quarter for 2019 gross written premiums were $252 million growth of 62.7% compared to 154.9 million in 2018.
As Matt indicated this growth was driven by a combination of robust new business rate increases and strong premium retention with contributions across our product portfolio.
Ceded written premiums for the fourth quarter were $49.5 billion, representing an increase of 35.8% compared to their prior years fourth quarter, our risk transfer strategy remains a critical component of our business, especially as we demonstrate sustain topline growth.
The increase was primarily driven by an increase in our excess of loss or xol reinsurance expense commensurate with our growth and our quota share reinsurance, we utilized quota share reinsurance to minimize the impact of attritional losses on our portfolio and to generate valuable being tone from the seating proceeding on track.
Risk to reinsurance partners.
The increase in ceded written premium was in part due to increased ceding to the quota share reinsurance partners that said, while the total dollar amount of ceded written premium increased ceded written premiums as a percentage of gross written premiums decreased to 40.3% for the three months ended December 31, 2019 from four.
89.9 presents for the three months ended December 31, 2018, due primarily to the increase in gross written premiums in our residential earthquake in commercial real quick line, which are not subject to quota share reinsurance agreements.
This dynamic was also evident for the full year 2019 as ceded written premiums as a percentage of gross written premiums decreased to 43% for the full year of 2019 from 53.6% for the full year 2018.
As we grow our business, we expect to incur additional excess of loss in reinsurance expense as we maintain a conservative level overall coverage.
Due to timing of our reinsurance places of in terms of our underlying contracts there maybe a lag between earned premium and a reinsurance placement or expense, but overtime, we expect the impact of to smooth, though and their trends look the same our retention remains $5 million earthquake or wind event and repurchased $1.2 billion.
Total reinsurance coverage for California earthquake events.
Net earned premiums for the fourth quarter were $31 million, an increase of 75.9% compared to the prior fourth quarter due to the growth in earning of higher gross written premiums offset by the growth in earning of higher ceded written premiums net earned premiums for 2019 were $100.2 billion an increase.
The board of 3.4% compared to 2018.
For the fourth quarter of 2019 ceded earned premiums as a percentage of gross written premiums were 47.5% compared to 53.4% in the fourth quarter of 2018 for 2019 ceded earned premiums as a percentage of gross earned premiums were 50% compared to 49.3% in 2018.
Commission other income was approximately zero point $7 million.
Three months ended December 31, 2019, and zero point $5 billion for the same period in 2018.
Commission and other income in 2019 was $2.7 million and $2.4 million in 2018.
Losses, and loss adjustment expense or Ellie incurred in the fourth quarter were $2.2 million, an increase of $3 billion compared to prior years fourth quarter, our losses during the quarter included roughly.
Zero point $9 million of Attritional losses, According to Attritional loss ratio of 2.5% for the quarter.
In addition, we booked approximately $1.3 million of losses, and Ellie from Typhoon Heggie vis and unfavorable development from the events that occurred late in the third order quarter, including Typhoon Boxy tropical storm Imelda and Hurricane Dorian.
Losses, and really for the fourth quarter of 2018 included current year and priority or unfavorable development of zero point $3 million and zero point $5 million respectively.
Combined the impact of Attritional losses, with major events, our loss ratio for the quarter was 7.1% compared to a negative 4.4% for prior years fourth quarter as Matt mentioned earlier, our 2019 loss ratio was 5.6% compared to 9% in 2018.
Our expense ratio for the fourth quarter of 2018 was 56% compared to 64.3 present in the fourth quarter of 2018.
We believe our business will continue to scale over the long term.
Our combined ratio for the fourth quarter was 63.1% anchored putters their combined ratio of 59.9 present for the prior years fourth quarter.
Our adjusted combined ratio, which we believe is a better assessment of our efforts was 60.7% during the fourth quarter compared to 57.3% in the prior years fourth quarter that included negative 4.4 present loss ratio.
Our 2019, adjusted combined ratio was 63.3% compared to 69.5% in 2018, demonstrating our ability to scale.
Net investment income for the fourth quarter was $1.8 million, an increase of 75.6% compared to the prior years fourth quarter.
The increase was largely due to increased interest income generated by proceeds from our IPO in April.
We maintain a conservative investment strategy as our funds are generally invested in high quality securities, including Government Agency Securities asset in a mortgage backed securities and municipal and corporate bonds with an average credit quality of double.
The weighted average duration of our fixed maturity investment portfolio, including cash equivalents was 3.49 years at quarter's end.
Cash and invested assets totaled $272.8 million at quarter end as compared to $157.3 million at December 30, Onest 3080.
For the fourth quarter, we recognize realized and unrealized gains on investments in the consolidated statement of income of $1.2 billion compared to 3.6 million dollar loss than prior years fourth quarter loss during last year's fourth quarter was principally due to a decline in the value of the company's equity securities.
Our effective tax rate during the fourth quarter was 24.5% compared to 0.1% for the prior years fourth quarter. The 2019 fourth quarter tax rate includes an adjustment from prior periods of zero point $4 million or approximately three points of the effective tax rate for the quarter.
The increase in our effective fracs tax rate is due to our restructuring and the early part of this year Oliver operations are now taxable us, whereas in the prior periods, our Bermuda operations were not subject to U.S. taxes.
Excluding any unforeseen events, we anticipate that our tax rate will center around the 21% Mark for the joint 20 year.
Our stockholders equity was $280.6 million at December 31, 2019, compared to $96.3 million at December 31 to 2018.
This increase was due to our earnings during the year as well as the addition of IPO net proceeds.
Which will put downward pressure on a return on equity in the short term, while providing capacity for continued growth over the long term.
The fourth quarter of 2018 annualized return on equity was 20.4% compared to 17.6% during the fourth quarter 2018.
Similarly, our annualized adjusted return on equity during the fourth quarter was 21.5% compared to 19.6% during the fourth quarter in 2018.
Our adjusted return on equity for 2019 was 20, 424.1% compared to 22.7% for 2018 with a lower capital base.
Looking ahead to 2020, we expect to generate adjusted net income between $50.5 million to $53 million, which equates to grow a growth rate of 33% to 40% on a year over year basis.
As of December 30, Onest 2018, we had 24 million 92325 diluted shares outstanding as calculated using the treasury stock method.
Taking into account the 750000 primary shares issued from the January 2020 secondary offering there would be 24 million 842225 diluted shares outstanding as of December 31st 2019.
We do not anticipate a material increase to this number during the year ahead.
With that I'd like to ask the operator open up the line for any questions operator.
At this time, we will be conducting a question answer session. If you would like to ask your question. Please press star one and your telephone keypad and confirmation total indicate your line is in the question Q you May Press Star too if you would like to remove your question from the Q4 participant using speaker equipment. It may be necessary to pick up your handset before pressing the star Keith one another please while we pull for questions.
Our first question is from Mark Hughes Suntrust. Please proceed with your question.
Yes, thank you very much.
Good afternoon, and good morning.
On the earned premium if I look at your trend and written premium in recent quarters I might have expected a little more earned the flow through in the fourth quarter.
With more of that business signed near the end of the quarter or is there something in the ceded premium that influences that just to.
Anything about the timing of earned premium would be helpful.
Hey, Mark it's Chris Yeah, I would say there definitely was strong unearned premium to obviously respond strong written premium to finish off the year. So a lot of that is going to help the prospects of 2020.
Along with that I think we've said in the past that.
The call, but 50% ratio for ceded earned premium to see did you got a gross written premium is probably a better ratio than using the gross written premiums ceded written premium ratio that can get a little bit.
Out of whack, depending on what happened during the quarter, whether it'd be a large assumed deal or even significant growth and some of that growth that you saw in Q3 and even in Q4, it doesn't necessarily play out properly in the ratios. We think looking at the gross earned a gross ceded earned it is a better ratio to kind of pick.
When you're looking at modeling this out so I think those two factors and just as we talked about.
In addition.
[noise] excess of loss during the year that needs to come off relative to help facilitate the growth probably starting to play out a little bit in the fourth quarter, but overall, we're happy with the prospects and we're happy with the gross written premium and how is going to play out into 2020.
And then on the earthquake business so.
Clearly the California quake.
Was that it seemed like it was a catalyst how have you seen trends as the year has the last year progress that as you sit at the start of 2020.
Hey, Mark this is Mac.
Let me answer that question I'll bifurcated into the two components of our quake business first our residential and.
Then secondly, our commercial and the Ridgecrest earthquake.
It was a nice driver of new business growth in particularly in the third quarter in the fourth quarter. We continue to see strong new business in that manifested itself in north of 55% I think 58% growth in the residential earthquake business, but I think.
By the middle of the quarter any kind of come Ridgecrest was less of a driver and I think the bigger driver I think it's it up net positive for US is the continued dislocation in the California homeowners market.
Driven by wildfires and you have a admitted markets trying to non renewed business on a consistent fashion and I think you're talking about as much as 10% of their book is being non renewed so that comes back into the primary market in kind of jump on up for grabs dynamic and so we get to compete on that.
So I think that's a kind of a longer term catalysts for growth in residential quake.
That's correct I don't know if its dissipated.
Just because what you do have as a circumstance, we add new agents and we did add new agents over the course of the fourth quarter.
When you have assuming an Asian awareness is driven by awareness and the event itself.
On the commercial side I think ridgecrest is less of a driver of it I think frankly for US what was a bigger driver as getting access to new distribution sources.
And that being a function of a larger financial size category in this case and best size eight and hopefully what will come to root.
When we get to amortize fantasize nine and I think just one thing to point out if you look at the first part in this is anecdotal, but our small commercial earthquake business. If you look at the first eight months of the year.
Our average monthly submission activity was just approximately 860 submissions a month.
App come after August September through the end of the year that submission activity nearly doubled is closer to 1600 submissions a month and so I think that's a bigger driver of growth for us.
On the commercial side than the Ridgecrest earthquake. It just increase submission file.
Thank you.
Our next question is from David might have made in.
Evercore ISI. Please proceed with your question.
Our next question is from Paul Newsome at Sandler O'neil. Please proceed with your question.
I was hoping you could give us a little bit more detail about the basic assumptions not the details but.
Basic assumptions underlying guidance for the year in terms of.
Just in general the and then separately.
Is that does that net.
Guidance include some assumption for realized gains and losses.
Hey, Paul this is Mac.
Let me answer your second question first it does not assume any.
Realized gains or losses on the investments and I think overarching way.
We feel good about the guidance that we're providing we're very comfortable with the range and I think the key points emphasizes the numbers that we put forth is based on existing products in existing geographic footprint. There are no major leaps of faith. There is no assumptions on new products that aren't already.
In the market no new teams that are joining us no major and partnerships that we have not already consummated.
So we are Furthermore, no acceleration and pricing beyond levels, where we are today and therefore, no leaps of faith on premium retention. So we feel that we have a very good sense of what is required from our existing products to accomplish the range that we provided and I think what you'll also see is that.
From a loss perspective, we feel good about the loss assumption there and it's consistent with what we have done in the past where you have many cast and attritional loss contributing to it so that's kind of the overarching.
Yes.
Topped up approach that we take into our bottoms up approach rather we take into the model I think the one thing that I would add is that.
We kind of view this guidance as an interim marker it's no.
Way.
Ultimate goal, it's a near term goal and Furthermore, while weve been somewhat conservative in the assumptions that does not mean that we're not actively and new product development. We're not actively expanding our distribution front, we're not trying to go deeper in existing geographies, nor are we not trying to drive new partnerships.
And expand our footprint in that regard.
So that's really the overarching premise behind the guidance.
Well that makes sense.
My second question is if you could talk a little bit about.
Capital adequacy levels.
Received recently raised a little bit of capital.
But you're also growing quite quite fast.
Do you have any sense of like when assuming maybe the continued growth that weeks, we're seeing of late.
How you would.
How would the capital adequacy.
Change overtime.
So we ended the year.
Rob 0.66 times.
Ratio from a.
Premiums to surplus perspective.
That was prior to the incremental call it $35 million of net capital that was brought on the balance sheet in January that'll push is probably closer to the low 0.5 times. So we think that you know for the indefinite future. We are adequately capitalized the combination of free cash flow.
Well, a loud plus just.
In concert with organic growth will allow us to kind of stay ahead of.
A ratio of <unk> 0.9, 0.95 times, which is a number that we kind of think that we can get to on a steady state basis in anything beyond that that's when we probably look at incremental capital, but as long as were below that 0.95 0.9 times ratio, we think were good.
Thank you congrats on the year.
Thanks, Paul.
Our next question is from David automated Evercore ISI. Please proceed with your question.
Thanks, Good morning.
Just a quick follow up I'm on the outlook for 2020 are you guys, assuming any any catastrophe losses in there like a full retention loss or what is the assumption around cats in there.
Hey, Dave.
We are assuming kind of many cap so think about as a similar type of loss profile to what you saw in 2019, there is not an assumption around a four retention loss.
If you look at 2019, we had losses from.
Tropical storm, Barry tropical storm Imelda Hurricane door, and so there are cats that influence it and it's the mini cap component to what we've seen historically.
But no for attention loss.
Got it thanks, and just just Mac just a follow up on on getting upgraded to am best financial size.
Nine any any sort of sense in terms of timing around that.
And any other sort of initial thoughts or or or or attraction that you guys have seen from some of the larger brokers on a on the possibility of getting upgraded.
Yes, Dave so the timing the way that would work is once we file our Q1.
That's true oriented and group financial statements and MCU and we would automatically triggering because it's really just a mechanical process that they do once they import your financials into their system and then the financial size categories triggered so you're talking about.
Middle of the second quarter, and then over the course of the.
The second half that quarter in third quarter is when it would probably really manifest itself in the market.
And if going back to what I was talking about earlier on the call.
We got to finance OSAT category eight.
On the heels of the.
IPO and our first quarter results and it really didn't start to bear fruit increased submission activity and the promulgation of a broader broker network until August September timeframe. So the latter half of the third quarter.
Conservatively I think the benefits of the financial sad part of growing nine would probably start to really again come to play in a similar timeframe. So third quarter second half of the year.
Got it and do you do you anticipate a similar type magnitude, where I think you had said you got a doubling in submissions.
When you got upgraded to am best size eight.
I don't think it will be as pronounced.
As it was an ambitious pfenex size category eight.
I do think though it will help us in certain segments of commercial earthquake in commercial all risk in particular kind of layered in shared accounts, which candidly is an area where there is probably as much dislocation as anywhere in the property market at least.
So that should be helpful. There, but I don't think it's going to be again as pronounced as it was and.
Thank you circumstance is going to finish that's going to create.
Okay got it and if I could just sneak one more and I'm just on the the Japanese typhoon losses.
I'm, just sort of sort of taking 19 and what happened with the the losses in stride does that change your approach at all to expanding into into new lines.
Going forward and do you see making any changes to the assumed reinsurance book as a results of the experience.
So the assumed reinsurance strategy that we put in place is really we hired John can you seem to be our chief risk officer and in addition to overseeing our analytics department. He is looking to build out and assumed reinsurance product and ultimately what we're really trying to accomplish there is.
Get access to.
Certain geographies that have perils that we know well so illustratively northeast when where we're not licensed in activity writing business or Canadian earthquake that was what we are trying to do with assumed reinsurance. So we will we did we've assembled a book.
That has exposure to those perils plus some others, but all business that we understand.
Secondarily, we use it as a way to.
Really kind of get a sense of the market on a global basis, and a national basis to figure out where the our segments for us to you potentially go into so it's kind of a good tool for front end R&D. So I think.
What I would say I don't think the strategy is one that we're going to take our foot off the pad on I think those same principles applied that gives us access the products that we can't or geographies, where we can access on a primary basis. It gives us a tool to do R&D.
No, but at the same time, you know we hope that we can recoup some of the losses that we've incurred from that over the course of 2020.
So I I think that thesis remains solid and.
It's one that we're going to continue to Impartment hope, we get paid for the off that we've incurred in particularly from the Japanese storms.
Okay, great. Thank you.
Our next question from Jeff Schmidt William Blair. Please proceed with your question.
Hi, good morning.
And on the Attritional loss ratio I think you'd said it was around two and half percent excluding catastrophe.
Since there.
How should we think about that going forward as business mix changes, obviously, it's probably going to go up but could we get a sense of how you're looking at it from a degree perspective.
Yeah, Hey, Jeff Thats, correct, we said, 2.5% backing out some of the assumed or some of the storm activity that we called mini cats were not going to kind of car carve those out specifically, we've got a set in the past that we're only going to carve out full retention events that hitter book. So we view the everything kind of on the.
Attritional already cap, but we just wanted to make sure that people can see exactly what the.
More recurring or what we expect to be a little bit more hurting from a loss ratio standpoint. So that's why we disclose that number like you said as we grow into other lines of business, whether it be are all risk our inland marine we would expect the loss ratio to just pick up naturally overtime. We think it's those those lines of business do.
We have attritional losses associated with them they are going to have.
Losses with them, we do use different types of quota shares to help minimize the impact that any of those losses can have on our book that also helped generate fee income that fee income will help to drive down our acquisition expense overtime as well. So we use a couple different strategies that help those books, but they do we wouldn't the growth and with those.
It is becoming a larger component of our book I would expect the loss ratio to tick up slightly over time, it's not going to jump call. It 5.27 to happen point half a point over a quarter wouldn't surprise.
Okay.
And then looking at that NPW GPW retention it was a bit higher and expect to close to 60% did you say that was kind of driven by that that new assumed reinsurance business.
How should we think about that for 2020.
Yes, so I'd say for the fourth quarter, if I'm looking at that ratio, that's going to be driven by a lot of the growth that we see.
So like I've said before we buy excess of loss reinsurance you know in pieces, whether it be June one or January one. So when you look at the excess of loss component of that it's going to look a little bit more like a stair step where do you buy a piece of it and then if kind of said four or five or six months or three months, depending on how much growth.
Both were seeing but when you look at the growth that we saw that growth. So we bought excess of loss in June than the growth on top of is you're going to see a higher ratio that makes the ceded written look a little bit lower that's why I think it's more important from our standpoint to focus on the gross earned in the ceded earned which is truly.
A more equivalent ratio the risk that were on and the excess of loss being amortized over the term of excess of loss reinsurance. So like I said for the year. It was right around 50% I would expect that ratio to me remain true.
In 2020 years, well assuming that there is no major shifts in any of our lines of business or how we're doing quota share reinsurance the quota share reinsurance kind of jumping around a little bit there's a lot more linear for the written and for the earning of it when you see it on our books, but as our mix stays the same I would expect that 50.
We're set to be a better target when you look at the gross to Cdone hundred going forward.
Right right. Okay. Thank you.
As a reminder, if you like to ask a question. Please press star 100 telephone keypad, a confirmation tomlin get your lines and the question Q you May press Star too if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up brands that before presidents turkeys one moment, please while we pull for questions.
Our next question is from Meyer Shields KBW. Please proceed with your question.
Great. Thanks, good morning.
One of the themes that we heard from a number of reinsurance with regard to January one and that ceding Commission rates were going down are you seeing any bad in the quota share contracts that youre purchasing.
Hey, merits Mac, that's a good question.
Fortunately.
We have not we've been able to maintain the economics.
On the quota shares that we put into place in the fourth quarter and we didn't have much in the way of one one coming up but.
Well, we did renew in particular on the our aside was consistent with what we had expiring.
Okay Fantastic and then I just want to talk a little bit more on Japan, because I think I understand that a little bit less our you're writing that on a quota share or excess of loss basis yourself and can you tell us what the reinsurance protections are for that particular business.
Sure so.
We're writing that on an excess of loss basis, and the way we've done that as we have selectively partnered with existing reinsurers that we know well that are big.
Participants on our program and so there's an inherent trust that we have with those reinsurers and as an inherent familiarity that that brings us.
Yeah, Hey, a higher level of confidence so what we are doing though as we are just taking a percentage of their excess of loss program. If you would so we are attaching high up in.
Well, depending on the reinsurance, but generally speaking we are trending attaching pretty high up the PML.
And as a result like you have the losses are fairly modest. So there is no first our exposure and I think it's worth pointing out that the losses that we have had and Chris can chime in.
It's an estimate right now there have been no claims tendered.
So we're just working in concert with our partners there.
Okay Fantastic and the final question.
I know the insurance Commissioner in California is trying to sort of discourage nonrenewals is that impacting submission flow for California residents looks like.
Yes, I mean, that's a good question what I was you know I think he is the he certainly is the commissioners certainly is trying to discourage non renewals and its put a moratorium in place in selected areas.
And I think that constituted roughly 800000 homes in the state.
So it was it was a small component of and frankly, there are areas that are probably most exposed to wildfire.
You're still seeing.
10% of the average book of business, 10% of it being non renewed and I think that as a dynamic that when you put into context of the total size. The book that ensure has they can even if they're in a more 24 select segment. They can find another area to non renewal.
Probably doesn't meet their underwriting criteria at this point.
So it's not impacting us long winded answer.
No that's very helpful. Thank you so much.
Thank you.
Our next question is from Matt Carletti JMP. Please proceed with your question Hi, Thanks, Good morning.
Yeah, Chris actually want to follow up on Jeffs question about kind of loss ratio progression.
Is there any kind of corresponding expense ratio movement that we should expect in terms of whether it's kind of commissions paid with the smaller lines of businesses are growing.
And then separately.
Just in expense ratio question generally is as you kind of get to scale and kind of the target mix of business you're targeting.
What's a good run rate expense ratio that the company can achieve.
Yes, so all the acquisition expense for the lines of business that we're growing in those who will have a just naturally they have a lower acquisition expense that are some of our other lines of business. When you look at our residential earthquake business. It has driven by VMG market, which has a higher acquisition.
<unk> expense. These other lines that were looking at or that are growing right now all risk inland marine are driven by the wholesale markets that just having naturally lower acquisition expense than the MJ business. As I mentioned, we also have quota shares for though those lines of business. The ceding Commission that we receive on the quota shares is netted against because.
Emission expense, so that does help to drive down the acquisition expense a little bit more so as those lines become a larger component of our overall book I would expect the acquisition expense. Due also decrease not it's not going to drop similar to loss ratio. That's I don't expect to jump up I don't expect the acquisition expense too.
Drop.
Five points to the quarter, but I wouldn't be surprised to see a decrease slightly over a period of time. The other thing with that as its also on an earned basis. So it's going to take a little longer for that just to develop naturally through the book, but I would expect those lines that helped push the acquisition expense down.
Similarly going to just the other operating expenses are the expense ratio in general we have not provided any type of guidance on the expense ratio, but as we look at our book as we look at the way we built things.
For growth whether it be on the residential lives or just the systems that we put in.
I would expect there to be more scale in the book as we continue to grow I think the topline growth that we're seeing should exceed any growth in expenses.
To say that we're not going to be.
Prudent about adding.
People for technology people for.
Process improvement.
Just naturally the growth in the revenue is going to see room to offer.
We haven't provided specific guidance on.
The expense ratio is going to dropped to 55 or anything like that we just think its naturally going to go down overtime.
And just.
Matt just add a little more color.
If you just look to Chris is point on the scale the adjusted on other operating expenses.
Was 11.6 in the fourth quarter versus.
12% and the same quarter to your prior and that's where a lot more investment in headcount technology, and frankly public company expenses. So I think thats illustrative of the scale that we are starting to achieve.
So I think thats, probably anecdotal support right and then if I can I sneak one more in a Mac you know just high level question here, you've got a lot of kind of great opportunities ahead of you in very different kind of stages of of growth and incubation <unk>.
As you kind of look out over the longer term you know five years whenever you want to define that as which which business do you see you might see is the biggest opportunity for palomar or potentially is at one that we we haven't found out about yet and you guys have in the kind of in R&D and having our public on.
Yeah.
Good question, Matt I think just.
Overarching only right now I think we're seeing more opportunity in the commercial side of our business.
You know and there's a there's within those lines that we haven't commercial let's call it in marine.
The commercial earthquake and all risk there different catalyst for each one.
Commercial earthquake not to beat a dead horse, but that was the prime beneficiary of our larger financial SaaS category, and I think thats going to continue to be a driver.
Of increase submission activity and then you couple that three submission activity with a.
Hey, pretty attractive pricing environment that leads to selectivity and growth in better margin.
So I think we feel pretty good about the prospects there.
The already side that's in a much larger market then the earthquake market is so.
You know and while we're getting very good growth. There are we still think we're putting in the early stages of that operation. So I think theres a lot of promise there and then inland Marine is brand spanking new.
Less than one year of operation and we have some real talent in that organization the leader of that department.
Has now gotten is.
File is filings into all 27 states in which we are licensed keys increases production count from the third to fourth quarter by over 140%. So.
He put a lot of infrastructure in place to really scale that organization has continued to add talent. So I think that one which is really just the tip of the iceberg. So.
I think right now, we're probably seeing more growth in commercial more growth opportunity and promise in the commercial market.
We feel good about what we're doing also on the residential business the personal lines business.
Thanks, Matt Hey, Congrats on a first year as a public company a strong one and best of luck in 2020.
Oh, Thank you Matt appreciate it thanks for sport.
Our next question from Mark Hughes Suntrust. Please proceed with your question.
Yes. Thank you Matt what was your comment on the pricing residential versus commercial or different lines. What did you have to tell you then could you give us an update on where you kind of see things the standing today.
Yes, so our residential business where are you we don't have the ability to take rate like we do and the commercial and most of our products have what we call inflation guard, which allows us to kind of take rate a little bit ahead of the cost of construction in the likes of those typically have a 5% automatic renewal increase.
On them.
And that's what we have in place right now for our.
From a press purpose or personal business personal lines of business.
On the commercial side are our composite rate increase.
Was right around 9%, 9.2% for the.
Our risks side, and then 13.4% for the.
Commercial earthquake, so very strong and I think we've touched upon at the rate increases accelerated from the third quarter versus the second quarter and certainly the from the fourth quarter versus the third quarter.
I think we feel very good about demean the ability to maintain rate through the course of 2020 and frankly, that's as much informed by the.
The continued.
You know pullback of capacity from some of our competitors Lloyds in particular I think there. Another five syndicates that were wound down in the fourth quarter. I think there is very strong rate integrity on our distribution network and so alignment there.
And then larger riders continue to be mindful of their capacity in particular on larger properties schedules. So we feel very good about the pricing dynamic that we're seeing today and we that we saw in the fourth quarter and don't see a near term.
Catalyst it pushes it the other way.
How about the specialty homeowners some you've still got the solid growth there, but being outstripped by other lines how does the.
Has the competitive environment or your appetite there.
I think.
What I would say, it's more appetite that's that's a nice line of business for us and we put it into the specialty homeowners quota share facility. So it's a good driver a fee income for us.
But it's also in the circumstance of our Texas book is probably our most mature line of business. So we've kind of governed ourselves in terms of how much. We're gonna grow we will grow that as the extend our geographic footprint in the fourth quarter, we started to bring on more business.
In North Carolina to balance, what we're doing in Texas, Mississippi, and Alabama, and there are other states that are on the horizon over the course of 2020.
But you know that that line of business, what won't grow as quickly as they need the commercial lines of won't go as quickly as flooded static as quickly as residential quake.
Thank you.
We have reached the end of the question answer session and I will now turn the call back over to Mac Armstrong for closing remarks.
Hi, Thank you operator, and thank you all for your time. This morning. This concludes Palomar as fourth quarter and for your earnings call. We appreciate the time to questions and always.
Your support.
We feel the 2019 was a milestone year for the company. We entered several new lines of business expanded our geographic footprint, we strengthened our team to the addition of several highly talented.
Industry veterans and we generated strong financial results hopefully they will you know would you will see that our 20 nineteens accomplishments provide both motivation and invigoration for 2020 and hopefully the earnings guidance that we provided you you will feel very good about the prospects for 2020 I certainly we do so we look forward to speaking with you.
You after the first quarter and thank you very much for your time have great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.