Q2 2020 Palomar Holdings Inc Earnings Call
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Good morning, and welcome to Palomar Holdings, Inc.'s second quarter 2020 earnings conference call. During today's presentation, all parties will be in listen only mode. Following the presentation. The coxless will be open for questions. What the shops just to follow at that time.
This conference is being recorded I would now let's turn the call over to Mr., Chris <unk> Chief Financial Officer. Please go ahead Sir.
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Thank you operator, and good morning, everyone. We appreciate your participation in our second quarter 2020 earnings call.
Let me here today is Mac Armstrong, our chairman Chief Executive Officer and founder.
As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11 59 PM Eastern time on August 12 2020.
Before I 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 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, including but not limited to risks and uncertainties related to be Coburn 19 pandemic.
Such risks and other factors are set forth in our quarterly report on form 10-Q, there will be filed with the Securities Exchange Commission today.
Yes, we have 2020.
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 in isolation or as a substitute for results prepared in accordance with U.S. GAAP.
A reconciliation of these non-GAAP measures to their most comparable GAAP measures can be found in our earnings release at this point I'll turn the call over to match.
Thank you Chris good morning, everyone.
Before I discuss our second quarter performance I'll be happy Palomar I'd like to express my hope that all those on this call are safe and healthy.
We continue to find ourselves and uncharted waters as we navigate the coping 19 pandemic and the ongoing civil unrest in our country.
Regarding the cutting your pandemic our number one priority remains the health and safety of our team.
Our employee base remains resilient as the Coca 19 pandemic continues to impact our ability to return to the office safely.
To comply with state and local mandates and support our team well maintain our predominantly virtual remote workforce environment through the remainder of this year.
I want to take our entire team who continues to work diligently during these extraordinary circumstances.
Maintain business as usual standards for aren't shirts and partners.
Operationally, we remain fairly insulated from the coping 19 pandemic and good thing you believed that pandemic will not have immaterial impact on our profitability or growth.
Our specialty property focused precludes us from a loss in areas like workers compensation about cancellation and trade credit. Additionally, our exposure to business interruption isn't our view negligible as our commercial property policies require lost from physical damage to the property from the named peril and feature virus exclusions.
The three months ended June Thirtyth 2020 represent another strong quarter performance for power our second quarter results are highlighted by several notable achievements.
First we formed in loss Palomar excess and surplus insurance company or Patrick our newly established surplus life insurance company subsidiary.
Second we continue to thoughtfully manage our risk exposure in risk transfer strategy is evident in our successful June 1st reinsurance renewal.
Third we further enhanced our distribution channels, what the loss of two residential earthquake partnerships and in Michigan and its three new states expanding the geographic footprint, Palomar specialty or Medicare to 30 total states.
Fourth based on 2019 industry data recently published by SNL as of yearend, we became the third largest earthquake ensure in California, and the fifth largest earthquake insurer in the country.
Lastly to support our growth.
We added 18, new teammates across the organization.
As well, we had a Daryl Bradley as a new director to our board Daryl brings nearly four decades of industry experience and I personally look forward to working with them.
Separately I'd like to thank Brian Clark, our former chairman of the board for his service and Genstar capitals commitment to Palomar since inception.
John starts guidance insurance expertise and proven track record of investment success have been invaluable and greatly appreciated.
Looking at Patrick in more detail the Arizona Domiciled company is license to transact across all classes of insurance, including our current specialty property line and is a natural exciting progression in our continued evolution.
The formation of Patrick enables us to further leverage our Anikas <unk>, basically driven and disciplined underwriting framework right business on a national scale.
And it's your certain risks that are admitted product currently cannot satisfy.
As Patrick was just recently launched we will continue to make the necessary investments in areas like technology analytics and revenue generating underwriting talent throughout the remainder of the year.
We have capitalize the company with over 100 million of surplus utilizing the proceeds from an offering of our common shares in June Patrick recently received an a minus FSR from A.M. best.
And the group an exercise category of Epicene nine with the rating in hand, we expect to begin writing business in the third quarter.
Strategically managing our risk exposure remains a major pillar of our core business on June 1st we successfully renewed and expanded our excess of loss reinsurance program, which now exhaust at 1.4 billion for earthquake events and 600 million for hurricane events.
The program provides adequate headroom to support our growth initiatives, including Patrick.
It's incremental limit continues to permit the maintenance of reinsurance protection beyond the one and 250 year peak zone probable maximum loss and also to significantly exceed simulated losses from any recorded historical events.
We increased our catastrophe event retention for 5 million to 10 million for all perils, maintaining our retention inside of one quarter of earnings and less than 5% of surplus.
The June 1st placement marks the first reinsurance market Palomar space since inception, and we're very pleased to have earned the requisite capacity to sustain our growth and margin profile, while the costs are higher with the risk adjusted rate increased approximately 11%.
They are manageable when compared to the rate increases we are seen on a primary basis.
We believe the rising cost of reinsurance in the property market broadly you should create several opportunities within our portfolio.
From a distribution standpoint carrier partnerships continue to be a differentiated channel for our business and then the second quarter, we entered into two new residential earthquake partnerships, while making progress on several others.
As I've mentioned before these relationships take time to develop and we're proud to provide valuable solutions to other insurance companies.
With respect to our traditional retail and wholesale footprint total active producers increased 6.5% sequentially in the second quarter.
Additionally, we continue to execute our geographic expansion initiatives by growing the footprint of our admitted carrier 30 states across the nation.
I will briefly like to touch on our position as the third largest earthquake insurer in the state of California, and the fifth largest in the country.
Well this validates our commitment to the earthquake markets in it in its entirety. It also demonstrates our ability to increase penetration rates in the earthquake insurance market, which has historically been what are the most understood property insurance markets in the U.S.
We remain dedicated to providing product offerings that are not only differentiated from alternatives in the market.
But also motivate the purchase of earthquake insurance by consumers, who have previously not identify products that fit their needs.
We believe ample room for growth in our earthquake products remain and that Patrick will further drive growth in particular in our commercial earthquake segment.
Shifting to our second quarter financial results. We're pleased to report strong gross written premium growth of 43.6% year over year.
We saw meaningful growth across all product lines as we further enhance our position as a leader in specialty property market and increase our market share and newer lines of business like builders risks within our inland Marine Department.
[noise] major second quarter growth drivers were commercial all risk and commercial earthquake lines, which increased gross written premiums by 103.6 at 46.2% respectively.
From the prior year period.
Commercial lines growth was a function of new distribution sources expanded geographic footprint incremental product traction and most importantly sustained pricing increases our second quarter commercial policy average rate increase our renewal was 14.2% versus 12.1% in the first quarter, a 17.4% sequential increase as.
I mentioned earlier these rate increases more than absorb the increase in our reinsurance program.
During the quarter, our book experience premium retention rates of 88% consistent with the 90% achieved during the first quarter.
Premium retention for our residential earthquake, Hawaii hurricane in all risk products, we're all in excess of 92 per se.
We continue to believe these results are a testament.
To the unique value that our products offer insureds and distribution partners.
Loss and loss adjustment expense, which Chris will detail shortly totaled 4 million during the quarter generating a 10.1% loss ratio.
Our strong written premium and earned premium growth and modest loss ratio resulted in adjusted combined ratio of 65.1% and as adjusted our we have 16.4% during the quarter.
This are we was achieved despite a conservative net written premium to any stockholders' equity ratio a 0.57 times.
And the dilution from the $90.2 million capital infusion. We received on June 26, excluding those proceeds our adjusted or are we would have been 19.1%.
We continue to stay focused on growing our business as we scale our capabilities and broaden our footprint. Our team remains committed to the long term opportunity for Palomar and believe our results reflect the continued execution of our strategy.
Moreover, our team remains focused on delivering for all stakeholders of power.
Before I hand, the call over to Chris I want to take a moment to acknowledge today's current social environment as it has become increasingly apparent that our country has lost any systemic issues was racial and economic inequality that must be recognized and address our thoughts or the with those that have been impacted by the ratio injustice today and historically.
Palomar as a company built on values in those values compel us to help build a more just fair society across all cities and towns throughout our nation.
We stand it's all they already with the African American community all of our teammates and shared brokers and partners to fight racism engine and injustice.
Staunchly believed the black glass matter as such we recently donated $100000 to groups focus on fighting civil injustice racism in helping bill and helping rebuild the communities most impacted by recent events.
Including those in the pit from the pandemic.
We hope that with our help and support companies across the nation, we will work together and move towards the future of a quality and justice.
That I'll turn the call over to Chris to discuss our results in more detail.
Thank you ma'am please.
Please note that during my portion when referring to any pershare figure I'm, referring to per diluted common share as calculated using the treasury stock method.
Second quarter of 2020, our net income was $12 million were 48 cents per share compared to net income of $6.7 million or 30 cents per share for the same quarter in 2019.
For the second quarter of 2020, our adjusted net income was $13 million or 52 cents per share compared to adjusted net income of $8 million or 36 cents per share for the same quarter of 29 team. The second quarter 2020, and 2019 adjusted net income excludes expenses related to our stock offerings factories.
Structuring and stock based compensation debt extinguishment costs, and catastrophe bond related costs, including the tax going back over those expenses. During 2020, our shares outstanding have increased by approximately 1.9 million shares or 8% primarily due to stock offerings gross written premiums for the second quarter, where 83.
The point $8 million, representing an increase of 43.6% compared to the prior to second quarter. We continue to see robust new business rate increases and strong premium retention with contributions across our products.
Ceded written premiums for the second quarter were $30.2 million, representing an increase of 22.6% compared to the prior year second quarter, our risk transfer strategy remains a critical component to our business, especially as we demonstrated sustained at top line growth.
The increase was primarily due to an increase in reinsurance expense commensurate with our growth.
As we grow our business, we expect to incur additional excessive loss reinsurance expense as we maintain a conservative level of overall coverage due to the timing of our reinsurance placements and the terms of the underlying contracts there maybe a lag between earned premium ended a reinsurance placement or expense, but overtime, we expect view.
Impacts to smooth out and their trends look the same.
As of June 1st of this year, we retain $10 million per a quicker wind event and we purchased 1.4 billion of total reinsurance coverage earthquake events.
Net earned premiums for the second quarter were $39.3 million, an increase of 69.4% compared to the prior year second quarter. Our results improved primarily due to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.
For the second quarter of 2020 net earned premiums as a percentage of gross written premiums were 55.5 per cent compared to 49 point you present in the second quarter of 2019.
As previously discussed we believe the ratio net earned premiums to gross written premiums is a better metric for assessing our business versus the ratio of net written premiums the gross written premiums.
The past we have also indicated that with our current mix of business, we expect that ratio to be around 50% on an annual basis lower at the beginning of a new excess of loss treaty and higher up the yen with our expected growth in earned premium.
As of June 1st of this year, we have altered the structure of our specialty homeowner homeowners facility or essay, Jeff while the overall changes to the structure Lvs Asia will not have a material impact on our net income or our risk transfer strategy. The changes will impact our net earned premiums to gross written premiums ratio.
And our combined ratio.
The changes to our CHF structure, we expect our net earned premiums to gross written premiums ratio to be about 53% to 54% on an annual basis still lower the beginning of a new excess of loss treaty and higher up again with our expected growth in earned premiums. Additionally, we expect our combined ratio and our adjusted combined rate.
As you more specifically the expense ratio component to increase about two to two and a half points again, we do not expect these changes you have a material impact on our net income.
Commission and other income was $937000 for the three months ended June Thirtyth 2020, compared to $721000 for the same period in 2019.
The increase was primarily due to an increase in the policy related fees associated with an increased volume of premiums written.
Losses, and loss adjustment expenses or Ellie incurred in the second quarter were $4 million compared to $643000 than prior years second quarter. Our losses. During the quarter were primarily made up of Attritional losses in our commercial risk and specialty homeowners lines. In addition, we booked approximately 93.
Thousands of adverse prior year development.
Our loss ratio for the quarter was 10.1% compared to 2.8% for the prior year second quarter, our losses and loss ratio increased in the second quarter 2020, primarily due to increased attritional losses in our commercial all risk and specialty homeowners lines from heightened weather activity and PCF Pts events.
Including tropical storm Cristobal.
Part of this increase was driven by favorable loss development and our second quarter of 2019 results and that the majority of our specialty homeowners business use a four fronting arrangement through June 1st of 2019.
Our expense ratio for the second quarter, 2020 was 58.3% compared to 66.4% and the same quarter of 2019, the combined ratio for the second quarter was 68.4% compared to a combined ratio of 69.2% for the prior year second quarter.
Our adjusted combined ratio was 65.1% during the second quarter compared to 63.8% in the prior second quarter. We believe our business will continue to scale over the long term, even with the aforementioned investments associated with the launch of pesek.
Net investment income for the second quarter was $2.1 million, an increase of 42.5% compared to the prior to second quarter. The increase was largely due to higher average balance of investments. During the three months ended June thirtyth twentytwenty due primarily to proceeds from our primary stock offering during the.
Oh period as well as cash generated from operations funds are generally invested conservatively and high quality securities, including government agency asset and mortgage backed securities municipal and corporate bonds with an average credit quality you may want to keep us.
Our fixed income investment portfolio book yield during the second quarter was 2.83% compared to 3% for the second quarter 2019.
Weighted average duration or fixed maturity investment portfolio, including cash equivalents was four years at quarter end cash and invested assets totaled $430.4 million at quarter end compared to $245.3 billion at June Thirtyth 29 team.
For the second quarter, we recognize realized and unrealized gains on investments and the consolidated statement of income of $778000 compared to $493000 and the prior year second quarter, our effective tax rate for the second quarter 2020 was 21.5% compared to 21.1%.
For the second quarter of 2019.
Excluding any unforeseen events, we anticipate that our tax rate will settle around the 21% Mark for the 2020 year.
Our stockholders equity was $375.2 million at June Thirtyth 2020, compared to $199.6 million at June Thirtyth 2019, the second quarter of 2020 annualized return on equity was 15.1% compared to 17.8% during the second quarter two.
The 19.
Similarly, our annualized adjusted return on equity during the second quarter was 16.4% compared to 21.2% during the second quarter 2019, a change in annualized return on equity and annualized adjusted return on equity reflects a significant increase in the company's stockholders' equity primarily due to.
Two $213.1 million in capital raise across multiple stock offerings.
Between April 29 team and he ended the second quarter of 2020.
Looking out to the remainder of the year, while investing in our new units company. We believe we are well positioned to achieve our previously stated expectations of delivering adjusted net income between $50.5 million to $53 million for 2020, which equates to a growth rate of 33% to.
40% year over year is worth emphasizing that these results assume there are no major losses from a natural catastrophe and or are those are rising from business interruption legislation.
As of June Thirtyth, Twentytwenty, we had 26.222 million 551 diluted shares outstanding as calculated using the treasury stock method.
We do not anticipate a material increase to this number during the year ahead.
With that I'd like to ask the operator to open up the line for any questions operator.
At this time, we will be conduction a question and answer session. If you like to ask question. Please press star one on your telephone keypad confirmation total indicate your line is in the question Q. You May proceed are too few we'll look to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up you had said before question. The Sarkies one moment, please as we pull for questions.
Our first question comes on line of Matt Carletti with JMP Securities. Please proceed with your question.
Hi, Thanks, good morning.
Mac you mentioned.
You talked a little bit about the Palomar opportunity and touched on the commercial bank little bit I was hoping you might be able to dig a little deeper and give just a little more color on kind of the opportunities in the market that you're seeing maybe that without the units company you haven't been able to take advantage of but but that would that you will be able to.
So we get a better feel for the opportunity.
Hey, Matt Yeah Bank that the Great question BNS company is something that we're very excited about and.
It's something that we had been contemplating for several years, but fortunately in 2020 market conditions as well as our capital base put us in this position to put it can bring into fruition.
Ultimately you know at least initially we think it's going to be very focused on specialty property markets. Because there are segments of our core franchise that we really haven't been able to access effectively as an admitted ensure and I think that's most pronounced in commercial earthquake and commercial all risk and our builders' risk departments.
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Where we have had more of a small to midsize commercial focus and we have not been able to participate in the layered in shared market.
Having to E N S platform, which is where the layered in shared market is and this is going to be you're talking about two total insured values that are in excess of $100 million. It typically will have several carriers participating in a stack a limit we have not been able to access that and so now with the and asked company.
We should be able to do so it won't change the amount of limit that we put out on a given risk, but where we attach in where we participate that is one area that we see considerable opportunity I would also added that's been an area, where there has been considerable dislocation and pricing disruption over the last 18, well really less.
12 months, and we think it's going to be sustained through the rest of this year into 2021. So thats one segment, where we see kinda our core franchise really being extended and frankly, expanding our Tam. Additionally, we're admitted in 30 states. So there are certain geographies that we have not been able to access.
Or just felt that we couldn't do a good job being competitive with an admitted.
Platform. So we think the N.S. company will allow us to take existing products.
Into new geographies.
Where we just couldn't get our admitted products approved in certain cases, or just they weren't going to be competitive.
So I think it opens up all 50 states for US again in state segments like fly them in segments like inland Marine and builders' risk. So those are a couple examples and I think what you'll see as we launch you know in August We said August 1st was kind of our target date as we launched this month you will see initially you really have.
A concerted effort to extend our franchise in specialty property.
Great. That's really helpful. The only other question I have is.
Centers around the reinsurance program and kind of similar hoping you could give us a little bit more color there.
I know as we compare it against kind of the other midyear movement and then one of those books are very different Palomar.
11% is pretty good outcome.
Could you just helps a little bit about kind of what you saw what what kind of attracted reinsurance the program I know on the path Quaker had been a very diversifying risk and that's been something that they wanted as opposed to the more when the portfolios, but if there's any anything that stuck out would be helpful.
Yeah, So I think first and foremost our team.
Led by he Fisher and John can you didn't did an exceptional job and getting the placement.
Completed with a with a relatively favorable outcome what I would tell you is you're exactly right that our portfolio is unique it's a unique from historical loss perspective, it's been very little Theres been no earthquake losses paid its unique in that it is indeed diversifying.
It's unique in that we have a very broad and robust panels not overly concentrated no was more than I.
I think approximately 7% of limit so we've got great partners that can accommodate our growth.
But what I would say is when you look at the overarching the 11% increase you know it was more be eight rate increases were more pronounced where there was a wind exposure wind and earthquake exposure versus standalone earthquake. So.
As we add more limited, it's gonna be driven by our prevailing exposure, which is earthquake. So I think that will allow us to.
Sustain modest or not nearly the level that you're seeing and win rate increases. So I think the unique complex one of our book.
And the strengthen our panel allowed us to get it done at again I'll use the term relatively favorable outcome.
Thanks, Matt really appreciate the color and best of luck getting the company live and rest of the here.
Thanks, Matt.
Our next question comes from the line of Mark Hughes with two security. Please proceed with your question.
Yes. Thank you a good morning.
On the.
Excess.
Commercial business, what do you think you're a.
Pace will be in terms of ramp up there.
Some of the broker commentary could be believe they're going to be pretty eager for more capacity.
Could you talk about the kind of what you're seeing out there now and then also what is the individual risk look like how much exposure per risk.
Kind of where you sitting in those excess players just a little more detail there would be helpful.
Sure Mark.
Good to hear from you what I would say is you know we bought incremental limit to the tune a roughly $200 million to support our growth in and around the CNS company as well as the admitted platform and we think that is sufficient for the immediate future certainly as we have identified new distribution partners are leveraging.
Existing distribution partners and all of our specialty property markets, but most pronounced in this excess property arena.
<unk>.
We will think we can grow our sustained growth rates like we saw in the second quarter with commercial earthquake growing approximately 40% I'm not going to say that all risk will grow at 100%, adding phenomena, but I think we can continue to see solid growth from that line in those are going to be the two markets that are most for now.
Pounced.
For the most pronounced beneficiaries of the CNS franchise.
But I think that where we don't expect us to.
When coupled that book, writing excess property I think it's going to be consistent growth of what we've done historically.
It also will be consistent is how we participate in the risk from a.
Lifesize perspective, you know our average line for all risk.
As typically between five and $7 million I think that's what we'll look at to continue to do.
On the commercial wins side earthquake, we are willing to write a bit of a larger line for select accounts.
Maybe pushing up to 10, and if we use facultative reinsurance 15, and maybe a bit above that.
But I don't think what you're going to see as outgoing and doubling the size of the limit that we put out on an individual basis. It's really what we're trying to do now its access segments of the market, where there is dislocation and need for capacity and do it in the same fashion that we have done it historically from an underwriting standpoint from an attachment staff.
Endpoint and certainly from a.
Risk transfer modeling standpoint.
Oh, Thank you for that and I assume that's something that could be done pretty expeditiously.
This isn't the.
Process of.
The long ramp up there so a lot of need for at the immediately is that fair.
Yeah, I think there there that is fair I think there's this is very different than admitted where you get an mitigate company up and running then you're waiting for 45 to 90 days for Department of insurance you prove your rates and forms we already have existing forms we already have exists or existing underwriting guidelines.
So we should be able to start to bring business on.
Hey August 1st was our official launch date, we have written a policy or too.
As I speak to you today so.
It should ramp, but we're going to we're going to be disciplined.
We're not going to ramp it up just for the sake of topline it's got to be consistent with our underwriting framework got to hit our target metrics.
From a PML in NHL perspective.
But it does it's much more expedient than doing not admitted basis.
None the loss ratio in the quarter, you mentioned elevated whether how much do you think of the loss ratio was driven by that.
Yeah, I think obviously mark weather played a factor in and there is little bit of seasonality with some of our well we do have some texas exposure and some southeast exposure outside of Florida right. Now. So when you look at that obviously, we were exposed to weather.
The other piece of it is when you look at our book.
The complexity and has been changing over time.
We look at the called the first half of 2020.
Our lines is exposed to Attritional losses are now about 40% of the written premium in the first half of the year compared to the full year and 29 team that was about 30%. So that is growing about 30% on a year over year basis. So that is also kind of pushing up the loss ratio from where I want.
As of the in last year was about 5.6% of in last year. So now that has grown.
To about 7.9% when you look at the full first half a year. So it's kind of like we said before it has ticked up from where it wasn't the into last year, but thats a lot of as being driven just by the complexity and over the overall portfolio.
Well I think it's worth emphasizing a couple of things just reiterating what Chris said the other side of the corn is 60% of the books still does not have attritional loss. So that gives us a lot of visibility on the underlying loss ratio of the book of business and then.
Additionally, there was heightened weather activity and I think a lot of people in the market Preannounce cast. This is what this is the these many cats is what were built to do.
So we don't really bifurcate them unless they are really pronounced kind of laying following storms.
Tropical storm is that par for our course.
Wishes as we wish it wouldn't be.
And the final question did you give a any dollar figure for how much the.
Ramp up of the.
Yes.
Unit has been what what are your costs, so I'd say in Twoq.
[noise] Mark we've not given dollar figures there I think what Chris alluded to in his remarks.
And I did as well is that the guidance that we provided reflected the investments that we are making them all and we'll make in the third quarter and fourth quarter on the Ines company and that can include.
Talent systems.
Incremental bespoke reinsurance for certain new products or extend through products.
It's hard to handicap, because there might be someone that we find thats a terrific layered in shared underwriter or someone that can help lead certain facets of what we're doing.
New product development.
We're budgeting for them, but they may come on early to make them on a little later, so we're not going to trying to peg a dollar, but where we are going to give you just kind of targets and what we think we'll have we'll end the year.
Thank you very much.
Our next question comes the line of Jeff Smith with William Blair. Please proceed with your question.
Hi, good morning.
The question on the Attritional loss ratio I understand how that's being impacted I've seen that shifting business mix into non event based products.
But could you provide any more detail on.
Quota shares there I think you retain a little bit maybe 10%, especially homeowners.
You know maybe more like 20% of commercial all risk.
Has that moved a lot I mean, where did those stand today.
Yes, Jeff.
Chris can chime in.
We did increase our participation on the specialty homeowners facility I think for now we are around 22.5%.
The all risk.
We are taking more of the cat.
Still seeding off.
The good majority of the Attritional a buyer.
Premium in exposure.
Yes, I'd say similar to our excess of loss retention, we've increased our participation in the quota share is a little bit so I talked about the.
In the prepared remarks that.
It's going to impact a little bit of the expenses and also the net earned so we talked about that and there but those are the key pieces overall, we don't expect a call a material impact from those changes, but there is going to be let's call a little more participation on our side commensurate with the growth from.
Net income, but also grown from a capital that we just raise so those are all being put into place and I think leveraging our balance sheet balance sheet, a little bit more now with the additional capital.
Okay.
And then is that the case with the builders' risk nonresidential flood as well I mean, I know you kind of started out small up there and can talk maybe you could increase that over time or are you starting to increase that participation on on those yet.
We we I think we mentioned this.
In our year end remarks that we took the quota share participation on the residential flood up to 30%.
And so that was consistent with your four.
Of operation and now starting to see a pretty consistent performance.
The builders' risk and it's still early so we have not changed much in the way of our participation there.
Okay.
And then just a question on the capital raise I mean, it looks like the majority that just went in in the cash is their plans to deploy that and investments pretty pretty quickly.
Yes, Jeff it is being deployed.
Fairly expedient way.
There was a little bit of it.
Our investment manager was fair frankly in that they told US it wouldn't have been from a cost management perspective ineffective free to put it into an investment account on day. One. So we just put it in cash because we are closing that financing June 2016, 27th the return we would have got would not have matched what the investment management fee would have been so we decide.
To put in cash.
Got it okay. Thank you.
Once again, if you would like to ask question. Please press star one on your telephone keypad. Once again, if you will assess question. Please press star one on your telephone keypad.
Our next question comes from the line of Mayor shoot with KBW. Please proceed with your question.
Great. Thanks have a series of small questions.
Mac you talked about extending the team by about 18 people no the underwriters protect people or what.
Yes.
All the above.
It was a lot in Tac.
A lot in accounting.
I actually mean.
Underwriting there were a few in accounting, especially as we are now no longer and emerging growth company and need you.
Sorry to push forward on.
Sox compliance.
We also added our chief strategy Officer.
So can continue to build out that function too. So I would say the biggest hires would've been in underwriting.
And technology and then it would have been rounded out.
With other corporate seats.
Okay.
Thanks.
The two new partnership default increase or decrease the percentage or should that increase or decrease.
Amount of.
California earthquake in the book relative to other lines.
[noise].
Those partnerships the two new ones should well one of them is a kind of national earthquake partnership, but just the size of the market is in California is.
Quite larger than the rest of the.
Exposures exposed data, so I think that would push California residential earthquake higher as a percentage of residential earthquake and then the second partnership is really around California residential real quick.
Okay perfect.
Chris This guidance for the tax rate should it be below 21% in the back half of the year.
This fairly again, there as far as if that was hard here.
No I'm, sorry up a bit here at all day.
That's your tax rate guidance for the full year imply something below 21% in the back up.
It's always possible I think we look at different things around that you know, whether there's stock option exercises or things of that nature that could potentially push it down, but we think that our average effective tax rate is going to be around 21%, it's kind of.
What we're comfortable providing guidance around but there are obviously things out there that can move around but I would say.
It's always potential, but my guess and sobi around the 21% Mark.
Okay got it and then final question I get back to Mac.
Should we think about ethic participating in the quarter marketplace or that's still a reason you want to avoid.
Yes, Thats a great question I think there we will likely take a small participation in the Florida commercial market.
And as a result, we will likely reinsurance somewhat independent of our core reinsurance program, which frankly governs how much business, we will do there.
We will not do any residential business there, it's more than likely what it would be is writing national property count that have.
Locations in Florida, but not Standalone, Florida business.
Perfect. Okay. Thanks, so much and.
Well.
You too. Thank you. Our next question comes a lot of David Multimodal with Evercore. Please proceed with your question.
Hey, good morning.
Just just a question just on the residential earthquake business. So I heard the points just on the good retention.
Wondering specifically just how new applications were trending in twoq versus one Q.
And and if there and there seems to be a trend at least of a move away from cities and more into the suburbs as a result of the pandemic I'm wondering if you're seeing that creating any opportunities for you got.
To gain share in the Reggie market or maybe even expand the market.
Hey, Dave.
Yes, that's an it didn't into Thats, an interesting assessment and observation.
To answer your first question new business volumes were pretty consistent between Q1 in Q2 save for some new partnerships that are coming online and starting to ramp. So we were.
Pleased by that.
Additionally, we continue to see dislocation in the California at home owners market, which is creating this kind of.
Vacuum for capacity on the homeowners side, which in turn creates policies that come out for bid on the earthquake come up for bid on the earthquake side. So.
Dynamic.
It's persisting.
Yeah, I think it exar been a migration creates opportunity certainly as people.
By their homes and I think the other thing frankly as we it was we enter into one six or seven of the pandemic in a remote work environment I think people are mindful more and more of protecting their assets in the incorporations trying to make sure that theres continuity and the operations of their businesses. So I think thats something that.
Could be a nice.
Somebody that sustains, our new business and the growth in that residential real quick market.
Got it. Thanks, that's good color. Thanks for that and then I just have another question about a report from from a cat risk modeling agency trembled or that had indicated slightly higher earthquake probability.
Especially on the on the San Andreas fault relative to I guess previously thought.
Obviously, that's just want opinion, but I'm just wondering.
What your take is on that how you're thinking about it and how your pricing or your your risk or pricing. The product like are you changing at all eyes are response to do this.
This Tremblay report.
You know we know the folks it trends are very well and think there sharp.
Data scientists various bright geologist as well and we have collaborated with them on.
Several items.
What I would say is you know, it's not something that's caused us to change our.
Our underlying base rates, but it does factor in in terms of exposure management.
Concentration spread of risk.
And I think you also you know when we when we marry that those theses with what we're trying to do from traditional underwriting and target returns and in the 10th of a hard market. It probably presents an opportunity for us to get more rate.
In the B zone.
But it's not something that we've taken the tremble reporting added.
Trimble are based relativity to our.
Ray forms and filings and our underlying.
Data analytics.
Got it thanks, and do you expect to see or have you seen already just any change to the way reinsurers are pricing the risk.
Are you guys to see ought to you as a result of that.
We didnt, we've not seen it.
And I.
I think they're going to look at concentrations and how we stack up in our in in that area.
They always do I don't think it'll change.
Their perspective, I think Dave what they like about our portfolio is that we provide.
Terrific spread of risk not just within California, but nationally on an earthquake basis. So I don't think.
It's going to hurt us because.
We're not overly concentrated delay in fact, it could potentially help us.
Got it that that's helpful that makes sense Mac and then if I could just sneak one last one in.
Just about just just sort of thinking through the the market opportunity here for the CNS company.
I guess, what you know how can I think about I guess, the ultimate size that you think back and get to is it really just like can I just take the capital that you guys are putting in the and ask company and putting a some sort of premium to surplus multiple on that like 0.7, 0.8 times and that could be like a sort of a good initial.
Again.
Or I guess, how is there there are certain.
A certain number you can get us to think about what the opportunity is there.
Yeah, I mean, I think overarching leave the lines of business that we're going to ride if they maintain a similar complexity in which at least initially they will in the specialty crop with the specialty property bad.
You would we should be able to right at a net premiums earned.
Just surplus ratio of.
Just inside of one to one.
At this 0.9 to one and that the target that we would have I don't see any reason why we can't get the Ines company in due time.
To a similar size as the admitted the company.
Right.
Where we're not to do that overnight by any stretch the imagination, nor would you want us to but I think when you factor and.
The market environment right now the geographical Brad the expansion of Tam of existing lines of business the expansion of the Tam with the new geographies.
And new products that are made for units that we just have that we wanted to get into what we haven't yet.
Like layered in shared.
Alright earthquake or builders, but again, there's a lot of potential for it so.
I think if you want to just look at the group.
You know it can expand can expands our prospects considerably.
Great. Thank you.
Ladies and gentlemen, we have reached the end of our question answer session and I would like to turn the call back over to Mr. arm for any closing remarks.
Great. Thank you operator.
And thank you all for your time this morning.
This concludes Palomar second quarter earnings call. We appreciate the time and questions and always your support.
Our team and our business has shown.
Frankly remarkable resilience during a complex and challenging year for our country and our and our world.
We're going to continue to adhere to our founding values and principles as we execute our strategy and on our stakeholders, we're excited and eager to pursue the near term and long term initiatives that we've covered today most notably.
Palomar excess and surplus insurance company.
We're going also continue to prioritize safety.
For our team quality injustice as well so thanks very much it will speak to you after the third quarter I have a great day by.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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