Q3 2020 Palomar Holdings Inc Earnings Call
Good morning, and welcome to the Palomar Holdings Inc. third quarter 2020, <unk> earnings Conference call.
During todays presentation, all parties will be in listen only mode.
Following the presentation. The conference will be opened for questions with instructions to follow at that time.
As a reminder, this conference call is being recorded.
I would now like to turn the call over to Mr., Chris you cheat as Chief Financial Officer. Please go ahead Sir.
Thank you operator, and good morning, everyone. We.
We appreciate your participation in our third quarter Twentytwenty earnings call with.
With me here today is 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 web.
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PM Eastern time.
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Before we begin let me remind everyone that this call may contain certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These include remarks about management's future expectations beliefs estimates plans and prospects.
Such statements are subject to a variety of risks uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements, including but not limited to risks and uncertainties relating to the COVID-19 pandemic threats.
Such risks and other factors are set forth in our quarterly report on form 10-Q that will be filed with the securities and Exchange Commission, 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 measure can be found in our earnings release.
At this point I will turn the call over to Matt.
Thank you, Chris and good morning, everyone.
I hope those of you with us today continue to be safe and healthy.
I'll speak to our third quarter results at a high level and speak to our operations before turning the call over to Chris to discuss the financial results in more detail.
For the third quarter ended September Thirtyth 2020, we experienced several notable achievements.
First of all a matter of our business remains strong as evident in our year over year gross written premium growth of 55.4%.
Figure that included meaningful growth across several product lines as we have increased our position as a specialty insurance leader.
Second our excess and surplus insurance company or Patrick our newly established surplus lines insurer watch at August and bound policies across several lines of business during the third quarter we.
We believe Patrick will only enhance our ability to pursue profitable growth and respond favorably to a further hardening rate environment.
Third during the quarter, we continued to expand our distribution network executing several new partnership in lines like residential earthquake in flood and roll out new products to existing and new distribution partners.
[laughter] fourth we sustained our commitment to building a world class team and grew our headcount by 10%.
One of the key additions to our team we welcome Jason Sears and experienced yeah. That's casualty in programs insurance Executive Senior Vice President of programs to lead our program business as well as the scaling and diversification of passing.
Lastly, and subsequent to quarter end before might want start U.S.G. Committee of the board of directors, which will not only help articulate measure the companys values, but reinforced polymers reputation as a forward thinking employer and partner.
Turning to the third quarter, our country experienced an unusual frequency of severe weather from the mid west are right Joe to an unprecedented windstorm season to the devastating wildfires in our home state of California.
Palomar in our policyholders were impacted by the state of Hurricanes that made landfall in the United States, including Hurricanes Hana is say, yes, Laura Sally and beta.
I'm very proud of our team's rapid response as we worked to help our policyholders and their communities recover from the damaging events.
Our Swift actions, our best exemplified by the fact that at the time of this report.
7% of our specialty homeowner's claims from the aforementioned stores are closed or settled.
Due in large part to the impact of losses associated with these events during the third quarter, we reported a net loss of 15.7 million compared to net income of 7.5 million in the third quarter of 2019.
This result is disappointing as it clouds the results of an otherwise strong quarter more so for lines of business not exposed to the Gulf of Mexico approximately 80%.
Well, we could go on about be incredibly low probability of the 2020 wind season, and how the hard market will allow us to take rate and recoup our losses and that is something we intend to do.
Wanted to discuss the improvements we have begun to execute.
Tom first culture is premised on continuous improvement problem solving and agility. It has also analytically driven.
As such we will apply the data we have gathered and lessons we have learned across the organization to enhance our underwriting analytics and risk transfer operation and Moreover drive consistency in results and predictability in earnings.
As we learn and grow as a business, we will rigorously optimize our reinsurance program product suite in geographic mix in light of market opportunity risk adjusted return on capital and payback analysis.
With respect to Palomar is reinsurance program, we will look to implement new coverages that further protect the balance sheet and earning stream from severe infrequent events.
It is worth highlighting the Palomar secured incremental reinsurance coverage in October that preserved our $10 million per event retention through June 1st 2021.
As it pertains to underwriting and exposure management in October we decided to exit commercial all risk on an admitted basis in Alabama, Louisiana, and Mississippi as well as specialty homeowners in Louisiana.
Additionally, we are reducing our exposure to risk with the short proximity to the coast for commercial risk.
These actions among others reflect our focus on remaining agile preserving our ability to invest in our core markets in new initiatives like Pepsico, and importantly achieved the requisite payback from a catastrophe for Palomar, our investors and our reinsurance partners.
We feel the it should achieve ability of these measures are feasible in light of what we expect will be an incrementally harder insurance market.
[noise] operationally remain fairly insulated from Cove in 19 and continue to believe the pandemic will not have a material impact on our profitability or growth and.
It is our belief that our exposure to business interruption remains negligible as our commercial property policies require loss from physical damage to the property from the name peril, if future virus exclusions.
Turning to third quarter results, we experienced meaningful growth across several product lines as we expanded our position as a specialty insurance leader.
Driven specifically by our newer lines of business like inland marine which experienced growth of 360% during the third quarter.
Our builders rescue motor truck cargo offerings continue to demonstrate strong traction and encouraging market opportunity.
Another major driver was our commercial earthquake business, which grew 115% compared to 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 third quarter commercial palsy average rate increase on renewals was 14.1% versus 14.2 in the second quarter.
With respect to our residential business. It is worth highlighting the growth of two products flood and residential earthquake flood.
Grew 50% year over year across 11 geographically diverse states, while residential earthquake grew 30% year over year with a prior year comparable in the third quarter of 2019 and saw a large surge in new business. Following the ridgecrest earthquakes in July of that year.
During the third quarter, our book experience premium retention rates of 90%, which increased from 88% achieved during the second quarter.
Premium retention for our residential commercial earthquake.
Why hurricane in residential flood lines of businesses were all in excess of 92%.
This continues to be a testament to the unique value our products.
Offer insureds and distribution partners.
Moving onto our newly launched SNS company, Patrick we expect it will add an additional dimension of capability and growth for Palomar. As previously described Patrick will also enable us to further leverage our analytically driven underwriting framework to write business on a national scale and to ensure a certain risks that are admitted products cannot currently satisfied.
For example, Pepsico out Palomar to compete in the layered in shared commercial property market an area, where there is currently a high level of market dislocation.
In August we entered into a new partnership with especial risk underwriting division of leading wholesaler and wants to underwrite produced layered in shared property business for passing we.
We certainly anticipate this partnership and Patrick on the whole will be a growth driver for 2021 and beyond.
Fair in our distribution network remains a key priority and we are proud of the progress we made during the quarter.
In the third quarter, our retail and wholesale active producers increased 6% sequentially from the second quarter.
Carrier partnerships continued to be a differentiated channel for our business and then the third quarter, we entered into multiple new partnerships, including another residential earthquake partnership motivated by the continued dislocation of the California homeowners market.
Our flood business entered into a new partnership with torrent technologies, a flood insurance technology company a subsidiary of March.
The partnership will give torrents distribution access to our residential flood offering in the 11 states. We currently write business.
These relationships take time to develop and we're proud to provide valuable solutions to other insurance carriers.
Separately, we continued to execute our geographic expansion initiatives by growing the geographic footprint for our Medicare to 31 states across the nation.
We're also excited to announce the launch of our new real estate errors and omissions product offering. This is a lot of business that our team has extensive prior experience with and will we believe it will be a beneficial addition to our product suite.
As we grow Patrick at all of our business. We believe it is vital that we sustain investments technology analytics and talent.
I already mentioned the growth of our team and the addition of Jason Sears to spearhead the execution of our programming DNS efforts.
The third quarter also included two developments within our existing leadership team that we believe reflect the ongoing evolution and focus of our business and strategy.
In early August John Christiansen, our former Chief operating officer took the role of Chief underwriting Officer.
In concert with his promotion we substantially subsequently promoted our chief Technology Officer, Britt mores to assume the role of Chief operating officer the.
The vital role that technology plays across Palomar Enbridge instrumental role in building out our technology team and platform made him a natural choice. We also expect to have richer placement a CTO in place.
By the end of the first quarter.
Yesterday, we announced a renewal rights transaction with affiliates of geographic holdings, whereby Palomar whopper policies to all Geo Vera Hawaii residential hurricane policyholders upon renewal this.
This transaction will considerably increase our footprint in the state of Hawaii and market. We first entered into in 2015, and I've actually looked to deepen our presence.
Lastly, subsequent to quarter end, we formally launched our SG and diversity inclusion community engagement inequality or dice committees, which will reaffirm and pursue our efforts and ongoing dedication to the environment health and safety.
Corporate social responsibility corporate governance and sustainability.
The U.S.G. Committee will meet on a quarterly basis led by myself and board members, Darryl Bradley and Marthena terrorists.
This committee will be responsible for hoarding the company and management accountable for progress already asked you goals as.
As established by power management and in consultation with our team members.
We believe that diversity quality, including your greater organizational creativity and productivity.
This helps us serve our customers and partners more effectively delivering on our diversity commitment returns greater value to our shareholders and ultimately makes a positive impact on the communities in which we do business.
With that I will turn the call over to Chris to discuss our results in more detail.
Thank you Matt.
Please note that during my portion when referring to any pershare figure I'm, referring to per diluted common share is calculated using the treasury stock method. This.
This methodology requires us to exclude common share equivalents, such as outstanding stock options during periods. When we incur a net loss and include them in profitable periods. We.
We have adjusted the calculations recorded.
As you see in the earnings release, we have added new metrics, describing our results, including and excluding catastrophe losses. We believe that this additional information provides better visibility into our business and results going forward. We will continue to show these metrics.
For the third quarter Twentytwenty reported a net loss of $15.7 million or negative 62 cents per share.
Compared to net income of $7.5 million or 31 cents per share from the same quarter in 2019 and.
On an adjusted basis, excluding catastrophe losses, our net income for the third quarter was $13.7 million or 52 cents per share compared to $9.6 million or 40 cents per share boots equals 2019 gross.
Gross written premiums for the third quarter were $103 million, representing an increase of 55.4% compared with prior year third quarter.
We continue to see hoping you business rate increases and strong retention with contributions across all of our product offerings.
Ceded written premiums for the third quarter were $41.6 million, representing an increase of 48.1% compared to the prior years third quarter. The increase was primarily due to increase in reinsurance expense commensurate with our growth our.
Our risk transfer strategy remains a critical component of our business and especially as we demonstrated sustained top line growth.
As we grow our business, we expect to incur additional excess of loss reinsurance expense as we retain a conservative level of overall coverage.
As of June 1st of this year, reaching $10 million per earthquake or wind event, and we purchased $1.4 billion in total reinsurance coverage earthquake and additionally.
Additionally, after multiple hurricane events during the quarter, we purchase backup reinsurance coverage, maintaining or $10 million event retention. The additional expense of $6 million freedoms coverage began in the fourth quarter No. We'll run through June the first 2021.
Net earned premiums for the third quarter were $42 million, an increase of 51.9% compared to the prior year's third quarter results improved primarily due to the early.
Increased gross written premium offset by the earning of ceded written premiums under reinsurance agreement.
For the third quarter of 2020 net earned premiums as a percentage of gross earned premiums were 52.9% compared to 51.8% in the third quarter of 2019.
We believe the ratio of net earned premiums to gross written premiums is a better metric for assessing our business versus the ratio of net written premiums to gross written premium.
As previously discussed last week.
We expect that ratio to be around 53% to 54% on an annual basis.
Lower at the beginning of a new access to Wall Street and higher at the end with our expected growth in earned premium.
This quarter's results are in line with that expectation, but the additional expense for the backup reinsurance later, we'll adjust the ratio slightly below the normalized level beginning in the fourth quarter.
Commission and other income was $816000 for the re month ended September Thirtyth 2020, compared to $79000 from the same period in 2018.
The increase was primarily due to an increase in policy really fees associated with the increased volume of premiums written.
Losses and loss adjustment expenses were really encouraged about third quarter were $41.1 million compared to $2.4 million in the prior year's third quarter our losses. During the quarter were primarily the result of increased catastrophe activity converging Ana you say, yes, Laura Sally and better.
We define catastrophe losses on certain losses, resulting rubin's involving multiple claims and policyholders, including earthquakes hurricanes floods convective storms terrorist acts or other aggregating events. This definition captures the catastrophe losses from this quarter and Hurricanes Harvey imports from previous periods.
We had catastrophe losses of $36.5 million <unk> third quarter of 2020 within the range provided in October you can tell.
So the loss ratio of 86.9% compared to no catastrophe losses for the third quarter of 2019.
Our loss ratio, excluding catastrophe losses for the quarter was 10.8% compared to 8.8% in the third quarter 2019, the increase in our Attritional loss ratio in line with the expectation that our loss ratio would increase by group as we diversify the book of business any lines like Liberty, where there is attritional loss.
Our expense ratio for the third quarter, and 2020 months, 59.4% compared to 64.6% in the same quarter in 2019 as.
As we have previously discussed we expected the expense ratio increased to 2.5 points sequentially compared to previous quarters from structural changes to our SH and investments in <unk>.
These changes will not have a material impact on net income due impact.
Our ratios such as the expense ratio combined ratio and net earned premium the grocer in Britain.
The combined ratio for the third quarter was 157.1%.
Her to a combined ratio of 73.4% for the prior years third quarter, excluding the catastrophe losses in the quarter, our adjusted combined ratio was 68.9% quarter compared to 63.6% in the third quarter of 2019.
We believe that given the unprecedented activity in the third quarter. This is a better measure of our results for comparison purposes offers a better sense of our business on a steady state basis.
Net investment income to the third quarter was $2.1 million, an increase of 23.7% compared to the prior years third quarter.
The increase was largely due to a higher average balance of investments during the three months ended September Thirtyth 2020, due primarily to proceeds from our burn rate stock offerings during the period.
As well as cash generated from operations fund.
Funds are generally invested conservatively and high quality securities, including government agency.
And mortgage backed securities municipal and corporate bonds with an average credit rating of any one of your books.
Our fixed income investment portfolio book yield during the third quarter was 2.33% compared to 2.9% for the third quarter of 2019.
The weighted average duration of our fixed maturity investment portfolio, including cash equivalents was four years at quarter end.
Cash and invested assets totaled $450 million at quarter end compared to $263.2 million at September Thirtyth 2019, well the third quarter, we recognize realized and unrealized gain on investments in the consolidated statement of income from $24400 compared to $361000 in the prior years third quarter.
Our effective tax rate for the third quarter of 2020 was 28.2% compared to 21.1% for the third quarter of 2018 hires.
Hi, this quarter with a pre tax loss in conjunction discrete tax deduction stock related compensation. This would decrease the effective January impurity <unk> pretax income excuse.
Excluding any unforeseen events, we anticipate our tax rate exclusive of discrete permanent items will settle around 21% Mark for the 2020 year.
Our stockholders equity was $361.9 million in September 32020, compared to 2200 $18.6 million at December 30, Onest 2018.
For the third quarter 2028 annualized return on equity was a negative 17% compared to 14.6% during the third quarter of 2018.
Our annualized adjusted return on equity excluding catastrophe losses during the third quarter was 40.8% compared to 18.8% during the third quarter and 29.
The change in annualized return on equity annualized adjusted return on equity excluding catastrophe losses reflects significant increase in the company's stockholders' equity, primarily due to order and $25.5 million in capital raise across multiple stock offerings during 2000 each one.
Looking to the remainder of the year given the high even cat activity during the third quarter and into the fourth quarter.
Adjusting our full year 2000, each one you know.
We previously projected adjusted net income between 50.5 million and 53 million. This range did not assume any losses from major catastrophe as we need to find them.
We are now anticipating full year adjusted net income, excluding catastrophe losses between $51 million and $52 million, which equates to a growth rate of 35% to 37% year over year.
These assumptions include the additional reinsurance purchased and assumed that there are no major losses from business interruption legislation.
As of September Thirtyth 2020, we had 26 million 271615 diluted shares outstanding is 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 open up the line for any questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone indicate your line is no question queue.
You May press star two if he would like to remove your question from the Q.
Dismiss using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question comes from the line of Matt Carletti with JMP Securities. Please proceed with your question.
Hey, Thanks, Good morning, Matt I was hoping you could maybe dive in a little bit deeper to your opening comment about you know some of the potential adjustments, you're making to the book you know kind of as you learn from the frequency of the event that took place in the quarter I appreciate kind of a you walk through a few lines and talking about kind of on the primary side.
Exposure reduction can you talk a little bit about maybe some of the reinsurance tools that might be available to you to help cap that as well and those are things that you'd expect that kind of proceed whereas there's do you think that you know a lot of the actions you've taken on that the the inward side of the business, They oh well suffice.
Hey, Matt good to hear from you and thanks for the question. It is a great one and and I think there's some in substance of it is we need to do both we need to take the underwriting actions that I can go into more detail on in addition to solve for the balance sheet.
Section because if we do the first you know the former then we're going to be very successful in the latter, but we need to marry those two and put them together in concert and I I think it starts with when you look at our business. You know we have the luxury of certain lines have been terrific margins and terrific growth opportunity.
Hi, and growth prospects in front of them and you know when you.
Marry that with you know our culture, that's premised around problem solving using data analytics to interpret data I think what we try to do is it beat up a base and and look to continuously improve.
When you have the wind season like we did <unk> you know it gives you a pretty big lines into how the book is performing.
And so you know we have a target are we on our individual products. It's in excess of what we deliver you know on a an aggregated basis because it's it's based on a net basis <unk> dollar capital of a dollar of capital.
And so when you looked at the third quarter.
What we saw in you know the commercial all this business for instance is that we were not going to hit the target or are we certainly with the losses, but Moreover, not going to hit a target or are we in those markets that would generate a sufficient cash payback.
And so if you think about it you know where we have a target are we have 20% we need to make sure that we can get over time, an average ARPU of 20% I'm in a state like Louisiana, Mississippi and Alabama.
So when we applied that methodology, we just couldn't see a market opportunity that we could get enough rate and have enough premium in that segment to generate the cash payback. So that led us to take the steps that we've done like.
Like exiting Mississippi, Alabama.
ER and Louisiana on the commercial all risk basis.
Great first of all it's business as well as exiting especially the homeowners in Louisiana.
Turning to reinsurance I think if we do that we are going to materially.
Reduce our exposure in areas, where we generated loss, we're going to in theory reduce potential exposure just generally for when store.
And that will allow us to go down the path of not just buying reinsurance for severe events, but also protecting the balance sheet from multiple of that so what we will look to implement is either some type of an aggregate cover or and that quota share that really keeps losses from multiple events inside our attention.
So.
Like I said, what it's really incumbent upon us doing the analytics and making some tough choices as well as making thoughtful informed choices that will reduce our exposure improved the underlying results from an underwriting standpoint, and then Furthermore, protecting the balance sheet with new types of risk transfer that aren't just focused on major severe.
Your events, but also you know potentially more frequent events.
Great. Thank you for that very well thought out as usually the case just one other quick one if I could you mentioned a bit about buying the backup cover and keeping the you know the per about retention at 10 million capping. It at 10 million is that how we should think about delta and data and the potential impact they might.
Having Q4 or are there other items at work to do that might not be just kind of the.
20 on the high side.
Oh, yes. It appears that you should continue to assume that the losses from the single back would be 10 million and we we have secured incremental coverage.
Chris and I, both pointed out and that is kind of locked in and there is some incremental expense, but its expense that will happily incur to maintain that.
That level of protection.
Okay, great. Thank you for the answers in Buffalo.
Thanks, Matt.
Our next question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.
Good morning, I was hoping you could give us a little bit more detail on.
Any sort of numbers.
Numbers behind it but the expected growth rates of the firm.
You see quite stunning so over the last couple of years.
And then as part of that I assume that the.
The run off of the commercial our risk, especially home in churches in those cat prone lines will have at least some impact on premium growth perspective, but can you give us a sense of.
Maybe how big that would be.
Sure. Paul This is Mac you know what I would say is first and foremost yeah. We were pleased with the growth and Ah that we achieved in the quarter and saw a growth in.
Core lines like residential quake commercial earthquake <unk> newer lines like in the marine and flood.
So we and and you know we we've also entered in some new partnerships and introduced some new products that are just getting off the ground. So we think there's considerable greenfield and growth.
In front of us that generate the target returns that we expect.
I expect isn't that you all as investors expect from us, which candidly makes <unk> difficult some of the decisions that we've made around shrinking the all rest book.
Easier in some ways as well as you know that the small stuff that we're taking in exiting Louisiana in specialty homeowners.
You know I think you know that it's it's really more of an effort to reduce exposure then reduce premium those markets were not that large in totality. When you look at you know state by state details of the fine and that's in Oh yellow book filings. So it will certainly the the all rest line.
The growth rate will come down and that book certainly on the admitted type of contract, but there is ample growth in other segments, yes, whether its pesek or the lines that I mentioned that will more than compensate for it.
And I think it's also worth pointing out that you know while we.
Took the decision to exit a Louisiana on the specialty homeowners side of the business. There. The rest of that book is performing rather well I'm on a pretax basis.
You know.
Texas, Mississippi, Alabama, the Carolinas the states in which we write that had the combined ratio on a inside of 80% and in certain states its less than 70%. So that that's that's that book as well and it grew rapidly in the third quarter, it's continuing to perform at.
It is generating the requisite payback that we need to see for cat exposure. So long winded way of saying you know I think there is adequate growth outside of all rest I'm not book will come down, but we'll still be it we still feel very good about the growth prospects for 21 and beyond.
Great.
My second question I think we all expected as the book moved away from earthquake that we would see the.
Higher attritional ratios is that.
Loss ratios over time, but I don't think most was built in new material cat load respectively.
As the the business mix change, particularly with some of these new efforts should we be thinking about some level of the cat load in our expectations in 2021 2002.
Hi.
Paul I'll, let Chris chime in what I would say is you know you if the way we define kept its really going to be losses that are material.
More than likely going to be result in reinsurance losses, and if you look in the third quarter of 2019 their worst storms like Dorian.
Marco and others. So that there will be cash that's and P.S. loss that is in our standard loss ratio and that's reflected in the 10 plus percent that we incurred on kind of a normalized basis on a steady state basis. So.
You know I think we still and her no severe weather activity and our normal losses because of the exposures that we write but you know a storm like.
Laura or salaries is a different a different animal, but Chris I'll, let you offer your thoughts do you.
Yeah, So Paul what I could tell you exactly how to create your model I think generally obviously, we are hyper focused on cats and trying to mitigate the risks that they can.
Can cause in our book, but we generally do not put it into our model and it's part of it's also reflected in the way we give the guidance is that you know we know that events happen, but we aren't going to be come predictors of when they're going to happen and the severity that they're going to hit us that so we do not usually think about.
Large cats, you know when we're doing our projections because I think it would provide too much noise and say Oh, we think the cat is going to happen in Q1 that didn't happen and then we outperformed for that that's not how we think about our book, we think about our book from an operational standpoint, and make sure that the core is doing everything that it needs to do and then we build the model with reinsurance.
You know whether it be quota shares excess of loss and then strategically with underwriting to hope and to try and make sure that that minimize the volatility of those losses will have on our books. So do we think about it but we don't try and put it into our models are predicting when it's going to happen like Mac said you know we.
Have included catastrophes this quarter, we backed out some of them that are larger events, but the attritional loss ratio still does have losses from call. It smaller events, whether it be the earthquake in Utah Cristobal earlier this year. So there's other.
Called Cat type events that are still in the attritional loss ratio, but it's really just the little call severe events that we've kind of separated from the rest of the book to kind of show that metric, but I think we have a lot of faith in what we're doing and we're back talking about we're adjusting to try and protect the book.
You know, it's really the core operations that we try and focus on and think about with all those metrics and then making sure that we're protected when a cat does happen.
And Paul the only thing that I would add to that Chris described that well <unk> is that you know as we start to.
Crystallize.
Our thoughts on that quota share or an aggregate we will certainly inform you and in terms of the cost that may be incremental to what's in kind of art and our model right now and but then also what's the what's the positive consequence of that in terms of potentially capping losses from a confluence of events like we were.
Through in the third quarter, so I think that might be a better way for us to help manage on a go forward basis is just what's the.
Shifting cost of reinsurance and how much of that is associated with Kathy not a single one that retention, but potentially some type of net quota share or aggregate solution that.
Caps or losses in totality.
From apparel, Yeah, just one.
Right now it's one of the things that I would add is that when we think about our historic numbers. The only other events you know would be harboring floor and so we'd be included in our cat.
Definition. So you know in 2019, there were no cats from the way we would define them that would go into our results.
Great. Thank you very much let some other folks ask questions, but appreciate the help.
You got it.
Our next question comes from the line of Mark Hughes with Trust Securities. Please proceed with your question.
Thank you [noise].
I'm actually say that the.
Aligned to the the accounts, you're exiting or not that large can you give us a specific number on that.
[noise] [noise] well I mean, I think that there are large in terms of their t. Ivy and their exposure the that the total premium.
On a year to date kind of in force basis for those states on a commercial basis is around <unk>, eight and a half million Mark.
Yep, Okay, and that was kind of in force and then.
The end of September.
[noise] eight and a half million in four at September.
Yeah, and so we you know that.
It's these are admitted policy. So you know they they will come up for non renewal and so they will wind down over the course of Oh the year I think though you know the one thing that's a little bit nebulous Mark is just the impact that as as we shift our appetite for.
Writing certain risks on the coast and move further up the coast that is not just limited to Mississippi, Alabama, and Louisiana, that's going to be in all states because what we saw from like a storm.
Like Hurricane Sally where the expectation was that it wouldn't <unk> weather was a 10th intensify or just all kind of started moving basically three miles per hour. So it stayed on the coast for an extended period of time and did more damage from water than it did from wind you know that informs our underwriting perspective on coastal.
Yes, and so coastal risk is again to all states in which were writing in the South East we'll pull back from there that's harder to gauge how much of that premium will be non renewed.
'cause it's not state specific.
And one thing I might add to that is you know, we mark you're focusing on the premium side about it but you know we're thinking about this you shift more from a profitability standpoint, so when we look at our target returns.
We're taking a premium that was outside of our target return. So hopefully you know when we do this movie helps improve the overall.
Net income in our or we have our current book.
Yeah very good point.
[noise] the.
Moratorium in California, homeowners I think Oh, it's not something I'm not here today I'm not sure how Ah.
Broad it is does that make it a little more difficult to sell residential quake, if a there's a non renewal a.
Order in place.
Mark.
Mark I think it's a very good question my.
My short answer is it it does not now the more the this is the second wave of Moratoriums, that's like the California had put in place I'm. The first one applied to I think right now.
Just under a million homes. They got around 850000, this one's a little bit larger matter, where close to double that but if you look at our new business over the course of 2020, we wrote a in it and no more new business in 2020 for the first I missed your than we did for 2019 and that's even with.
A big pop that we saw in the third quarter by team from the Ridgecrest earthquake. So I do not believe it's going to challenge our ability to sell residential earthquake in California, and frankly, I I keep the continued dislocation.
In the homeowners market, whether there's a moratorium in certain segments. Its state wide. It's you know the wildfire season was longer it was more permit dramatic and more pronounced and therefore more impactful on the sackings at a minimum homeowners unsure.
Sure. So we did dislocation continues a in there I think it's going to persist and I think again, it's there's look no further than that but the the slew of partnerships that we continue to do in California with either new entrance on the N.S. side or a incumbents that are looking to pull back in the market.
The do Aveiro why did they pursue a renewal rights transaction is there any rate action that you need to take.
When you take over that book.
Mark you know I can't speak for Geo Barents intention in their decision to exit the market. They were a great to work with on this deal and we were and we looked at the opportunity to further bolster our presence in the market of Hawaii you know, it's one that we are.
Now offering multiple products and Weiner came most notably in a flood and then some builders resting in the marine.
This deal.
Deal gives us true ballast and critical mass in the market. It gives US you know the ability to convert plus approximately $17 million or premium or.
On to our book.
It's in a line that does not have attritional loss in a line that's a great diversifier from our core earthquake reinsurance program. So we're really excited about it and then to answer your question specifically the rates are very comparable so we feel like we should have the ability to.
Convert and feel that the risk is adequately priced.
Thank you very much.
Thank you.
As a reminder, if he would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of David No Madden with Evercore. Please proceed with your question.
Hi, good morning.
Matt I appreciate the commentary you made on the underwriting actions that you've taken.
In all risk and specialty home exiting in those states.
And then also in <unk>.
I guess, writing further away from the coast and their remaining exposure.
I guess I'm wondering if there is any sort of rule of thumb or any indication about the reduction in the PML is that this will result in a.
Or a reduction in kyiv like <unk> and just in terms of any sort of way that we from the outside can gauge just how much the exposure has been reduced.
Sure, Dave and thanks for the questions and those are good ones no. The the P. M. L. A that it's going to come off from those states is you know, it's it's not insignificant it would probably constitute close to.
15% of our total wind PML, but that would also you know and that's when you factor in why Texas and the Carolinas. So you now have a pretty good diverse a diverse uncorrelated mix.
What it does do is it gets rid of PML inhale and that it had a pretty correlated bad Mississippi, Alabama, Louisiana tend to correlate. So we think that will allow us to you know reduce PML. It will reduce exposure. It will do is correlated exposure and additionally.
No just simplistically and and I can tell it Jon Christensen and John can knutson will roll their eyes, and I see that but it just kinda reduces targets as well and targets, where we just don't think that there was a big enough market opportunity for us to generate the returns that we wanted so I you know what I, if we have done like kind of a role.
Forward, assuming kind of normal non renewal cycles, you know by the middle or the height of one season next year, we will have less than a million a premium in force in those markets.
On the on the Ami, all rest side and and there'll still be some residential business there.
Got it okay. That's that's helpful and I guess just thinking about.
You know obviously it sounds like the rate momentum.
As has been sustained.
At around 14% rate increases on the commercial side.
I guess I'm just wondering in terms of.
And I think you kind of alluded to this earlier Mac just in terms of.
The additional rate that you think you can get to that would maybe offset the the incremental cost of the reinsurance and I say this because.
I'm just looking at the book of business and I see you know, it's 45% ish of it is in red.
Reggie earthquake, where you know that is capped in terms of how much rate you can take and you obviously wouldn't be taking rate on that for when risk in the south East U.S.. So I guess, that's a long way of asking you know do you think that you can get incremental rate on the specialty.
Home side or on the commercial RMS side that would offset the higher cost of reinsurance.
Yeah, Dave another you know a stupid question and what I would say, let me I'd like to answer that in a few different ways first and foremost with with respect to.
All the commercial all risk and the wind exposed across all states were pushing more rate now at 40% on the heels of the storms and the continued dislocation in the property market or whether it's from wildfires direct sales or obviously this winter season, we're not renewing and account you know.
Less than 20%.
Furthermore, we now have the E.N.S. company, which allows us to be or even.
More assertive, if you would and our renewals and that will allow us to further get get more rate I'll provide more rate integrity and or just.
Better terms and conditions.
So I I think we're going to see more rate I think as it relates to.
So that's on the one side of commercial earthquake, we're continuing to drive rate there. Its 14, 15%, there's a derivative impact of rising reinsurance costing and market dislocation or cross property that will allow us to maintain that level of rate as well and we're continuing to push mid teen type.
Teens rates on quake. So we feel very good about the rates, we're seeing in the commercial business I think it's important though to come back to you know, how we buy or reinsurance you know outside of the new changes that will put in around some type of aggregate or net quota share we buy considerable amount of reinsurance to protect us from.
Severe events and this was a season of severe events, but it's worth emphasizing that not a single event the largest lost it we'll see as we currently have booked on a gross basis is not going to go beyond it's only going to your second layer reinsurance in its inside of 14, 15%.
Of our total wouldn't limit so we buy copious amounts and we'll continue to do so but I think it's more important that it says that.
85% of the tower is gonna be renewing loss free.
Knock on wood, you know, but it right now as we sit here today as loss rate. So I think that gives us ample cushion to under rate increases by the way we already paid at six one so we've kind of already bear the brunt of that so the combination of having lost three renewals.
[noise] exposure, that's come down because of the <unk> underwriting changes that we've made and then a very very conducive market to pushing rate and the primary side makes us feel like weekend handle the rate increases that we'll see.
At six one, especially again because a good portion of that what is set to renew is indeed lost rate.
And one thing I might add Mac is you know David you were talking about the residential earthquake and I believe we talked about this before the residents earthquake book does have an inflation guard on it and when you look at the overall retention above 90%, let's call. It 90% of that book does get a 5% rate increase on.
On an annual basis, so it's not a coke zero percent rate increase make or there is still some rate that we're getting on the residential book, but like Mexico. It is lost free when you look at it from the reinsurance side as well.
No. That's that's great color I really appreciate that guys that's helpful detail.
If I could just ask just a quick one on just overall you know growth contain.
Continues to be very solid.
I guess I'm I'm wondering how much of a contribution that unites business had.
To this quarter's growth if any if much at all.
[noise] Yeah. It's a fair question, Dave It was pretty modest I think the you know the E. N S. <unk> premium was in and around $9 million, we didnt launch it until August.
That's when it really we're in the market and the majority of that was gone came from commercial quick.
So you know the new M. one's program that we talked about that.
Went live effective.
He one in theory, but you put that business a pretty far out in advance some of the new product or other partnerships that we entered into a new producers that we appointed same thing applies so with the exception of really commercial earthquake everything else was really in its infancy and.
And so we feel pretty good about the prospects are for Q4 and team you know the units company.
Tracking.
Yeah, no that definitely sounds like there's a lot of momentum.
So that that's that's great well stay tuned thanks, a lot for the for the answers guys.
Thank you.
Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question.
Great. Thanks, I guess first question is I was hoping you could explain to me the mechanics of needing reinstatement premium I guess I know usually I would have thought they would have to burn through like the whole 600 million one layer for that so can you explain what I'm asking.
[noise] ER so many of the way we what we have is.
We have prepaid reinstatements.
So essentially you know we had let's just use our our 20 excess of 10 Blair. We if we burn through $20 million excess of that 10 million from multiple events. We already had it been stated so we base that we had $40 million working for us excess of 10 million.
Good to cover us for multiple events and that certainly have applied here and we still have some of that limit.
In place.
For storms that have hit in the fourth quarter or could or earthquake that happened in the future.
Plus then we procured another.
Limit, which is 20 excess of 10 kind of backup to backfill that should that incremental 7 million or excuse me the incremental amount. That's left in the 20, x. attached or the $40 million blanket being totally subsumed.
Okay. So we don't have been the entire tower doesn't drop down or whatever with no. Yeah. No dollar we had to limit yeah. So there we have certain layers at the top of the program to Cascade down, but the what are the what we've done is we have reinstatements for those two layers are those to limit to that.
We bought incremental limit to backfill the to limit that we're using.
Okay. That's helpful. I don't think had a sophisticated enough understanding a another naive question I guess.
Is it just an affordable to maintain the pre $615 billion. That's one for one.
[noise] you are married candidly, yes, I mean, what do what the size of the book It you would more than likely be paying a rate on line at the equivalent to trading dollars.
So.
I think we're better served putting in some type of an that quota share or an aggregate the caps losses.
From multiple events at a certain level, so that certainly inside of what we experienced in third quarter. We could do we could try to do it but I. Just think you know the rate on lines would be.
Pretty readers.
Okay got it that makes sense and just finally, the reinstatement premium did that impact written or earned premium at all in the third quarter or is that all over the next three.
No. That's all over the next three that was not placed until Q4.
Okay, perfect all right. Thanks, a lot for that.
Our next question comes from the line of Adam Klauber with William Blair. Please proceed with your question.
Hi, Thanks, and can you talk a bit more about the role that rollout have sick.
Again, you mentioned that third quarter is just getting going fourth quarters, beginning ramp up could you just for perspective, given idea you know whats the perm a submission levels you're seeing.
This quarter compared to last quarter.
[laughter], Adam I, you know I like what I would tell you as that you don't for one of our lines we wrote.
More last week than we did in totality of the quarter. So it's really.
Turning to scale for those partnerships that we entered into and.
Q3 online towards the end of Q3.
And there are several more that are forthcoming that will just be coming up and being brought online in Q4. So.
So good it's really you know submission count is somewhat negligible, but I think I could just give you kind of more anecdotal direction I.
I would expect us to see pretty rare.
Rapid sequential growth.
Okay, and which products are being sold through the through classic.
Right now we are writing.
[noise] commercial earthquake national layered in shared property, which is wind a as well as quake and then builders' risk.
We Oh I have a couple of new programs that will be coming along in mind that we'll have a package a property and casualty component to them, but we'll give you more color right now what's really what we wrote business and it's really more property I'm kind of right up the middle for what we've done.
On quake, a builders risk and.
Kinda layered in shared wind and ER.
And.
Okay.
You mentioned that the that the partnership or the deal with them ones, which is great given them. When size now you are dealing with major wholesalers and one's artsy prior but on an admitted basis now obviously, how much more in the mainstream so I guess could you just give us some perspective that what slice of the pie did you.
Uhhuh access before from those big wholesalers compared to what size the pie within your line, obviously, you're not doing casualty, but within your lines yeah, what slice of the pie do you think you have now compared to when you were just dealing with them on an admitted basis.
[noise] [noise] you know what I would say Adam is you know I'd really look at it.
All the wholesalers that we are working with kind of view this as a small to mid market.
Market account writer and that's what we're doing and all risk and that's what we're doing in commercial quake west the E. N S. A deal we can in as a company. We can write national schedules weekend right larger accounts, where were part of a.
A slip so to speak so where we might be 10% of 100 million dollar account, we might be 10% of a 50 million dollar account when before we were only going to be you know they don't they come to us for 10 million.
As a primary layer or standalone layer. So it <unk> not only gives us access to you know a market segment, that's probably quintupled the size of where we have been and commercial quake or national property, but it also allows us to kind of spread our limit more effectively.
He gets concentrated as you are when you're running kind of primary risks.
Right right, Okay, and then as far as the ramp up and you talked about your term third quarter very very little fourth quarter guidance.
Much more from a you know from a sequential standpoint, but I mean, how many quarters because it really take to get deeper into again, the m. wins and our teams to really begin to you know you know match with their distribution, which is quite sizeable.
You know Adam it's that's a great question I think it's it's also it's it's also the nature there it's specific to the nature of the relationship excuse me, so us going and doing a business arrangement a partnership with MSR. You mean that you start to come onto they're in force business.
As well as seen submissions from other all other offices that were going to directly to or commercial quake or our builders rest team. So I think we can get scale with some partnerships quicker than getting just almost submission flow. So that's been kind of our strategy is let's get normal submission.
Flow through our existing lines, but then its enter into a handful of partnerships that can get us a percentage of an existing book of business.
And that's why we're very excited about having something like Jason Sears come into lead programs for us because that allows us to go into <unk> existing.
Existing lines, where there are books of business that can be moved over in addition, or are dislocated. In addition to kind of normal submission flow.
And so that's what that anyway. That's are you guys.
Yeah, Yeah that makes sense and then this is sort of a bigger macro about that market not Maureen asked but.
My sense is that the market had been more on bundling versus bundling, meaning that you know pick up pick a care that they thrown away and.
Quick one often thrown some of those coverages for free you know I know in the last 612 months, what I'm hearing is that there is more of a nature to unbundle separate those so I guess two questions is one is that accelerates that unbundling accelerating and two does that ever you know does that ever Palomar and how does that favorite talmer.
Yes that dynamic Adam that dynamic is existing its accelerating its favorable to Palomar.
I look no further than the commercial earthquake you know we were 215% a year over year and a good reason for that is we're now able to go into layered in shared property accounts that we previously did not have the ability to go into it.
An admitted ensure or were somewhat structurally limited in doing so and so while we grew you know the growth in third quarter is a lot faster or more pronounced than it was in the first half of the year and when you look at losses from <unk>.
All the property losses in this quarter when fire mid western.
Direct Joe's.
It only further sustain that dislocation and not on bundling in a couple of weeks.
Okay, great. Thank you.
Thank you we have no further questions at this time Mr. Armstrong I would now like to turn the floor back over to you for closing comments.
[noise] Oh, great. Thank you operator, and thank you all for your time. This morning. This concludes Palomar third quarter earnings call. We appreciate the time and questions and as always your support.
You know, although from a loss perspective, the third quarter was our toughest since inception, we did continue to experience very solid growth and I believe as we apply the lessons learned from this storm season, we will emerge stronger and better positioned in.
Which will in turn to further enhance the growth opportunities for the business, but we will continue to focus on profitably growing Palomar ants and scaling Palomar capabilities as we expand our reach and our product footprint you know we're on this journey.
With our investors and the team for the longer term and Palomar remains focused on delivering for all stakeholders, you know and and I. Today is veterans day I do want to say all members of the armed forces for their service and all that they have done and continue to do for our country. So with that I hope you all.
All remain safe and healthy during this holiday season, thanks, very much Jim will speak to the fourth quarter have a great day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.