Q4 2020 Palomar Holdings Inc Earnings Call
[music].
Good morning, and welcome to the Palomar Holdings, Inc, fourth quarter and full year 2020 earnings conference call.
During todays presentation, all parties will be in a listen only mode.
Following the presentation of the copper line will be opened up for questions with instructions to follow at that time.
And once you require operator assistance. Please press star zero on your telephone keypad.
As a reminder, this conference call is being recorded I would now like to turn on the call over day, Mr. Christopher Cheetah Chief Financial Officer. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate your participation on our fourth quarter and full year 'twenty and 'twenty earnings call with me here today is Mac Armstrong of our chairman and Chief Executive Officer and founder.
As a reminder, the telephonic replay of this call will be available on the Investor Relations section of our website through 11 59 P. M. Eastern time on March four 2021.
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 the 1995.
These include remarks about management's future expectations beliefs estimates plans and prospects such.
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.
Such risks and other factors are set forth and our annual report on form 10-K that will be filed with the Securities 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.
And of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U S GAAP and.
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.
Today I'll speak to our fourth quarter results at a high level and then discuss our initiatives to expand our business and drive profitable growth before turning the call back to Chris and discuss our financial results in more detail.
During the fourth quarter, we executed upon several notable initiatives that further position Palomar for consistent earnings growth in the years ahead.
First we grew gross written premium, 31%, including growth across existing and new product lines and expanding our position on the specialty insurance leader.
Second our newly launched E&S carrier, which we referred to with Patrick accelerated traction and the fourth quarter, our efforts with Patrick represent the logical extension.
Of our business and enable us to address the large and attractive market opportunity.
Third we consummated several new partnerships during the quarter, most notably the residential earthquake partnership with the travelers company.
And the ships like these continue to be of meaningful source of growth for Palomar as well as an important validation of the value that we provide the the market.
Fourth we acquired the renewal rights to Geo Barents book of Y and residential hurricane business.
This transaction allowed us to solidify our position and attractive market, where we already provide our producers and carrier partner of the differentiated product technology platform.
Stability.
We continue to refine our underwriting strategy and implement measures that emphasize the risk adjusted return cash.
Dystrophic payback.
And earnings predictability.
As such we made the decision to exit commercial all risk on and admitted basis specialty homeowners and Louisiana and put into place the host of other underwriting changes.
We are committed to the continuous improvement of Palomar across all dimensions of the business and believe that the underwriting changes made during the fourth quarter to reflect this commitment.
Finally, we continue to emphasize the protection of our balance sheet and our earnings base that effect subsequent to year end, we secured a $25 million of aggregate excess of loss reinsurance limit the aggregate cover to put a floor on on row, and combined ratio and earnings base.
Ultimately minimizing the impact of losses from multiple severe catastrophe events.
Turning to our results in more detail, we delivered gross written premium growth of 31 per cent of the fourth quarter and approximately 41 per cent for the full year of.
Full year growth consisted of an 87 per cent increase and our non earthquake offerings gross of 52 per cent for our commercial earthquake business and 14% growth on the same store basis for our residential earthquake business.
We continue to expand our product portfolio lots of four new products and plastic and 'twenty and 'twenty and are encouraged by the traction of these newer products and quickly established.
For example are and the Marine Division grew premium by over 500 per cent and year over year, albeit off of smaller base.
Our commercial lines premium the 95 per cent and year over year, the function of new distribution sources expanded geographic footprint incremental product traction and most importantly sustained pricing increases of four.
Quarter commercial policy average rate increase on renewal was 16% versus 14% in the third quarter, demonstrating sustained rate integrity and the commercial property market.
Our book experienced premium retention rates of 84 per cent during the fourth quarter of rather strong result went factory and the amount of non renewals of all of risk and specialty homeowners policies of Macquarie.
And the 87 per cent for the full year 'twenty and 'twenty.
Premium retention for our residential earthquake and hot why hurricane and lines of business remained the strongest across our portfolio.
Both the in excess of <unk> 92 per cent.
We believe these results are a testament to the unique value of our products offer of insured and distribution partners.
And we think about our evolution in 'twenty and 'twenty and what is to come in the years ahead, Patrick is the key pillar of our progress.
It's natural extension of our business truly enables us to extend the breadth and reach of our product suite.
And it provides us the flexibility to enter new program.
The new market segments, and expedient fashion and in some cases permits us to enter the lines of business or geographies, where previously precluded from as it had been and ensure.
Patrick also gives us the opportunity to participate and national property layered and shared business for commercial earthquake commercial all risk and in the marine business.
Tactics of 128% sequential growth and the fourth quarter demonstrates the potential.
Strategic partnerships continue to be of key growth driver for Palomar.
Over the course of 'twenty and 'twenty, we executed new partnerships and the earthquake flood and commercial lines of property business and on behalf of the Palomar specialty insurance company and Patrick.
These relationships enable us to enter new lines of business as well as deepen our standing as the go to residential earthquake partner.
The major national insurance carriers.
Subsequent to quarter, and we joined forces with travelers by residential earthquake products through their agency partners, and the Missouri, Indiana and Utah.
The partnership began in earnest last month and is emblematic of our strategy. We are pleased with the initial reception of that our products have received by the travelers clients and producers and look forward to extending the relationship the new additional geographies of the year has progressed.
Although these relationships take time and develop we believe the investments will serve the company well and we provide valuable technology enabled solutions to other insurance carriers and.
I'd also like the briefly touch on our newly launched real estate of errors and omissions program.
Classes of business, where our team has long standing experience of the distribution relationships, we believe it or the strong ambition to the Palomar product suite and Harold's are careful and targeted expansion into casualty business.
We're pleased with the progress of submitted offering has produced over the past few months.
As previously mentioned, our country experienced and historic strength of severe weather events. During the second half of this year, which resulted in a meaningful impact on our financial results.
And it's always our immediate reaction was to ensure that our policyholder and the business partners received the support they deserve.
Once this work is complete our focused churns.
Utilizing the lessons that we learned to improve our financial results and our business overall.
And we rigorously examined our product performance and underwriting guidelines and evaluating the available returns and specific market segments and geographies.
Such we opted to exit the admitted commercial all risk and totality and specialty homeowners and Louisiana.
These collective actions reduced our gross losses from the historically act of 'twenty and 'twenty, one season by 70 per cent.
With the launch of Patrick we shifted our approach to writing layered and share at all of our SKU counts on and E&S basis materially alter the exposure and participation on an individual risk and aggregate portfolio of basis.
As it pertains to our reinsurance program in October we announced the procurement of of back backup coverage of our 20 million of excess of $10 million layer the Lai.
We will remain in place until June 1st 'twenty and 'twenty one.
As it relate.
So you mentioned $25 million of aggregate cover of placed earlier this year and and steps April 1st and has an attachment point of 30 million and providing coverage to qualify and events within the per occurrence retention.
The coverage applies across all perils, including earthquakes hurricanes convective storms and floods above of qualifying and that level of 2 million and ultimate gross loss recovery and on our first dollar basis once above the threshold.
And politically speaking the aggregate kicks in and after three full retentions are after the accumulation of losses from a multitude of $2 million of ultimate gross loss of beds.
The actions taken demonstrate our commitment and focus on remaining agile and preserving our ability to invest and our core markets and most importantly to achieve the requisite payback on the catastrophe bond Palomar of shareholders and our reinsurance partners.
'twenty and 'twenty was at try and you get one of the accomplishments.
The grew rapidly and maintained our profitability, but more importantly, we got better of the company.
The hard lessons learned over the second half of the year and the Swift actions of our team to adapt learn and improve during the pandemic and bought on the numerous paths for growth that lay ahead.
And I'd like to spend a few minutes on our team who are at the core of everything we do and what fuels the forward.
So the extent we had several no notable additions to our world class leadership team, including the Angela Grant who joined US in November as our Chief legal officer the.
The promotion of Michelle Johnson, the Chief talent and diversity Officer, and the addition of Mark Rose as Chief Technology Officer.
The most vital strength of our talent, which we continually invest and while also promoting diversity and inclusion and the workplace.
I would also highlight the launch of.
Of our novel sustainability, and citizenship report, which we plan on releasing annually the report.
<unk> represents our commitment.
Two exceeding traditional environmental social responsibility and governance standards as we strive to build the workplace grounded and ethical behavior.
And the quality.
I'm proud of the strides that we've made toward creating economic opportunities and for.
The Modi and social Justice.
Turning to our attention to 'twenty 'twenty, one and the future prospects for Palomar I would like to start by addressing the severe weather activity throughout the country of this past week and in particular Winter Storm, you worry and Texas were Palomar has had considerable market presence.
First off I want to tell our policyholders and Texas that our thoughts are with them and stand ready to support them.
And to help them rebound.
Secondly, I want to remind our stakeholders the palomar protect the Texas business residential and commercial alike with not only catastrophe excess of loss covers of response and a gross loss of exceed $10 million, but also with underlying quota share reinsurance where there is first of all of our participation and help manage attritional loss.
And unlike the hurricane losses that impacted us in Q3, and Q4 of 'twenty and 'twenty, both commercial and residential quota shares will respond to the spend.
On the ground up basis within our retention and that such we do not expect to incur material losses from the storm.
We believe we are well positioned to further support continued profitable growth.
Palomar has the ability to innovate adapt and market conditions and to maintain our profitability and strong risk management of Differentiators that will enable us to capitalize on new and existing market opportunities.
We are investing to support this growth and we are confident we will continue to scale our business, while diversifying our product.
We're excited with the prospects for the year ahead, as well as our ability to deliver attractive results for all of the company's stakeholders for the full year 'twenty 'twenty. One we believe that our adjusted net income will be between 62 and $67 million.
Additionally, we believe that with our aggregate cover in place we have established the floor of approximately 10% adjusted return on equity 80 per cent for adjusted combined ratio and 39 million for adjusted net income for the year.
With that I will turn the call over to crest and discuss our results in more detail.
Thank you Mac.
Please note that during my portion when referring to any per share figure I'm, referring to per diluted common share as calculated using the treasury stock method. This methodology requires us to include common share equivalents, such as outstanding stock options during profitable periods and exclude them and periods when we incur and net loss we have and.
Adjusted the calculations accordingly.
For the fourth quarter of 'twenty and 'twenty, our net loss was $1.8 million or seven cents per share compared to net income of $10 $9 million or 45 cents per share for the same quarter in 2019.
For the full year of 'twenty and 'twenty, our net income was $6 $3 million or 24 cents per share compared to net income of $10 $6 million of 49 cents per share and 2019.
Gross written premiums for the fourth quarter were $96 $1 million, representing an increase of 31 per cent compared to the prior year's fourth quarter for 'twenty and 'twenty. Our gross written premiums were $354 $4 million growth of the 46 per cent compared to $252 million and 2019 and.
And as Matt indicated this growth was driven by a combination of new products accelerated rate increases expansion of of U S footprint and the.
Extension of our distribution networks.
You did written premiums for the fourth quarter were $53 8 million, representing an increase of 82.3 per cent compared to the prior year's fourth quarter.
The increase was primarily due to the increase in reinsurance expense commiserate with her gross.
During the fourth quarter. The company also incurred additional reinsurance expense associated with the losses sustained in the third and fourth quarter of the year, while maintaining the company's 10 million dollar retention.
And the fourth quarter, we fully utilize the original reinsurance layer and providing $20 million of coverage in excess of $10 million the.
Exhaustion of that layer of resulted in expense acceleration and a four point of $1 million of the remaining costs that would have normally been recognized in 'twenty and 'twenty one.
Newsletter and was fully utilized including a reinstatement due to the historic weather activity and the second half of 'twenty and 'twenty.
Additionally, at the beginning of the fourth quarter, we placed the backup layer to provide the equivalent coverage through June 1st the 2021.
The original air was impaired.
This backup of your costs $6 million $2.2 million of ceded written premium and the fourth quarter the.
The portion of the backup later was utilized during the fourth quarter, resulting in a reinstatement premium and the $759000, but the full and it remains in place for wind storms earthquakes and other events such as winter storm hurry through its exploration and.
And as Mac mentioned and evident and our recent announcement on a risk transfer model remains a critical component to our strategy as we seek to parents and sustained top line growth with conservative levels of reinsurance protection.
The aggregate cover we recently placed effect that the April 1st of this year.
The back of the strategy and this.
As a reminder, our cat excess of loss program and provides coverage once the loss exceeds our current retention of $10 million, our retained losses from qualifying events will contribute to the new aggregate cover that kicks in at $30 million.
Net earned premiums for the fourth quarter were $38 $9 million and increase of $25 six per cent compared to the prior year's fourth quarter due to the growth and earning of higher gross written premiums offset by the growth and earning of higher ceded written premiums that include the additional and accelerated reinsurance expense described earlier.
And net earned premiums for 'twenty, and 'twenty were $155 $1 million and <unk>.
Increase of $54 seven per cent compared to 2019 of the four.
Quarter of 'twenty and 'twenty net earned premiums as a percentage of gross earned premiums were $45 two per cent compared to 52, 6% and the fourth quarter of 2019. The decrease was significantly due to the reinsurance acceleration charge and.
Backup later expense and reinstatement premium incurred and the fourth quarter of 2000 and 'twenty four.
And for 'twenty and 'twenty net earned premiums as the percentage of gross earned premiums of 51.4 per cent compared to 50% and 2019. We believe the ratio of net earned premiums of gross earned premiums and the better metric for assessing our business versus the ratio of net written premiums the grocery and premiums and as we stated last quarter. We expected the net earned premium range.
The decrease of the fourth quarter and with the placement of the backup layer.
This was further decreased by the reinsurance expense acceleration and the reinstatement premium we.
We continue to expect the rest of this ratio to be around 52 per cent to 54 per cent on an annual basis low where at the beginning of of renew reinsurance placement and higher up the and with our expected growth and earned premium.
The expected net earned premium ratio contemplates the new aggregate cover and provides increased protection and improved earnings visibility if we face multiple catastrophic events similar to what we saw in 'twenty and 'twenty.
Michigan and other income was approximately $803000 for the three months ended December 31, 2020, 654000 and for the same period and 2019.
The commission and other income and 'twenty and 'twenty was $3.3 million and two points of a million dollars and 2019.
Losses, and loss adjustment expenses were and L. E incurred for the fourth quarter were $17 $2 million, including $14.5 million of the chest catastrophe losses and $2.7 million of non catastrophe attritional losses.
And redefine catastrophe losses of certain losses, resulting from the events involving multiple claims and policyholders, including earthquakes hurricanes floods and convective storms terrorist acts where other aggregate events. The definition captures the catastrophe losses from a third and fourth corner and Hurricanes Harvey influence from previous.
Periods the loss ratio for the quarter was 44, 2% comprised of the catastrophe loss ratio of 37, 2% and and Attritional loss ratio of seven per cent compared to a loss ratio of seven 1% comprised entirely of Attritional losses. During the same period last year.
And our 'twenty and 'twenty loss ratio was 41, 3% comprised of a catastrophe loss ratio of 32, 9% and and Attritional loss ratio of <unk> four per cent compared to five 6% and 2019 comprised entirely of Attritional losses, the increase and the Attritional loss ratio between the two years is in line with our XP.
The patients.
Our expense ratio for the fourth quarter of 'twenty, and 'twenty was $68 six per cent compared to 56% and the fourth quarter of 2019. The increased expense ratio was driven by additional reinsurance placement with increased ceded premiums and continued investments in person.
The ratio of other underwriting expenses, excluding adjustments to gross earned premiums for the fourth quarter of 'twenty and 'twenty was 10% compared to 10.5 per cent for the fourth quarter of 2019.
This ratio was 10.2 per cent for the full year of 'twenty and 'twenty compared to 11.6 for 2019.
On a combined ratio for the fourth quarter was 112, 8% and compares to a combined ratio of $63 one per cent for the prior year's fourth quarter.
Excluding the catastrophe losses in the quarter, our adjusted combined ratio of 73.8 per cent for the fourth quarter compared to 67% and the fourth quarter of 2019 the <unk>.
Increase is primarily primarily from higher expense ratio and as previously discussed and inline with our expectations. We believe that this ratio is a better measure of our results for comparison purposes and offers a better sense of our business on a steady state basis.
Our adjusted combined ratio, excluding catastrophe losses for 'twenty and 'twenty, the 67.5 per cent compared to 63, 3% and 2019.
Net investment income and the fourth quarter was $2 $3 million and increase of 29 per cent compared to the prior year's fourth quarter the.
The increase was largely due to a higher average balance of investments held during the three months ended December 31, 'twenty and 'twenty due primarily to cash generated from operations as well as proceeds from the Companys January and June 'twenty, and 'twenty stock offerings, and we maintain a conservative investment strategy as our funds are generally invested and high quality.
Securities, including Government Agency Securities asset and mortgage backed securities and the useful corporate bonds with an average quality the credit quality of <unk>.
Our fixed income investment portfolio book yield during the fourth quarter was two point of 3% compared to 2.9% for the fourth quarter of 2019.
Our weighted average duration of our fixed maturity investment portfolio, including cash equivalents was three point and 96 years at quarter end cash.
Cash and invested assets totaled $456 1 million at quarter and as compared to $272.8 million at December 31, 2019.
One of the fourth quarter, we recognized realized and unrealized gain on investments and the consolidated statement of income of $245000 compared to $1.2 million gain and the prior year's fourth quarter.
Our effective tax rate during the fourth quarter was $23 one per cent compared to 24.5 per cent and the prior year's fourth quarter, the 'twenty and 'twenty fourth quarter. The company's income tax free differed from the statutory rate due to the tax impact of the permanent component of employee stock option exercises.
Excluding any unforeseen events, we anticipate and our tax rate will settle around the 21% Mark for the <unk> 2021 year.
Our stockholders' equity was $363 $7 million of December 31st 2020.
Two $218.6 million at December 31, 2019.
For the fourth quarter of 2020 and annualized return on equity was a negative 2% compared to 24 per cent during the fourth quarter of 2019 similar.
Similarly on a annualized adjusted return on equity during the fourth quarter was negative 1.4 per cent compared to 21, 5% during the fourth quarter of 2019, our adjusted return on equity for 2023 per cent compared to $24 one per cent for 2019.
And as Mackie indicated looking ahead to 'twenty 'twenty, one we expect to generate adjusted net income of between $62 million to $67 million.
This adjusted net income guidance considers the impact of the winter Storm Murray and Texas.
As of December 31, 2020, we had $26 million 245339 diluted shares outstanding as calculated using the treasury stock method, we did not anticipate the 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.
Thank you we will now be conducting a question and answer session.
We'd like to ask the question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is and the question queue.
You May press star two if he would like to remove your question and from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Our first question is coming from the line of Matt current Levy with JMP. Please proceed with your question.
Hey, Thanks, good morning.
And couple of questions Mac, maybe start with one centered on gross.
I appreciate your comments about seven new partnerships being signed and the quarter and and really my my question is could you help us.
Kind of gauge your excitement and optimism for the the growth path going forward, specifically kind of what the the potential for those new partnerships. How should we think about the timing of the ramp of those and and really what the kind of of the Bottomline question of you know as you look at 2020 and and what was the very strong kind of of 40% or so gross.
And the growth rate.
Do you feel that sustainable or do you feel that something that can be built upon or is the model.
During the back and they'll still be strong growth, but maybe we should think about those numbers.
Yeah, Matt.
The good to hear from you and thanks for the question.
And definitely wanted to address this because I think it's important to say that we feel very good about our growth prospects into 'twenty 'twenty, one and beyond and when you look at our growth over the course of 'twenty and 'twenty. It was strong but with the addition of new products.
The new carrier and a new partnerships, which you've touched upon and we we do believe that our growth rate, that's and we don't we're not going provide premium guidance per se, but we do think that our growth rate that we achieved in 2020 is sustainable and we think that that is directionally, a very achievable and.
And I wouldn't mind, just giving us a little more color on the fourth quarter topline growth because ultimately when we went through the exercises and the underwriting changes that we put into place and the fourth quarter, we focused on profitability.
And as a result, we made changes that.
And have slowed the growth in certain lines of business. So <unk>.
Clearly the commercial all risk exiting that business and the middle of the quarter on and admitted basis and pivoting to the E&S layered and shared.
Focus on exiting especially of homeowners and Louisiana.
You could argue that sacrifice seven points of growth and just what our average new business wasn't a month, but it also took away the potential losses of seven and 70% of our losses that we incurred from the wind season of 'twenty and 'twenty.
We also looked at certain of our lines like commercial earthquake to make sure we were getting the same.
Targeted return you know even with the earthquake, where you have a circumstance where.
You see.
Oh no no attritional loss, you do have underlying target metrics and there were a lot there were certain accounts that we opted to walk away from that weren't going to achieve our targeted returns and so you know if you compartmentalize that that was probably around seven points of growth within the commercial earthquake and then just one little nuance on.
On commercial earthquake is that the there is around $1.2 million of premium that's tied the national property and the E&S book that is earthquake premium that could have been recapped reconstituted and you know what of pushed up the earthquake growth rate and closer to the commercial quake closer to 23 per cent.
And the only thing I would highlight too is on residential earthquake. Our same store growth was 15% of our largest product value of select was north of 20% in the fourth quarter. So if the long winded way of saying when you look at just the underlying trends and earthquake plus factor and the growth from.
The E&S company, new partnerships that we have and builders risk certainly for national property and some of our new casualty lines of the real estate agency and you know.
The new earthquake partnerships with the someone's like of travelers are flood partnership with Torrent and then also the Hawaii and hurricane.
Renewal rights deal, which didnt kick in till the first quarter, because there's a lag on zinc and from the timing of the deal to when you actually deliver the renewal notice.
There are.
Multiple growth drivers that gives us very good confidence about sustaining growth equivalent to the out of 'twenty and 'twenty for the full year in 'twenty and 'twenty, one and the only out of the last point I'd make is you know what.
We're two months into the year and we're seeing very good growth earthquake.
Why you named the life.
Great. That's very helpful. Thank you and then just one other question.
Kind of on more of our underwriting approach question, particularly as we think about some of the.
Newer partnerships that have been and outside of I'm thinking of things that are a little larger limit to them like the excess liability partnership on the builders' risk partnership.
Can you just kind of a little inside baseball on how how you approach and of those sorts of partnerships, where maybe there is and some of those there's a little more tail involved theres little larger limits and ball and I'm sure of reinsurance is probably part of the answer and as well as just the old passion of underwriting, but and any color you could give the that'd be great. Thank you.
Yeah, absolutely and so well first off we wanted to underwrite it on a net line basis or looking at what is the unit level profitability irrespective of reinsurance because if you do it that way you have the ability to supplement your risks and yeah your underwriting appetite with reinsurance.
And so those lines that you touched upon the new of partnerships and builders RASK are the new partnership that we've done in the casualty arena those have quota share reinsurance supporting them. So typically we would only ended up being 20 to 25 per cent of the RASK much like we've done with all of our attrition.
The last line and that's why we have the confidence that we do around the results and Texas, we have underlying quota shares of working.
Side by side with us so those new partnerships, we're gonna weighed into those markets.
You know a very disciplined underwriting appetite have incremental reinsurance supporting us and you know and doing it in a market that is conducive to name and your terms and conditions. It is still a very favorable market from a pricing and terms and conditions standpoint.
Great. Thank you for the color and the best of luck and 21.
Thanks, Matt.
Thank you. Our next question is coming from the line of David momentum with Evercore ISI. Please proceed with your question.
Hi, Thanks, good morning.
I had a question Mac just on just a bit more on the on the growth during the quarter.
And specifically there of residential earthquake AR growth, where it slowed a bit and I think I caught that you had said.
14% to 15% same store growth in residential earthquake.
And you guys have historically had very good retention and this line. So I'm I guess I'm just wondering maybe if you could touch on new business trends and was that and just running a little bit light and for Q that yes, it seems like and it might be temporary based on the comments that you just made but wondering if you could just expand a bit.
On the on the residential earthquake, a growth of about 6% year over year and the quarter.
Yes, absolutely, Dave and again, what I would say is that the same store growth was 15% and our largest product value select grew 20.
20% in the quarter.
The Theres really two specific things that influenced and impacted the gross and it wasn't new business. It was actually some of our assumed reinsurance partnerships. We had one partnership.
With the carrier that exited the line in Utah that we stopped doing business with that actually and the fourth quarter gave us a little bit of of one type of unit.
On the premium bump.
So that was roughly a four point kind of aberration in the fourth quarter of 2019.
And then the other thing was we had one other assumed reinsurance relationship with the homeowners rider in California that has materially changed at the appetite due to wildfire.
We.
And have supported them on the earthquake side and they're still very good partner, but they have changed the the size of the risk they want their non renewing policies because of the wildfire exposure and the state of California. So when I look to again on all our core products value select heritage Flashpoint. Those grew 20 plus percent you had to.
Legacy partnerships for lack of a better term debt have been kind of wound down and one was bombed out and wanted to come back some considerably.
And then again as I said, if you look at the start of this year and new business is strong and we feel very good about sustaining the growth rate that you saw 15 plus percent.
In 2020 on the residential which we're excited and 2021.
Great. Thanks, that's really helpful. And then maybe a quick follow up on that are you know great to hear about the partnerships.
And you know, adding seven and in the quarter and great to hear about the travelers partnership and Missouri, Indiana, and Utah I I guess I'm. Just wondering if you of any line of sight into expanding that relationship to include some other states like California, and Washington and Oregon.
I guess and is that and ongoing conversation that you guys are having.
Those are the ongoing conversations I think what we're focused on right now is executing and those first three states getting our systems well integrated with their agents getting R. R.
Our marketing team the train there their marketing reps as well as net producers on the products themselves, but yeah. The.
And we entered into this arrangement with the hopes of expanding the well beyond those three states.
And I hope to report that there is expansion over the course of 'twenty and 'twenty, one, but you know what we're going to walk before we went on and get it right. Because this is an important deal for us.
Got it that makes sense. Thanks, and then I guess you know just just shifting over to reinsurance.
It's great to see the the aggregate that you guys put in place earlier this month.
I'm wondering if you could maybe just touch on other parts of the program and and just on the reinsurance renewals at one one of.
What sort of rate increases.
You guys are ex.
<unk> and then also maybe just just give your outlook on how you.
The reinsurance rates to progress over 'twenty and 'twenty, one and.
Especially now it sounds like the the specialty home facility is clearly working as you guys had intended.
But I believe that when news at six and one and that's yeah. So just wondering I guess, that's as well specifically on the specialty home facility out of your thinking about.
The window on that.
Sure.
But I would tell you David So we did not have any reinsurance.
Renewing at one one of the majority of the program or news.
At six one, but we did go out and the in place the aggregate earlier this year and it's and the steps at four one and it wasn't you know we did it in the in January and as you know and we had a good experience we have some great reinsurer of supporting US It was price kind of in line with our expectations.
And the as it relates to six one.
On the broader Cat program of news we are in the market now we have a terrific panel of reinsurers that the the strong majority of which would not have incurred losses and so I think we feel good about the placement of the guidance that we've put in place reflects some rate increase.
And and <unk> and it's.
The digestible rate increase when looking at the primary market and what we can get there.
On the specialty homeowners facility I think that first and foremost what it starts with as we need and do a very good job of.
Servicing our policyholders wanted to make sure that they're not disrupted.
And their homes or back of their homes with full utility too that we're responsive and also not putting ourselves in a position where there's leakage from the claims handling and expense or.
Just.
Overall, malaise and servicing the business and if we do a good job of that we feel that we have you know we will be able to successfully renew the specialty homeowners facility at six one up until this month that program had done very well and it has.
And we've done very well historically, we've got a great group of reinsurers supporting us and so we think we'll be able to get it out of place, where we're very confident and that and we take around 22 and a half per cent of the rest of their we might be able to dial that up or down some.
But I think what at first and it comes down to is just being very transparent with our reinsurers and being very responsive to our policyholders and getting these claims are serviced and closed.
As quick as possible.
Okay, great. Thanks that makes sense.
Thank you. Our next question is coming from the line of Mark Hughes with Truest. Please proceed with your question.
Yeah. Thank you and what you've said the Texas as the material, but and thinking about your guidance of 62 to 67 and I do wonder whether there might be a million or two that you assume from the winter storms in the.
Guidance I think you said it was inclusive of the Texas and East, Texas zero or is it the.
Perhaps a couple of million dollars.
Yeah, Mark and.
This is Mac and it's at the fair question I mean, we will have some loss its going to be on the lower and it'll be within that range.
If I had the handicap right now it'll be within that range that you specified and so that's why we feel that it's the.
And material, but it's it's still too early to tell but the guidance that we.
Put out there reflects the losses, the AR from Texas.
And that's kind of all we can say because it is.
Early stage of certainly in terms of the adjudication you know that the volume of claims is dissipating some of them, but we're still seeing them. So until we get our true hands around that.
The range of the net is.
And what kind of what you outlined.
The one thing I'd add around the.
Guidance as well is that you know we.
And we talked about it on the call and mentioned earlier. This year is that that also includes the new cost of the aggregate of which is a new to our program, but it will definitely help create more visibility on it.
Consistency of earnings, but also you know as Matt mentioned in his prepared remarks.
Create more of a floor for what our adjusted net income will be for 'twenty and 'twenty, one and so I think that'll just helped prepare but thats. The there is additional cost associated with that included and that guidance that we're providing.
And <unk>.
Mac you gave us the number is talking about the floor of specifically I think the 10% of ROE and 80% adjusted combined ratio did I hear that properly and then I think you've provided the third.
Metric.
And I didn't know.
Yes, the numbers were.
<unk> 10 per cent the floor. This is again the floor a 10% Roe.
And 80%, our adjusted combined ratio and adjusted net income of $39 million.
For what it's worth if based on the underwriting changes that we've made in 'twenty and 'twenty were to repeat itself again with the same type of store and St location. You know the the range that we would have the four wouldn't be.
And 39, and it would be closer to $41 46, but news the full utilization of the aggregate would be of $39 million adjusted net income.
Understood and then the past I think you've mentioned the 128% sequential growth.
You might have given the <unk> SKU number last quarter.
But what was the contribution and the fourth quarter.
It was from a range.
The gross written premium.
Yeah sure Yeah, it was and and.
Let me give you the exact number it was in and around $21 million.
And then what do you think about the ramp on that obviously the 128.
The <unk>.
Central.
Where is that.
You know going on.
Yeah, what what kind of ramps and we anticipate on the roughly.
Yeah, I think long term, we think the the premium and passed it could be equivalent to what we have and the admin.
The company.
You know we have internal targets. We are we're not going of guide to them. This year, but we you know the new partnerships that we've announced and builders risk and excess liability and those are the E&S, there's great momentum with what we're doing with and wins as well as Inc.
And.
The national property as well as and commercial quake, So theres a lot of and there's a lot of things and the hopper. So we feel very good about the long term prospects and you know I don't know if we're gonna grow sequentially, 130% of our COO.
But we're gonna grow.
Pretty nicely.
And the U S company.
Thank you.
Thank you. Our next question is come from the line of Jeff Schmitt with William Blair. Please proceed with your questions.
Hi, good morning.
The commercial all risk booked at you exited I think of the past you said that was part of 9 million dollar book and but it did cost you sort of seven points of overall growth and the quarter I believe which implies maybe it was a bit larger so I guess, what what was the size of that book and all of that come out fairly.
[noise] evenly this year as policies non renew.
Yeah.
Yeah, Hey, Jeff It's Mac.
I think it was 9% of total premium not 9 million.
So the but what I would tell you as you know and sequentially.
We are.
That book of business declined.
It's from.
Call it.
Uh huh.
Well and a half million or so in the third quarter and decline probably about by about 50%. So it's going on a sequential basis, it's going to wind.
Wind down Ratably over the course of the year, it's going to be offset by growth on national property and the E&S company. So that you know it'll probably end up being looking slightly flat to down modestly as categorized as the commercial all risk, but it will be all E&S.
First of the admitted so we're kind of rolling off you know.
Close to.
Eight to 10 per cent per month, and the limit comes down and commensurately as well.
And I think a good indicator of that is if you just look in the fourth quarter.
And we disclose this how much of our Texas premium declined sequentially.
And that was.
What is the function of the commercial all risk being wound down in that state of the admitted commercial all of that is being bought out of date.
And then the only thing that I would add is just if you look at the business that we're bringing on on the layered and shared national property business and the metrics are considerably better not necessarily from a pure <unk>.
Rate perspective, but from a pure premium perspective, and the a L. The premium and some of the other metrics that we track.
You know, it's considerably better it's close to 38% better from a theoretical or underlying profitability standpoint. So it will help with our margins it will reduce our cost of reinsurance and it will enhance our spread of risk.
Got it okay. Yeah, that's great color and then kind of looking at the other line and premium it's actually ramping faster than Florida, almost as fast as builders risk is that all of the real estate D&O product or I thought that was and where I guess, what what is in that and.
And and so what are the growth prospects of that.
Yeah. So there's a there's a few things and there there is.
And there's real estate of the you know there are some some new E&S our assumed reinsurance relationships. We are starting to write kind of non property assumed quota share reinsurance and with the team that's long standing.
The market experts and so that that's another component to it and that could be four of line like.
Most of the casualty and debt. So the other right now is going to be really more of our casualty business.
And so we've gotten a good start and ramping that up.
Is that casualty in terms of like with the property like a commercial property kind of a commercial package.
And yes, some of it could be yeah. Some of it could be package some of it could be of just the pure liability products. Some of it could be like the real estate agency and know what's it's the professional lines.
Got it okay.
Okay. Thanks for the answers.
Yeah.
Yeah.
Thank you. Our next question comes from the line of Tracy Bengie with Barclays. Please proceed with your question.
Thank you just wanted to circle back to Ari on.
There are a lot of ethnic and it seemed to be pretty vary and that large and danger of catastrophe reinsurance having and provided.
Provided their view yet so I'm just wondering as and you were thinking about your outlook for the year. It seems to be in a tight range. How you think about the industry loss size of this event and if you could also just walk us through the mechanics, there of your reinsurance because I realize it's not linear.
Pardon me if I could follow up on your question.
I like what I would tell you Tracy and we can follow up on it and I think we've talked about since we've been public debt, we use for attritional loss lines.
Like Texas homeowners of our specialty homeowners facility and we use of quota share reinsurance and so we're taking.
22.5% of the risk you know what day.
And with recoveries on the first dollar basis, but we have quota shares and place for the.
But the specialty homeowners business, we haven't been in place for the.
All risk business as well as builders risk and in the marine and so we have three separate quota share is in place to support us from and Attritional loss standpoint. So those are on inside of our retention and then once above 10, the once the aggregate losses above $10 million.
And when it's triggered by our Cat program. So we have the ability to recover from multiple vehicles, our quota shares for the three individual lines plus our cat program.
And as it relates to the size of the event and it's it's too early to call, but for us the <unk>.
And that we have those four reinsurance programs and working to our benefit.
It gives us very good confidence that the losses are going to be immaterial. So.
And then Chris I don't know if you'd offer anything else, but I think that's really the sum and substance of it and we can give you a full tracy offline of breakdown of how all of them, Yeah, I guess book.
Yeah, I, I guess and you've previously mentioned and between Shanghai for our specialty homeowners, but I think of walk us through what your retention as far of commercial property and also and.
You're asking and take a view that you won't blur really are our current tower.
Okay.
We will not flow through our current salary. This will not we will not have 600.
Plus million dollars of loss from <unk>.
It will be nowhere near that.
We it could go into the first layer of our reinsurance program. It's it it's still early to tell as I said earlier the claims have dissipated or.
The pace of claim tendering has dissipated.
Literally over the last few days.
So it's it's a manageable identifiable number and Ah. So the are all risk on average we're taking about 20 per cent of the attritional loss.
And same thing on the builders' risk.
And it's 22 and a half on the specialty homeowners.
And I appreciate you laying out all al and then I guess where the.
A lot of discussion on gorilla, maybe on the flip side, you had mentioned and I got to reiterate and not new news on this.
Is that your extra day and I'm wondering if there is any other areas, where you're not meeting the are principally kind of risk adjusted return on capital of that May look less attractive right now and you hear anything.
Right now beyond the commercial all risk and the specialty homeowners and Louisiana, We look at it on the state by state and of an account by account basis. So we and that's the beauty of having the E&S company or having the ability.
To modify rates even on the admitted side. So no. There's no line of business. There there could be ZIP code there could be certain classes that we're gonna take rate on but that's just good underwriting, but so there's nothing.
No broad brush.
And you can.
Thank you. Our next question is coming from the line of Meyer Shields with K VW. Please proceed with your question.
Great. Thanks, So first I think Mike you mentioned seven new deals should we think of those outside of the travelers as.
Being the typical earthquake hotspots.
Yes, that's that's fair and married Yeah, it's going to the mirror, where we have filings and place existing presence and distribution, but that's right.
Okay.
And those are all of those up and running as of January one.
Be on.
Ah, yes, and varying degrees and some of them are and pilot phase and some of them are and training phases on the single state. So theres a lot more to come in terms of penetration.
Training and adoption.
Adoption.
Okay. That's helpful.
And I'm, hoping you could just go through the reinsurance program associated with the growth and Florida, just because its been and forgive me.
Sure so the the reinsurance and so we have a separate tower.
The the North Atlantic Hurricane Tower that is that covers us for the Florida exposure and.
And some of the Florida exposure that we brought on was part of his motor truck cargo and some of it is the assumed reinsurance that doesn't have cat exposure.
And you know the the the new Florida business that we brought on and that's tied to our layered and share of property. There is a standalone facility that we have that attaches of 10 million and then at some point of the the broader cap program at one third of the benefit of the broader cap program, but R. P M LS and <unk>.
Right now of very modest.
Okay.
And then I'm, assuming it wasn't accidental but I was wondering whether you've given any thought to disclosing how palomar looks at anything else.
In terms of of how we look at our average annual loss.
Yeah, and that's where you looked at and we should build it.
Well I think I wouldn't I mean, the average annual loss. It we built it a L. Our reinsurance program is price as a multiple of the a all of it.
At the same way, we price our premium you know I I think if you're trying to figure out like what the cat load is but.
But where we have I think our best offering to you is we have put the aggregate and place that puts the floor. If there are you know three retentions.
After three retention and it goes into the aggregate. So that there is you know a lot would have to happen and we saw it happen in 'twenty and 'twenty, but 2020 is going to look very different in 'twenty and 'twenty, one just because of our underwriting appetite. So you know the cat load.
And.
If it's one event and if it's.
And that would be I don't know how you want to do that math I think and when we look at day, how we use it and look at the underlying pricing and how we pay per our reinsurance and the lower the a L. The cheaper our reinsurance is and so by the higher than that on our net earned premium is.
No I understand and I know, it's not the question you can and so that's something for the model.
Okay.
Thank you. Our next question is coming from the line of Paul Newsome with Piper Sandler. Please proceed with your question.
Thank you and and good morning.
Hoping you could talk a little bit about the outlook for the Attritional layer and the loss ratio of obviously you have of.
Business mix change happening.
And with the new E S.
S business, which I assume would have a higher attritional losses, but theres been a lot of changes and.
Reinsurance and.
On pricing. So you know do we should we continue to expect sort of and I guess, it's a gradual increase in the nutritional loss.
Ratio or should just tell how should we think about that and how that maybe changes in the last three six months.
Yeah no.
And handle that one Mac, but I think you described it well you know I think there's really.
No change in the philosophy that we've kind of been giving really over the last year that we do expect the attritional loss ratio to continue to tick up and as you can see for the full year of 2020.
It didn't jump you need and we went from five six years and 19 to about 8% for the 28.
Eight five per cent for 2020. Some of that is also a little inflated just because of the amount of additional reinsurance expense that we had to take in the fourth quarter. So the push the loss ratio up slightly but you know these are all in line with our expectations through the year than it was going to go up obviously, we are still expanding some of those line.
And especially the homeowners' line is still growing as Mac mentioned, we are rotating out of our admin and all risk of going into another all risk or of layered and shared all risk program I will say of the Attritional loss profile of that book is a little bit better than our historic book or sort of admitted book. So we do expect to.
See some improvement there but.
And there are lines, expanding such as inland marine and Oh risk.
On the layered and share at all risk, especially the homeowners and it will still have attritional losses. So we expect it still to tick up but like I've said before and it's not turning into you know the 12.
<unk> 20 per cent overnight. This is gonna be you know eight 5% of moving up to maybe 9% next quarter or things of that nature, but it's as you know.
The loss ratios on arent perfect and they are a little bit of seasonal so and then theres going to be some.
Bumps and valleys and that but on an annual basis, we don't expect it to jump to the.
20 per cent or anything like that you know maybe.
Point or two each.
Each quarter or Hoover and annual period.
Great and I think what I.
And Paul if you look at the fourth quarter it was 7%.
It was flat year over year, so again to Chris's point, it's very gradual.
And that's great.
And then on.
On the reinsurance I use of quota share are there any products, where you are on.
No.
And they're expanding or contracting the use of quota share.
That might affect sort of net to gross.
Respectively on the next year or two.
Not not in the material fashion.
Our our participation and the and our flood product has ticked up modestly.
Over the last few years you know.
But so no it's not like we're going to start to take a 100 per cent of that book.
We're still sitting out.
60 per cent of it.
Yeah, and like I said, you know obviously, when we've talked about it on the call or on the prepared remarks on the call.
Weighted that are the net.
The net earned premiums should remain around that 50 to the 54 per cent Mark does that includes our thoughts on our participation and the quota shares the ink.
<unk> expense of the Yeah, and then also obviously of any reinsurance that we place the.
The June one renewal.
Great. Thank you very much.
Thanks, Paul.
Thank you. Our next question is coming from the line of Adam Klauber with William Blair. Please proceed with your question.
Hi, a couple of questions on the expense ratio quarter over quarter, obviously jumped up went from sort of year over year of 54 of two of them of 67.
How much of that of the reinsurance.
Yeah, there's a significant amount of that that is being driven by reinsurance you know when you think about it.
The that ratio is calculated as you know the.
It would probably let's call it.
About a 12% hit each of those ratios so when I look at the expense ratio and it.
Was <unk> 56 last quarter, you know and on adjusted basis $53 six or 54 and is now adjusted is about $66. Seven if you were to back out and some of those reinsurance charges for the year that gets you below 60, so on and Madhu reinsurance charges and I'm talking about is the expense of acceleration of four.
And $1 million and then the reinstatement of the backup layer of about 760000 and you take those out of your net earned or add those back into your net earned that lowers the ratios would be within our expectations for the year or for the quarter, where we did talk about the fact that as we've seen.
The quota shares back in Q2.
We increased our participation and then also changed the structure, where we had a lower ceding commission, but that also helped drive up the improved net earned premium but.
The expense ratio definitely inflated I'd call it about seven and a half two eight points and gets inflated from purely from the acceleration and additional reinsurance in the quarter.
Okay. That's helpful. So none of the so this is more directional than exact but so 19.
The expense ratio was 50 720.
Up to 59, but again had a lot more reinsurance expense and.
As we think about 'twenty, one you've got the aggregate coming in and get some of the additional insurance costs. So you know, we're looking at that sort of higher level. The net ask for and exact button and a 59 or with the additional reinsurance could you know it could be going up from what we saw in 2020.
Yeah, No I think it should I think one thing we've talked about is the investment, we're making and Patrick and I think over the last couple of quarters. We've said that the expenses on the ratios will probably flatten out and a little bit over Q4 and and into Q1 of this year. So I think it's going to.
Stay at that level, let's call it for maybe a quarter or two but then we do expect you know let's call. It by the end of or the probably the second half of 2021, and we will start seeing that scale come back into the model and some of those investments take hold back.
<unk> talked about we will continue and the investment in people.
And you talked about Angela grant and the other folks that have joined the team and we're continuing and invest there and then also on some of the other things that help us.
Does it grow but.
That scale, we do expect to continue to be in there and I think you could even see it when you look at the other underwriting expenses on a gross basis, I mean and compared to gross earned if you look at the other underwriting expenses with the the adjustments included last year. It was 10, 5% and this year was 10%. So there is still improve.
And those layers are and those ratios we look at on a gross basis, which is generally how we look at it and internally because it takes out the noise and any type of reinsurance expense is going to put into those ratios.
Okay. Okay. Thanks.
And then going back to assume the premium growth and again the commercial all risk.
Will it be a bit of of Dragon and it sounds like more of the first half of how.
How big is the Louisiana homeowners that you're running off and then also on the commercial earthquake sounded like he did some re underwriting of the fourth quarter is there any of that going forward or is that probably more of a tip of the fourth quarter type hit.
And yet.
Adam.
Mac of questions first on the Louisiana homeowners at its very modest its.
Plus or minus $1 million of millions of dollars. So that will not have much of it and the impact if any on the commercial quake I would say it was it was just the specific to the fourth quarter as I said, we're seeing very good growth to start the year and what I would add is we're seeing very good.
Growth to start the year with our target metrics being hit so we're getting rate increases will improve and terms and conditions. So.
Right.
And we feel very good about commercial earthquake growth.
At this point.
And then sorry somewhere of question on the residential I think you said one.
One of your one of your partners is there's not two and one in California and I think.
One other thing depressed that somewhat growth and the fourth quarter will we see some of that carryover and the first half or is that more of a fourth quarter issue.
That was the fourth quarter issue. There one was the one time you of unearned premium bump that.
And that we received and those can happen.
As we bring on new partnerships, but that was the partnership that was resolved fairly quickly after a short term.
Arrangement and then the other one is it's.
And that's kind of run and that's up over the course of 'twenty.
20th so the they've stabilized what they want and California homeowners.
Okay, Okay, and then more of an overhaul of the on the E&S and impulse of pet Yeah I mean.
And again, it's still very new two quarters and year.
The building up some partnerships there.
On the momentum and that property market and you know still building as much of a and sort of three six months ago or is there any I guess planning out of flattening of that momentum.
No we're still continuing to see rate increases and we feel good about that for the remainder of the year I mean of it.
And the fourth quarter, our average rate increase was around 16% I don't know if I want to say the euro for the rest of the year will average of 60 per cent rate increase, but we will get right and it's right on top of rate at this point, which is a good thing so.
And then some of the yeah. So I think we feel very good about the rate environment, and it and sustain certainly and a positive fashion through.
Through the rest of this year and probably end of the early part of the extra too.
And how about the you know the level of opportunities coming in the door and Oh.
100% sequential growth.
Do you see any change and that the environment anytime soon.
No I mean, we're you know we're seeing a lot of different new partnerships new markets and are you know we have to be somewhat mindful of bandwidth and and how we allocate our time and resources and making sure that these new arrangements can hit our target returns, but yeah. There's there's no shortage of opportunities.
And out there and this market.
Okay, great. Thanks, a lot.
Thank you there are no further questions at this time I would like to turn the call back over to Mac Armstrong for any closing comments.
Okay.
Great. Thanks, operator, and thank you all for your time. This morning. This concludes Palomar fourth quarter earnings call. We appreciate.
Your participation the questions and and certain and your support.
We believe 'twenty and 'twenty was a significant year and our company short history. We lost in the media that platform. We grew in both new and existing lives added terrific talent to our team and.
And also and most importantly, we adapted swiftly the market conditions and challenges looking ahead. We really are excited about the opportunity ahead of us and 'twenty 'twenty, one and we think will be and we will showcase on.
And our efforts and our growth initiatives and the very good fashion and Moreover, provide strong consistent earnings over the course of 'twenty one.
So with that and hope everyone remains safe and healthy. Thanks, So much and we'll speak to you after the first quarter and have a great day.
Thank you for your participation. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a great day.