Q1 2021 Palomar Holdings Inc Earnings Call
[music].
Good morning, and welcome to the Palomar Holdings, Inc. First quarter 2021 earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation of the conference line will be open for questions with instructions will follow at that time as a reminder, this conference call is being recorded.
I would now like to turn this call over to Mr. Chris The Cheetah Chief Financial Officer. Please go ahead, Sir. Thank you you may begin.
Thank you operator, and good morning, everyone. We appreciate your participation of our first quarter 2021 earnings call with me here today is Mac Armstrong, our chairman Chief Executive Officer, and founder as a reminder of a telephonic replay of this call will be available on debt on the Investor Relations section of our website through 11 59 P M Eastern time.
May 13 2021 before.
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.
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 implied by such statements, including but not limited to risk of uncertainties related to the COVID-19 pandemic.
Such risks the other factors are set forth in our quarterly report on form 10-Q filed with the Securities Exchange Commission, we do not undertake any duty to update such forward looking statements. Additionally.
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'll turn the call over the back.
Thank you, Chris and good morning, everyone.
Today I'll speak to our first quarter results at a high level and then discuss the ongoing efforts to expand our business and drive profitable growth.
From there I'll turn the call back to Chris to discuss the financial results in more detail.
We had a strong first quarter of quarter that generated solid financial results and of course that puts us in a position to reap the long term benefits of several key initiatives.
I like the Q1 I'd like to emphasize are as follows.
First our strong growth trajectory not only continue but actually accelerated as the gross written premium increase of 45 per cent during the quarter.
We grew broadly across both new and existing offerings, including residential and commercial earthquake, Hawaii Hurricane and then the marine.
Second our U S carrier pass the continues to be an important driver of growth for existing products and diversification and the new lines of business.
I think we are rapidly approaching $100 million in annualized gross written premiums and just the second full quarter of operations.
Third we continue to refine our underwriting and risk transfer strategy, while benefiting from sustained attractive pricing environment of dislocation.
The specialty insurance market.
We've spoken to this in great length on previous calls, but I'd like to emphasize that we are committed to the ongoing improvement of Palomar across all dimensions of our business I believe that our actions. The results this quarter reflect this commitment and capability.
Fourth we remain focused on providing visibility into our earnings based on growth.
Very pleased that the $25 million of aggregate excess of loss reinsurance limit.
We refer to as the aggregate cover that.
That was security of the first quarter will protect our balance sheet. Moreover, it establishes a floor for our earnings and return on equity.
Aggregate covers an actionable example.
How are you proactively safeguarding our business and our results.
Finally, our business model on strategy are architected to support continued profitable growth by addressing several attractive tailwind and we remain confident the Palomar is still on the early stages of executing upon our long term plan and the associated market opportunity.
The launch of two new products in three carrier partnerships this quarter of Prime examples of this dynamic.
Okay.
Turning to our results in more detail as previously mentioned, we delivered strong gross written premium growth of 45% of in the first quarter.
Overall earthquake premium grew 44 per cent one on earthquake premium increased 46 per se.
Our commercial earthquake products, what 96 per cent of the quarter driven by rate and distribution partners accessing Patrick.
Our residential earthquake products for 25 per cent.
The other strong contributors were in the marine and Hawaii Hurricane with 315% in the 128 per cent year over year of growth respectively.
We've seen very good conversion rates on the book of business in Hawaii, We acquired in late 2020.
Newer products like our real estate of errors and omissions program continue to gain traction and scale.
Our commercial lines premiums grew 58 per cent and year over year during the quarter of.
The function of Pathics launch new distribution sources expanded geographic footprint. It came on the product's traction interest.
The pricing increases.
This growth of more impressive when factoring in the run off of our admitted all of this policy near the extent.
Seven per cent offset to a premium growth rate.
The average rate increase on renewals during the first quarter for our commercial earthquake policies with 18% versus 15 per se in the fourth quarter of 2020, demonstrating the ongoing hard market.
We're seeing the strongest day rate increases in the small to mid size accounts with larger accounts, showing some deceleration afternoon or dislocation.
Our other commercial lines of business. We're also seeing the state or even increases in certain cases like small accounts single shot of large T. I D. What frame builders. The rest of accounts increases are well north of 20 per cent.
We also the continue to use terms and conditions as well as the risk attachment point to optimize our risk adjusted returns.
This has been most successful in our E&S all risk program.
Our premium retention of exceeded 90% across the book during the first quarter, excluding the run off of admitted all of his business most notably the residential earthquake commercial earthquake and Hawaiian hurricane experienced retention rates above 93 per cent.
The continued high retention range of our testament to the unique value of our products offer ensured the distribution partners.
Turning to our E&S company.
Patrick our conviction remains as strong as ever about the added dimension. It will provide our business E&S premiums in the quarter were $23 8 million, which constitute 60 per cent sequential growth from the fourth quarter of 2020.
This considerable growth was driven by a combination of existing property lines of business, such as commercial earthquake and new lines such as layered in shared natural property.
In the quarter, we launched two new products excess liability and national builders of yes without meaningful on gross written premium contribution of the quarter have meaningful prospects.
The excess liability program kind of fix versus casualty line of business, the builders' risk product falls or tested playbook of watching the line of business with the initial focus on regional small commercial accounts and then extending in the national large account business with the well respected partner.
Both products of buttressed by strong quota share reinsurance programs to enable the successful a conservative launch.
Patsy provides us with the flexibility of being a new market segments in an expedient fashion and serves as the logical extension of our commercial property franchise.
Over the long term, we can see our E&S carrier protein the size of the Barton Medicare as well of the eventually has seen the majority of our commercial business given its superior ability to address changing market conditions.
The insurance carrier partnerships continue to be a key growth driver for the company.
During the first quarter, we launched the partnership with travelers involved in the marketing of Palomar residential earthquake products. The travelers agency partners of Missouri, Indiana and Utah.
Partnership further expands our retail distribution footprint in this day and will help diversify our earthquake business.
Separately, we consummated another earthquake partnership for the quarter that involved the assumption of an existing book of business be a reinsurance transaction.
This new partnership provided the onetime transfer of $3 6 million of unearned premium and inception, as we stepped into the risk.
We believe these partnerships the liver sustainable long term growth and surety of an important point of how Palomar can collaborate and add value to our partners.
As it pertains to reinsurance matters. There are two successful initiatives in the quarters worth highlighting.
The aggregate cover and our Torrey pines of weak catastrophes on specifically.
The after mentioned $25 million of aggregate excess of loss reinsurance limit effective April 1st of this year, we will provide supplemental coverage against losses from multiple severe catastrophe events, including but not limited to earthquakes hurricanes convective storms and floods.
The aggregate coverage triggers after $30 million of pre tax losses from qualify any day.
Threshold that can be reached the full retention losses or a number of smaller events.
We believe this aggregate cover further enhances the visibility into our performance by providing the for on our earning the return on equity.
At the end of the quarter, we successfully issued 400 million dollar $1 40 for a catastrophe bond.
The pie injury is a multi year reinsurance of great.
Whereby palomar is provided with the indemnity based reinsurance covering earthquake events at the.
Seamlessly into our existing traditional cat reinsurance program.
We were pleased to upsize the offering for $300 million of 400 million a compelling price of human believe the success of the issuance.
Next investor confidence in our ability to underwrite residential and commercial earthquake the spectacle.
The multiyear protection strengthens our robust reinsurance program broadens, our already expected panel of reinsurance partners and benefits policyholders distributions of investors by providing further transparency into our risk transfer for everything.
As we speak here today, we're essentially complete with our six one reinsurance renewal, we're pleased with the outcome and greatly appreciate our reinsurance support and Moreover, the acceptance of the underwriting actions taken in 2020.
We intend to release, an 8-K with more detail once all the allocations terms and conditions of finalized it.
It is worth noting the cost of the six one reinsurance renewal is reflected in our revised 2021 guidance.
I want to take the opportunity to briefly touch on winter storm Barry.
First of our thoughts remain with all of those impacted by the storm and we'd like to reiterate our commitment to supporting our affected policyholders well, Chris will provide more detail regarding the value in his remarks, I will reiterate the due to our conservative and thought we designed for.
Reinsurance structure for batch of this nature are net loss from this event, it's approximately 1 million in line with what was signaled on the Q4 2020 earnings call.
We are hyper focused on protecting our balance sheet from both shock attritional losses and catastrophe losses.
The proved to be the rare event for both risk transfer strategies, where you simultaneously.
I'll also point out the Gary did not consume any of our aggregate cover.
Finally in late March on our board approved the share repurchase program effective March 31 of this year the.
Plan authorizes the repurchase of up to $40 million of our outstanding shares over a two year period. This program provides the company with the flexibility to Opportunistically deploy our capital in an accretive fashion when we believe our shares of underpriced.
Ultimately drive long term value creation for our shareholders.
That said this program is opportunistic and does not diminish our growth strategy of our ambitions.
The main as energized as ever about the long term opportunity ahead of us to bring unique products to market for sure.
For the growing footprint of customers partners and team members and to deliver attractive results for investors for years to come.
With the strong start for the year, we are pleased to increase our adjusted net income guidance for the full year 'twenty 'twenty. One we believe that our adjusted net income will be between 64 and $69 million.
Additionally, we believe that with the aggregate cover in place we have established a flow of approximately 10, 5% adjusted return on equity and 41 billion for adjusted net income for the year.
With that I'll turn the call over to Chris to 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 of calculated using the treasury stock method. This methodology requires us to include common share equivalents, such as the outstanding stock options during profitable periods and exclude them in periods when we incur the net.
Loss.
We have adjusted the calculations accordingly.
For the first quarter of 2021, our net income was $16.6 million or <unk> 63 per share compared to net income of $11.8 million or 48 cents per share for the same quarter of 2020.
Our adjusted net income was $19 $3 million or 73 per share compared to adjusted net income of $12 $3 million or 50 cents per share for the same quarter of 2020 grew.
Gross written premiums for the first quarter were $103 $6 million, representing an increase of 44, 9% compared to the prior year's first quarter as Mac indicated this growth was driven by a combination of new products sustained rate increases expansions of our E&S footprint.
And the extension of our distribution networks ceded written premiums for the first quarter were $43 4 million representing.
Representing an increase of 47 per cent compared to the prior year's first quarter net.
Increase was primarily due to increased excess of loss reinsurance related to our exposure growth.
Additionally, on an excess of loss costs were impacted by the acceleration of expenses and charges related to the reinstatement of our reinsurance program.
Separately, we had increased quota share sessions due to the growth in the volume of written premiums subject of quota shares.
Ceded written premiums as a percentage of gross written premiums increased to 41, 9% for the three months ended March 31, 2021 from 41.3 per cent for the three months ended March 31 2020.
This increase was primarily due to excess of loss charges and higher proportion of our written premiums being subject to the quota shares.
Net earned premiums for the first quarter were $47 1 million an increase of 35 two per cent compared to the prior year's first quarter due.
Due to the growth in earning of higher gross written premiums offset by the growth in earning of higher ceded written premiums that include the additional and accelerated reinsurance expenses described earlier for.
For the first quarter of 2021 net earned premiums as a percentage of gross earned premiums were 51 five per cent compared to 53 six per cent and the first quarter of 2020.
We believe the ratio of net earned premiums to gross earned premiums in the better metric for assessing our business for some of the ratio of net written premiums to gross written premiums with.
With the additional reinsurance expense impacting the first and second quarter of this year. We expect a similar gross earned premium ratio of $51 five per cent for the second quarter of 'twenty 'twenty. One after that we expect this ratio to be around 52% to 54% on an annual basis lower at the beginning of the new reinsurance placement and higher at the end.
With our expected growth in earned premium.
The expected net earn premium ratio contemplates the new aggregate cover that provides increased protection and improve earning visibility if we face multiple catastrophic events similar to what we saw in 2020.
The losses and loss adjustment expense, where L. E. The occurred in the first quarter were negative for $4 million made up of $5 $2 million of Attritional losses, offset by $2 $4 million of favorable prior year development on 2020 catastrophe losses, and winter storm, Yuri which I'll describe a little more later.
The loss ratio for the quarter was negative $9 four per cent, including an attritional loss ratio of 11, 1% compared to a loss ratio of $5 four per cent. During the same period last year comprised entirely of entirely of Attritional losses non.
Catastrophe losses increased due to the growth of lines of business subject to the attritional losses, such as especially homeowners flood and in the marine.
Due to winter storm here in the first quarter, we incurred additional reinsurance charges related to the reinstatement of our reinsurance program for the first half of 2021 Yuri rules OLT and a net underwriting loss of approximately $1 million comprised of approximately $4 million of additional reinsurance expense in the first quarter of 2021 and a similar.
The reinsurance expense in the second quarter of 2021, partially offset by the negative net loss in the first quarter of 2021.
Our expense ratio for the first quarter of 2021 was 69.8 per cent compared to 58, 2% in the first quarter of 2020.
On an adjusted basis, our expense ratio was 62.7 per cent for the quarter compared to 56, 2% in the first quarter of 2021 the.
The increased expense ratio was driven by additional reinsurance placements with increased ceded premiums and continued investment in Patrick.
Our acquisition expenses as a percentage of gross earned premiums for the first quarter of 2021 was 21 two per cent compared to 21 per cent and the first quarter of 2020, the ratio of other underwriting expenses, including adjustments to gross earned premiums for the first quarter of 2021 was 11.9% compared to $11 two per se.
In the first quarter of 2020.
The combined ratio for the first quarter was $60 four per cent compared to 63, 6% in the first quarter of 2020.
Our adjusted combined ratio, which we believe is a better assessment of our efforts was 53, 3% during the first quarter compared to 61 six per cent of the prior year first quarter.
Net investment income for the first quarter was $2 $2 million, an increase of 9% compared to the prior year first quarter of the year over year increase was primarily due to a higher average balance of investments held during the three months ended March 31, 2021, offset by lower yields on invested assets.
We maintain a conservative investment strategy as our funds are generally invested in high quality securities, including Government Agency Securities asset and mortgage backed securities and municipal and corporate bonds with an average credit quality of <unk>.
Our fixed income investment portfolio book yield during the first quarter of was 2.24 per cent compared to $2 85 per cent for the first quarter of 2020 the.
The weighted average duration of our fixed maturity investment portfolio, including cash equivalents was 3.97 years at quarter end cash.
Cash and invested assets totaled $436 $7 million as compared to $324 million at March 31, 2020.
For the first quarter, we recognized losses on investments in the consolidated statement of income of $739000 compared to the $440000 gain in the prior year's first quarter.
Our effective tax rate for the first quarter was $17 three per cent compared to $22 three per cent for three months ended March 31 2020 from.
The current quarter on income tax rate differed from the statutory rate due to the tax impact of the permanent component of employee stock options exercises.
Our stockholders' equity was $376 4 million at March 30 for 2021 compared to $363 $7 million at December 31, 2020.
For the first quarter of 2021 annualized return on equity was 18 per cent compared to $19 seven per cent for the same period last year.
Our annualized adjusted return on equity was 28 per cent compared to <unk> 26 per cent for the same period last year.
As Mark indicated looking ahead to 2021 we are increasing on an adjusted net income guidance to between $64 million to $69 million. This adjusted net income guidance considers the impact of winter storm here in Texas the <unk>.
<unk> for some of the moving pieces associated with Winter Storm. Yuri described earlier, we are providing adjusted net income guidance for the first half of 2021 of between $31.5 million and $33 million. We believe the unique nature of winter storm areas of impact to our financial results over multiple quarters necessitates this additional guidance.
Well, we believe that this additional guidance is warranted in the current situation. We will only provide this type of information in the future. If we believe the facts warrant such disclosure.
As of March 31st 2021, we had 26 million 198960 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.
At this time, we'll be conducting a question and answer session well if you would like to ask the question. Please press star one on your telephone keypad. The confirmation from the Kate Your line is on the question queue. You May Press Star shoot you have moved on.
Question from the queue for participants using speaker equipment on maybe not the therapy the pickup your handset for personal snarky, one moment, while we poll for questions.
The first question comes from the line of Matt <unk> with.
You May proceed with your question.
Hey, Thanks, good morning.
Just a couple of numbers questions for me first is on the the current year Attritional loss ratio is there anything of note in that in terms of kind of one timers, one way or the other or is that a good kind of starting point to think about kind of where the business is today and.
And I would I presume is the go forward in some of the newer products.
Grow at a faster rate than some of the earthquake products the slow drift higher.
Hey, Matt This is Matt good to hear from you what the Crystal chime in and have some thoughts on this as well, but what I would provide is you know when you look at the Attritional loss ratio. There are few things that I believe are worth highlighting.
The first is exactly what you touched upon and that it is a function of the growth.
A lot of certain lines of business to have exposure to attritional loss.
I'll pick on inland Marine for instance, it grew 315%.
It has some attritional loss to it now mind you it's performing in line with the expectation, but as that grows at a disproportionate level of over index as the rest of the book that will move the loss ratio up.
Similarly, that's what you would see even the with the new E&S all rest of the line of business, which is one of the big drivers of the E&S growth that does have attritional loss. So as that outpaces the growth of maybe of residential earthquake for instance, or who youre going to see.
That attritional loss tick up.
The other point that I would make though as you know, we we kind of guided folks towards a slow increase of that attritional loss ratio.
It was 11% on this quarter that number is somewhat obfuscated by how Yuri is being accounted for with reinstatement premiums of reinsurance expense as opposed to being captured in the loss ratio of that reduced our net premiums earned so if you kind of normalize the 11% attrition of.
The loss ratio was closer to a 10% which is just the subtle.
Subtle increase from the fourth quarter. So that's what I'd point out, but I'm sure Chris out of a few things to offer yeah. No. Thanks, Mac I think you described it well obviously when you look at it compared to what we've talked about before we have indicated when you think about the.
The end of 2020, the overall loss ratio for the year was about eight 5%. We had indicated that we do expect that to tick up I think we indicated probably about two to three points for.
For 2021, when you think about that that's the right in line with that especially when you think about the.
Higher ceded premiums the kind of mix the ratio of a little bit higher you can adjust that out and think of it as more of is 10% I think seasonally also the first quarter is a little bit of a higher loss ratio of month for us just naturally because of some of the exposure that we have in Texas and other states that kind of have some tour hail or even.
Events similar to Yuri on some of our other lines had higher exposure with whether it be motor truck cargo that was impacted by some of the icy roads that were out there. So it was just a little bit higher in nature of but overall nothing that I would say of surprising and kind of in line with what we would expect to see based on the growth of the lines you talked about and then also some of the indication.
We gave to the market.
After of following the year end results, yeah, and just to piggyback on the seasonality point.
So even like you look at on a line like flood for us.
Where are we right flood states like California, and even in Hawaii. There is some seasonality to it until we see a little bit higher loss in the first quarter of the year than we do the rest of the year certainly on the state like California.
Okay, Great. That's helpful. And then if I go kind of the follow up there just as the you've got the extra 4 million you know of the ceded premium that well.
Well also impact Q2, all else equal that the 10 was up more of like all evident in Q2, as well correct and obviously I understand the seasonality can be different in the mix of business different and so forth, but all else equal that would repeat itself into Q.
Yeah, that's correct, yeah, there will be incremental.
The reinsurance expenses associated with you already in the second quarter, that's exactly right, Greg one of them.
Thank you very much for the color appreciate it.
Our next question comes from the line of day.
David.
With Evercore ISI you May proceed with your question.
Hi, Thanks, good morning.
I just had a question you are good to see growth Reaccelerate this quarter.
I guess I'm wondering.
There anything sort of one off in the growth that you would call out or is this sort of a good indication of of what we should expect.
To see from a growth standpoint over the course of the the rest of the year.
Hey, Dave.
Great question, Yeah, we were thrilled to see the growth and.
And what we expected when we did we touched upon it at the end of Q4 on Q4 earnings call that we saw very good momentum in the business and.
It did manifest itself in Q1, and we think it's kind of manifest itself through the rest of the year to your question on one offs as I mentioned in my remarks, there was a.
$3 $6 million of premium that was associated with the earthquake book, both commercial and residential for a partnership that we stepped into that.
That you could argue is one off but at the same time. They're also it was around seven points call. It $7 million of premium that was wound down.
From the all risk book.
So net net it washes, so I guess, the best way to describe it as not all of a sudden done in this quarter Theres nothing really one off because there is one thing to the good and one thing that was probably two X of that to the bad. So we feel very good about the growth in this quarter and how we're positioned for Q2 and beyond.
Got it thanks for that and just on the all risk book, that's winding down the 7 million of of headwind. This quarter of the southern points is that going to remain around that level over the course of the year or is that book non renewing those are there are some some of them. Some chunkier pieces that are rolling off on subsea.
Oh on quarters.
I think that should be a good rule of thumb for the for the year.
But it'll probably be less pronounced in Q4, because that's when we started to non renew but.
So the majority of the policies will be coming off.
The October timeframe, but I think that is a good rule of thumb now the one thing that we have going for us is that the.
National accounts, all risk business the layered in share of dollars business that we're doing in concert with Ameren is growing it's growing nicely, it's getting great returns.
It's hitting our metrics if not exceeding them from an average annual of loss.
And the PMA for the premium standpoint, so we're encouraged with that for that mitigate that decline and we will continue to drive growth beyond 2021, but I do think that theres about seven points of headwind associated with the wind down of the admitted book debt, we'll see over the course of the net certainly the net Q2, and Q3 and it might be a little bit less.
Q4.
Got it that makes sense.
Then I guess on the other side, obviously, the E&S book continues to ramp up.
Yeah. It is it I guess, maybe could you just quantify it sounds like $25 million of course this quarter of gross premiums.
I believe it was 21 million last quarter or so you know ramping up on an annualized basis by a decent amount of.
I guess, we sort of reached yeah. Yeah do you expect to see of continued sequential acceleration on that or are we kind of hit us.
From the.
The city now of of where you think of kind of can like obviously still very good year over year growth, but yeah, maybe it slows down a bit more sequentially.
Yeah, Dave I don't want to give guidance on a sequential growth of what I'd say is there's very good momentum in the E&S company right now and it's coming from commercial earthquake, it's coming from a national property accounts, but there are also new programs that we launched in the second quarter as I said that were not meaningful.
<unk> in particular, the builders' risk partnership for National builders risk accounts.
Our excess liability program all of those have great potential terrific market conditions to be on participating in are capturing.
We're taking advantage of of rather great.
Great distribution partners that can drive production.
Some cases, an existing book of business that we can slot into so I would say there is terrific momentum in the lines that we launched in Q3 and Q4 of 'twenty. There's a lot of terrific potential in products that are just getting off the ground in Q1, and then lastly, there we're not done there are several more that are in various states.
As of the R&D so to speak so I think you'll see more products in the E&S market come on line from US This year, which gives us the conviction to say that in time the majority of our shooting.
The majority of our commercial business could be E&S as well as it has the potential to be the same size of the DMA the company.
Got it great. Thanks for the color.
Our next question comes from the line on that.
Paul Newsome with Piper Sandler you May proceed with your question.
Congratulations on the quarter.
I just had one remaining question.
Apologize.
Just can you can choose the.
The name of loss ratio.
Amazing think of.
Once in my career.
But what's interesting to me.
The current year was it maybe the network.
Not just the price.
All of them.
Could you talk about how the just mechanically works with respect to Tampa.
You get to a data for the.
For it.
Curious just this last month.
Is that a function of the issuance.
Or is there something else.
Hey, Paul its Chris the livers respond to your question, yes, it's a good thing.
You pointed out yes. It is a little bit of something that is unusual to see I think just naturally happen that way based on the way that our reinsurance of structure. Obviously, we've talked about this before we use of quota share reinsurance for a lot of our interest all lines of business and then we buffer that with excess of loss.
Just happened to be an attritional losses that went into our cat tower as well these contracts of use.
The reinsurance relationships do not the newer to the benefit of each other so I think that's one thing to point out when we look at it.
We think of the negative loss as being offset by the ceded premium that is related to the reinstatement of the reinsurance layers I think when you look at it in Q4 that was about $4 million.
Going to draw the a similar amount.
Q2, just because of the way the reinsurance as expenses through ceded premium. So if we were to combine those numbers I think we've talked about it on the <unk>.
Prepared remarks remarks, we think that is a negative $1 million so for us it's really.
The accounting treatment of kind of shows it in two different lines, but we think of it as a combined loss.
One example, or maybe in the analogy that we think of is think of this as we use our restructured reinsurance structure with a reinstatement premium of function to it so that when the event happened we were able to recover 100% of loss and then offset that with the reinstatement premium we could.
Also structured this with a co participation where instead of recovering 100%, we only recover the net amount. So in that scenario our loss would have been about the same $1 million loss of you just would've seen at all through the last line versus US we use reinstatement premium for our structure and so you can see it in the ceded premium and in the.
The last number so that's kind of.
I'll call it a little bit of of the nuts and bolts about the accounting treatment and why its in different lines and why it's showing up over multiple quarters and that also reiterate the reason why we gave on the call we gave.
For the first half year guidance, because with the ups and downs caused by that reinsurance charge, we want to make sure. The market had a better view of how we're thinking about the first half of 2021 impacted by those reinsurance charges.
Yes, Chris described it well Paul it's ultimately.
It is and that it is a negative number in that loss, but it ultimately ends of collectively been when you factor in reinstatement and the like a loss of $1 million positive losses, so to speak.
Yes.
Okay.
Thank you.
That's very helpful.
Okay.
Yes.
Our next question comes from the line of Mark Hughes with choice. You May proceed with your question.
Yeah. Thank you good afternoon and good morning.
Can you talk about capital.
Kind of where you said, obviously of Patrick is the ramping.
The ramping up pretty quickly how much more runway do you have with your current cash.
The balance sheet.
Yeah, Mark this is Mac that's at the very good question.
And what I would say is we have ample capital to support the growth that.
And that we have in front of us.
We right now are in and around a 0.5.
Net premiums earned to surplus ratio.
Our long term target on that is <unk>.
<unk> nine to one in fact that target could actually be moving up somewhat because of the complexion of the book as we write some cash.
<unk> the business.
Has a longer tail to it.
So as a result of we think we are adequately capitalized and then some to go.
And execute on the plan that we've put in place I also think it's it's the impetus behind why we are we authorized the stock buyback because we think that we can be opportunistic in how we deploy capital we can be opportunistic to go out and do a an acquisition like we did in Hawaii and acquire a book of business with we're doing are excellent.
Job of bringing on to our paper.
We could go out and buy back our stock and acquire.
Our currency at what we think is of very.
Attractive valuation.
And get on ROE, That's you know in the mid teens.
Or we can continue to invest in the business.
Where we could bring on new teams or enter into new lines of business and Fortunately the capital position that we're in right now really affords us the chance to do all of those so we think that we can be very effective in how we deploy capital over the next several quarters and generate attractive Roe.
And several different fashions.
Thank you for that and then the excess liability book.
How do you how are you approaching it from an underwriting perspective, what expertise of you brought in house.
What does the informing your judgment about what the pieces of business you should the you should right.
Yes, that's the.
Very good.
Good question Mark.
And what I will tell you is.
We have brought in a leader.
And Jason Here's who's overseeing all of our program of business, but he has a long standing casualty underwriter and we have selected a partner who he has a long standing history with to help us.
The build out the excess liability franchise, and I think overarching way and what we are doing in excess liability is very similar to what we've done with all lines of business that we've gone into that.
Our non earthquake or non Hawaiian hurricane and it might be viewed as a little further afield and <unk>.
That is b very deliberate in terms of how much we want to write in year, one very conservative and how much limit we're willing to write.
And then also very conservative in how we use reinsurance to support it so in this circumstance.
We will write no more than a $5 million gross line, but we're taking around 22, 5% of that so our net position is around of $1 1 million.
Fine.
And we are attaching into an excess position.
And a market that is very hard right now. So we think we have the potential to build the nice book of business there.
It's with a production plant that we have great history with the property arena, but what we're trying to do now is get them familiar with our philosophy and strategy in this segment in casualty generally, but I think there's great promise there, but its not a circumstance, where we're going to turn around and write $50 million of excess liability on your one it's going to be modest, but it does have the potential.
Maybe in year two year three to be.
You know of.
A sizeable book.
Thank you.
Our next question comes from the line of Tracy <unk> with Barclays. You May proceed with your question.
Thank you.
And I just wanted to follow up and from the comments you made about the buyback authorization I totally got that youre not trying to sneak in all of that constructive about growth.
But just help me think about how that may be attractive you can usually you tend to see companies wanted to buy back more stock when they are trading below our book value on your wallet.
So if you could just help me understand the framework you have in mind.
Yeah sure Tracy this is Mac and that's a fair question to ask I think for our board and us as the management team.
We look at our earnings growth potential and the all of the steps that we've taken to provide consistency and stability in the earnings whether it's with the aggregate cover.
Whether it's with the even the cap on and certainly with all of the underwriting changes we have considerable conviction and the visibility that we have in the business. That's why we took guidance up.
And we think that when you look at our.
You know my background as the former reform private equity investors, we look at earnings growth in the price of the earnings growth and we think that is pretty compelling at this level.
It's materially below our earnings growth trajectory and so that's part of the impetus and that's why our board has.
They've gotten comfortable with the.
For the buyback.
Okay excellent that's very helpful.
Youre growing in so many different areas, but if I could just take you home too.
Or earthquake risk I noticed, particularly within commercial all of that's grown pretty substantially and I'm just wondering as of.
Others, just don't have the appetite now like what you're seeing in terms of competition and risk appetite.
Sure Tracy I think an earthquake and commercial earthquake. The one that you specifically called out of it did have terrific growth.
In excess of 90 plus percent of 96% that was as much of us being able to.
Continue to take rate, especially in our small commercial earthquake franchise, but also opening up the E&S company to our longstanding distribution partners. So that's allowed us to get on the risks that we previously didn't have as much access to.
The call it mid size or large account business where.
Our.
Admitted offering really was not acceptable or not permissible just because of the forms of coverages and rigidity of such so I think that's what's allowed us to come on.
And build on.
Our show very strong growth in Q1, and the commercial quake.
The competition wise.
I think there is competition in that market, but generally speaking there is a very good rate integrity I actually touched upon it in large accounts were probably seen.
A little pullback in the rate increases and the acceleration of rate small account you are still seeing very good rate. So overarching I think we've got very good runway and commercial quake I'm, not saying the 96% of sustainable, but I do believe that the.
The market condition, certainly is amenable to us is the new entrants so to speak on the E&S side as well as the longstanding interest on the admitted side or on any participant on the emitter side, continuing to take share and drive terms and conditions.
You can't very comprehensive answer I really appreciate it.
No. Thanks.
Our next question comes from the line of Mayor Shields with VW. You May proceed with your question.
Great. Thanks, I had a couple of numbers questions first and then one bigger picture question.
So I guess on.
Many of the register Chris if we take out the.
On the $2 3 million of adjustments that we get underlying operating expenses at just under 11 million as I think of a run rate for the year.
Yes, Thanks, Matt.
Let's say that as a decent run rate I think as we projected before we did expect call. It Q1 from a percentage of standpoint to be up to flat compared to where it was last year. So I think.
That's a pretty good run rate do you expect let's call it with the growth of in earned premium on the scale to be more in the latter half of 2021 and from there on.
I don't I wouldn't shy away from that run rate from a materiality of standpoint, I think it's a good.
Point to pick off of.
Okay.
Perfect and then on the reinstatement premiums.
I just want me for that only impact the I guess feet.
Ceded earned premium ceded written ceded earned premium rate debt doesn't impact the actual operating expenses.
That is correct. It does not impact of the actual operating expenses is only see the written and the ceded earned but it does impact of the ratios because just because of increases or decreases the denominator that those ratios are calculated off of it. So that's why we were kind of doing a little bit of math earlier to help.
Break that out but yes, it is not in the any.
Any of the operating expense dollars is just in the debt or premium basically.
Okay. That's perfect. Thank you.
I think of quick question I know, there's a lot of conversation about construction material cost inflation.
How quickly can you incorporate I mean, if you assume that though the.
Debt placement will persist how quickly can it be incorporated in pricing and should we worry that we're seeing the larger property of rate increases decelerate at the same time at may be in place and getting worse.
Hey, Mary Yes. It is interesting in the there have been certain cases, where we've had.
Estimates move up because of the cost of lumber and the like and so that's being factored into the underwriting.
And that is we and everything that we do from underwriting the risk level or.
Modeling of the portfolio of level in the range, we always throw demand surge on.
Two it's for expected loss of average annual loss and so that should be captured in how we price our risk again at the portfolio or at the individual level.
So what I would tell you is we should be staying ahead of that and having the E&S company.
It's allowing us to do it and I go to what I mentioned on the call.
I'll I'll pick on or highlight are.
Our builders' risk right and that's where you would most directly be feel the cost day to day and just in terms of your projects.
The building them and bringing them up the ground or replacing them and are proving them on the heels of of loss and.
We're seeing 30% right.
Rate increases for as much as 30% rate increases for large accounts and certainly north of 24 single shot small account business.
Which is definitely keeping pace with the rising cost of goods in that regard, but it's what we're watching it and it is something that.
I think the whole industry is focused on.
We're also focused on frankly the.
<unk>.
The potential labor shortage, driven by it as well with the demand for newbuild or the areas that.
Materially impacted.
Our Lake Charles Louisiana, It's not just the cost is the labor. So we have to factor that in as well.
Okay.
Perfect. Thank you.
Our next question comes from the line of Adam Klauber with William Blair. You May proceed with your question.
Hi.
Could you talk on the sales support in the field fuel network.
You go into new product have you been expanding that excuse me, how big of that today versus the year ago.
Yeah.
Adam This is Matt just to clarify youre asking about the sales support in our production plan and the like.
Or are you talking to.
You feel you feel.
Yeah, Yeah no great question. So if you look at just year over year our distribution.
Footprint grew by 22% and a line like in the Marine the grew 300% of put distribution footprint was up 63%.
The residential earthquake was up 25% year over year. So these are numbers that we are a.
Metrics that we track very closely.
Because they can are leading indicators of future growth as well as existing growth.
And I'll highlight residential earthquake for instance, we added.
On a sequential basis, a couple of hundred producers from Q4 to Q1.
And that.
That was driven as much by new partnerships. So the travelers partnership we were able to appoint new producers now do they all start sending over.
A ton of submissions and we bind the ton of policy of no. That's not that that wasn't the case, but it's a good leading indicator for what the potential can be so we are definitely expanding our distribution network. The combination of partnerships new products and obviously just opening up past X the E&S company to either existing or.
The new distribution sources.
And it is the.
The contributing factor to that.
Okay. Thanks, and then as far as the excess of loss and the builder's risk or those programs.
And who are the distribution partners on those programs.
Yes, the excess liability as of program and that's with.
K to an MGA, we've known for a long time.
The leadership there are a lot of us well the entire management team has worked with the leadership team there.
And then.
The builders' risk is with.
True technical risk and the writers, which is part of our ESG.
And what we've done there is it's very similar to what we've done in Kuwait, where we have on.
Our in house builders risk team led by Robert Byerly, Who's built our inland Marine Department. He oversees that program, while he's also riding it day to day.
On the small commercial or mid size of account basis. So it's a tried and true for me that we've gone for a large account business, we're going to work with a partner that can use our capacity to support of layered on shared strategy, while writing of in house for small single accounts or mid size accounts and that's what we've done in quake, that's what we.
I've done in builders' risk and we've done two of lesser degree in all risk as well.
Great and then as far as and the end of April.
The there was some of I think some bad storms on the south because your first half guidance. I guess include the storms and do you think the storms for you will have the bigger or lower impact on you saw with your.
The first half of Adam Good question first half guidance definitely incorporates that's on.
On losses from those stores and it will not look like.
Yuri.
Okay, and then last question I'm, sorry, if you've said this as you renew your capture your main cat Treaty for the end of the year. What's your what's your women can be your retention is it still going be 10 million or has that been pushed out.
So what I can tell you is we've actually finalized the placement yesterday. After the earnings went out and we were <unk>.
Pleased with the outcome and the support that we receive from our reinsurers and you know what I'll tell you right now as you know, while we're kind of dotting the i's crossing teeth and getting all of the paperwork put together.
We procured more limit to support our growth and this will all be out of an 8-K.
Basically maintained the retention in line with what it was in 2020, the complexity is going to be a little bit different.
But it's going to be basically the same number of net of expected a little bit less.
And we've also incorporated all of the rate.
The changes, including those from loss impacted layers into our guidance. So.
Long story short the six one win how we'd hoped.
And we also were able to go out and secure in aggregate and place of cap on in addition to that which gives us even more conviction on the.
The reality and predictability of the earnings.
Right. Okay. Thank you. Thank you very much.
Our last question comes from the line of Pablo Sing song with Jpmorgan. You May proceed with your question.
Hi can you hear me.
Yes, loud and clear.
Perfect. So I just wanted to follow up on your net income guidance, which increased by $2 million at both ends of the range did the.
The favorable the Lady factored to the sort of all of which I think was a little over 10 million on the first quarter or did you have other considerations when you raise the range.
Yes, Pablo what I'd say is as we raised the range.
We factored in.
Q1 and.
From the positive development from here to the excuse me pause the developed from prior quarter storms.
We've also factored in the impact of Uri in the first two quarters.
And then also of the strong growth. So we feel very good about the guidance that we've pushed up.
We think that the range we provided is achievable.
And also of ambitious but.
There's this great momentum in the business and ultimately.
There are some favorable development Q2, that's a nice dynamic the half or do you want excuse me. That's the nice to have we're not going to hang our hat on that every quarter. So we just assume that everything else remains flat for the course of the year.
In terms of development that is.
And if we get continued favorite of element that I've seen on the cake.
Understood.
Second question, so youre clearly benefit benefiting from pricing on the E&S side can you talk about the pricing dynamic in a minute earthquake.
The pricing there tend to move in relation to the border of P&C market and maybe if you can distinguish between.
Commercial which is I guess at this point for the less admitted in the residential were submitted.
Yes, so residential earthquake.
Sure.
The rates are not changing beyond.
On inflation guard that we have on the product and we have not put a rate filing in place to change rate.
Since we started the business our results have been strong.
So the residential market rates.
Are not changing on an admitted basis now we are writing E&S business on residential earthquake and that tends to be more high value and therefore, the different underwriting because of the contents exposure of the cost of reconstruction labor demand surge all of those questions that were asked previously of us and there.
I would say youre looking net rate increases and rate activity, that's more similar to the commercial so I would almost bifurcate it between the E&S and admitted in residential was E&S looks a lot like commercial E&S and admitted more standard business you are kind of governed by what the state permits and we're not taking.
Taking rate based on the historical accident and the performance of the book.
Got it and my last question.
Is there sort of from a high level way to think about the mix of commercial and residential earthquake on your books for clearly for me.
She was very much faster I'm not sure if it makes sense of sort of where your book of that in the right.
Okay.
Of all earthquake market is the right into the share or do you think at some point just because the growing so fast that maybe commercial will become a bigger book than residential.
High level thoughts on how that could develop over time.
Yeah.
High levels.
Want to maintain earthquake.
50% of our business.
On the whole.
Yeah, I mean, I think commercial is the is ultimately a bigger.
And market.
And as our balance sheet grows and as the E&S company gets traction I think the the delta in terms of percentage mix between commercial and residential could close down but.
Even if you just look at where we exited the year.
It seems to me exited the quarter.
There is still a pretty decent.
Headstart that residential has in residential sales growing at a pretty good clip that 25% in the quarter. So I think the GAAP will shrink but it.
It is still 50% more so I think theres of ways to grow.
Okay. Thanks for answers.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Mac Armstrong for closing remarks.
Great. Thank you operator, and thank you all for your time. This morning. This concludes Palomar is first quarter earnings call.
We appreciate your participation and questions and always your support.
We are pleased with our first quarter results and more importantly, I think we're very enthusiastic about our growth prospects on a go forward basis.
We executed across all facets of our plan.
During the strong quarter.
Illustrative Lee our strong premium growth laid.
The ground for continued momentum in existing franchises as well we have new lines of business. If you could provide incremental growth that are just getting off the ground.
The new partnerships and new geographies that we've entered into we've also made meaningful progress on enhancing the predictability of our results.
Such we raised our guidance.
And we hope you can sense, our enthusiasm for what lays ahead of us and hopefully you share. It. So thanks, everyone and we look forward to speaking to you after the second quarter and have a great day.
You may now disconnect your lines at this time. Thank you for your participation of enjoy the rest of your day.
Okay.
Okay.
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Yes.
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Okay.
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