Q2 2021 Palomar Holdings Inc Earnings Call
[music].
Good morning, and welcome to the Palomar Holdings, Inc. Second quarter 2021 earnings conference call. During today's presentation, all parties will be in a listen only mode.
Following the presentation. The conference line will be opened for questions with instructions to follow at that time.
As a reminder, this conference call is being reported I would now like to turn the call over to Mr. Chris Your Cheetah Chief Financial Officer. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate your participation and our second quarter 2021 earnings call with me here today is Mac Armstrong, our chairman and Chief Executive Officer, and founder and as a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11.
<unk> 9 PM Eastern time on August 12, 2021.
Before we begin let me remind everyone that this call may contain certain statements that constitute forward looking statements within the meetings of the private Securities Litigation Reform Act of $19.95 of.
These include remarks about management's future expectations beliefs estimates plans and prospects.
Such statements are subject to a variety of risks uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements, including but not limited to the risk of a certain and uncertainties relating to COVID-19 pandemic slips.
Such risks and other factors are set forth and 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 and.
Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of these this additional information should not be considered in isolation or as a substitute for results prepared in accordance with the 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 Mac.
Thank you, Chris and good morning, everyone.
Today I'll speak to our second quarter results at a high level, and then discuss our strategic initiatives and efforts to drive profitable growth.
From there I'll turn the call back to Chris to review, our financial results in more detail.
The second quarter was the very good 1 and 1 and which we generated record written premium solid profitability and position Palomar for further execution of key strategic initiatives underway or identified.
As such I'm eager to speak to several of the Q2's highlights.
First our premium growth not only maintained the first quarter and 2000 twenty's levels, but actually strengthen this quarter as we grew broadly across our product portfolio suite.
We grew gross written premiums by 54 per cent compared to the first quarter gross rate of 45.
Premium growth was driven by a combination of new product launches sustained performance and existing products rate increases new and existing partnerships and the extension of our distribution network.
Strong premium growth products included but were not limited to residential and commercial earthquake specialty homeowners, Hawaii hurricane and and the marine.
Additionally, we saw very strong traction and Palomar excess and surplus insurance company.
And our newly launched DNS carrier, which grew 43% sequentially from the first quarter of 2021.
Second we look to build on our success as we continue to broaden our product suite and partnership slate.
During the quarter, we launched several new products and partnerships be of Patrick and continue to harvest the existing products and partnerships most notably those in the residential earthquake sector.
These efforts allow us to grow new and existing lines of business and capitalize on conducive market conditions, and the dislocations and diversify our overall portfolio.
New products and the quarter included casualty offerings, like layered and share it excess liability and small contractors general liability.
Our newest partnership with pure programs announced in June is another Prime example, as it allowed us to enter into the high value residential builders risk segment and complements our commercial builders risk product offering.
Third our successful June 1 reinsurance renewal further demonstrate our commitment to profitable and predictable growth.
And we secured incremental earthquake and hurricane limit to support our growth trajectory enhanced our already robust robust panel of reinsurers and kept our retention at a level below that of 2020 when factory and the elimination of co participations.
We believe the incremental limit manageable retention and the aggregate limit procured and the first quarter insurance earnings stability and puts a floor and our results of approximately 11% for adjusted return on equity and $41 million per adjusted net income for the year.
The fourth we remain focused on continuous improvement as we constantly assess our products and markets to ensure we are earning adequate risk adjusted returns.
We are optimizing every aspect of our business and developing tools that provide insights into the complex markets. We serve as we strive to deliver predictable returns and steady growth.
For instance, we continue to take rate on our commercial business runoff of unprofitable segments like the admitted all risk of Louisiana homeowners utilize quota share reinsurance per attritional loss exposed casualty products and.
And drive terms conditions of risk attachment point.
Market conditions, and the favorable on a portfolio basis, and we remain optimistic on the outlook through the balance of the year.
Lastly, we Opportunistically bought back 239000 shares for 15, $815.8 million during the second quarter and importantly, we know that we have the capital to execute our strategy for the foreseeable future and believe this action underscores our confidence and the business our results to date, our strategy and our.
To create value.
Turning to our results in more detail, we delivered strong premium growth of 54% during the second quarter overall.
The overall earthquake premium grew 29%, while non earthquake premium increased 85% our commercial earthquake products were up 47% driven primarily by rate and new business from distribution partners accessing Patrick.
Other primary contributors were inland marine and Hawaii, hurricane with 239% and 140% year over year growth respectively.
The specialty homeowners showed a healthy increase of 65% year over year, our commercial lines premiums grew 70% during the quarter and it is worth highlighting we are delivering this growth. Despite the continued run off of our admitted all risk policies, which impacted our second quarter premium growth by nearly 14 percentage points.
As we speak here today are admitted to all of this business, which contributed 64% of the hurricane loss in 2020 has been 68% runoff as I previously mentioned and pass it continued to experience strong growth as we expanded our product offerings and distribution relationships, we believe that our E&S.
The business, which delivered $34.1 million and gross written premium grew 42% sequentially from the first quarter of the year is and the very early innings of its development and can approach because of the size of our admitted carrier over time.
The second quarters considerable growth was due to strength and existing property lines of business, such as commercial earthquake and layered and shared national property and further footing and within our new lines like excess liability and <unk>.
We're excited by <unk> long term prospects and I look forward to updating you on our continued progress in future quarters.
Our focus on existing and new partner relationships continue to provide increased distribution and geographic expansion and product diversification.
This concentration help expand our distribution distribution footprint, and 5.4% sequentially and 21% year over year.
Our aforementioned new partnership with pure programs enabled Patrick to enter another focus market that of high value residential builders risk insurance, we will continue to develop and seek new partnerships like pure that enabled palomar to aggressively grow our market share within profitable market segments.
In addition to our overall top line momentum we delivered strong earnings and grew adjusted net income of $13.2 million in spite of $3.9 million of previously disclosed nonrecurring and reinsurance charges incurred as a result of winter storm here.
Adherence to conservative levels of reinsurance coverage as exemplified by the successful completion of our reinsurance placement at June 1.
And where we procured and approximately $180 million of incremental limit for earthquakes and $100 million of incremental limit for wind storms.
Our reinsurance coverage now exhaust at $1.65 billion for earthquake events, and 700 million for hurricane events, providing ample capacity for our <unk>.
And growth.
We also increased our event retention from 10 to $12.5 million for all perils, but actually reduced our true retention when factoring and co participations.
The successful 6.1 placement is emblematic of the strength and collaborative nature of our reinsurance relationships and Moreover positions us to take advantage of capella and market conditions.
The underlying cost of reinsurance continues to be subsidized by the favorable pricing and overall dislocation and the specialty insurance marketplace.
The average rate increase of renewals during the second quarter for commercial earthquake policies was 14% versus 18% and the first quarter of 2021 of.
Our builders' risk products saw new business come on and the blended rate increase of approximately 21% with large accounts, increasing as much as 25%.
As it pertains to all risks are new business policies are being written and an average risk adjusted rate, 25% higher and our expiring August business with rates, increasing between 12, and 25% depending on the geography and size of the accounts.
It is worth highlighting that is not just in our commercial business, where we are increasing rates.
And coastal North Carolina, the state's department of insurance improved a 14, 3% rate increase.
And our specialty homeowners book.
We remain confident that we will be able to sustain material rate increases throughout the remainder of the year.
Separately, our premium retention and the second quarter was 86% for the total portfolio, excluding the runoff of our admitted all risk business.
Turning to corporate sustainability and responsibility I'm happy to report that we are continuing to make progress on the development and execution of Palomar and ESG initiatives. We recognize the strong ESG management better serves our employees our business partners, our environment, our communities and all our stakeholders.
We are building of our ESG team and are continuing and strategize and formalize our policies and I look forward to updating you on the progress of our ESG initiatives going forward.
Additionally, we announced last week.
The addition of Dana and Middleton to our board.
Dana has nearly 30 years of experience and operational leadership customer relationship development branding marketing and the use of technology and analytics to grow businesses will add significant value to Palomar as we continue on our strategic mission.
Overall, I'm delighted with our results and the execution of our growth strategy and the opportunity that I see ahead. It is important to emphasize that we of the capital to fully execute our growth strategy and repurchase shares and an opportunistic fashion.
As a result.
We bought back approximately 239000 shares or $15.8 million of our $40 million share repurchase authorization and the second quarter.
We will be inventive as we capitalize on opportunities and maximize our growth and drive long term value creation for our shareholders.
For the full year 2021.
We continue to believe that our adjusted net income will be between $64.69 million.
This range considers additional investments in talent and systems infrastructure and reinsurance both excess of loss and quota share we have made or expect to make and the second half of 'twenty..1 that we ultimately feel will generate strong returns over the next several years.
Additionally, the aggregate cover put into place establishes a floor of approximately 11% for adjusted return on equity and 41 million per 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 the during my portion and we 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 outstanding stock options during profitable periods and exclude them in periods, where and when we sort of net loss and we've adjusted the calculations accordingly.
For the second quarter of 2021 of our net income was $12.3 million or <unk> 47 per share compared to net income of $12 million of 48 per share from the same quarter in 2020, our adjusted net income was $13.2 million of 51 per share compared to adjusted net income of $13 million of <unk>.
52 per share for the same quarter of 2020.
And with the interplay between the first 2 quarters losses and reinsurance premium we believe the first half of the years of better representation of our steady state business for the first half of 2021, our adjusted net income was $32.5 million from 1 <unk>.
All of 24 per share compared to $25.4 million.
From a dollar and <unk> <unk> per share from the same period last year and.
Additionally, we are pleased to report that our first half of 2021 adjusted net income was above the midpoint of the guidance provided with the first quarter results.
Gross written premiums for the second quarter were $129.4 million.
Representing an increase of 54, 4% compared to the prior year second quarter and as Matt indicated this growth was driven by the combination of growth within our product portfolio sustained rate increases expansion of our unit footprint and extension of our distribution networks.
Ceded written premiums for the second quarter were $51.6 million.
Representing an increase of 78% compared to the prior year second quarter and the increase was primarily due to increased catastrophe <unk> reinsurance expense related to our exposure growth and additional non recurring charges, resulting from winter storm Euro 7.
Separately, we had increased quota share sessions due to growth and the volume of written premiums subject to quota shares.
Ceded written premiums as a percentage of gross written premiums increased to 39, 9% from the 3 months ended June 30 of 2021 from 36% from the 3 months ended June 30 of 2020.
This increase was primarily due to catastrophe <unk> charges and a higher proportion of our written premiums being subject to quota share.
Net earned premiums for the second quarter were $54.2 million.
And increase of 37, 9% compared to the prior year second quarter due to the growth and earning of higher gross written premiums offset by the growth and earning of higher ceded written premiums under reinsurance agreements for the second quarter of 2021 net earned premiums as a percentage of gross earned premiums were 52, 9% compared to 54.
5.5% and the second quarter of 2020.
As previously mentioned with the additional reinsurance expenses impacting the first and second quarters, we expected pressure on this ratio and the second quarter. This ratio would have been above 56%, excluding the additional nonrecurring reinsurance premiums.
Yes.
We believe the ratio of net earned premiums of gross earned premiums is a better metric for assessing our business versus the ratio of net written premiums. The gross written premium as part of our recent reinsurance renewal, we adjusted our participation and our nutritional quota share arrangements with these changes we expect this ratio to be around 53%.
The 55% on an annual basis lower at the beginning of the new reinsurance placement and higher of the yen with our expected growth and earned premium.
The expected net earned premium ratio contemplates our new aggregate cover that will provide improved earnings visibility and increased protection should be phase the.
And we faced with multiple of catastrophic events going forward.
Losses, and loss adjustment expenses or LAE incurred for the second quarter were $7.2 million due to attritional losses of $8.4 million offset by $1.1 million.
The favorable development of current and prior year catastrophe losses.
The loss ratio for the quarter was 13, 3%, including and Attritional loss ratio of 15, 4% compared to a loss ratio of 10, 1%. During the same period last year comprised entirely of Attritional losses.
Non catastrophe losses increased due to an active tornado and hail season and growth of lines of business subject to attritional losses, such as specialty homeowners and flood inland marine and our newer lines of business with conservative loss estimates as we continue to grow the premium base.
And our expense ratio for the second quarter of 2021 was 62, 6% compared to 58, 3% and the second quarter of 2020 on an adjusted basis, our expense ratio was 65% for the quarter compared to 54, 9% and the second quarter of 2021, the increased expense ratio was <unk>.
Driven by additional reinsurance placements with increased ceded premiums, including the aforementioned additional nonrecurring ceded premium and.
Continued investment and in the passive talent systems and other infrastructure.
Similar to our net earned premium ratio, we feel is the better representation of our business to look at our expense ratios as a percentage of earned premium.
Our acquisition expense as a percentage of gross earned premiums from the second quarter of 2021 was 21, 9% up slightly from 21% and the second quarter of 2020.
This increase was influenced by the change and business mix and growth of our E&S business.
And the ratio over other underwriting expenses, excluding adjustments to gross earned premiums for the second quarter of 2021 was 11, 1% improved sequentially from 11, 9% and the first quarter of 2021, the combined ratio for the second quarter was 76% compared to 68, 4% and the second quarter of 2020.
Our adjusted combined ratio, which we believe is a better assessment of our efforts was 73, 8% during the second quarter and compared to 65, 1% and the prior year second quarter, excluding the additional nonrecurring ceded reinsurance premium and the quarter. Our adjusted combined ratio would have been approximately 69% per the quarter made up of of loss ratio.
And and expense ratio of approximately 13% and 56% respectively. We believe these ratios and a more accurate picture of our business.
Net investment income from the second quarter was $2.2 million and increase of 3.8% compared to the prior year second quarter. The year over year increase was primarily due to higher average balance of investments held during the 3 months ended June 30 of 2021 offset slightly by lower yields on invested assets are.
Our fixed income investment portfolio yield during the second quarter were $2, 2.5% compared to 2.8 and 3% for the second quarter of 2020 of the.
The weighted average duration of our fixed maturity investment portfolio, including cash equivalents was 3.8 and 4 years at the end of the quarter cash.
Cash and invested assets totaled 400 of $27.8 million.
As compared to the $430.4 million at June 30 of 2020.
For the second quarter, we recognized gains on investments and the consolidated statement of income of $300000 compared to $778000 gain and the prior year second quarter of.
Our effective tax rate from the second quarter was 25% compared to 21, 5% from 3 months ended June 30 of 2020 from.
And the current quarter, our income tax rate differed from the statutory rate due to the tax impact.
The permanent component of employee stock option exercises.
Our stockholders' equity was $376.7 million.
At June 32020, compared to $363.7 million at December 31, 2020, and $376.4 million at March 31, 2021, and importantly, the June 32021 balance reflects our $15.8 million.
Of stock repurchases.
And the second quarter of 2021 annualized return on equity of 13, 1% compared to 15, 1% from the same period last year.
Our annualized adjusted return on equity was 14, 1% compared to 16, 4% from the same period last year again, we believe the first half of the years of better representation of our steady state business from the first half of 2021, our annualized adjusted return on equity of 17, 6% compared to $17.1 person.
<unk> from the same period last year, which included the capital raise in June of 2020.
As Mac indicated looking ahead to the remainder of 2021, we are maintaining our adjusted net income guidance of between 64 and $69 million.
As of June 30, we had $25 million and 992585 of diluted shares outstanding as calculated using the treasury stock method.
Not anticipate and materially increase of the this number during the year and.
With that I'd like to ask the operator to open the line for any questions operator.
Thank you.
If you would like to ask the question. Please press star 1 on the telephone keypad and the confirmation tone will indicate your line is and the question queue.
You May press Star 2 if you would like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys and.
1 moment, please while we poll for questions.
Our first question is from Paul Newsome with Piper Sandler. Please proceed.
Good morning, congratulations from the quarter I was wondering if you could talk a little bit more about.
Operating leverage, particularly with the other underwriting expenses.
And and.
Just give us a sense of.
All of these may or may not grow in proportion to the.
And the rapid revenue and issue new building.
Hey, Paul its Chris Thanks for the question, yes, so when we look at operating leverage and especially like you pointed out the other underwriting expenses.
Do you think about that and we talked about it and it really over the last couple of quarters that we expect of that kind of be flat to potentially up from where it was before so we do feel that we have established and let's call. The good base as we've kind of built and invested we do plan on continuing to invest but I do expect that ratio to improve over the second half of the year and kind of into 2000 and.
92.
And I said, we will still invest in new talent, new systems, and making sure that we are of building scale and the organization over the long term, but even with those investments I do expect that ratio to continue to improve like you saw sequentially, especially compared to gross earned premium between the first quarter and the second quarter and the second quarter.
<unk> It was about 11, 1% versus the first quarter of 11, 9%. So youre starting to see that scale kind of buildup and I would expect that to continue.
And Paul This is Matt Chris describes out well and I and I think just putting looking at it long term I think the other thing that will can drive operating leverage is when we launch and new product. As you know we are very conservative and how we use reinsurance whether its quota share per risk as the products get more traction our risk appetite.
Likely increases, which will obviously allow us to retain more and.
And therefore drive some more further scale. So if you really think about it long term 'twenty 2 'twenty 3 that's when you can see even more leverage coming into play.
And I wanted to ask a similar question about.
Net investment income.
Im assuming.
Assuming that there is a little bit of leverage and there is.
E&S and earthquake, which you said I assume the longer tail lines of business, but you also have investment income going.
Low interest rates, probably 1 of the direction.
Maybe if you could give us a sense of sort of of how that should develop quite nicely over the next quarter, but over.
Over time, given the product mix change that you are working.
Yeah, Paul it's a great point you raise.
And the history of Palomar and the specialty property focus has led us to have a rather short duration and the investment portfolio and frankly of rather conservative investment portfolio. Ultimately we drive the majority if not the totality of our income through underwriting, but as the complexion of the book changes I think it will allow us to potentially extend our.
The ration change the complexion of the investment portfolio some of last year, we hold no equities.
So that will develop over time, especially also as we have the ability.
With longer tail business to extend.
And how long we might go out on the yield curve.
And so that really is a longer term phenomenon and I don't expect.
A material bump up and investment income over the next 2 quarters, but you are absolutely right. It will afford us the luxury of.
Potentially taking on a bit more.
And I don't want say risk and the investment portfolio and just make it more commensurate with the exposure pattern.
And you probably see it a little more and duration.
And Reagan and yield.
But still a very conservative overall portfolio.
Great. Thank you I'll, let some of our folks ask questions, but I appreciate the help.
Thanks, Paul.
Our next.
<unk> is from Jeff Schmidt with William Blair. Please proceed.
Hi, good morning.
Just looking at the Attritional loss ratio was 15% and the quarter versus 10% last year.
Much of that was driven just by kind of above normal non cat weather versus the change of business mix and Inc.
Could you provide any detail on how much you increased participation and the various quota shares.
Yes, Jeff well lots of Unbox, there, but a very good question.
So when we think about that and we think about just the pure attritional loss ratio of about 15 points of for the quarter. Some of that was influenced by the additional reinsurance expense as I mentioned on the prepared remarks, and if you take out of that reinsurance expense that probably drops the closer to about 14%. So it's still a little bit elevated and.
What we've guided to you before but I think of little bit closer in line with expectations. When you think about of the second quarter of the year is a little more seasonal from a loss standpoint for us on the Attritional side, we do have a tour of hail exposure and Texas and then some of the other Gulf States. So that was impacted the industry and this quarter. So looking at those 2 things.
It was a little bit of elevated the other thing I would like to add to that is when we think about the new lines of business. Those lines of business. We do feel that we are being conservative and our loss estimates and that can be influenced by some of the inflation that we're seeing but also on those newer lines and where we don't have a lot of earned premium yet and don't have a lot of.
History, I think we're also being conservative and the loss picks were using to try and estimate those lines. So those are some of the things influencing the quarter as we look at it what I have talked about kind of of our range of loss ratio and looking at and on a long term perspective, generally I'm, giving that on an annual basis not necessarily.
The quarter basis, so it can move up and down but I do expect that to.
The normalized a little bit you got a good point all of the other part of of the quota shares of <unk>.
With the 6.1 renewal we didn't change our quota share participation and so that will.
The increase of the loss ratio of little bit over time basis compared to the guidepost of given before I wouldn't expect it to jump again, and I think thats, probably going to go up let's call. It 1 to 2 points.
Overtime from what the Guidepost I gave before which is kind of call. It 2 to 3 points on the 8.5 for the year. So now we're probably talking 4 to 5 points over the year compared to last year as that continues to grow you don't see a lot of that and the Q2, yet because those quota share has just changed at 6.1 youll probably.
The a little more of that and Q3 and Q4 the.
The thing I'd add to that is.
With that additional loss ratio of the 1 thing youre going to get and we always talk about this as youre going to get a little more net earned premium so that net earned.
<unk> now is going to be between 53% to 55% and even venture to say over a 12 month period of that 55 might actually get to 56, and we're not going to give too much color on that but obviously always lower at the beginning when we set new reinsurance treaties and then kind of higher at the end and that kind of compares to what I mentioned on the prepay.
Remarks is that our adjusted net earned premium would have been closer to 56% this quarter versus the $52.9 with the additional reinsurance expense.
<unk> with the backup of things related to Europe. So a lot of different pieces, there, but I think overall with that additional quota share of our participation of the quota share and it's going to be positive to the bottom line because of this as additional participation and lines of business that are doing well and and lines of business that we're very comfortable with.
Jeff. This is Mac interest did a great job answering that and I'll just provide a couple of more anecdotes around the loss ratio. So I think.
1 thing to point out was around 12% of the loss ratio call. It.
A point or so was from our admitted all of its business thats running off so that was the disparate.
Relatively of disproportionate contributor.
So if you kind of normalize and again I think that 13 and 14% Chris was alluding to is a good number.
And then secondarily with those quota share as they are increased participation. It's taking it's line specific some lines were taking and another 5 or 10%, but it kind of blends out of around 5% to 7.5% of increased participation. The balance sheet supports of the underwriting results supports at the history and the programs.
Support it so it's a logical progression as we grow our balance sheet and.
And.
Grow our familiarity and frankly, our underwriting results history.
Okay, Great that's great color.
And then regarding the growth in Florida I believe in the past you mentioned that was builder's risk alright, yes motor truck cargo and then assumed reinsurance.
Does that continue to be the case or are you starting to write other products, there and what's your appetite to grow and that market.
You have 3 of the 4 zone.
And.
The fourth product is the national layered and share property the.
All risk property. So we have been writing that since August of last year and the state of Florida, but the majority of it is going to be that line with the and with some of smattering of builders' risk and then it's motor truck cargo and assumed reinsurance and those last 2 are not cat exposed.
Got it okay. Thank you for the answers.
Thanks, Jeff.
Our next question is from Matt <unk> with JMP Securities. Please proceed.
Hey, good morning, Matt Good morning, Chris.
A couple of questions first 1 wanted to ask you a question on capital I mean, obviously, you feel comfortable and youre buying back stock. So so theres excess but the question is as we look forward with the changing mix of business more breadth of specialty lines and obviously, some changes and quota share how should we think about kind of the.
Leverage ratio or some other metric that kind of is the appropriate capital level from the company going forward versus it might've been a little higher and the past given more earthquake exposure.
Yeah, Hey, Matt. This is Matt Great question, Great to hear from you.
The.
And the boundary that we have used historically is.
1 times, our net premiums written to surplus and as we sit here today, we are at 6.4 times and hence.
And that is why we are.
1 of the reasons why we Opportunistically bought back stock.
Basically the stock that we bought back was financed by free cash flow in the quarter or surplus that would have been built and accrued to the balance sheet, but since we are still <unk>.
Relatively.
Overcapitalized the those guideposts, we feel very good about our ability to execute the long term growth strategy and.
Maintain the premium growth that we've kind of discussed we said, 40% similar to last year. We're ahead of that over 50% year to date.
But your point is well taken that as the complexion of the book changes and much like the investment portfolio of that can shift out a little bit of duration. So can the targets now that being said shifting it out is it 1.1 times and at 1 point of your type of I think that's feasible and conceivable, but it's not a material change.
Especially when you look at how the book is coming together.
Quake and Hawaiian Hurricane and still grew 36% for the first part of the year and totality. So there still is a meaningful contributor from those capital intensive non loss or non attritional loss bearing lines.
Great and then my other question relates to specifically the earthquake book, both both commercial and residential.
Is it continued to grow has the kind of geographic footprint, where we think about the peak exposures and things like that changed much over the past couple of years or is it largely unchanged just growing kind of with the same mix.
So theres a couple of ways to answer that question, Matt and.
Obviously, we grew just under 30% on the earthquake book.
<unk> 47 residential 24 per cent for the first 6 months of the year.
Inherent in that is improved spread of risk and.
That's something we look at and something that we monitor very closely we don't want all of our growth to come from 1 specific crest the zone, Los Angeles or San Francisco, we want to come from across the state of California, We want to come from across the state of California, plus the Pacific Northwest as well as the Midwest. If we can get that as well that spread of risk drives down our unit level.
<unk> and the cost of our reinsurance and I'm pleased to report that we do continue to see that spread of risk and I think it's best exemplified in our underlying metrics like average annual loss of premium which is continuing to improve on the commercial side and the and.
Driving to a level of Thats close to.
Low twenty's and totality and the portfolio and on the residential side its and the high teens. So we are getting good spread of risk is going to continue to be that.
We should continue to develop that way as we expand our distribution footprint monetize partnerships.
And drive terms, especially on the commercial side.
And thanks very much I appreciate the color.
Thanks, Matt.
Yes.
Our next question is from Mark Hughes with true Securities. Please proceed.
Yes. Thanks.
Good afternoon, and good morning.
You've talked a lot about the losses.
Sure.
Other expenses, but how about the acquisition expenses any particular trajectory there or is this the good run rate.
Hey, Mark it's Chris good to hear from you.
No I think right now obviously the acquisition expenses did go up a little bit when you look at it over a quarter over quarter basis, and I think.
Right now, it's a pretty good.
And this would probably be a pretty good run rate and may trickle up a little bit.
1 of the quota shares that we talked about the little bit before the.
And by participating a little more we are going to lose a little bit of the ceding Commission. So that will push the acquisition up a little of acquisition expenses up a little bit and then also with that we are still.
Expanding our lines of business. It was a lot of of the commercial lines and the <unk> lines are going to be driven through wholesaler channels, which is a little higher than retail so that might push it up slightly but where you saw this quarter I think at least on a gross basis around 21, 9% I think is probably a good run rate it could.
'twenty to 'twenty, 2 and half of 'twenty, 1 and a half is going to hover around the area based on the quarter quarter mix, but overall I wouldn't expect it to jump we're not changing.
The new.
New ventures, or anything like that and a lot of wholesale for commercial there is no.
The retail players something like that and it's going to push the swing of the acquisition expenses I think of should hold pretty steady.
Yeah.
On the quake business.
Thinking about both commercial and residential.
And do we sit in terms of the growth the 2.
The January growth cycle, there either of the.
Rich, Chris Kuwait with the nice catalyst, but you maintained a lot of momentum, even and thats kind of faded and the background. The wildfires I think and we're catalyst.
And.
Where do we sit now in terms of the the growth outlook.
Mark This is Mac.
It's a good question I think we feel very good about the growth that we've had year to date for both those products.
Residential quake is our largest line of business.
The.
The bellwether line, if you would it grew 24% the dynamic that you're talking about around dislocation and the California homeowners' market driven by wildfire.
<unk> remains a.
And.
Remains a catalyst for the intermediate future.
So what I would offer you is that I think we feel very good about the growth prospects for that line commercial quake, we have rates that were still getting and we're continuing to expand the distribution footprint.
Yes.
We are pleased with the growth there, obviously, 47% and the second quarter was terrific.
As I said earlier earthquake and Hawaiian hurricane on a blended basis grew 36% so.
And I don't know if thats sustainable indefinitely, but I think theres a lot of momentum in those lines of business.
And that gives us.
The conviction around the next few years.
Thank you.
Our next question is from David Mann from Madden with Evercore ISI. Please proceed.
Thanks, Good morning.
I had another question.
Just on the Attritional loss ratio.
And.
Sort of thinking about if we sort of hit a threshold here.
In terms of of the impact of the mix shift and what's the that's having on on the Attritional loss ratio.
<unk>.
I don't know I may have misheard, you and Chris but it sounded like you had said that after we get through the call. It 4 to 5 points of year over year increase.
And this year.
I guess as we think about 2022 and beyond.
Should we think about the the.
And the impact of the mix shift on the on the loss ratio as being lower than I think it was like 2 to 3 points that you had spoke about previously.
Yes, I was just making sure I'm understanding your question feel free to jump in if I'm answering it the wrong way. So the way I think about it first of the Mac talked about the growth and the earthquake and Hawaii and lines of those are of very binary lines and still growing at a strong rate.
Of 36% so those do provide a very good anchor for the loss ratio and those will continue.
Provide a good called anchor for the loss ratio and of zero percent as we go forward and kind of grow and earn this premium over the next 12 months the <unk>.
Mix, obviously is very important to the overall loss ratio as we do look at different lines that do have attritional losses, whether it would be the.
The real estate program.
And the.
And the marine and some of our other casualty lines of those you have losses associated with them and I think as I said before we are trying to be very conservative on how we pick those lines because they do have some of them and do have a little bit longer tail. So I do expect as those lines and as we take a little more participation of the quota share I do expect it to continue.
<unk> to move up incrementally I don't expect it and theres not going to be and overnight shift where it jumps from escape from 14.
<unk> thousand 14% to 28%, but.
But I do expect as that mix or as some of those lines become a greater percentage of the.
This call Palomar overall book that the.
There will be more loss ratio as it goes on and and thinking about let's call. It I think of your question past 'twenty 2 right and so I think.
Call. It a couple of more points into the second half of the year based on where we bought were based on more of the quota share participation, but and you think long term I do think it will still continue to trickle up but with that.
We are also going to probably long term increase our net earned premium those lines don't have cash ex ol exposed to them and our cat loss exposure and so we do not have to spend as much on X of well. So what I would say is you are still going and getting a good profit margin or net income delivery from.
Those lines of business as they continue to grow and you are losing a lot of that volatility by not having cat exposure and youre getting rid of some of that reinsurance spend on those the sides and quota shares I'm, just saying the pure <unk> spend on those lines, obviously a lot less.
Non existent and then on some of our other lines and.
And Dave just to kind of put kind of a.
Low around it.
Zero loss or zero Attritional loss lines of quake and.
Why are 51% of the business right now so it's the zero loss ratio the loss pick berries buyers certainly each line, but its not a circumstance where every single line is going to be 40% slide is in the low single digits. So it's not this is not going to run away from us and even if it was 40% for.
And every other line, but quake and Hawaii.
<unk> 20 per cent loss ratio and.
So that and how that evolves that kind of an out of bound at least over the next few years. So.
We think it's something that we can absolutely manage and.
And we also think that.
And there's great prospects for the lower lost lines. So this is very manageable.
Got it okay. That's helpful and that explains it.
Thanks for that guys.
I guess.
Another question I have is and just wondering there is a lot of mix shift going on I'm wondering if we could sort of peel back the onion a little bit.
And if you could give us a sense for on some of the the non earthquake lines how.
How margins are trending there.
And specifically on like the Attritional loss ratios are those are you seeing margin improvement.
And that's been sort of masked by the mix shift.
Yes, I mean, I think it's line specific.
Of the builders' risk program and the flood program or 2 that I would highlight or that are performing very well from a loss perspective.
The builders' risk of getting great rate and addition to producing consistent results. We do have certain lines that we could see some improvement in that the pick on 1 but the motor truck cargo line has the loss ratio thats above its target.
And we think as a result, we have kind of been going through and optimization and the portfolio optimization effort with respect to that and premium retention is down but the underlying loss ratio is sequentially, improving so I think youre going to see.
And the product by product those that are hitting the target margin I think.
Specialty homeowners is hitting its target margin and <unk>.
States like Mississippi, and Alabama, Texas is pretty close when you back out Yuri it's better.
So we are seeing good performance in those lines and then some that we do need to do.
Right the ship, a little bit, but nothing thats gotten out of whack and and plus the way that we use quota share reinsurance it really prevents us from running the temperature and the line and that's something that we've always.
It's something we've always adhered to and we're going to cede off 20, or we're going to retain in 2025%, 30% out of the gate cede off the residual amount that affords us installation from of shock loss it affords us.
A major <unk>.
The event and disrupting the results.
I think all of those tools, we've used have allowed us to have a pretty consistent result outside of.
The GAAP season of last year.
Got it okay, great that makes sense. Thank you.
Yeah.
Our next question is from Tracy and UE with Barclays. Please proceed.
Thank you and just going back to the op line of question as you ramp up new products. The Pizza hut can you contextualize, how many new underwriter and you'd need to bring on board first of all utilizing managing general underwriter.
Are you seeing saturation and amongst NGA.
And shrank predominantly and thinking about recap.
Try and get the same thing.
Yeah. Tracy this is Mac. Thanks for the question, it's a good 1.
I would say is that we're doing both we are working with MGH and especially as we think about layered and shared business and.
More often and that theyre going to complement what we do internally from an underwriting standpoint. So you can certainly do get operating leverage when you work with and MGA.
Got you are basically having.
The oversight underwriter and making sure that the underwriting guidelines are adhere to youre hitting your target metrics youre hitting your target.
Return parameters.
We are also though adding underwriting talent and.
Internally for new lines of business of our existing lines of business and we have several initiatives underway. This quarter that we look forward to introducing.
To you all.
After Q3, so it's a combination of the 2 but to your question, we're getting a new product up and running on the E&S company, we try to do it in a fairly.
Investment light fashion, and what we have done and it's something that Jon Christianson, Our CEO has spearheaded as we're calling it an innovation lab and it is what it is trying to do is do you kind of of thin client approach from a system's development perspective to rollout of new line of business. It could be 1 that we don't write right now or are currently writing so for.
Instance, we are bringing on of new residential E&S flood program, that's leveraging existing underwriting talent and leveraging existing systems, but it's going to be delivered through a thin client front and at the lower cost.
The investment that allows us to prove the concept once it's proven itself. We can move it onto more of a calendar of Cadillac policy administration system or peg of platform that we already have for all of our other lines and in doing so you reduce the execution or the sunk cost.
And I think what the long and short of it is we're going to use both approaches we've done that historically, we want to have both internal underwriting and program underwriting for our property business, we're going to gin up new lines internally.
Net hopefully don't take a ton of investment from a talent perspective, and assistance perspective, but they will cost something and Thats why when we give our guidance we feel very good about the guidance and we also feel very good about the long term process, because we are investing and growth not just in 'twenty, 1 but of 'twenty, 2 and 'twenty 3 whether it's people talent.
People systems or other infrastructure.
Great that's true.
Great maybe just a follow up on that question about the saturation amongst the MGA.
Is it tougher these day, 2 and turn Q partnership given there's a lot of others that might be try and do the same thing or are you still have your pecking Inc.
Yes, that's a good question no I think we feel very good about the day, we have a terrific group of MGA that we do work with longstanding history terrific track Records. Many of them go back to prior of the relationships go back prior to the formation of the Palomar, but no. We think we are seeing and the business that we want and I think ultimately.
And most again most of the MGA business, we are doing.
Is layered in share of property, where we take a pro rata participation. So it.
And it allows us to add incremental limit or replace limit and like and large tower of property exposure. So theres not a saturation circumstance.
Okay. Thank you.
Thank you.
As a reminder, if you would like to ask the question. Please press star 1 and there's a whole keypad and the confirmation tone will indicate your line is and the Q.
Our next question is from Meyer Shields with <unk>. Please proceed.
Great. Thanks.
Is there any room to adjust the inflation guard when we're seeing the sort of building materials cost inflation that we're seeing now.
Hey, Mary.
And the inflation guards, depending on the state needs to be approved by the department of insurance and so.
We have and automatic 5% increase and residential earthquake, and California, and the mid side of similar 1 for Hawaii.
I will say for our more complicated risk and residential quake, we're riding them E&S.
And by writing the E&S, which.
Which we always do factor and the cost of inflation.
And.
The level of not only demand surge, but a rising cost of goods and replacement cost of goods I think just overarching we as you think about inflation.
It's already been in our portfolio with the inflation guard that you talk about but also how we use demand surge and setting the base level of <unk>.
For a risk we price risk off of AAM and by having demand surge and that reflects heightened cost of labor heightened costs and material goods. When there is the catastrophe. So that lever. If you would is factored into all of our unit level of pricing. So we think that we can adjust for it.
I think the other thing that I would add too is just the short term and it's short tail nature of our business.
Will allow us to cycle through inflationary increases probably quicker than other.
Others that may be exposed to social inflation or just a longer tail of loss cost development I know that's more than you asked but I thought I'd add that.
And I always will come from more than the assets.
The limitation of the mail and questions.
And just I know we touched on this earlier I just want to make sure from modeling purposes.
And when we take out the non recurring charge. So obviously, we get a lower operating expense ratio is.
Is this charge not likely to occur even if we have multiple storms or other issues and the taking into context, the reduced exposure and Louisiana and so on.
Yes.
And a lot of this or most if not all of it was really related to <unk>. So.
Those events can happen and again I think the way we restructured our reinsurance program now and say it is less likely and I think theres a couple of factors.
Don't have any cope ours right now.
And no reinstatement, obviously coming into play and then also we have the aggregate later and more importantly that will limit the.
The downside impact of multiple events on our portfolio. So I think those 3 factors.
No.
Don't and eliminated completely but I think.
Previously we provided that we don't feel that this is going to happen and it's definitely not something we're building into the models that we're using because it would take a unique set of events or something like that to occur again, well I think I did.
I don't proceed happening for the reasons, Chris talked about but also the loss came from the line of business that we're exiting.
More than.
80% of the loss came from the admitted all risk business. So.
That's the line that we're out out of.
And is not to say that we couldnt see E&S losses.
From a winter storm like that but it's not going to be a similar type of exposure. So it is fundamentally it is absolutely nonrecurring.
Okay perfect. Thank you so much of it and ship clarification.
Okay.
Yeah.
Our next question comes from Pablo <unk> with Jpmorgan. Please proceed.
And another question and the Attritional loss ratio of at this time more short term I just wanted to make sure I understood you correctly. So if you take 14 and 15% of the base with the reasonable to assume a step up and the second half of the here just because of the reinsurance program kicking in and then I guess.
We also think about some element of seasonality given the weather loss of tend to be more concentrated in the second half of the year.
Yes.
So I would say this for our book of business. When we talk about it the attritional losses are usually weighted more to the first half of the year and it is going to be a lot more toward hail, obviously, we do have a significant Texas exposure.
For our purposes, so if youre thinking about it from and Attritional standpoint, and we view it as more of the first half of the year.
Titan phenomenon, so with that I would say generally speaking we do see.
Loss flattening to improvement in our book for the second half of the year definitely you see that and Q4 with data did indicate that we did change our participation. Some of the quota shares. So I wouldn't expect our loss ratio to go up but I would expect it to kind of be in that range of where we were before gross costs of 11.
And to 13% to 14% unexpected to blend out there so there can be ups and downs, but.
Generally view of the second half of every year from nutritional standpoint to be lower now obviously, we are in the midst of hurricane season, but like we said, we don't build that in.
Yes, Pablo and and just add a little more color again, the nonrecurring reinsurance charge that influenced the attritional loss ratio by 2 points or so so if you back that out the loss ratio of 13%. So you can you should sequentially or you can sequentially grow the loss ratio off of that base as opposed to.
And a higher number so that's why and Chris feels good about that 11% and 14% range. He is referring to.
Okay. Thanks for that and then the second question just on capital. So how should we think about the pace of buybacks from here and.
Amortization of potentially given that you use up a good amount of the 40 million program the.
Standing and.
As you had mentioned that you still of a decent amount of capital flexibility.
Yeah. So.
Overarching Lee I think we will continue to be opportunistic with the buybacks and and.
And also putting the opportunistic deployment of that capital vis vis the other investments that we're making and the business.
And as I said and I'll reiterate we feel that based on where we are from a net premiums written of surplus ratio that we have adequate capital to grow.
And execute the growth plans and grow 40% plus for the rest of this year without incremental capital and beyond for that matter. So I think it's really going to be opportunistic Pablo and it's going to be juxtaposed against new lines of business and new partnerships new talent that we're bringing on.
And the.
Of the Greenfield opportunities, we see I think in the second quarter, we just saw something that was disproportionately.
Advantageous for us when we thought.
With respect to value return on equity and.
And just free cash flow generation.
Okay. Thank you.
Thank you.
And gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to management for closing remarks.
Thanks, very much operator, and thank you everyone for your participation today, hopefully you walked away with the sense that Palomar is performing at a very high level and we have a considerable amount if not a ton of conviction and all that we have in front of us the <unk>.
Growth is very strong the profitable growth is equally strong.
We're very focused on providing consistent earnings and look forward to.
Sharing our results with you and the third quarter and the months to come so be well and thanks very much of your time.
This concludes today's conference you may disconnect. Your lines at this time. Thank you very much for your participation and have a great day.
Okay.
Yes.