Q4 2021 Palomar Holdings Inc Earnings Call
[music].
Good morning, and welcome to the Palomar Holdings, Inc, fourth quarter and full year 2021 earnings conference call.
During todays presentation, all parties will be in a listen only mode. Following the presentation. The conference will be opened for questions with instructions will follow at that time. As a reminder, this conference is being recorded I would now like to turn the call over to Mr. Christian <unk> Chief Financial Officer. Please go ahead, Sir you may begin.
Thank you operator, and good morning, everyone. We appreciate your participation in our fourth quarter 2021 earnings call with me here today is Mac Armstrong, our chairman Chief Executive Officer and founder.
As a reminder, a telephone replay of this call will be available on the Investor Relations section of our website through 11 59 P. M. Eastern time on February 24 2022.
Before we begin let me remind everyone that this call may contain certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations beliefs estimates plans and prospects such statements are subject to a variety of risks uncertainties and.
Other factors that could cause actual results to differ materially from those indicated or implied by such statements, including but not limited to risks and uncertainties related to the COVID-19 pandemic.
Such risks and other factors are set forth in our quarterly report on Form 10-Q filed with the Securities and 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 bad.
In our earnings release.
At this point I'll turn the call over to Mac.
Thank you, Chris and good morning, everyone today.
Today, I will speak to our fourth quarter and full year results our progress on strategic initiatives implemented in 2021, and our continued efforts to drive and sustain profitable growth.
From there I'll turn the call back to Chris to review, our financial results in more detail.
To start I'm very pleased with not only our results in the fourth quarter and 21, but also the significant steps that we took throughout the year to position Palomar for long term growth and predictable earnings in the years ahead.
Highlights for the year include strong top line growth as Palomar gross written premiums increased by 56% for the fourth quarter and 51% for the full year 2021 .
This strong growth was driven by our core products, including earthquake and Hawaiian Hurricane combined with the successful scaling of our E&S business, Palomar excess and surplus insurance company Patrick.
It grew its gross written premium an impressive 158% year over year in the fourth quarter.
Second we continue to invest in our business and plant the seeds for future growth notable accomplishments in 2021 with the recruitment of talented underwriters to build our casualty professional liability and excess property franchises as well as the launch of the fee generating Palomar front in September .
Third we took considerable underwriting actions to improve our portfolio and reduce our catastrophe exposure to apparel disproportionately impacted by climate change.
While we are focused on delivering sustained revenue growth it will not come at the expense of our bottom line because it support this over the course of the year. We completed the run off of our admitted all risk in Louisiana homeowners portfolios shifted our commercial wind exposed property focus to a layered in shared model, mainly reduced our maximum limit and line side. It took.
The advantage of favorable market conditions to increase rates and improved terms and conditions.
These actions helped reduce our continental hurricane probable maximum loss by approximately 40% from its apex in 2020 and eliminated a primary driver of our attritional loss ratio.
Fourth minimizing volatility in our business and protecting capital has been a constant theme of palmar going back to our founding eight years ago during.
During 2021, we continue to thoughtfully use risk transfer to protect our balance sheet and deliver consistent earnings.
These efforts include the placement of a multi year catastrophe bond Torrey Pines re 2.0, the placement of multiple quota shares that reduced maximum limit per risk and provide fee income and the purchase of aggregate reinsurance the aggregate not only protects our business from losses generated by multiple severe catastrophic events, but also put the Florida are adjusted.
Roy.
Fifth our board of directors authorized a $100 million share repurchase program last month that affords us the ability to opportunistically deploy capital and buyback our shares at levels that we believe are meaningfully undervalued.
Importantly, we continue to believe stock repurchase will not impede our ability to capitalize on the open ended growth opportunity that we see before us.
We believe the buyback, notably demonstrates the conviction we have in our long term strategic plan and the optimism in the future power.
Lastly, we launched our ESG portal in 2021 and released our annual sustainability and citizenship report last month.
We are very pleased with the progress that we've achieved on our ESG initiatives as well as the associated commitment to our employees the environment and the communities we serve with these initiatives demonstrate.
Turning to our results in more detail, we delivered strong premium growth through the fourth quarter as we experienced momentum across all lines of our business.
Our earthquake franchise saw growth of 21% in the fourth quarter, 31% for the full year with commercial earthquake growing 35% and our values. So like residential earthquake products, our largest product growing 26% in the quarter.
As we have discussed on previous calls opportunity than the earthquake market remains abundant whether it be from dislocation in the homeowners market or the California earthquake authority advocating a potential reduction in coverage the shedding of limit or the permission of participating insurers to seek alternative earthquake insurance solutions.
We have less than a six 2% share in the California residential earthquake market, which provides considerable room for continued strong growth in this important and profitable line of business.
Shifting to Patrick we launched the business in August of 2020, and Ive been extremely pleased with how quickly our operations scaled as we've delivered $152 million in premium for the full year 2021, as compared to $29 million in 2020.
This growth was driven by past six main products, which include commercial earthquake national layered in share commercial property builder's risk.
During the year, we also launched several new E&S products, including professional liability excess liability and contractors liability. These products along with others will be significant contributors to our success and bottom line in the years to come.
Needless to say Patrick will remain important growth driver for Palomar and we believe the business can become 50% of our premiums over time.
Other strong performing product lines in the fourth quarter included the inland Marine which grew 290% year over year and exited 2020, you wanted a $72 $8 million run rate.
Hawaii Hurricane with 109% year over year growth in flood, which grew 32% year over year, our first casualty product real estate errors and omissions continues to show great promise as it grew nearly nine fold year over year.
While the strong topline growth is and will continue to be a significant driver of our success as an organization Palomar is keenly focused on profitable growth. We are pleased to report in the fourth quarter for all of 2021, and frankly, we're able to marry the 50% plus top line growth with a very strong bottomline and return on equity.
We generated adjusted net income of $19 2 million and $53 4 million for the fourth quarter and full year 2021, respectively, which translated to an adjusted ROE of 19, 9% and 14, 1% for the same periods.
Additionally, during the fourth quarter, we completed the aforementioned runoff of the admitted all risk and Louisiana homeowners books of business. These lines contributed 61% of our catastrophe losses in 2021, we believe exiting these businesses not only reduces our catastrophe exposure, but also improve the predictability in our results.
Our strong results combined with the substantial investments in products systems and talent provides confidence and our positive outlook for growth in the years ahead.
Over the course of 2021, we launched several new businesses and products to further fuel our growth in the medium term Palomar front, it's one that I'm, particularly excited about introducing September our team has quickly built a strong pipeline is already executed three programs, which are all fee based and do not involve us taking underwriting risk.
Adding a fee based revenue stream to our business further fortifies our earnings base and I believe we will build the fronting business the $80 million to $100 million of managed premiums in 2022.
We also recruited talented underwriters for our team in the third and fourth quarters. We were in the early stages of building their franchises in segments like general casualty professional liability and excess property Palomar is an attractive company for experienced underwriters given that we have the technology distribution relationships reinsurance in the analytics acumen as well as back office.
<unk> to rapidly scale the business our expectation is that the underwriting leaders will build their businesses over the course of 2022 and meaningfully contribute to our premium growth and bottom line in 2023.
Turning to the market and our 2022 outlook, we are increasing share and extending our Tam in our P&C market that remains conducive to rate increases and improved terms and conditions.
During the fourth quarter, we saw rate increases in the mid single digits on a commercial earthquake book and expect that dynamic to persist in 2022.
The builders' risk segment of our inland Marine franchise saw a low teen rate increases in the fourth quarter and for 2022, we expect to see sustained price increases as well as in our form sensitive insurance to value and the impact of inflation on loss costs, while our casualty lines are Nathan and therefore don't offer much in the way of renewal price increase commentary, we are targeting rate increases of five.
5% to 10% on expiring terms with certain segments professional lines seeing greater upward movement.
Our national layered as shared property program saw rate increases in excess of 20% in the fourth quarter with December increases over indexing the quarterly average.
Pull back of capacity in the market will allow rate increases at this level to persist into 2022.
As we look to manage volatility and reinsurance costs, we do not expect to increase our commercial wouldn't exposure in 2022, all growth from that line will come from rate.
On a related note we are exiting specialty homeowners business outside of the state of Texas to further reduce our continental hurricane exposure probable maximum loss and steady state reinsurance expense.
We believe the combination of rate increases and reduction in continental hurricane exposure pretense for successful reinsurance renewal.
The runoff of the admitted all raskin, non Texas homeowners business and the capping of commercial hurricane exposure reduces our continental hurricane probable maximum loss by 60% from its high point in 2020.
Importantly.
These efforts resulted in only 9% of the expected loss in our excess of loss catastrophe tower coming from Continental Hurricane the segment of the property catastrophe reinsurance industry facing the most price pressure.
Our program dominated by earthquake and Hawaiian Hurricane is truly a differentiator and a diversified reinsurers. The uniqueness of the reinsurance program is best exemplified by a recent renewal of our commercial earthquake quota share.
Renewal pricing improved from the prior year January one 2022.
We are renewing our loss free aggregate program and we look forward to providing our shareholders with an update upon its completion.
We're confident that theater and provide the same utility in 2022 that it did in 2021.
While there are likely to be increases in our cost of reinsurance at June one. This year, we believe it will be manageable and our program will be in high demand.
Turning to the matters of capital allocation return, we expect to see operating leverage in our business model and financial metrics.
Lee we have excess capital put to work as our net written premium to ending equity is at <unk> 78 acts and we feel comfortable writing business up to onex for our cat exposed lines and higher for others. So.
As we start new lines and build our fronting business, we will see a return on equity increased from already compelling levels. Additionally, when we renew our aggregate we will continue to have a floor on our ROE.
Minimizes volatility ensures predictable results and consistently build our surplus.
And our shares have come under pressure and we believe our trading below fair value. Our board of directors authorized a new two year $100 million share buyback plans. It replaces our original $40 million plan.
Looking forward, we have sufficient capital resources to invest in our numerous growth initiatives as well as fully fund our buyback.
We have more than enough capital to execute our strategy for the intermediate future.
Turning to our guidance for the full year 2022, we expect to generate between 80 and $85 million of adjusted net income representing 54% year over year growth and an adjusted ROE of 19% at the midpoint of the range.
This range factors in the additional investments that we're making talent and systems infrastructure and reinsurance as we continue to position Palomar for the future assuming full utilization of the current aggregate reinsurance program. Our adjusted ROE has a floor of 14%.
Before turning the call to Chris I'd like to conclude with an update on the many ESG initiatives we have underway.
Of note, we launched our ESG port on our corporate website that details our efforts and acts as a central repository for all commerce ESG materials.
We also released our annual citizenship and sustainability report this month, providing an update on our progress related to specific ESG initiatives established in 'twenty, one as well as our initiatives and goals for the year ahead.
One endeavor that I'm, particularly excited about is Palomar protects which is a charitable initiative that.
Reinvest earned premium back into communities to help them prepare recover from natural disasters.
As we move forward our ESG program will continue to be an area of focus for us and I look forward to updating you on future initiatives with that I will 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 your per diluted common share as calculated using the treasury stock method. This methodology requires us to include common share equivalents, such as outstanding stock options during profitable periods and exclude them in periods. When we incur in all our net loss we have.
Did the calculations accordingly.
For the fourth quarter of 2021, our net income was $16 6 million or <unk> 64 per share compared to a net loss of $1 8 million or <unk> <unk> per share in the same quarter of 2020.
Our adjusted net income was $19 $2 million or <unk> 74 per share compared to adjusted net loss of $1 $3 million or <unk> <unk> per share for the same quarter of 2020 for the full year of 2021, our adjusted net income was $53 $4 million or $2 <unk> per share compared to adjusted net income.
$8 $9 million 35 per share in 2020.
Gross written premiums for the fourth quarter were $149 9 million, an increase of 56% compared to the prior year's fourth quarter.
Full year of 2021, our gross written premiums were $535 2 million.
<unk> growth of 51% compared to $354 $4 million in 2020 as Mac indicated this growth was driven by a combination of strong performance by our core products and new initiatives gaining traction in the market.
Ceded written premiums for the fourth quarter were $70 4 million representing.
An increase of 38% compared to the prior year's fourth quarter.
The increase was primarily due to increased catastrophe excess of loss reinsurance expense related to exposure growth and increased quota share sessions due to a greater volume of written premiums subject to quota shares.
Ceded written premiums as a percentage of gross written premiums decreased to 47% for the three months ended December 31, 2021 from 56% for the three months ended December 31 2020 the.
The decrease in this percentage was primarily driven by a higher reinsurance expense in the fourth quarter of 2020, you will recall with the storm activity in the second half of 2020, we accelerated reinsurance expense incurred reinsurance reinstatement premium and purchase backup reinsurance, resulting in a higher percentage of ceded written premiums.
In the fourth quarter of 2020.
Net earned premiums for the fourth quarter were $67 8 million.
An increase of 74, 3% compared to the prior year's fourth quarter. This increase is due to the growth and earning of higher gross written premiums offset by the growth in earning of higher ceded written premiums under reinsurance agreements and the higher seeded earned premium in the fourth quarter of 2020 as described earlier for the fourth quarter of <unk>.
21, net earned premiums as a percentage of gross earned premiums were 55, 2% compared to 45, 2% in the fourth quarter of 2020.
The increase in this percentage is primarily the result of the additional reinsurance expense in the fourth quarter of 2020 described earlier that reduced the ratio for that quarter.
Net earned premiums for 2021 were $233 8 million, an increase of 58% compared to 2020 for 2021 net earned premiums as a percentage of gross earned premiums were 53, 9% compared to 51, 4% in 2020.
We believe the ratio of net earned premiums to gross earned premiums is a better metric for assessing our business versus the ratio of net written premiums to gross written premiums as previously mentioned as part of the June one reinsurance renewal, we adjusted our participation in the nutritional quota share arrangements with these changes we expect this ratio to be around 53 to 55.
On an annual basis for our core historic business lower at the beginning of a new reinsurance placement and higher at the end with our expected growth in earned premium.
Launched unexpected growth of our fronting business could push this ratio below 50% on an annual basis, though will add consistent fee income that will enhance our ROE and bottom line.
We will continue to monitor this ratio and update the market based on our new business.
Losses and loss adjustment expenses incurred for the fourth quarter were $10 2 million.
Due to attritional losses of $11 $9 million slightly offset by favorable catastrophe loss development of $1 7 million the loss ratio for the quarter was 15% comprised of an attritional loss ratio of 17, 5% and our catastrophe loss ratio of negative two 5%.
Approximately 10% or one seven points of the Attritional loss ratio for the quarter was from a line of business. We have fully exited as of the end of the year. The attritional loss ratio would have been 15, 7% if we exclude those losses.
Our 2021 loss ratio was 17, 7% comprised of a catastrophe loss ratio of two 1% and an attritional loss ratio of 15, 6%.
Our expense ratio for the fourth quarter of 2021 was 60% compared to 68, 6% in the fourth quarter of 2020 on an adjusted basis. Our expense ratio was 55, 7% for the fourth quarter compared to 56, 3% sequentially in the third quarter of 2021.
Similar to our net earned premium ratio, we feel is a better representation of our business to look at our expense ratios as a percentage of gross earned premium.
Our acquisition expense as a percentage of gross earned premiums for the fourth quarter of 2021 was 22, 2% slightly higher compared to 21% in the fourth quarter of 2020, driven by the changes in our mix of business the ratio of other underwriting expenses, including adjustments to gross earned premiums for the fourth quarter of 2021 was 92%.
On a sequential improvement compared to nine 4% in third quarter of 2021 as.
As we continue to invest in talent systems, and our infrastructure, we expect our business to scale over the long term.
The combined ratio for the fourth quarter was 75% compared to 112, 8% from the fourth quarter of 2020 for 2021, our combined ratio was 80% compared to 102, 5% in 2020.
Our adjusted combined ratio was 77% for the fourth quarter compared to 111% in the fourth quarter of 2020 for 2021, our adjusted combined ratio was 76, 1% compared to 104% in 2020.
Net investment income for the fourth quarter was $2 4 million, an increase of four 6% compared to the prior year's fourth quarter. The year over year increase was primarily due to higher average balance of investments held during the three months ended December 31, 2021, offset by slightly lower yields on invested assets are.
Fixed income investment portfolio yield during the fourth quarter was two 2% compared to two 3% for the fourth quarter of 2020.
Weighted average duration of our fixed maturity investment portfolio, including cash equivalents was $3 99 years at quarter end.
Cash and invested assets totaled $516 3 million as compared to $456 1 million at December 31, 2020 for the fourth quarter, we recognized gains on investments in the consolidated statement of income of $2 million compared to $245000 gain in the prior year's fourth quarter. The recognized gains were.
Driven by dividend, yielding equity index funds that like the rest of our portfolio will continue to be conservatively invested but may impact, our recognize gains and losses from quarter to quarter.
Our effective tax rate for the fourth quarter was 22, 3% compared to 23, 1% for the fourth quarter of 2020.
For the fourth quarter of 2021, the tax rate differed from the statutory rate due to the nondeductible executive compensation expense for the fourth quarter of 2020, our income tax rate differed from the statutory rate due to the tax impact of the permanent component of employee stock option exercises.
Tax rate for the full year ended December 31, 2021 was 19, 8%.
Our stockholders' equity was $394 2 million at December 31, 2021, compared to $363 7 million at December 31 2020.
For the fourth quarter of 2021 and annualized return on equity was 17, 2% compared to a negative 2% for the same period last year, our annualized adjusted return on equity was 19, 9% compared to a negative one 4% for the same period last year. Our adjusted return on equity for 2021 was 14, 1%.
Compared to 3% for 2020.
As of December 31, 2021, we had $25 million and 982568 diluted shares outstanding as calculated using the treasury stock method, we do not anticipate a material increase in this number during the year ahead.
Looking ahead to 2022, we are providing adjusted net income guidance range of $80 million to $85 million, representing 54% year over year growth and an adjusted ROE of 19% at the midpoint of the range with this guidance is worth reminding everyone about the impact winter storm year. He had on our results for the first and second quarter of last year.
As you look at future periods, we believe the fourth quarter of 2021 is a better starting point or estimating our future results.
<unk> consistent with previous guidance. These estimates do not include any losses for major catastrophic events as such we are providing our continental U S. Wind projected net average annual loss or net <unk> of approximately $6 million projected at as of September 32020 to the peak of wind season.
This net <unk> as an industry metric used to assess continental hurricane and severe convective storm exposure that projected that approximately 40% lower than the peak of wind season for 2021 and incorporates the underwriting and reinsurance changes mentioned by Mac earlier, as we continue our commitment to consistent and predictable earnings.
In January we announced a new two year share repurchase program with authorization to repurchase up to $100 million and shares. This program replaces our previous $40 million program, we did not repurchase any of our shares during the fourth quarter related to the previous $40 million share repurchase authorization and newest shares have been purchased under the new authorization.
Well, while we are not pivoting from our established growth strategy. We view our current shares is trading at a discount and we will take an opportunistic approach to share repurchases under this program. Thus we remain mindful of our goal of investing for profitable growth and are not deviating from that strategy, but we believe the share.
This program is another capital allocation tool, we can leverage to increase long term shareholder value with that I'd like to ask the operator to open the line for any questions operator.
At this time, we'll be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two churn there will be a question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star Kids, one moment, while we poll for questions.
First question comes from the line of Mark Hughes with Shirley You May proceed with your question.
Yeah. Thank you good morning.
Or mark how are you.
Good morning Central time.
The.
Chris when we think about the progression when you look at Attritional losses, and the expense ratio relative to your mix of business. Obviously, that's been migrating over time.
How do you see that playing out in 2022.
Yeah. Thanks, Mark. Good question, obviously, you know we've talked about the loss ratio over the last couple of quarters and we have indicated that we did expect it to start going up as the mix of business has changed and I think youre seeing that this quarter when we adjust that loss ratio a little bit for the historic all risk book that we have.
Now a fully <unk> run off as of the end of the year that loss ratio for Q4 was closer to.
Of 15, 7%. It's also by about the same factor about one seven points of our full year 2021 loss ratio was about one seven points as well from the historic all risk book, So that puts the annual loss ratio below 15%. If you use that metric so.
We believe that we've telegraphed that a little bit we do as we also said we'd be do you expect that to continue to tick up slightly as we continue to change our mix of business. So I wouldn't be surprised to see that go up another one point you a quarter as that continues to evolve. Its also important to point out that we still use a lot of quota share.
Especially for the new lines of business the casualty lines the inland Marine and then our national all risk business that we have so we are still using that so that is going to help make sure that loss ratio does not run away from us. So we're continuing to do that but these are all very profitable lines and that loss ratio is still anchored by <unk>.
Our earthquake business and our Hawaii Hurricane business that is very binary that is still about 55% of our overall book. So those are all screens.
Help make sure that loss ratio stays low, but the mix is evolving and so I do expect it to tick up slightly it's not going to run away from us, but it will tick up a little bit from there.
Moving onto the other piece the expense ratio I'd say the biggest driver that I expect to see from that over the next 12 months is going to be from the fronting fronting business. Obviously as you are aware does come with a ceding commission. So that ceding commission over the next 12 months I expect to drive down the acquisition expense historically.
I've said that I expect more scale from the other underwriting expense I would say that is still true on a long term basis, but I think in the near term I would expect to see a little more.
Movement in the acquisition expense and Thats really from the fronting you can kind of see that fronting premium and our net written for this year for this quarter.
Ceded written premium for the quarter was about 47%, which is up from Q3 of about 38%. So you can kind of see that we are ceding a little bit more and most of that is driven from quota share which is from the fronting business. So I think those two factors are.
Going to push the acquisition expense ratio down a little bit as the year continues and then other underwriting I talked about that a little bit I do expect that to improve or the long term.
But we are continuing to invest and teams we are continuing to invest in systems and people and our organization to make sure that we have all the right pieces in place to be successful in the fronting in the casualty and in our core earthquake and in the marine lines that we've been building over time, so it wouldn't be surprised about ratio flattens or.
There is even potentially a little bit up in Q1, but over the full year I do expect that ratio to improve so a lot of pieces. There just to make sure I hit everything that you were looking for.
Yeah, no that's great detail.
Hunting premium are you going to break that out so we know how much is attributable to that versus the.
Other business.
Yeah, I think over time, we will it was still a very.
A small component of our book So that is right now is sitting in the other premium but over time, we will probably start breaking that out I think one other thing I would add about the fronting premium and Mark Yoon I spent a lot of time on this topic is when you think about our net earned premium at the end of the quarter. It was sitting at about 55% are for the quarter was thinking about 55% with the fronting business.
Do you expect that to tick down, it's probably going to tick down at a similar rate as that our acquisition expense also takes down so you'll be able to see how that Roe.
Or how the gains on row running through the business as our fronting business comes through but obviously as you are aware that business is almost.
Almost risk free we're not going to have losses from that book of business, we're not going to have any shocks from it. It's just going to help improve the long term Roe of the organization.
Marvin.
Oh, Yeah. Please go ahead.
Two things.
On the frontier as a reminder, I did say that we're targeting between 80 and $100 million of.
Managed premium there and think we have a very robust pipeline that could push that higher but thats a good directional target and then secondly, all of these lines while the.
The Attritional loss ratio may move up some they are all accretive to the ROE.
I'm assuming that they are writing below a 100 combined and I think that's best evidenced we had to.
Steady state, 15% loss ratio attritional loss ratio in the quarter and our annualized ROE was pushing 20% almost 20%.
Yes.
Chris You mentioned, a $6 million number.
Possible loss potential law is that a.
You know, maybe it's suggested or reasonable cat load for the business does that makes sense.
Yeah, No I think Thats a great question Mark no. So this is our continental U S wind net <unk> and that is $6 million.
So that is what we believe if we were to put a put a metric out there a good cat load estimate for 2022 based on our current book of business and Thats projected as the peak of wind season, So with all those other underwriting changes that we've made you look at where it was last year. That's still had our historic all risk business and if you think about the chain.
That Mac talked about with underwriting and reinsurance that we're making this year that number is about 40% lower than it was last year. So we do believe that as a good metric or a cat load that people can use to think about our book of business going forward.
And then one final question.
Commercial quake pricing, it's been decelerating a bit.
Mac I think last quarter, you said on a combined basis without the quake business could grow 20%.
Or maybe an indefinite period.
How do you see that now.
Yeah, I I said on the call Mark we think the quake market remains kind of abundant with opportunity.
And I would say that it's it's both in the commercial and.
The residential market and probably even more pronounced in the residential market on the commercial market rates have decelerated sound, but theres rate integrity and you are seeing mid single digit increases.
I think that as you're there is not a surge of new capacity in that market. So there is an opportunity to grow that book and continue to take share I think it's on the residential side that we feel that there is the most.
Runway for growth.
That's great because that's our largest line of business.
Whether that's driven by continued dislocation in the homeowners market I know AIG came out at the end of the fourth quarter and talked about pulling out of California admitted homeowners.
Further wildfire dislocation and then also what I referred to with the California earthquake authority. So I think all of that is creating a lot of opportunity in considerable runway and I would say that just as an aside January of 2022 was our highest new business month ever for our value select residential earthquake business. So the product excuse me so.
I think thats.
A nice harbinger for.
Continued strong growth in near a quick line.
Thank you very much.
Okay.
Our next question comes from the line of Matt <unk> with JMP Securities. You May proceed with your question.
Hey, good morning.
Hey, Matt Mark Mark covered most of what I had but I guess I'll follow up Chris for the conversation on fronting.
You know what the right way to think about it is.
It will be wrong to assume it's kind of all of our market.
Level five ish percent kind of fronting fee and if we use that against kind of the 80 to 100 million guide for 'twenty two that that's kind of the magnitude of impact in restaurants that it might have on the acquisition ratio.
Yes, that's a fair assessment that call it $80 million to $100 million. That's the written number. So obviously this will have to be earned over the terminal three years. Most of these I would assume are going to be 12 month policies. So you have to earn that out but yes. That's the right way to think about it the margins going to be between five to seven.
On all of these depending on the type of risk that we're looking at and the type of business that we're using so yeah. That's the right way to think about it and so that is going to.
That's the right market as you said to us to start pushing down that acquisition expense.
Okay, and then Matt maybe just a follow up on.
The color you gave there on kind of some things going on in the California market for quake and particularly the CBA.
Seems like <unk> been waiting for a little while now for them to kind of decide how they want to handle.
Risk management going forward is there is there a certain timeline around that by which you expect them to make a decision or is it more of just a kind of a wait and see and laughed when they're ready.
Yeah, I think there's a couple things that I point out Matt first they did put out in December .
A circular that did authorize the participating insurers to seek alternative solutions, so theres something definitive there and that bodes well for us because that potentially opens up new partnerships as you know carrier partnerships have been a nice.
River of growth for us and in the end a nice a unique distribution channel for us.
In Q4, we did bring on a nice new partner.
And the California residential quake market.
But beyond that you know.
It's hard to say, whether they're going to go down the path of shedding limit or whether they're going to go down the path of buying less reinsurance.
Or or reducing coverages.
All of that said, though that is a nice dynamic for us to market against it does create agita amongst producers. It does create ads that potentially amongst insured and certainly creates agitato with participating sure. So.
That's the type of dislocation that Palomar does well and.
And it gives me.
The optimism that we all collectively have around.
The growth in that line.
Great well, thank you for the color and congrats on a strong engineer.
Thanks, Matt look forward seeing soon.
Our next question comes from the line of David.
David Maura Madden with Evercore ISI you May proceed with your question.
Thanks, Good afternoon.
Just a question on you know as part of the the outlook for 2022 I'm. Just wondering if you could just talk about your view on on.
On top line growth gross premiums written growth in 'twenty, 'twenty, two and and maybe just a little bit more color. I think you mentioned that you were exiting all homeowners outside of Texas.
And then I wasn't quite clear on the statement you made about not growing exposure in the south east in 2022, and it would just be rate driving the premium growth. So yes.
Yes.
A big question, but wondering yeah, what youre assuming for top line in 'twenty. Two if you could elaborate on that and also just some of the some of the new changes that you're talking about.
Sure Dave Yeah, all good questions.
Happy to.
Found upon that.
We haven't given top line guidance, but what I would say is that we feel very good about the growth trajectory of the business.
Last year, we grew 50 plus percent for the full year when you factor in the run off of the.
Admitted ulrik business is actually closer to 70% now I don't think we're going to grow at that rate in 'twenty.
22, but what I will say is that we think that we can maintain.
Pretty strong if not industry, leading growth rates that allows us to maintain our margin structure in the combined ratio like we had this year and achieve that net income guidance.
Range, but I think it's important to point out that the growth that we are.
We'll achieve from a topline perspective, and the 50% plus bottom line growth that we're targeting is coming with the business that we are running off further and that is the.
Specialty homeowners business outside of Texas, and so that was around 5% of the book last year.
On a steady state basis ex cat, it's probably a mid <unk> combined ratio. So what we are looking to do is exited a line of business that could give us good pre cap margin, but does have too much volatility for us and so I think it's important to point out that the 80 to 85 that we're giving you.
Is very.
Very different volatility profile than what we had last year and certainly what we had the year before and I think Thats also.
Exemplified by the fact that.
Layered in shared National property program. The question you asked we are not looking to grow our exposure. There. We think we can grow that line, but it is going to come purely from rates and.
And so that allows us to say, we have reduced our P&L by 40% over the course of the year, but we think it will actually be by the peak of wind season reduced by 60%, it's allowing us to stay does that net out is $6 million for continental Hurricane, which as you know two.
Two to three points of cat load. So the growth that we're targeting is a different complexion than what we had in years past, it's more predictable its more consistent it's much less cat exposed its fee income for Palomar front.
It's new lines of business that our casualty oriented that have considerable amount of quota share to reduce our net line size and insulate us from shock loss. So it's a different complexion. So I think it's a long it's a long winded explanation, but I do think it's really important for us to get across to all of our investors that the growth.
We have considerable confidence in the growth, but we're also very confident that reduced volatility in that book of business that will give us.
50% top 50.
50% bottom line growth.
Got it thanks that that makes sense that makes sense and I guess with that that 6 million L.
<unk>.
Is there going to be any change in the reinsurance program as a result of that I think its at 12, and a half million or 12 million retention right now on the per occurrence.
And I'd add that as you know both earthquake and wind I'm wondering are there you're going to change anything on the wind side, maybe bring down the retention.
Or yeah.
Yeah, I guess any outlook on that.
Yeah, David I think the retention up until six one to 'twenty two is $12 5 million I think that directionally.
Directionally a good target it could tick up.
$1 million or so depending on.
Market conditions, and what we're comfortable with we obviously have always wanted to keep our retention inside of 3% of surplus and well inside now at this point.
Quarter of earnings so that is going to be our guide post I think the reduction in the exposure will help that being said as I said at the outset only 9% of our expected loss in the reinsurance tower is going to come from Continental Hurricane.
That is.
The toughest segment place in the market right now and so we're going to need to be nimble there, but I don't think its going to change materially from where it is today and I think the actions that we're taking that will run its course over the over 2022 will allow us to maintain that.
On a prospective basis as well.
Got it okay that makes sense and then maybe if I could just sneak more one more in on share repurchases and good to see the authorization.
The 100 million authorization you didn't utilize the prior.
The prior 40 million authorization I know it was over two years, but you had used I think it was 40% of it or are you is this something you intend to exhaust the.
The 100 million or I guess, yeah, maybe just a little a little bit more on how you're thinking about.
You know share buybacks now.
Yeah, absolutely thanks for the question.
I think for us.
We will be opportunistic.
We do look at where we're valued now from a pay standpoint from a price to earnings growth standpoint, and it's below the S&P is below the Russell 2000, and so that just says that we should be thinking about buying back our stock, especially when we have excess capital.
In the fourth quarter, we would have liked to potentially bought back stock, but we were restricted because Christmas putting in place a credit facility for US frankly provides us liquidity too.
Our incremental liquidity to potentially buy back our stock on a levered fashion.
Yeah.
I don't think we will be opportunistic I'm not sure if we will fully exhaust that but we certainly intend to use it.
And I think the other thing Thats worth pointing out.
Is.
If we use it well we can juice, our ROE and we already have put a floor on the row with our aggregate that this year, we're targeting around 14% if we buy back our stock we can actually move that up and get a better return on the equity for our shareholders.
And leverage the cost of capital even more.
Usefully.
Got it thanks that makes sense.
Our next question comes from the line of Tracy Bangui agree with Barclays. You May proceed with your question.
Thank you I wanted to go back to your comment about exiting specialty homeowners business outside Texas to reduce your continental Hurricane P&L, but you only now going to grow on rate but.
And this is gyn accounts deeper basic what does that leave you proportionally more exposed to wane at Texas is highly exposed.
So Tracy thanks for the question, Texas is exposed, but it's not as exposed to Texas, Mississippi, plus Louisiana, plus Alabama, plus North Carolina, and South Carolina. So we reduce via Simplistically, we reduced the target so to speak. Furthermore, what we write in Texas is not.
On the coast, it's in tier two counties.
So think Harris County, and Houston, and then up in the states. So we have a better dispersion of risk in that state, which allows us to finance the cash more effectively than we did with other specialty homeowners lines, where it was purely coastal so I think.
And it's a big enough book that it has a faster payback then.
Right.
Mississippi, or Alabama, where they're just not as much premium so our choice to exit that line. We had a great partner that was very good at what they did they had a good attritional loss ratio. It's just unfortunately, it just brought too much volatility and when we have a stable earnings base that.
That should generate $80 million to $85 million next year, we feel like it's not worth adding a couple of million dollars on a cat per year that could turn around and generate $10 million or $12 5 million of pretax loss.
Okay very helpful that you clarify that your Texas exposure is away from the coast.
Yeah could you also discuss what drove the negative cat losses from prior period development and I guess, one thing just for that $1 7 million prior period development. It looks like you had zero cat losses can you confirm that that's the case.
That is the case, obviously go.
Going into the first part of the question.
Prior period development was storms from 2020 stores for 2021 that we had that we could have favorable development.
<unk> said this in the past or we try and have a conservative position when it comes to loss ratios that goes for the cats that goes through the Attritional. So this is kind of moving the direction that we would expect when we look at it. So just think about all the storms that we were exposed to it in 2020, 2021 and just the favorable development. There. These are mostly also.
Call it.
Probably some of the smaller ones. These are within the retention changes so not a lot of.
Things that are happening above our prior retention, so thats kind of where the favorable development came in.
On the cat side and thinking through.
Whats also part is yes, we did not have any major cats.
In the fourth quarter, we do have small exposure too many cats things of that nature, but nothing that we would call a cast that hit our portfolio.
Okay, and I guess, what's interesting in taking that prior period development action like everything overall concern about inflation.
I guess could you just comment yes.
Are you are thinking like that wasn't as big of an issue.
In replacing call.
Sure.
Tracy I would say inflation is is.
Front and center for Us.
And it is front and center and how we are underwriting it's front and center and how we are.
Transferring risk it is front and center and how we're handling claims inflation certainly did factor and I think with a lot of the development that we had was just the IV in our load that we have uncertainty of these events was conservative like Chris said, and we got through and close down the majority of our outstanding claims certainly on residential business for.
A storm like Hana a storm like Ida.
Delta and data Unfortunately, a lot of but so I think it's worth.
We still have very high IV NR for storms, thats, driven by inflation and the rising cost of things like lumber or staffing shortages that influence business interruption coverages and the like so.
I wouldn't say that we were we're making a call on inflation not being a persistent nuisance here.
Alright, thank you.
Our next question comes from the line of Paul Newsome with Piper Sandler You May proceed with your question.
Hi, good morning, congrats on the year and quarter.
Modeling questions.
The first is.
If we.
Sure.
Should we assume that essentially all things being equal the topline growth will be a little less than the bottomline growth because the <unk>.
The increased proportion of the business and fronting and the margins thereof is that fair.
I guess, what I'm trying to make sure a bifurcated. This the right way for you Paul So you're saying the bottom line growth is going to be higher than top line growth talking about pure gross written premium because the gross written premium will include the fronting. So we do continue to expect that to grow I would say the net.
Written on that or the net earned on that let's call. It from a dollar standpoint should be zero, but the overall pure topline gross written premium will increase but.
I just want to make sure is that the way youre thinking about it.
Net basis.
We see goes to the income yes. So if you just look at pure fronting from that standpoint on a net written our net earned basis spreads. The net earned or net written on that is going to essentially be zero, but our acquisition expenses will be going down. So yes. We will it will look like if you just added fronting to the current book today and added $100 million.
Sure fronting premium then yes, our bottom line would increase with our net written and net earned not changing so yes, youre thinking about that the right way.
Okay.
Netting out the fronting fees.
And running it through the expense line.
Thank you.
Expenses.
<unk> expense as opposed to putting it through the top line.
Correct that is going through and reducing acquisition expenses as seeding Commission. So our acquisition expense was on a gross basis, 22%. This quarter I would expect that you start going down from the additional ceding commission on the printing side.
I've seen the accounting them both ways. So I'm just trying to clarify.
So I just want to make sure that that's how we're showing it.
Properly done.
Different opinion kenzie.
And then my second question has to do with the $6 million.
Cat load.
Ordinarily we take.
We essentially assume a cat load for the companies that we cover.
And put that as part of our earnings estimate.
But your Brazilian a little differently then.
Others do so.
Could you just talk about sort of the sort of intellectual.
Pros and cons to basically just taking.
The earnings guidance that you gave us and then subtracting out $6 million.
Whether that makes sense or not makes sense and just kind of like why do you think.
You should look at it either way.
And maybe I'm just we're all that's too simple, but your thoughts there would be great.
No I think Paul I think we are trying to.
We are not and maybe it's superstition, maybe it's not we're not trying to load in a hurricane.
Come through and hit our book, but we do think we obviously model everything out and look at.
Catholic and deterministic results and this is the hurricane Alley, and severe convective storm a L. A.
For the Continental U S and that's where we've had the majority of our losses, we think that's a good tool.
It may be something that we start to incorporate and on a go forward basis, but as we are in kind of a transitional period.
We think this is a great guidepost for you.
No. It's certainly helpful. Thank you.
Our next question comes from the line of Mayor Shields with K B W. You May proceed with your question.
Yes. Thanks.
Yeah, that's a separate thing you've given us a tremendous amount of data and I really appreciate that that's very helpful.
There any way of sort of ballpark in the a L from either with the earthquake or a Hawaii hurricane.
No.
We have not given that and I just don't think that's relevant mayor because its earthquake and Hawaiian hurricane it doesn't have it.
<unk> exposure.
The market doesn't look at it that way, we don't price in loss from an earthquake. So I think this is the this is how we would think about cat load of wearing our shoes.
Okay. That's fair is that a one event cat loads.
No I mean this isn't theoretically if the average annual loss of this would be a multitude of assets can be multiple storms. It could be multiple events. It's just averages it all out.
Okay. No that's helpful and one last question if I can because I think about this so when I think about this.
Probably directionally to <unk>.
<unk>, but I would assume that the combination of our growing earthquake book and some.
Hesitation on the part of reinsurers, whether it's toward low level low level coverage or aggregate cover that the 12 and hypertension would've gone up over the course of this year when we head into June and it sounds like you're not that concerned about it.
And you know a lot more about this than I do so was hoping you could take us through your thoughts in terms of those two factors the gross book growth and reinsurance Edison's.
Sure So I think.
As it relates to the aggregate well actually let me start with retention, yes, I mean, I think we feel like the retention at $12 5 million or Directionally close to that is doable.
I think it starts with the fact that the majority of the exposure now is going to be Hawaiian hurricane.
And earthquake so that is remains.
Is a great diversified for reinsurers and I think if what you saw at one one was a gravitation.
Five the reinsurance market to those segments that are.
More.
And not subject to what's called secondary apparel severe convective storm or winter storm.
Jerry and so I think that helps us stand out and uniquely positions us well as it relates to the aggregate we are in the market.
We have lost three renewal.
And it's also <unk>.
Dominated by those same perils, we've pulled out 60% of the wind exposure that they were on risk for last year and they were loss free on and now we're coming to them with something that's more quake and Hawaii Hurricane and flood Griffin. So we feel very good about that because of the <unk>.
The program because of the improvements in the program.
And the results that we generated for them.
Okay fantastic. Thank you so much.
Thanks Mary.
Our next question comes from the line of Adam Klauber with William Blair. You May proceed with your question.
Adam You May proceed with your question.
Good morning, guys. Thanks.
Could you tell me the progression progression in your distribution you.
Did a fair amount of commercial earthquake this year.
Marine really picked up and clearly some of the other categories some of the units.
Your liability coverages.
There's a lot of that going through the wholesale channel.
Somebody is going through other channels and give us some flavor flavor there that'd be great.
Yes sure Adam.
Yes, I mean, I think our team did a great job.
Broadening the distribution footprint total distribution across the company increased 19% in.
Inland Marine grew 40 plus percent.
Distribution points in residential quake was up 25%.
I would add just from a channel focus I would say like Patrick the E&S company is going to be very wholesale driven.
And that will be the majority of what we do through the E&S company the residential business.
It just tends to be more.
<unk> admitted company is going to be a mix of retailers and MGA wholesalers to a lesser degree but.
Inland Marine is probably going to skew more wholesale.
A small bit of retail distribution.
And then the residential quake that a lot of that growth was driven by the carrier partners, which opened up individual producers that were either captive to them or were appointed by them that we now have the proverbial hunting license to go training and gift producing on our products.
And then just just because the commercial earthquake and some of the liability is that also more of a wholesale channel.
Wholesale.
Okay. Okay.
And is it fair to say that that in the wholesale channel you're bigger than you were a year ago, but youre still relatively early stage with.
With the big producers in that channel.
Yeah, I mean, I think we're still building out our franchise there we've got great relationships with the wholesalers, but we can go deeper in certain offices and I think it varies by product I think as it relates to earthquake. We have we have pretty good coverage.
Builder's risk and inland marine extending.
So, yes, I think it's.
There's a lot more.
Tam to address there.
Okay. Okay. Thank you.
And then as far as the.
The loss profile.
Great.
Great you're reducing exposures.
Liability programs, what what's the retention on those and given that they have a tail what what sort of loss picks are you putting up on.
Those their network for exact but just just some some idea would be great.
Yeah, So I think on the casualty and the longer tail business. What we are targeting from a net line exposures of 1 million to 1 million and a half hopefully we can put a gross quota share that allows us to do $5 million.
But so for that that's what we're doing on the casualty side and on the loss picks it vary but.
It's going to be anywhere from a.
It's really good line.
Mid low forty's, pushing up to kind of high <unk>, but I think that's directionally, where it will be.
We want to be conservative out of the gates here, we have terrific leader.
Leadership in those segments that have long standing histories in those markets.
So.
Our actuaries and those leaders are probably being conservative and that's fine by us.
Okay. Thank you and then as far as the planning.
Running business.
I would assume those are generally you know sort of one off one off sort of deals.
Those deals being generated is it contacts in the market are you and your team are they being funneled through reinsurance brokers, what's the what's the process.
To build up that book of business.
You touched on several of the channels Adam we have.
Our program team led by Jason Sears has overseen the fronting.
Efforts as well and they are.
They have terrific distribution or to the reinsurance relationships.
We have relationships with other non rated or lower rated insurance companies.
And then we also have John .
Jon Christianson I have brought up a couple of deals to the table through relationships. We have so I think it's all of the above.
Like you said it.
It's elephant hunting there.
So you can kind of know when to really lean in and go after something.
You don't have to.
Turnover too many stones.
Okay. Thank you very much.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, one moment, while we poll for questions.
Our next question comes from the line of Pablo <unk>, Zhang with Jpmorgan. You May proceed with your question.
Hi, Thanks.
First just on the funding piece will all of this call it $4 million to $5 million based on dementia premiums you provided.
Our purion 'twenty, two or will it be spread out between 2020 three just based on the numbers that you gave in.
When thinking about how this will affect earnings will all fall to the bottom line or are there any associated expenses to think about.
Yes. So this is tackling the first question this will be spread over the next two years right. So we will earn this very similar.
You are normal acquisition expenses were basically just.
For 12 months policies, we earned over the next 12 months. So that is $100 million of Mac talked about that as the full year written premium number. So that 80 to 100 will be built will be earned over the next two years and so that call it 5% to 8% fronting fee will be earned over the same period.
Going.
The other part of your question.
So when we think about that.
A little bit sorry.
There's not much incremental expense it should follow the bottom line Pablo yeah.
Youre exactly right, we don't need to add a lot of head count.
As I said, it's we're leveraging our programs team and other.
Senior leaders, so we should be it should be a pretty good margin.
But I will say we are.
Or infrastructure around that just to make sure that we do have the proper procedures in place to manage that when we think about how we still need premiums and claims audits. We're still looking at underwriting results, making sure that we are.
Looking at the collateral of all of the partners that we're dealing with to make sure that we have the right people in place to manage that.
Yep understood.
And the second one I had just a quick numbers question I was hoping you could provide color on some some of the line items that will build up to adjusted net income in 'twenty two so.
Specifically I'm looking at add back for stock comp and amortization as well as what youre, assuming for net realized gains or losses, because that does flow through.
Your adjusted number and that was a little larger than usual in the fourth quarter. Thank you.
Yes, so stock comp would you see that going up obviously, we did talk about some of the new arrangements that were done during 2021.
For the executive group. So the stock comp is going up obviously that is a standard non cash expense amortization is that most of that amortization is part of the.
Hawaii deal that we did last year and so that will continue to run off over the term of that deal I believe that is.
Call It seven to 10 year amortization period.
And then the last piece of your question then when we think about that the expenses.
Associated.
With the <unk>.
The transactions those are.
Shouldn't be you should be minimal, but certain things approaches we will be looking at those and adding those back as well.
Oh, Yeah, just to clarify because I was asking about investment gains or losses, I think oh, sorry, guys investing a whole lot of them really well.
Talk about that equity.
The equity exposure that we do have it has changed over time when we look at are.
Overall.
Investments, we think about those and we feel like we do have adequate capital in place when you look at the duration and the changes our mix. The casualty we talked about a little earlier those are longer tail. So that we do feel that we could take a little bit more equity exposure in our portfolio to help.
Manage some of the abilities to collect gains. So that has increased you did see that in the fourth quarter. So we do expect to have some gains and potentially losses from those as we continue to move on but we do not expect that to be material. As we said in the past, we do view ourselves as underwriters not investment managers, but we do.
Obviously, an adequate portfolio to play with so we do have taken a larger portion of our book into.
The equities, but these arent call it pure individual stock players. These are more index equity index funds that we're investing in.
Got it and are you able to provide a number on how much you're assuming in that 80 to 85 is it zero or is that some small positive number or just any color there would be helpful. Thanks.
Yes, probably we are not assuming any.
Equity gains or appreciation in their <unk>.
Arrow.
Alright, thank you.
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 to all for joining US. This morning, we appreciate your participation and questions and your support I'd also want to thank the Palomar team for their hard work and commitment over the last year as they are key to our success past present and future.
To conclude I'm very proud of our results and the position we are in as we begin 2022.
Our core products are benefiting from a strong market, which is driving both volume and price regulatory tailwind and the dislocation in the selected markets look like they are present further opportunities over the course of the year, our new businesses in existing products are scaling and they should drive 50% plus net income growth in 2022.
And then lastly, we have meaningfully reduced the volatility in our portfolio will continue to do so which should in turn generate consistent predictable growth. So hopefully you all.
Get a sense and ascertain our enthusiasm for 2022 and hopefully share. It. So we look forward to speaking with you at the end of the first quarter. Thank you and enjoy the rest of your day take care.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation during the rest of your day.
[music].
Yes.
[music].