Q1 2022 Palomar Holdings Inc Earnings Call
[music].
Greetings and welcome to the Palomar Holdings incorporated first quarter 2022 earnings conference call.
During todays presentation, all parties will be in listen only mode.
Following the presentation. The conference line will open for questions with instructions to follow at that time.
As a reminder, this conference is being recorded.
I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate your participation in our first quarter 2022 earnings call with me here today is Mac Armstrong, our chairman Chief Executive Officer, and founder as a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11 59 PM Eastern time on May 12, 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 mentioned 95. 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 annual report on Form 10-K filed with the Securities and Exchange Commission, we do not undertake any duty to update such forward looking.
These statements.
Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U S. GAAP a.
A reconciliation of these non-GAAP measures to their most comparable GAAP measure can be found in our earnings release at this point I'll turn the call over to Mac.
Thank you, Chris and good morning, everyone.
Today I'll provide a review of our strong first quarter results and an update on the progress achieved executing our near and long term strategic initiatives simply.
Simply put it was a very good quarter for Palomar as our topline surged more than 60%. We earned $17 $17 6 million of adjusted net income inclusive of a $1 3 million dollar realized and unrealized loss from our equity holdings and generated an adjusted ROE of 18, 1%.
Obviously, Chris will review these results in more detail, but I wanted to cut the chase before I went into my remarks.
When we began the year, we outlined four strategic priorities for 2021 generating strong premium growth to monetizing the new investments made over the course of 2021, three the sustained delivery of consistent and predictable earnings and for scaling our organization I'm quite happy to report that we made strong progress across all four initiatives.
During the quarter and I'd like to spend a few minutes updating you on each.
As it pertains to written premium growth. The first quarter was another stab example of our ability to sustain topline growth in the first quarter gross written premiums increased 65% as compared to the first quarter of 2021.
Given by continued strength in residential and commercial earthquake as well as in our E&S business, Palomar excess and surplus insurance company.
Looking at our lines of business in more detail I'll start with our earthquake franchise.
Our total earthquake book grew 24% in the first quarter with commercial earthquake growing 18% and residential earthquake, our largest line of business grew 29%.
Several factors drove the growth in the residential earthquake line, including but not limited to a new partnership with progressive the continued dislocation in the California, homeowners' market and the California earthquake authority officially stating they are reducing their reinsurance purchased by the equivalent of $1 billion.
These factors along with our existing marketing efforts led to record new business sales for residential earthquake in the first quarter.
The partnership with Progressive is one that I'm excited about as it is a solution to provide progressive homeowners policy holders outside of California, with a comprehensive earthquake solution being assumed reinsurance arrangement.
We're thrilled to partner with progressive and optimistic on the potential for this relationship.
As it pertains to the CA, we believe the continued uncertainty regarding their claims paying capacity provides considerable room for continued strong growth in this important and profitable line of business.
Beyond earthquake other product lines performing well in the first quarter include in the Marine which grew premiums of 133% year over year and is now our fourth largest line commercial all risk grew 37% year over year with the large majority of the growth coming from rate increases as opposed to exposure.
Flood premiums grew 31% year over year as the national flood insurance programs risk rating to pointed out starts to influence market this market conditions.
As previously discussed the NFIB rating action will likely generate a material price increase at renewal, which we believe creates opportunity to palomar to capture market share as we work through the year.
As it pertains to our Nathan casualty franchise, our real estate errors and omissions program as a stand out as it continues to grow rapidly with year over year growth of 151%.
Shifting to our E&S business, Palomar excess and surplus insurance company had another strong quarter generating $41 million of gross written premiums representing 71% written premium growth year over year inclusive of our fronting business. The gross written premium was $67 million.
<unk> growth was primarily driven by its main products, namely commercial earthquake national layer and share commercial property in builder's risk or recently lost E&S products, including professional liability excess liability and contractors liability are beginning to ramp and we expect it to be significant contributors to our growth.
Pass it continues to be an important growth driver Palomar, we believe the business can become 50% of our premium overtime.
Our second 2022 strategic priority as monetizing the investments made over the last year, or so and new products and businesses.
Along these lines I'm very pleased with the initial success of Palomar front lots of September Tom or front achieved almost $30 million in gross written premiums in the first quarter. One of its initial success stories is a fronting program for an innovative cyber MGA and a world class panel of reinsurers that has gained strong traction in the market and are taking advantage of the remarkably hard mark.
Pricing environment in the cyber market.
On the whole our fronting programs are performing well from an underwriting and collateral perspective, and we continue to believe that adding a fee based revenue stream to our business will further fortify our earnings base given our strong start to the year. We remain confident in our goal of building the fronting business to $80 million to $100 million of managed premiums this year.
We're also pleased with the progress that our newly hired underwriters are making as they build their franchises in segments like general casualty professional liability and non catastrophe exposed excess property.
While still in their early stages of formation. These businesses will be important growth drivers for Palomar is in the year ahead.
That said our focus over the first half of 2022 is to thoughtfully build these businesses.
The necessary talent infrastructure and support to enable our underwriters to scale their franchises.
During the quarter considerable efforts were made and the procurement of quota share reinsurance distribution network build out and the development assistance forms of files, while the premium generated in the first quarter was modest we encouraged with the quality of business bound.
The third strategic priority is focusing on earnings predictability and reducing volatility in our results. While growth is certainly a priority. We're also laser laser focus on growing profitably and properly managing the risk in our portfolio.
Along these lines, we took three important steps during the first quarter to achieve this goal.
First we renewed our aggregate reinsurance program and in the process move the floor on our adjusted ROE from 10% to 14%.
We believe this program creates real value for our shareholders by essentially coloring. The downside of our financial results second we successfully placed new quota shares for our new professional lines and casualty products.
These quota shares allow us to walk before we run as we conservatively build the books of business for these important new lines. They not only reduce our net limit exposed to an account and the impact of a shock loss on instant book, but also permit us to generate fee income.
The architecture of the quota shares enable us to proceed cautiously and if you're right to a 90 combined ratio generate half of the product's income from seeding commissions and half from underwriting.
Further demonstration of our focus on fee income and earnings predictability as an example, taking professional liability program, where we assumed 25% of the risks can cede off 75%.
We will earn a 10 point margin of 25% of risk that we underwrite assuming a 90% combined ratio.
Then around a 5% override in excess of our cost on the 75% of ceded premium. So the majority of our profits come from ceding Commission.
Third we continue to reduce our continental wind exposure are non Texas homeowners business is now officially in run off and we are not growing the exposure of our national layered in share commercial property business.
Our fourth strategic priority of scaling the organization what makes our platform so attractive to new hires that we can offer them industry, leading technology and infrastructure combined with a wealth of talent and expertise that affords our new underwriters the opportunity to build a platform capable of delivering our products and services and the fastest most efficient way possible.
It's a competitive advantage as a strong selling point to experienced talent in our industry. Our entrance into casualty is being led by market experts with strong track records of success, you saw Palomar as an attractive platform to build their business.
We continue to bolster the analytical actuarial technologic technology and operating expertise to support our growth key hires this quarter included Eric Kennedy.
VP of analytics, who formerly hopefully the property analytics team at the global reinsurance broker and Denmark ASCII another actuarial fellow to augment our budding casualty franchise.
As you can see we've made significant strides executing our strategic initiatives in the first quarter as we strive to position Palomar for sustainable growth predictable earnings.
And reduce volatility.
At this point I'd like to spend a few minutes updating you on what we're seeing in the market.
From a pricing standpoint, we are seeing a sustained rate increases across all lines and pockets of business where rate increases are accelerating and commercial earthquake. The average rate increased ticked up from the fourth quarter of 2021 as rate increases moved up from approximately 5% to 7% in the quarter. We expect further hardening for the next few quarters in this line of business.
As previously mentioned, we're not looking to grow the exposures in our wind exposed national layer and share commercial property business as we believe we can generate sufficient growth from rate.
For this line of business, we experienced risk adjusted rate increases of 22% year over year with over 14% risk adjusted rate strengthening in Q1 alone.
This market is becoming increasingly dislocated as the reinsurance market hardens.
Generally seen continued rate increases combined with improved terms and conditions.
As it pertains to inflation. In addition to the use of third party license data, we can leverage our builders' risk program and audits construction projects on a monthly basis to form a perspective on the cost of materials and labor.
We are incorporating these factors into our underwriting and marrying them with rate increases and higher inflation guards for personal lines like residential earthquake, we increase the inflation guard from a historical level of 5% to 8% this year, while our casualty lines remain in their infancy, and therefore don't offer much in the way of renewal price increase commentary, we are getting rate increases of approximately.
<unk> hundred 57% unexpired terms with certain segments professional lines and general liability seen greater increase.
Turning to our six one reinsurance renewal we are currently in the marketplace and our program and believe the combination of rate increases and reduction in our continental hurricane exposure pretends a successful renewal while it is undoubtedly a hard reinsurance market. Our unique program that includes ILS market support remains appealing to reinsurers in IL.
As investors.
We are more than 60% place at this point and expect to finalize the placement shortly we will provide an update to the market when the placement is complete.
Turning to capital allocation, we will continue to see operating leverage in our business model and financial metrics as we scale. Additionally, we're generating cash from operations, which provides sufficient capital to fund our growth initiatives, while providing ample room to execute on our $100 million share repurchase program.
As a result, we were active with our repurchase program as we saw and continue to see our shares at levels. We believe are undervalued, especially in light of the numerous growth vectors in our business and the adjusted ROE for a 14%.
Conclude we're very pleased with our results and the momentum in our business as we look out to the remainder of the year.
We are reiterating guidance for the full year 'twenty, two where 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%.
This range factors in the additional vessels that we need to make in talent and systems infrastructure. The current projected cost of reinsurance.
And the unrealized losses on equity securities in the quarter.
With that I'll turn the call over to Chris to discuss our results in more detail.
Thank you Mac. Please note that during my portion when referring to any per share figure I'm, referring to per diluted common share 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 a net loss we've adjusted the calculations accordingly.
For the first quarter of 2022, our net our net income was $14 5 million or <unk> 56 per share compared to net income of $16 6 million or <unk> 63 per share for the same quarter in 2021, our adjusted net income was $17 6 million.
Or <unk> 68 per share compared to adjusted net income of $19 $3 million was <unk> 73 per share for the same quarter of 2021.
As compared to the prior year results. It is important to remember the impact of winter storm year. He had on our results for the first and second quarters of 2021.
Yuri resulted in favorable net losses in the first quarter of 2021, we did incur additional reinsurers reinsurance expense were ceded written premiums in the first and second quarters of 2021.
Gross written premiums for the first quarter were $170 9 million, an increase of 65% compared to the prior year's first quarter. The discontinued strong growth was driven by a combination of increases in premiums across our core products as well as gain momentum and our recently entered lines such as printing.
Ceded written premiums for the first quarter were $89 $6 million.
Representing an increase of 106, 5% compared to the prior year's first quarter. This increase was primarily from quota share reinsurance from our new fronting business as well as increased catastrophe <unk> reinsurance related to you where the exposure growth.
Ceded written premiums as a percentage of gross written premiums increased to 52, 4% for the three months ended March 31, 2022 from 41, 9% for the three months ended March 31 2020.
Our new fronting business was the primary driver of the increase in this percentage slightly offset by the decrease in <unk> percentage compared to last year that included the impact of yours.
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 net earned premiums for the first quarter were $76 million, an increase of 61, 6% compared to the prior year's first quarter. This increase is due to the growth and earning of higher gross written premiums offset.
The growth in earning of higher ceded written premiums under reinsurance agreements.
For the first quarter of 2022 net earned premiums as a percentage of gross earned premiums were 54, 7% compared to 51, 5% in the first quarter of 2021 and compared sequentially to 55, 2% in the fourth quarter of 2021 as previously indicated the launch and expected growth of our fronting business could push push this ratio.
Below 50% on an annual basis.
Add consistent fee income that will enhance our ROE and bottom line.
Losses and loss adjustment expenses incurred for the first quarter were $15 million due to attritional losses of $14 $5 million in unfavorable prior year catastrophe loss development of $5 million.
The loss ratio for the quarter was 19, 7% comprised of an attritional loss ratio of 19, 1% and our catastrophe loss ratio of <unk>, 6%.
Our expense ratio for the first quarter of 2022 was 56, 8% compared to 69, 8% in the first quarter of 2021 on an adjusted basis. Our expense ratio was 52, 4% for the quarter compared to 62, 7% in the first quarter of 2021 and compared to 55, 7%.
In the fourth 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 first quarter of 2022 was 22% compared to 21, 2% in the first quarter of 2021 and compared to 22, 2% sequentially in the fourth quarter of 2020.
The decrease was driven by additional ceding commission from our new fronting business that is netted in acquisition expense and overall changes in our mix of business the ratio of other underwriting expenses, including adjustments to gross earned premiums for the first quarter of 2022 was 9% an improvement compared to 11, 9% in the first quarter.
2021, and compared to nine 2% sequentially in the fourth quarter of 2021, and as we continue to invest in talent systems and our infrastructure, we expect our business to scale over the long term, but I wouldn't be surprised if this ratio was flatter in the coming quarters with those investments.
Our combined ratio for the first quarter was 76, 5% compared to 64% in the first quarter of 2021, our adjusted combined ratio was 72, 1% for the first quarter compared to 53, 3% in the first quarter of 2021.
Which included the unsustainable negative loss ratio in the first quarter of 2021 from here.
Net investment income for the first quarter was $2 6 million.
An increase of 16, 2% compared to the prior year's first quarter the.
The year over year increase was primarily due to a higher average balance of investments held during the three months ended March 31, 2022, due to cash generated from operations and by slightly higher yields on our invested assets are.
Our fixed income investment portfolio book yield during the first quarter was $2 three 4% compared to $2 two 4% for the first quarter of 2021, the weighted average duration of our fixed maturity investment portfolio, including cash equivalents was four seven years at quarter end cash and invested assets totaled $533 2 million as compared to.
$436 7 million at March 31, 2021.
For the first quarter, we recognized losses on investments in the consolidated statement of income of $1 3 million compared to losses of $739000 in the prior year's first quarter. We will continue to take a conservative investment approach, which may impact, our recognized gains and losses from quarter to quarter.
Our effective tax rate for the first quarter was 23, 8% compared to 17, 3% for the first quarter of 2021 for the first quarter of 2022, the tax rate differed from the statutory rate due to nondeductible executive compensation expense.
Stockholders' equity was $380 4 million at March 31, 2022, inclusive of the share buyback and unrealized changes to our investment portfolio compared to $394 4 million at December 31, 2021 for the first quarter of 2022 annualized return on equity was 15% compared to 18 <unk>.
<unk> for the same period last year, our annualized adjusted return on equity was 18, 1% compared to 28% for the same period last year.
As of March 31, 2022, we had $25 million 817059 diluted shares outstanding as calculated using the treasury stock method, we do not anticipate a material increase to this number during the year ahead.
For 2022, we reiterate our previously provided adjusted net income guidance range of 80 to 85 million.
Presenting 54% year over year growth and adjusted ROE of 19% at the midpoint of the range consistent with previous guidance. These estimates do not include any losses from major catastrophic events. As a reminder, we expect continental U S wind projected net average annual loss our net <unk>.
Of approximately $6 million as of September 32022, the <unk> win.
This net hail as an industry metric used to assess continental hurricane and severe convective storm exposure during the quarter, we repurchased 219061 shares or $13 million worth of shares under our previously announced two year $100 million share repurchase program, we have approximately $87 million remaining under the author.
Rins program, while we are not pivoting from our established growth strategy. We view our current shares is undervalued and we will take an opportunistic approach to share repurchases under this program.
While our goal of investing for profitable growth remains our core focus we believe the share repurchase program is an appropriate use of our capital in order to increase long term shareholder value. This bifurcated capital allocation strategy reinforces our confidence in the strategic direction of the company for long term growth.
With that I'd like to ask the operator to open the line for any questions operator.
Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys once again Thats star one on your telephone keypad, one moment, while we poll for our first question.
Our first question comes from Matt <unk> with JMP. Please proceed.
Hey, Thanks, good morning.
Just mark I wanted to first question you mentioned about the recent actions taken by the <unk> and I was hoping you could expand on that one I just want to make sure I'm understanding it right that.
No.
That by buying less reinsurance more assessment risk shifts to the member companies and therefore, theyre going to be less eager to sell a CA quite policy and two is you know when I saw the news it was rather late in the quarter and so how much of that are you seeing any of that yet or is this something you expect to impact results as we go forward.
Hey, Matt good.
Good afternoon.
And depending on which co chevron or but.
Yes, it's a great question and I think first and foremost youre right. It was the actions of the CEO . We're later in the quarter and so.
The declaration of the reduction of around.
One 1 billion to of claims paying capacity.
Really hadn't taken.
Full root in the market.
In the first quarter and I think the market frankly is still digesting it as it pertains to.
Participate insurers I think what it does do is create a circumstance where there is less claims paying capability, which means there is a higher potential assessment applied to them.
As you recall.
That would mean that they have to put more capital up but also it means that if they are likely.
To be more inclined to find alternatives to the CA and there was a decree in December which did allow.
Participate insurers to explore alternatives in conjunction with to the CA and in conjunction with the mandatory offer so long story short.
We think this is something that will really probably impact.
Or extend the growth in this line on a prospective basis rest of this year into next year and when you marry that with just overall dislocation in the California, homeowners' market, which we've talked about it's a nice catalyst for extended growth.
To residue for an indefinite period of time.
Okay great.
Yes sure.
Oh, sorry, and I think the one thing is also that the claims paying capacity does potentially impact is just the ratings of the cei and so I think Fitch took some action.
There has not been others, but that could also lead to a bit more come off too sorry.
Alright, great. Thanks.
Thank you. Thank you that's great and then.
One quick numbers follow up maybe for Chris.
Sorry, you broke out the.
Palomar front premiums as a separate line this quarter.
Just remind us what I know I think last quarter Q4 is kind of is the first full quarter of operations. What was the what was the gross written premium in Q4 for that business.
Yeah. It was it was modest in Q4 I don't think we've disclosed the exact number of what that was yet, but I would say less than $5 million in Q4 of last year and last year or did you put that was in the other bucket. So it was it was modest.
Yes, yes.
Okay, great. Thank you for the answers I appreciate it.
Thanks, Matt.
Our next question comes from Pablo <unk> with JP Morgan. Please proceed.
Hi.
Uptick in the accident year loss ratio was a bit higher than I would've thought.
And I assume a lot of it was driven by the new lines Youre, writing was there anything unique about this quarter and are any of the or the loss of the new lines consistent with your expectations and I.
I guess you know.
Given that you're growing faster in those lines I was hoping you could provide some perspective on how that loss ratio could progress over time.
Yeah.
Thanks, Pablo Yeah, no that's a great question.
Look at the loss ratio, it's important to remember a few things first and foremost our business is still anchored by the binary lines, our Hawaii hurricane or earthquake lines are relatively binary and obviously not contributing to the attritional loss ratio.
You exclude the fronting premium from that book has remained.
Relatively consistent about 55% of that premium is still from those binary lines of about 45% of the premium from the lives of Attritional loss. So it hasnt changed the dynamic too much. It's also reported remember anything about fronting fronting does not add anything to the loss ratio or TV net earned premium the only thing that really does is it kind of reduces the acquisition expense.
<unk>.
And also when we think about the loss ratio. It's important to note that these lines are still very profitable lines. These are lines that we are comfortable with when you look at it. These obviously we've said this before as long as they are sub 100, they are accretive to the ROE and the bottom line, but when you look at it on a gross basis. When you look at Q4 of these lines were writing or probably around 40%.
Percent loss ratio in total so still very profitable lines of business specifically on the first quarter. Obviously it is up a little bit from where it was in Q4 I think if you remember our adjusted number for Q4 was about 15, 7% I had indicated that I expect that to go call on one to two points.
Quarter up but on an annualized basis that are expected to be around 3% to four points up for the year. This is well within that range and so we're very comfortable with where it's at ICU.
Also want to reiterate that generally the first and second quarters of the euro a little bit heavier for US we are exposed to tour hail and other exposures that definitely are higher in the first two quarters of the year. So there is potential for that number to decrease or stay flat for the year, but when I look at it on an annualized basis, 3% to four points up is well within the range.
Probably a little higher sequentially than the call. It one to two points that I'd indicated, but well within our comfort zone, so with that I don't expect it to move.
Timing.
For the remainder of the year it could be lower it could be higher but I would expect that three to four points on an annualized basis to be a good target for the full year results.
Pablo This is Mac and Chris described it well, but the only thing I would add is if you look at.
So the lines that are major contributors it tends to be the <unk>.
Specialty homeowners book and as a reminder, that a good portion of that specialty homeowners book is going into run off.
So when you combine the fact that it's going into run off I think that add some stability to what Chris was talking about and maintaining it and that.
Plus or minus three to four points year over year.
But then also that is this is tends to be seasonally.
Right there is higher <unk> activity in the first and second quarters of the year. So we think it's well confined and Moreover, the newer lines.
Casualty re.
Real estate, DNO and flood, our within our targets and frankly performing.
Better than expected loss ratio.
Thank you for that and my follow up.
<unk> question here, how much fee income the hunting produced in the quarter.
Well, we haven't broken out specifically what that fee income is obviously, we wrote about $30 million, we are earning that premium and earning a fee I would say, it's generally going to be.
Plus or minus around that 5% range. So you can do the math on depending on when that came in the quarter and how you're earning it but no. So we'll take that let's call. It 5% fee over the next 12 months from when it was written but we haven't disclosed the specific number but the ones that you can note. When you look at it sequentially and you look at the acquisition.
On a gross earned basis. It was about 22% in Q4 and that has decreased to about 20% in the first quarter of this year. So you can kind of see that ceding Commission.
Additional ceding commission run through and that's really driven by the fronting premium is a little bit of a mixed differential from quota shares on the other attritional lines of business, but the main driver is that fronting premier that fronting ceding commission are lowering the acquisition expense.
Got it thanks, Chris.
Our next question comes from Mark Hughes with <unk> Securities. Please proceed.
Yeah. Thank you.
Could you talk about the capital situation you talked about you bifurcated strategy, you're obviously growing very rapidly and buying back some stock.
Much more room do you have in terms of.
Your current capital base.
Obviously with your.
Returns being pretty high that's adding to it so just some thoughts.
About your runway from here.
Sure Mark.
This is Mac and I will take the first crack and then Chris can chime in.
I think in the first quarter, we bought $13 million stock back and that was in conjunction with the $100 million share repurchase program that we authorized thats over a two year period of time, so kind of on a $50 million run rate. If you would but that's also a reflection of where the stock.
Trading and the values that we saw.
It is important to point out that holding aside.
Unrealized changes in the investment portfolio.
We still generated increased surplus on a pure cash flow basis.
Net income was $17.
<unk> 6 million and we bought back 13 million of stock. So I think we're going to want to continue to build our surplus opportunistically buy back stock as we see it present itself and then where we are writing right now from your net premiums earned to surplus basis, we still feel that we have ample capital to do.
Both those things.
No.
Certainly cushion to grow free cash flow buy back stock Opportunistically and not our growth plans impeded at all.
Specifically on numbers that Matt was talking about on our ability to write premium.
Trailing 12 months basis, net written premium to any capital it was a little bit higher than it was last quarter. It's about eight five times right now, but still well within the range, we were purely a cat company.
I've said that we would be comfortable writing up to a one to one but with the growth in the other lines that are not as exposed some of your attritional lines, whether it be in the marine whether it'd be the casualty lines that are longer have can have a longer tail, we definitely feel comfortable going over that one to one ratio. So we still have ample capital room from a net written premium basis too.
Grow the premium base and still look at buybacks opportunistically as our share price still.
A little undervalued.
And then from a cyclical standpoint, Mac you had pointed out that the.
Pricing increases were sustained and accelerated in some cases, when you say sustained or you'd seen.
Sustained at the same rate of the increase or are you seeing any kind of deceleration there seems to be.
You know.
A bifurcated.
To use the word oh, yeah that whether there's some deceleration or or.
Sustained or acceleration.
Little more on that would be helpful.
Yeah, absolutely. So again I think it is sustained or excuse me.
It's sustained and certain products its accelerating or is it really just bifurcate it so.
The segments of our book, where Youre still seeing rate increases call it 5% to 7% tends to be the newer lines like the casualty lines.
That being said there are within the casualty segment pockets, where youre getting.
Increases in that 10% to 20%.
Uh huh.
G. L package. They may have some auto exposure for instance, or our sub classes within there that had higher loss activity.
For us where we're seeing it accelerate again is an earthquake and.
The commercial all risk so that what we call our national layered in shared property program.
Where we're seeing it accelerate and then I think what you have in the residential business.
Quake, we are increasing our inflation guards, we are using our E&S company more effectively especially for higher value accounts, where we can get again better risk adjusted returns. So really is product specific but we don't have any line within our portfolio where <unk>.
Rate increases or flat.
<unk> seen it either.
Modestly.
Consistent levels or accelerating.
And why the acceleration in commercial quake.
Capacity.
The hardening reinsurance market.
And so therefore, there is a capacity limitations.
Or the cost of risk transfer is higher than the prior year.
So that's and that's probably more pronounced in kind of mid mid size to large commercial accounts and there'll probably be a catch up in small commercial account that youll see but as I mentioned on the call. You know we went from an average rate increase of 5% in the fourth quarter to 7% plus in the first quarter.
And that was a reversal of I guess, probably three four quarters.
Decelerating rate increases, so and I don't think thats going to reverse back I think we're going to continue to see acceleration of rate increase.
Thank you very much.
Our next question comes from Dave Martin Madden with Evercore ISI. Please proceed.
Hi, Thanks.
I just had a question just as a follow up for Chris on the Attritional loss ratio.
You know continuing to hold the outlook of it being up three to four points for full year 2022 versus a 2021.
I guess could you just remind me what base I should be using because I know there were some exited lines.
That were you know that are obviously gone now that impacted.
That impacted the ratio last year. So I'm wondering if you could just help me out on that on that point.
Yes, so the right way to think about the base of the way I think about the base is when you look at the fourth quarter of last year.
Blended or the adjusted loss ratio after you back out the.
Admitted all risk book that were running off last year and then we did still have some losses from in the fourth quarter that blended loss ratio or the adjusted loss ratio excuse me was about 15, 7%. So for me that's my starting point sequentially as the book evolves and I think about where it's going to go forward 2022.
On an annualized basis, I think thats going to be up three to four points for the full year.
And previously I would also say I'd say, if you think about that sequentially that could be one to two points a quarter, but.
But also I'd also say is that could be plus one quarter or minus for the quarter. It's still kind of be within that comfort range. I think the number this quarter was definitely within that range I'd say, it's a little bit higher than we'd like to see but well within the comfort zone, especially when you think about Q1 and Q2 being a little more volatile for our Attritional lines.
When you think about that toward hail season in Texas, where we still have a large portion of our specialty homeowners book inland Marine. It does also have a little bit of exposure. There. So nothing surprising in that number and I think definitely something in the region still feel comfort about blending.
Do that three to four points up from that $15 7 million I talked about it a little bit earlier for.
For the year.
Got it thanks and.
Mac I guess, just a kind of a related question on just your loss trend assumptions and if you've made any changes.
In the quarter in response to the inflationary environment on some of the short tail lines.
Yeah. So.
It's a good question, David I think on the short tail lines. The loss trends. We are we think we have a very good sense of inflation.
Whether it be how we are incorporating our third party data analytics with our frontline information that we're getting from our builders' risk book.
What we are doing is.
Measuring and accurately gauging, the ITV and making sure that the base level exposure is accurate and that's where we use those data sources, both third party and proprietary and taking what we're seeing in builders risking using there for specialty homeowners then we're overlaying and inflation guard them we're overlaying.
Rate increases.
It's kind of a three pronged approach. So I guess, that's a long winded way of saying that we feel that we have the right loss picks and based on the utilization of those three tools.
And then.
As we look at things going forward, we can continue to use the E&S company for potential certain selected residential risks to be even more.
Nimble so to speak and not be reliant on insurance department approval for certain rate changes and thats, probably most relevant for residential quake.
Hurricane.
And those short tail lines, you're you're touching upon touched upon.
Okay. That's that's great color. Thanks, I appreciate that and then if I could just sneak one more in.
Yeah. The adjusted expense ratio at 52 point for Yeah that was definitely.
You know better than I had thought just wondering the sustainability and future improvement.
In that from these levels I think Chris you made some comments.
That the underwriting the other underwriting expense ratio.
It would be flattish for the rest of the year.
But I guess, how should I think about the acquisition ratio as you ramp up the fronting business over the course of the rest of the year.
No. That's a great question and so when I think about the other underwriting expense.
And then you go back to my commentary on Q4 or for Q4, I definitely said that it could potentially be flat to up it improved a little bit this quarter. So we are still seeing.
Some good dynamics, there and like I said on the prepared remarks, I wouldn't be surprised if it was flattish for the near term quarters, So maybe a quarter or two but I definitely expect it to still improve and definitely improve compared to last year and then on a long term basis I definitely feel that there is still plenty of potential in the other underwriting.
Fences for margin expansion and to scale the organization, but.
Good lead it into the near term I would you expect to see more.
Faster improvement on the acquisition expense ratio and that is really driven by the fronting premium you saw it this quarter.
Specialty compared to last year on a gross basis I talked about a little bit earlier.
Reducing expense in Q4 on a gross basis was 22% it's 20% in Q1 I would expect that to continue to improve so I would expect to see continued improvement in the near term from the fronting business Ceding Commission driving down acquisition expense and expect to see that throughout the remainder of the year, especially.
As Matt talked about we would like to get to $80 million to $100 million of printing premium. We wrote 30 in the first quarter. So I think we're on track for that but with that premium I expect the acquisition expense ratio to improve faster than the other run rate expenses, but still expect long term improvement in the other internet.
Expenses.
Great. Thank you for the color.
Our next question comes from Meyer Shields with K B W. Please proceed.
Great. Thanks, very much for taking my question.
Mac you talked about raising the inflation guard two 8%.
Can you, let us know I guess, what the filing requirements and status of that is and I guess my second related question is in the current environment is 8% of all.
Hey, Barry Yeah, that's a great question.
Fortunately there is no filing requirement.
Associated with our approvals associated with that so we can implemented.
Do you think 8% is enough because you have to remember this is for residential earthquake.
We have.
<unk> had a 5% inflation guard in place since we formed the company and so you think about a policy that was.
Bound in year, one of operations and we average 90 plus percent policy retention for that line would have something thats since its.
Initial.
Bind the underlying Ti V and the underlying exposure would have increased more than by more than 50%.
Furthermore, we do is when we underwrite and price that.
Risk we take.
The greater of our estimate or.
Estimated homeowners policy. So we think we rely on the homeowners policy estimate for our own to determine what is the base Civ and then we also again manage the portfolio and we're constantly looking at using a tool like that from Corelogic and our own what the underlying caught replace.
The cost is in the market and overlaying that again thats, how we come with our base level against a homeowner's policy to calibrate. So that's a very long winded way of saying, we think the 8% inflation guard is sufficient but this is a tool that we've had in place well before 2021, and 2022 inflationary pressures start to rear its head.
<unk>.
No thats, Okay look the answer is more than welcome. So that's great.
Next question, I guess and I apologize if I missed it just I was hoping for an update on new money yields in the investment portfolio compared to book yields.
Because I assume that most of your investment portfolio is fairly short tenure.
Yeah.
Yes, Youre right.
It is fairly short tail.
Especially when you start to think about the growth from fronting premium just to grow the investment portfolio. The new yields that we're seeing right now around 3.8% or so compared to historical yields of two in a quarter. So there is a pick up.
And it's obviously, it's not at the expense of.
The journey, so the credit risk remains identical.
So we think that is a good thing for us long term, but.
Palomar makes the majority of its money through underwriting and it always will.
But.
That's not a bad I.
I guess tailwind to have.
Talk to you the downside one last question if I can.
Did you discuss how the fronting premium production in the first quarter compared to your expectations.
Sure.
It's exceeded our expectation we said we wanted to do $80 million to $100 million, we feel very good about that number.
As I mentioned.
My remarks, we have one large deal with a very reputable and strong performing.
Cyber MGA that Hasnt been terrific panel of reinsurers are basically funding for those reinsurers.
As you know mirror the cyber market is very hard and so the rate that they are seeing their exceeded our initial expectations.
The one thing that I would temper that with is when we put a lot of these programs together, we do put a premium caps on them, because we want to be mindful of collateral or not.
Overextending, our exposure, but when you have rates that are 50% to 100% up depending on the size of an account the underlying pip is meaningfully less than we thought so that's a nice dynamic to have so we are exceeding our projections on the frontier side and we have a nice pipeline of deals.
That we think will help us.
Build this into a nice franchise.
Perfect. Thank you so much.
Thanks, Matt.
Our next question comes from Tracy <unk> with Barclays. Please proceed.
Hi.
<unk> seen the breakout in your disclosure.
This subsidiary level premium so I noticed the E&S premiums now represent nearly 40% of your mix and I'm just wondering prospectively, how you think that could shift over time.
Yeah Tracy.
Good observation.
We're pleased with how the E&S company is trying to EMEA and it was 40%. We said that we think it can be 50% of the premium now the one thing that I would temper the 40% with is some of that coming from fronting.
The fronting.
As I mentioned.
A real number in the quarter on the E&S.
<unk> was.
I can remember.
$50 million plus or minus.
40 million excuse me, it's $41 million. So it was closer to 25, 26% of the book when you exclude the fronting when you include fronting it was 67 million. So that gets you to that 40% number so low.
Still means we still believe that they can get to 50% and thats on the core business that we are underwriting and retaining risk on.
The frontier will potentially inflate that.
As we use both the admitted and the E&S company.
Got it and then just looking at our fronting business I mean I recognize these days most reinsurers are hybrid they also had primary operation.
What structurally do they need from you versus maybe writing this risk on their own paper and then we'll be getting an internal reinsurance back.
Sure.
Yeah, Tracy it's really deal specific.
We have one deal that we are fronting for another insurance company that has a statutory limitation.
We have another deal where that we've just talked about where it's really an MGA that has that we have the relationship with we bring them a panel of reinsurers.
So those reinsurers could potentially try to go and do it on a primary basis, but they'd be dislocating, the MGA or ourselves who.
Are in the market so that the deal the MGA deals they need a primary front the reinsurers that we work with are the reinsurance business not in the primary business and then we have other deals where.
It may be for another insurance company that doesn't have the requisite a M. Best rating. So it's it's a hodge podge of transactions that will do is a fronting carrier.
And we also view <unk> as a great R&D tool for us to learn about markets, where we may end up taking some risk in time and so in doing that.
We are the risks there are to some degree, but really control the program. It can steer the reinsurance as we deem fit.
Great just maybe one other question I remember years ago, there was an issue in industry with reinsurance recoverable.
A large part of balance sheet and just given that you do see a lot of your premium is that a metric that you're watching.
Yes, absolutely.
I think we I feel very good about the quality of our reinsurers.
And we also feel very good that we have a rather diverse reinsurance panel that's over 60 panelists and no one is more than 6% to 7% of the.
Total limit.
We also have cat bonds, where its collateralized, so but that being said we.
Constantly look at the underlying credit ratings of our reinsurers are brokers have security panels.
That day.
Report back to us on we have provisions in our reinsurance contracts that gives us the right to call.
If someone is downgraded and.
And force a redemption so to speak.
So it's something that we actively look at.
And.
Fortunately, we have never had any issues to date with recoverable.
John what in my head when.
When I say that yes, I would say financially obviously when we look at this from a seasonal standpoint, and a credit standpoint and so.
We look at the activity that we had in 2020 in 2021, we did have some learning we still do have some reinsurance recoverable, we evaluate that on a quarterly basis to see if any changes have happened to our reinsurers and anything any action needs to be taken but we have not had to decrease our receivable or take a write down on any of our receivables because of <unk>.
Credit quality, specifically on the printing side.
Depending on the quality of the reinsurer, we run each of our counterparties through a collateral analysis to determine whether or not we need and how much collateral where we need to collect we look at their size capital structure capital structure history licensing and authorization to determined to that type of capital when we look at the unearned premium.
We look at the expected losses, and then depending on the counterparty, we could be collecting 100% to 150% of that are required collateral from.
The reinsurer involved to make sure that we do have adequate capacity on high end and make sure that that is either entrust.
We are either holding any kind or looking at different types of arrangements to make sure that we do have that cash available. So it's something that we are very focused on and make sure that we understand to make sure that there is no additional risk that we're taking from the reinsurance parties that are involved in these transactions.
Great. Thank you.
Thank you at this time I would like to turn the call back over to Mr. Armstrong for closing comments.
Terrific. Thank you operator, and thanks to all of you were able to join we appreciate your participation and questions and importantly, your support.
I'd also want to thank our team at Palomar for their exceptional work.
They are instrumental in our success.
So to conclude.
I'm proud of our results and the progress we made executing against our 'twenty two strategic initiatives during the quarter.
Did indeed deliver.
<unk> growth, we monetize our and continue to monetize our new investments.
We are enhancing our earnings predictability and we and we're scaling.
We do believe that we can continue to cultivate the new businesses harvest the existing ones and attract outstanding talent to the company.
And we have the foundation in place to deliver strong growth at or better than industry average Roe.
That will generate value for our investors and shareholders. So along those lines. We are thrilled to announce that we will be hosting an investor day on June 15th in New York City to discuss these topics in more detail. We hope you can join our full team and business has for a deep dive into our strategic plan that we are calling Palomar <unk>.
We will be sharing further details on the event in coming days, which we posted the IR section of our web site. So we look forward to seeing you in New York June 15.
You again and enjoy the rest of your day take care.
Thank you. This does conclude today's teleconference and webcast you may disconnect at this time and thank you for your participation have a great day.