Q2 2022 Palomar Holdings Inc Earnings Call
Good morning, and welcome to the Palomar Holdings, Inc. Second quarter 2022 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 call is being recorded.
I would now like to turn the call over to Mr. Chris Your Cheetah Chief Financial Officer. Please go ahead. Thank you operator and good morning, everyone. We appreciate your participation in our second quarter 2022 earnings call with me here today is Mac Armstrong, our chairman and Chief Executive Officer as a reminder, the chair.
The replay of this call will be available on the Investor Relations section of our website through 11 59 PM Eastern time on August 11 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.
Brooding, 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, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U S. GAAP.
A reconciliation of these non-GAAP measures to their most comparable GAAP measure can be found in our earnings release at this point I'll turn the call over to Mac.
Thanks, Chris and good morning, everyone.
We're very proud of our strong second quarter results quarter highlighted by 69% gross written premium growth adjusted net income of $18 7 million and adjusted ROE of 19, 7%.
In addition to the strong financial results during the quarter, we introduced our investors in the market broadly the Palomar to X <unk>.
Intermediate term objective of doubling adjusted underwriting income and maintaining an adjusted ROE of 20% the organic growth.
It's also a philosophy that continually assesses our product suite to ensure there is enough organic growth opportunity to double the adjusted underwriting income of a business and an evergreen fashion.
As a reminder, key principles of Palomar to ask include but are not limited to profitable organic growth.
Portfolio anchored by binary slash no attritional loss business, namely earthquake.
Continued reduction of non binary catastrophe exposure.
A conservative reinsurance strategy fee income build out scaling the business with technology and process and a commitment to ESG.
Our second quarter results are a clear demonstration of executing our Palomar to ask and the four strategic initiatives that we outlined at the start of the year wake up everyday thinking about how we will double power Marsh adjusted underwriting income.
And I'm pleased to say we are firmly on track to do so as our products continue to deliver strong growth and the investments that we've made into new lines of business are ramping up.
As we look to the second half of the year and beyond.
Turning to 2022 strategic priorities you made significant progress across all four components in the second quarter.
First priority generating strong premium growth is abundantly clear.
And our record gross written premium of $218 7 million in the quarter, which equates to 69% growth over the prior year.
Notably premium in our earthquake business grew 47% and accelerated pace for Q1.
We saw continued record new business in our largest residential earthquake products and increased demand for our commercial earthquake offerings. It is important to highlight that the strong organic growth achieved in our residential earthquake line was not the result of both changes at the California earthquake authority looking forward. We continue to believe that the residential earthquake production will remain strong as the California.
Homeowners market remains dislocated and as the E. Ultimately reduces their exposure in the market.
Turning to our commercial earthquake product the hardening reinsurance market as I do capacity pullback.
An accelerating rate increases as we procured incremental reinsurance limited June one we are well positioned to not only take advantage of the capacity constraints in the market, but also optimize our book to cover the incremental reinsurance expense and maintain our margins.
While the earthquake lines performance stellar levels the strength in topline was broad based.
Our inland marine product grew 98% year over year commercial all risk before 2% year over year with nearly the entirety of the growth coming from rate increases and portfolio optimization as opposed to your exposure additions.
Lastly, our newly launched casualty franchise continues to build with our professional liability lines growing 36% sequentially and 225% year over year.
Tactics, our E&S business increased premiums, 200% year over year with a total of $102 4 million.
This growth was primarily driven by its main products named.
Namely commercial earthquake commercial all risk and builders risk.
Palomar front also generated a meaningful amount of premium domestic excluding Palomar front, Patrick premiums still grew an impressive 107% year over year.
Palomar front is the best Testament to the success, we've achieved on our second priority.
Monetize these investments made over the course of 2021.
Palomar front reported $42 2 million of gross written premiums in the second quarter and is tracking well ahead of our 2022 target of $80 million to $100 million of gross written premium.
Importantly, this target includes only a modest amount of premium from our Texas homeowners product in the quarter a.
A product that was converted to a fronting program June 1st.
We've been both impressed and encouraged with the response and interest we've received.
From reinsurers MGA than other carriers since Palomar French launched in September 2021.
Beyond the strong premium in the second quarter, we had a couple of notable accomplishments, which will drive further growth for the remainder of the year and beyond.
One we successfully extended expanded our program.
Partnership with cyber insurer cowbell, doubling the reinsurance capacity available to our program.
In addition.
Two the expanded partnership with Cabo, We recently announced the partnership with Omaha National leader in the Workers' compensation market.
This program should prove a nice driver of incremental fee income in 2023. These two new arrangements firmly positions Palomar front to trend well ahead of initial expectations.
As we continue to grow at Palomar front, we remain disciplined in evaluating our individual fronting agreements to ensure they are performing well from an underwriting and collateral perspective.
Please do note that we're trending well ahead of our previously announced plan to generate between $80 million to $100 million managed premium and we now believe that we can generate a $130 million to $160 million of managed premiums this year.
Exclusive of the Texas homeowners business, which adds approximately $45 million of fee generating premium over the next 12 months.
Moving onto our third strategic priority delivering consistent and predictable earnings we remain confident in the foundation built and the underwriting underwriting actions implemented over the past two years will ensure this directive.
In the second quarter, we further reduced our risk profile Palomar by transitioning the aforementioned Texas specialty homeowners business through a fronting arrangement.
Transferring the enforced premium to a fully reinsured fronted quota share facility.
Additionally, we successfully completed our June 1st reinsurance placement.
Reinsurance is a critical component to our business model as well as our Palomar to X framework and we are pleased to supplement our expiring program with the risk capital crucial to support a premium and exposure growth.
To recap our June one renewal, we experienced an approximate 9% rate increase on a risk adjusted basis as compared to our 2021 program.
While the pricing exceeded our expectations. The outcome was favorable as we successfully maintained our $12 5 million per occurrence retention, while securing $430 million of incremental earthquake limit as compared to our program and its up to June $1 21.
These accomplishments are me are even more impressive considering the six one treaty renewal period was deemed as challenging market at any since 2006.
Despite encountering the headwinds of a hard market driven by industry losses, and the associated impact of broadcast inflation Palomar strong results and efforts to realign its portfolio by reducing exposure to continental U S Hurricane and other secondary apparel.
Was well received by our reinsurance partners.
Hard reinsurance market provide for a cyclical industry action to increase premium rates accordingly in order to cover loss cost and maintain profit margins.
While we have historically received attractive rate on our specialty lines portfolio broadly we have utilized the reinsurance price increase to drive rate increase on renewals and filed rate increases across our business.
Our fourth strategic priority is scaling our organization we've made considerable progress with key hires as noted in our last quarterly earnings call and we continue developing our platform to attract the analytical actuarial technology and operating expertise to support our growth strategy.
As we further enhanced our infrastructure by adding notable talent and expertise our industry, leading technology has consistently provided the competitive advantages palomar by offering new underwriters and entrepreneurial entrepreneurial atmosphere that fosters innovative development tactics to further benefit our platform and efficiently deliver our products and services.
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 continue to view rates, increasing across all lines with specific lines of business sequentially accelerating the levels of increase and commercial earthquake. The average rate for large accounts increased to 9% on a composite basis compared to 7% in the first quarter of 'twenty two.
We expect further hard in this line of business for the remainder of 'twenty two.
As previously conveyed we are not looking to grow the exposures in.
E&S all risk business as we are generating significant growth from rate for this line of business, we experienced the composite rate increase of greater than 30% in the quarter. We continue to see a dislocation in the property market broadly as the hard reinsurance market persists and we expect continued rate increases combined with improved terms and conditions.
Well at a minimum cover any increase in loss cost for the foreseeable future.
As it pertains to inflation. In addition to the use of third party license data.
We leverage our builders' risk program that audits construction projects on a monthly basis to rapidly inform our perspective on the cost of materials and labor.
We've incorporated these factors into our underwriting to produce accurate insurance to value and appropriate rate increases to accommodate for inflation levels for residential earthquake <unk>, increasing inflation guard from historical level.
The 8% this year.
We've also had a 7% base rate increase in our Hawaiian Hurricane product approved by the insurance Department in the state that is in addition to an inflation guard that is now 8%.
Again, we remain acutely focused on covering our loss cost of incorporating inflation into our underwriting.
Our casualty lines remain nascent in their development stage and therefore don't employed.
For pricing commentary similar to that of our property business, but generally speaking, we're getting rate increases of approximately 3% to 10% for casualty lines with excess liability, having the highest average increase.
Turning to capital allocation remain confident the cash flow generated from our robust premium earnings growth provide adequate liquidity for our two pronged capital appointment, one strategically utilizing our $100 million share repurchase program and to funding of our multiple growth initiatives.
During the quarter repurchased.
Approximately 128000 shares at a total cost of $7 3 million.
To conclude the progress made in the second quarter firmly positions. The company as we look to the second half of the year and the path of Palomar to X.
We are reiterating guidance for the full year 2022, 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% the midpoint of range.
Yeah.
This range factors in the additional investments in talent systems infrastructure. The current projected cost of reinsurance and importantly, $5 9 million of unrealized.
Losses on equity securities at year to date.
The maintenance of guidance at this level implies a range of $85 million to $90 million when excluding unrealized loss on equity. So in essence the related range is actually a raise of $5 million from the guidance offered in Q1.
With that I will turn the call over to Chris to discuss our results in more detail.
Thank you Matt. Please note that during my portion referring to any per share figure I'm, referring to per diluted common share as calculated using the treasury stock method. This.
This methodology requires us to include common share equivalents, such as outstanding stock options during profitable.
And exclude them in periods when we incur a net loss we have adjusted the calculations accordingly.
For the second quarter of 2022, our net income was $14 6 million or.
<unk> 57 per share compared to net income of $12 3 million.
Or <unk> 47 per share for the same quarter of 2021 hour.
Our adjusted net income was $18 7 million.
Were <unk> 73 per share compared to adjusted net income of $13 2 million or <unk> 51 per share for the same quarter of 2021.
As it compared to the prior year results, it's important to remember the impact of winter storm Yuri had on our results for the first and second quarters of 2021.
While Yuri resulted in favorable net losses in the first quarter of 2021, we did incur additional reinsurance expense were ceded written premiums in the first and second quarters of 2021.
Gross written premiums for the second quarter were $218 7 million.
An increase of 69, 1% compared with the prior year second quarter, our consistent strong growth was driven by a combination of favorable rate environment and increases in volume across all of our products.
Cedric premiums for the second quarter were $122 6 million.
Representing an increase of 137, 8% compared to the prior year second quarter. This increase was primarily due to quota share reinsurance driven by the growth of our fronting business and lines of business subject to Attritional losses ceded written premiums as a percentage of gross written premium increased 56, 1% for three months ended June 32022 from <unk> 39.
9% from three months.
Three of 2021.
As anticipated our fronting business was the primary catalyst of this increase slightly offset by the decrease in extra well percentage compared to last year that included the impact of Yuri.
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 second quarter were $80 3 million, an increase of 48% compared to the prior year second quarter. This.
This increase was due to the growth in earning of higher gross written premiums offset by the growth earning of higher ceded written premiums during the reinsurers under reinsurance agreements.
Second quarter of 2022 net earned premiums as a percentage of gross earned premiums were 58% compared to 52, 9% in the second quarter of 2021 and compared sequentially to 54, 7% in the first quarter of 2022.
As previously indicated the launch of the expected growth of our fronting business could push this ratio below 50% on an annual basis, especially with the transition of our Texas, especially holders, but to the fronting model, though we will add consistent fee income that will enhance our ROE and bottom line.
Losses and loss adjustment expenses incurred for the second quarter were $14 4 million.
Made up of Attritional losses of $13 9 million and unfavorable prior period catastrophe loss development of $548000. The loss ratio for the quarter was 17, 9% comprised of an attritional loss ratio of 17, 2% and our catastrophe loss ratio of 0.7% the loss.
The ratio for the quarter is in line with our expectations and the evolution of the overall book of business. We continue to believe that the attritional loss ratio should be around 19% for the year.
Our expense ratio for the second quarter of 2022 was 57, 1% compared to 62, 6% in the second quarter of 2021.
On an adjusted basis, our expense ratio was 51, 2% for the quarter compared to 65% in the second quarter of 2021.
Compared to 52, 4% sequentially in the first quarter of 2022.
Similar to our net earned premium ratio, we feel is better representation of our book of business to look at our expense ratios as a percentage of gross earned premiums.
Our acquisition expense as a percentage of gross earned premiums for the second quarter of 2022 was 18, 1% compared to 21, 9% in the second quarter of 2021, and then compared to 22% sequentially in the first quarter of 2020 to.
The decrease was driven by additional ceding commission or hunting fees from a new funding business that are netted within acquisition expense.
And overall changes in our mix of business.
The ratio of other underwriting expense, excluding adjustments to gross earned premiums for the second quarter of 2022 was eight 5% an improvement compared to 11, 1% in the second quarter of 2021 and compared to 9% in the first quarter of 2022 as.
As we continue to invest in talent systems, and our infrastructure, we expect our businesses scale over the long term. However, those investments may result in the flattening of the this ratio in the coming quarters.
Our combined ratio for the second quarter 75, 1% compared to 76% in the second quarter of 2021 or.
Our adjusted combined ratio was 69, 1% for the second quarter compared to 73, 8% in the second quarter of 2021.
Reflecting on the Palomar to X philosophy, we shared at Investor Day, we are introducing a new metric that represents the dollar inverse of our adjusted combined ratio that metric is adjusted underwriting income.
Calculate adjusted underwriting income similarly to adjusted combined ratio, we start with underwriting income and back out the adjustments that may not be indicative of our underlying business trends operating results of our future outlook.
We believe that adjusted underwriting income is the most comparable financial metric for evaluating Palomar two eggs.
Our second quarter adjusted underwriting income was $24 8 million.
Compared to $14 $2 million last year.
Our year to date, adjusted underwriting income was $46 million compared to $36 $2 million last year.
Net investment income for the second quarter was $3 1 million, an increase of 43, 1% compared to the prior year second quarter. The year over year increase was primarily due to the higher average balance of investments held during the three months ended June 32022, due to cash generated from operations and by slightly higher yields on invested assets.
Our fixed income investment portfolio book yield during the second quarter was $2, 61% compared to $2 two 4% for the second quarter of 2021.
The weighted average duration of our fixed maturity investment portfolio, including cash equivalents was $4 one eight years at quarter end.
Cash and invested assets totaled $552 5 million as.
As compared to $427 8 million.
June 32021.
Second quarter, we recognized losses on investments in the consolidated statement of income of $4 7 million compared to gains of $300000 in the prior year second quarter.
We will continue to take a conservative investment approach, which may impact, our recognize gains and losses from quarter to quarter.
<unk> gains and losses, we do expect our investment portfolio yield to improve foreseeable quarters based on the current market conditions, our yield on investments made in the second quarter exceeded our overall blended yield for the quarter.
Our effective tax rate for the second quarter was 22% compared to 25% for the second quarter of 2021.
So the second quarter of 2022 to protect rate differed from the statutory rate due to the exercising of stock options during the quarter, partially offset by nondeductible executive compensation.
During the quarter, we purchased 127952 shares.
Total of $7 3 million.
Under our previously announced two year $100 million share repurchase program.
We have approximately $79 7 million remaining under the authorized program. While we continue to view our current share price is trading at a discount and we will take an opportunistic approach to share repurchases under this program. We remain focused on investing in and supporting the growth of our business lines as we strive to progress and execute on the framework we provided to deliver.
Palomar to eggs.
We are confident in our strategy to achieve long term growth and sustainable and predictable earnings.
Our stockholders' equity was $378 1 million at June 32022, inclusive of the share buyback and unrealized changes in our to our investment portfolio compared to $394 2 million.
December 31 2021.
For the second quarter of 2022 annualized return on equity was 15, 4% compared to 13, 1% for the same period last year.
Our annualized adjusted return on equity was 19, 7% compared to 14, 1% for the same period last year.
As of June 32022, we had $25 million 737899 diluted shares outstanding as calculated using the treasury stock method we.
We do not anticipate a material increase to December during the remainder of the fiscal year.
Our 2022, we are reiterating our previously provided adjusted net income guidance range of $80 million to $85 million include.
Including $5 $9 million of pretax unrealized losses on equity security holders.
This range is equivalent to adjusted net income $85 million to $90 million.
Excluding unrealized gains and losses for the year, representing 64, 64% year over year growth at the midpoint of the range.
Consistent with previous guidance. These estimates do not include any losses major catastrophic events.
As a reminder, we expect the continental U S win projected net average annual loss or net.
We are approximately $6 million as of September 32022, and <unk>.
The net hail industry metrics assess continental hurricane and severe convective storm exposure.
The updated adjusted net income guidance and reflect our recently completed reinsurance placement and the conversion of our Texas specialty homeowners business to our fronting business model.
With that I'd like to ask the operator to open the line for any questions operator.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad.
A confirmation 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, it may be necessary to pick up your handset before pressing the starkey.
Our first question comes from the line of Tracy <unk> with Barclays. Please proceed with your question.
Thank you good morning.
You reiterated your 2022 outlook of 80 to 85 million of adjusted net income.
But if I look at the first half of this year you achieved just over $36 million.
So it seems to be tracking behind so are you expecting the second half of the year to be better than the first half.
Yeah, Hi, Tracy this is Mac.
This is the guidance that we put in place and we've hit our targets.
Date and exceeded them there.
There is obviously a lot of embedded growth rate over the course of the year. So the premiums earned in our.
Our expenses for things like reinsurance are locked in.
We feel very good about hitting.
The 80 to 85 or the 85 to 90, if you back out the unrealized losses on the securities.
Okay.
How the premium ramps and some seasonality yes.
Yes, the only thing I'd add to that Tracy Brian when you look at that 36%. If you put the tax affected unrealized losses back in here around <unk> 41, and when you do the math on that call to the midpoint of either one of those ranges depending on what your starting point is its $46 million in the second half of the year. So we feel pretty good about those numbers, especially with the growth we've seen in the top.
Your line.
Got it and you also raised your Palomar front by tier 138, or $160 million from $80 million to $100 million in premium and I recognize this is a capital light line.
Could add more volume be accretive.
19% ROE target or do you need more critical scale to revise your ROE guide.
Yeah, Tracy I mean I think.
We outlined at Investor day.
We're trying to maintain.
We maintain an ROE above 20% and we are right there this quarter at $19 seven.
Palomar front and the growth that we have and that does indeed put us in a position to.
Past that threshold and our goal is to adhere to that if not continue to build from it.
It is capital light, we think we've got very good visibility on the revised range that we provided especially when you factor in a good portion of that uplift is coming from an existing book of business that is transitioning to a fronted relationship in the form of our Texas homeowners business.
So long winded way of saying, yes, I think it is accretive to the ROE.
And we have very good visibility on the revised range that we provided you.
Thank you.
Our next question comes from the line of Pablo <unk> with Jpmorgan. Please proceed with your question.
Hi, Thanks, so much.
Losses have been benign for you so far this year.
Would it be reasonable to assume that the average lot size to meet that you had referenced I think $6 million.
If that materialized, so should that be concentrated in hurricane season, so busy the second half of this year.
Yeah, Pablo that is <unk> for continental Hurricane so it would be during wind season.
Brian .
Well, yes, six one basically November one, but it tends to be more in the third quarter I think it's important to point out.
The number that we gave you is based on September 30 at the peak of wind season, and that should be declining post win post that 930 days because a lot of that comes from.
The homeowners book that's in runoff.
So we have a schedule that looks policy by policy state by state how that comes down.
And so.
That number actually we will start to tick down.
10, 112, one and obviously into next year.
Got it.
Just to follow up on that comment Matt.
The Texas business is being funded with debt.
The same dynamic busy meaning that even though the attach of everything June this year. It will take an entire year for it to be fully off the risk there is that how that book should work as well.
No no. That's a good question and thanks for asking and it's what it's worth that clarify no effective six one all risks are transitioned into the quota share. So we are.
Ostensibly off rack safer.
The reinsurance provided buyback watershed facility, which we do have it.
Our program.
So now we are in theory off risk effective six one.
Got it and the last one for me I was just.
I wanted to follow up on your comment about the deal having a 19% loss ratio for the year. Obviously the loss ratio. This quarter was pretty good then I think if you assume 19% for the year I'm, playing a pick up in the second half.
Just wondering if you could speak to your expectations, there what will drive that I guess sequential deterioration from here. Thank you.
Yes no.
I don't view it as a deterioration right I think thats kind of hitting the numbers on what we've kind of provided guidance for or guidepost for for the beginning of the year. We've always said, it's going to be calling that 18% to 19% range. We're obviously happy with a lower loss ratio this quarter, we had 17%.
Our book of business is still the loss ratio still anchored by the binary book of business and also now by the fronting book of business that represents about 64% over overall written premium. So we do see that developing nicely over the coming years and periods, but with the overall book and the runoff of some of the specialty homeowners book.
Non Texas, we do expect the loss ratio would still hover around that 19% so could it be $19 five or <unk>, yes that will be within our comfort range. So we don't think it's going to run away from US we've said that a lot, but overall, we're pretty comfortable of that pick that we gave out at the beginning of the year and sticking to that 19% for the remainder of 2022.
Thanks for your answers.
Thanks Pablo.
As a reminder, it is star one to ask your question. Our next question comes from the line of Mark Hughes with terrorist. Please proceed with your question.
Yes. Thanks.
Afternoon.
Back to your point about the.
Great Quake Authority I think you said you were not impacted by the CEO .
Why not.
Will you be impacted in the future.
Yes.
Mark It's a great question and.
Alright.
Southern substance of it is the.
It's certainly gone out and put out public volatile around the changes that they're making they have stated that they are buying less reinsurance moving it down from 400 to one in 401 and $3 50, which essentially is about a $1 2 billion reduction in P&L.
That's taking place kind of in real time, if theyre letting that limit potentially expire.
Certain reinsurance programs renew they have not yet put into place reductions in coverages. They have raised rates very modestly and so when I say it has not been.
Packaging, it's certainly it's a marking marketing catalyst for us, but there hasnt been a dynamic where now okay. They are changing coverages or shedding policies. So its frankly its runway for us what has been a bigger dynamic but it has been.
Dislocation in the homeowners market that is.
You've probably seen that today the continued wildfire activity in the state of California, and the residual impact that has on the insurance market. That's been a bigger catalyst and I think the other big catalysts for US frankly, it's been we continue to build our distribution network our distribution network in residential quake was up over 20% year over year.
Year, four 5% sequentially.
Partnerships are getting further traction in California, and outside so I don't want to diminish the potential changes from the DEA I just would say that it has not been.
And material driver, yet, which I think is a positive.
Okay.
And then.
Your point about.
In the commercial quake business, you saw acceleration could you talk a little bit more about that and what's going on in terms of capacity and competition demand what's driving that.
Yeah. So we did see some acceleration rate ticked up in large accounts for instance from seven to nine.
Hey.
There is some capacity limitations the cost of reinsurance went up our rate increase on the reinsurance was up 9% now if you isolate the quake was probably up closer to 5% to 6%.
But.
There is an emphasis at least internally for us on trying to recover loss costs.
Post six one in that renewal and I think others are doing the same so I think market wide, there's rate integrity and the need to recover loss costs and especially if you are buying your reinsurance on an all apparel basis.
We have the luxury of the majority of our tower being quake.
Your rate increase maybe more than a 9% even if it is loss pretty like we were so I think there is rate integrity theres capacity limitations or pull back.
And it's created a circumstance, where we think on the commercial side, we can grow and optimize the book at the same time.
Which is frankly a unique dynamic.
Chris did you.
<unk> reported are disclosed.
Fronting fees.
You generated in the quarter.
Hey, Mark.
Something that we've disclosed we've talked about it on the calls.
Obviously that generally speaking the fronting fee is going to be around 5%.
The fronting premium we earn that similarly to all of our risk bearing premium we do and we also talked about the fact that we do net that fee as seeding commission through our acquisition expense. So you can see that trend showing up in the acquisition expense this quarter with a continuing to go down.
18% on a gross basis this quarter from about 20% in Q1 so.
Everything is operating as expected and the fronting fees and the ceding commission even from our other lines of business was attritional losses, where we still use heavy quota share reinsurance that fee income is showing up and reducing our acquisition expense as we expected.
Yes.
Mac I like to comment about how Europe .
Keeping an eye on.
The inflation in the construction area auditing.
<unk> and replacement costs on a monthly basis.
How about when you look at excess liability how do you.
Keep an eye or trying to get in front of any potential inflation in that line of business.
Yeah.
Fortunately we've got.
Seasoned leadership that I think you had the chance to visit with an Investor day, Mark I think what we're really watching there is court activity.
And trying to.
See as the core to reopen what that portends.
And how that informs.
<unk>, how that informs lost costs and claims management frankly.
It's a small portion of what we do.
And.
So that's how we're approaching it from an underwriting standpoint, I think the other side that we frankly are.
Using as a tool for risk management is the quota share reinsurance so.
For excess liability, if we're riding a $5 million.
Line.
On average about 25% depending on the program, so either 20% or 30% of the risk so.
Individually in isolation, we're trying to manage it that way as well as get a fee.
<unk> income and then there's also the underwriting tools.
Management tools that we just referred to it's certainly something that we need to keep an eye on as that book grows.
Thank you.
Our next question comes from the line of David Madden with Evercore. Please proceed with your question.
Okay.
Hi, Thanks, good afternoon.
I had a follow up on the Attritional loss ratio of 17, 2% in the quarter can you talk about the moving pieces there during the quarter that drove the favorability versus the roughly 19% level that you've guided to for the full year.
And I guess I'm wondering specifically in there if there was any benefit.
Any tangible benefit from the one month that you had removed, Texas or move Texas to a fronting arrangement.
Okay.
Yes, David that's a great question.
The key the key components of that loss ratio or call. It <unk>.
Current year.
About or excuse me the prior year development was about half a million dollars.
Favorable development. So we've talked about in the past that we are always are generally conservative on how we set up a loss ratios. When we go into a period. So we did have a little bit of favorability come back into there I wouldn't call. It a material amount, but it was about 500000. So it was called the current year loss ratio was a little bit higher than the $17 two let's call. It.
$17 eight ish was the current year loss ratio with that favorable development backed out so I'd say that's in line with our expectations. As you did indicate we do see a little bit of a benefit from the Texas specialty homeowners book being turned into a front business, but for most of that quarter, that's still in there.
Still got some severe convective storm period in there, which is part of our heavier season for the Texas business, but again.
<unk> to share his operating as power as expected for the first two months and then moving all of that book into a front end is something that's going to be able to deliver.
Consistent profitable fee earnings over the next 12 months and into the future have that line and then the other homeowners book is kind of fully run off.
But I think David it is an astute observation you make that.
Really more for prospectively.
That is.
That line of business in the.
At the end of 'twenty, one the specialty homeowners book was.
Around 60 million of call it 12% of the book So it's either winding down over the course of the year.
<unk> converted to a front and that was the loss ratio, that's a little bit higher and obviously as the cat exposure. So I think that just adds more.
More stability in which in turn gives us more confidence on why we think we can maintain 19% and hopefully there is some positivity of the upside based on conservatism prior year estimates.
Got it. Thanks, that's helpful and so yes, I guess the way I interpret that and I guess the fall.
Follow up question is yes, the volatility is obviously removed.
From moving the Texas book to a fronting arrangement.
It feels like there might be somewhat of a of.
Of an attritional loss ratio benefit from that as well is that fair to assume.
Yes.
Yes.
Got it okay and.
Sorry, the $5 million or the 500000 favorable development that you had.
What that was on the Attritional losses could you just elaborate where where that was specifically what line.
Yes, no I think it was on the Attritional losses. So we had 500 are favorable on Attritional and then let's call. It 500 unfavorable on the cats. So those are the two components. When you look at it in the table almost a breakeven number for the quarter.
The Attritional standpoint.
Really nothing that stood out on the favorability it was really across the board on all lines of business, whether it be especially homeowners inland marine.
Flood all the lines really performed well this quarter our developed well this quarter. So we're very happy with it and I think it also.
Sticking with our theme of being conservative upfront. So we saw that kind of play out this quarter and the development.
And then.
On the Cat side right, we did have a little bit of unfavorable development there.
Nothing surprising on that or nothing I would call systemic or issues that are arising there. If you guys recall from our standpoint for a cat. It really has to be the smaller cats that impact our results because of the larger events go into the reinsurance tower until then move up or move down or not as impactful to our financial.
So these are.
Got it.
A small handful of claims that are getting closed out that develop poorly, but it's not on large events and it is not.
Is it just the smaller claims just getting closed down and Chris if I'm not mistaking the majority of that 500, if not the totality of it was from the admitted book has run off that is correct yes.
Got it.
That's great color. Thanks for that and then if I can just ask on the two fronting arrangements. The upsizing of our ball and then the California Workers' comp have you guys.
Have you guys decided to retain any of those two relationships and I guess, maybe how youre thinking about that from a risk management standpoint, if so.
Yes.
So we are going to take 5% on.
The capital program and.
It's a modest amount.
As I've said since all along like we've been able to basically do we use this as a form of due diligence right. We have the ability to learn of segment as a partner.
As a fronting partner and then.
There is a chance to take risk, we will elect two or not so we did elect to take 5% there.
And then on the workers comp is around a 4% participation as well.
Got it thank you.
Thanks, guys I appreciate it.
Our next question comes from the line of Jarrod Cohen with <unk>. Please proceed with your question.
Hi, yes. Thanks.
So you get really strong growth in the quarter, but just curious if your growth rates are being impacted by personal care of your partners pulling back just because of poor results and can you also comment on the insured tech side.
As they increasingly focus on profitability.
So derik thanks for the question I would say.
Our personal line personal lines carriers pulling back I think.
It's part of a broader theme of dislocation in the California homeowners' market that we've talked about so that's certainly a contributor what we're seeing is more and more homeowners business is going into the E&S market.
That's giving us the option or the ability to write E&S residential earthquake at a higher rate than we have historically as well.
Would end.
Say its been more pronounced this quarter.
And then it has been really over the last two five years.
And then on the insured tech side.
We are fortunate we partner with some of the insurer tax and.
We are very good at customer acquisition, and we think we provide them a nice complementary product to round out their suite.
We have not seen anything yet in terms of them.
Retrenching from a production standpoint.
I can't speak to how they're underwriting but.
It's been a good channel for us so.
The one thing that I will say around the partnerships as we are continuing to execute.
With partnerships like travelers as an example, where we have performed in certain states and now are trying to broaden the relationship to move into states beyond the initial cohort.
And we continue to have dialogue with other carriers.
Who want to either enter the California market as an E&S rider or are trying to manage their exposure in the state. So partnerships remains a pretty active channel for us.
Got it that's helpful. And then my second question is on inflation it looks like youre, largely maintaining hearing loss trend assumption that you raised last quarter.
How comfortable do you feel about that holding in the second half of this year. There's a lot of carriers have kind of razor loss trend assumptions.
Yeah. So.
We feel comfortable with it.
Especially on the property side, which is the large predominance of the book and I think it's worth reiterating that we taken somewhat of a three pronged approach to inflation.
It starts with.
The ITV in the inflation to value and making sure that we get the.
The appropriate replacement cost per square foot and that's where again, we have the luxury of leveraging a host of third party tools plus what we do in our builders' risk book, where we have auditable policies and we get a real time assessment of the replacement cost.
So that's one two is the inflation guard.
And then three would be rate change so I'll use the state of Hawaii as an example.
Are obviously going through the ITV exercise and getting that right.
And then secondly, we have now a.
8% inflation guard on renewal policies.
And then Furthermore, we have a 685 I'll round up to 7% rate increase so it's a multi pronged approach that we have to stay on top of listen we had a 9% rate increase on our reinsurance program, we need to cover that loss cost and then some to maintain our margins.
I think we're doing a good job of it.
But we can't take our eye off the ball.
Okay. Thank you for the detailed answers.
There are no further questions in the queue I'd like to hand, the call back over to Mac Armstrong for closing remarks.
Great well. Thank you everyone and thank you operator, we appreciate all they were able to join US. This morning. We appreciate your participation questions and most of all your support.
I want to continue I'd, rather I'd like to thank all of our employees for their hard work and dedication.
As they really didn't.
<unk> job of execution this quarter.
<unk> I am proud of our results in the second quarter and the progress on achieving our 2022 strategic initiatives, we've delivered consistent strong growth.
We continue to monetize our new investments.
Since our earnings predictability and it made strides on scaling the organization. Furthermore, we remain very confident in our ability to execute Palomar two ex the.
The combination of the considerable organic growth and the investments we've made really do position us well to double the adjusted underwriting income of the business and deliver better than industry average Roe.
And then what that translates to value for our shareholders and I think that's ultimately what youll see so thank you all enjoy the rest of the day and we'll speak to you next quarter.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Thanks very much.
Yeah.