Q4 2022 Palomar Holdings Inc Earnings Call
Good morning, and welcome to the Palomar Holdings incorporated fourth quarter 2022 earnings conference call.
During todays presentation, all parties will be in a listen only mode. Following the presentation. The conference lines will be opened for questions with instructions to follow at that time.
A reminder, this conference call is being recorded I would now like to turn the call over to Mr. Chris You Jada Chief Financial Officer. Please go ahead.
You operator, and good morning, everyone. We appreciate your participation in our fourth quarter 2022 earnings call with me here today is Mac Armstrong, our chairman and Chief Executive Officer.
As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11 59 P. M. Eastern time on February 23 2023.
Before we begin let me remind everyone that this call may contain certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These include remarks about management's future expectations beliefs estimates plans and prospects such statements are subject to a variety of risks uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements, including but not limited to risks and uncertainties related to the Covid nine.
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Such risks and other factors are set forth in our quarterly report on Form 10-Q filed with the Securities Exchange Commission we.
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.
Thank you, Chris and good morning, everyone.
Very pleased to report our strong results for the fourth quarter and the full year of 2022.
I'm proud of our team's achievements over the past year, and most notably delivering record gross written premium growth of 65% record. Adjusted net income was $71 3 million and an adjusted ROE of 18, 3%, even with the negative impact of hurricane yet.
Full year results reflect stellar execution of Palomar to X our strategy to profitably grow the company deliver predictable earnings and achieve an ROE in excess of 20%, while maintaining industry leading profit margins.
Over the course of the year, we made demonstrable progress in achieving our long term objectives of Palomar to X as we enhance our position in existing products launched new lines of business and invest in underwriting technology actuarial and data analytics infrastructure.
To both sustain and catalyze our growth.
Our revision remains unchanged as we strive to build premier specialty insurance company.
Our vision is reinforced by the growing team of 195 professionals, who continue to operate an incredibly high and productive level.
Turning to the fourth quarter, our strong results were highlighted by 60% written premium growth of 22, 4% loss ratio and an adjusted ROE of 22, 4% importantly, our premium growth was strong across all products property casualty and fronting.
Core earthquake business grew 40% with residential earthquake growing 26% and commercial earthquake products growing 66%.
The continued dislocation in the earthquake market has been amplified by the hard reinsurance market, which affords us the ability to both grow and optimize our book of business with rate increases and improved terms and conditions.
Beyond Earth Quake franchise in the marine grew 82% as compared to the fourth quarter of 2021, largely driven by our builders' risk products.
Our recently launched excess property book grew 60% sequentially as a constructed an attractive book of business with negligible catastrophe exposure.
Similar to our property products, our casualty business saw strong growth in the quarter casualty lines grew a 147% year over year highlighted by 233% growth in our newly launched professional liability lines and 35% growth in excess liability.
Importantly, all the casualty products performing in line with our expectations from a loss perspective.
We are thrilled with the success of the Palomar front prejudice.
During the quarter it generated $69 million of premium versus $11 5 million in the prior year Palomar front delivered $223 million in managed premium in 2022, well in excess of the original guidance of 125 to 145 million provided a year ago.
The managed premium from Palomar front offers an attractive and growing fee income stream as we move into 2023.
Beyond the sound financial results generated during the fourth quarter, our team successfully navigated the choppy waters of the global insurance market as the industry digested the impact of inflation, we can balance sheets and hurricane Ian.
From an underwriting standpoint, we continue to find balanced between exposure growth rate increases and enhanced terms and conditions for all products, but most notably our property book of business.
Our E&S all risk books at an average rate increase of 40% with exposures decreasing approximately 35% year over year or in the marine books are regional variance in pricing with builders risk accounts seen new projects priced 15% above the prior year, our growing casualty book saw exposure growth with disciplined rate action for instance, our most mature casualty line.
Real estate agents <unk> site, and a 5% rate increase in the fourth quarter.
As it pertains to earthquake, we continue to focus on taking advantage of the opportunities in the residential earthquake market as well as the emerging capacity limitations in the commercial earthquake market.
To that end, we successfully renewed our commercial earthquake quota share modestly increasing the session percentage and locked in an incremental $52 5 million, California earthquake limit to support growth in the quarter.
The risk adjusted pricing on these reinsurance buys was approximately 30% above the expiring terms.
While the pricing certainly reflects the hard reinsurance market. This increased favorably compares to dosing in headlines or other lines of business and reflects the quality of our reinsurance program, both the exposure and reinsurer panel.
Importantly, this purchase allows us to sustain our strategic focus of profitable growth and the earthquake market.
In an effort to keep pace with the increased cost of reinsurance.
We will continue to push rate on our commercial book beyond the 16% we saw in the fourth quarter.
Increase our inflation guards, which now stands at 10% and further further utilized our E&S company for residential earthquake.
Additionally, we will look to strike diversifying and reinsurance efficient partnerships such as the recently consummated deal with Bear River mutual where we are assuming ex California earthquake risk on behalf of our regional carrier in Utah.
Looking to the year ahead, we remain focused on executing Palomar to UX.
First off let me state that we believe that the cost of our core excess of loss reinsurance renewal will be manageable it will be up year over year likely at levels similar to what we saw in December and January but the capacity is there to support our growth as such we will continue to grow in the earthquake market.
We have also identified four key strategic initiatives in 2023 that are central to Palomar to X one sustained our strong profitable growth trajectory.
To manage the dislocation the global insurance market.
<unk> deliver predictable earnings and for scaled the organization.
Im pleased to report that we are already making strong progress on all of these initiatives.
Selected examples include the January announcement of a new fronting partnership with Advanced Act protection and.
A leading crop MGA following the United States Department of Agriculture, naming Palomar only the 14th approved crop reinsurer in the country.
Looking ahead, we believe this can be a sizable business for Palomar and the long term.
Separately in addition to the incremental reinsurance limit to support our growth and Eric earthquake, we put in place a new quota share for our motor truck cargo products and non catastrophe exposed property line at attractive economics from Blue chip reinsurance partner.
Additionally, we are supporting a handful of outbound reinsurance treaties with a few longstanding trading partners and continue to look at ways to find mutually beneficial ways to work with our reinsurance panel.
We are further reducing our continental wind exposure and we are talking to get the 250 year probable maximum loss below a $100 million this year.
This effort will help mitigate rising reinsurance costs and volatility in the earnings base.
Lastly, we continue to make additions to our terrific team of professionals in areas, such as casualty underwriting data analytics and treasury and investments.
We will continue to balance our capital allocation with a focus on investing in our growth initiatives and remaining opportunistic with our share repurchase program.
When our shares trade at a level, we feel undervalues the business.
As a result, we repurchased 222217 shares at a total cost of $11 million in the fourth quarter and a further 79469 shares at a total cost of $3 8 million thus far in 2023.
Turning to our full year 2023 guidance, we expect to generate adjusted net income of $86 million and $90 million.
Which includes $2 5 million of net catastrophe losses from recent California flooding.
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 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, where we incur a net loss.
Additionally, beginning in the fourth quarter of 2022, we have modified our definition of adjusted net income diluted adjusted EPS and adjusted ROE to adjust for net realized and unrealized gains and losses, we have modified the current and prior period figures accordingly.
For the fourth quarter of 2022, our net income was $18 8 million or <unk> 73 per share compared to net income of $16 6 million or <unk> 64 per share for the same quarter last year.
Our adjusted net income was $21 1 million or <unk> 82 per share compared to adjusted net income of $17 6 million or <unk> 68 per share for the same quarter of 2021 for.
For the full year of 2022, our adjusted net income grew to $71 3 million or $2 77 per share compared to adjusted net income of $52 4 million or $2 <unk> per share last year.
Our fourth quarter adjusted underwriting income, which we believe is the best financial indicators for evaluating Palomar to X was $23 5 million compared to $19 $9 million last year.
Our full year 2022, adjusted underwriting income grew 37, 8% to $77 1 million compared to $55 $9 million last year.
For the fourth quarter of 2022, our annualized adjusted return on equity was 22, 4% compared to 18, 2% for the same period last year.
We remain confident in our strategy to achieve long term growth and predicted in a predictable rate of return even with a full retention catastrophe loss. Our adjusted ROE was 18, 3% for the full year of 2022.
Gross written premiums for the fourth quarter were $239 1 million.
An increase of 59, 5% compared to the prior year's fourth quarter.
For the full year gross written premiums increased 64, 8% to $881 9 million.
Net earned premiums for the fourth quarter were $82 2 million, an increase of 21, 2% compared to the prior year's fourth quarter.
For the fourth quarter of 2022, our ratio of net earned premiums as a percentage of gross earned premiums was 38, 9% compared to 55, 2% in the fourth quarter of 2021 and compared sequentially to 41, 7% in the third quarter of 2022.
Decreasing as expected from the overall growth of fronting and lines of business that use quota share reinsurance for.
For the full year of 2022, our ratio of net earned premiums as a percentage of gross earned premiums was 45, 5% in line with our expectations based on the strong performance of our fee based fronting business.
Losses and loss adjustment expenses incurred for the fourth quarter were $18 4 million made up of Attritional losses of $16 6 million.
And $1 8 million of prior period catastrophe loss development, primarily hurricane Hanna and winter storm here.
The loss ratio for the quarter was 22, 4% comprised of an attritional loss ratio of 21% and our catastrophe loss ratio of two 3%.
Attritional losses for the quarter include many catastrophe events, such as Hurricane Nicole and Winter Storm Elliot.
The loss ratio for the year was 24, 9% comprised of an attritional loss ratio of 20% and our catastrophe loss ratio of four 9%.
Our acquisition expense as a percentage of gross earned premium for the fourth quarter was 12, 7% compared to 22, 2% in the fourth quarter last year and compared sequentially to 14, 6% in the third quarter of 2022.
Additional ceding commission and fronting fees drove the improvement.
The ratio of other underwriting expenses, including adjustments to gross earned premiums for the fourth quarter was six 9% compared to nine 2% in the fourth quarter last year and compared sequentially to seven 3% in the third quarter of 2022.
Our adjusted combined ratio was 71, 4% for the fourth quarter compared to 77% in the fourth quarter of 2021 hour.
Our adjusted combined ratio for 2022 was 75, 6% compared to 76, 1% last year, excluding catastrophe losses was 78% compared to 73, 9%.
Net investment income for the fourth quarter was $4 4 million.
An increase of 81, 6% compared to the prior year's fourth quarter.
The year over year increase was primarily due to a higher average balance of investments held during the three months ended December 31, 2022, due to cash generated from operations and by deliberately shifting invested assets from lower yielding investment assets into higher yielding investment assets.
Our yield in the fourth quarter was three 3% compared to two 2% in the fourth quarter last year, our yield on investments made in the fourth quarter was above 5%.
During the quarter, we repurchased 222217 shares of our stock for a total of $11 $1 million under our two year $100 million share repurchase program.
We have approximately $65 6 million remaining under the authorized program.
For the full year of 2023, we are providing an adjusted net income guidance range of $86 million to $90 million.
This range includes approximately $2 5 million of net catastrophe losses, resulting from the recent California flooding events, but does not include any additional catastrophe losses for the year.
On a gross premium basis, we expect our net earned premium ratio and acquisition expense ratio to continue to continue to decrease in 2023 from where they were in the fourth quarter of 2022.
With that I'd like to ask the operator to open the line for any questions operator.
Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
May press Star two if he would like to remove your question from the queue and for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys. Our first question comes from Mark Hughes with Truth Securities. Please proceed.
Yeah. Thanks good.
Good morning, good afternoon.
Chris You mentioned you expect the earned to written who continued to decrease from the fourth quarter level.
Any guidance on what that might look like for 2023.
Hi, Mark Great question, Yes, as we said and we really said for 2022 as well we do expect the net earned premium ratio.
<unk> to decrease it.
38, 9% in Q4.
With the growth in fronting and other lines of business subject quota share, we do expect that ratio to keep going down. So I would expect for the year, that's probably going to be within the mid <unk>, but it's just going to go down sequentially.
That takes into account for the quota share business, but also the additional excess of loss reinsurance costs that we will be expecting at six one of this year.
I appreciate that and then the.
The quake business.
Are you balancing the reinsurance.
Bye here.
Clearly you have some view on.
You'll need to support growth.
Presumably you could grow even faster depending on how you.
How you approach the reinsurance market.
Do you have kind of your vision of what the growth is going to be already dialed in Mac.
Hey, Mark Yes, that's a great question and it's something that we are really acutely focused on.
I think stepping back.
As I mentioned in my remarks, there is dislocation.
In the earthquake market, both residential and commercial and we.
We are taking advantage of that taking advantage of it through right.
Through enhanced terms and conditions, whether that's deductibles or attachment.
And Furthermore, further utilization of the E&S company and particularly on the admitted side of the business.
The guidance that we provided does reflect.
Solid growth and earthquake.
It could be a lot more but we do want to balance.
Reinsurance capacity availability and what we have seen as one one unfolded and as the year has.
Or is that 2023 has commenced as there is capacity to support at least the growth that we're forecasting.
There was a lot of talk in the fourth quarter about the CA and their reinsurance renewal frankly, I think that was something that we think that they are telegraphing. They had communicated that they were going to buy less limit at a board meeting.
The fourth quarter and that did come to fruition I think it was roughly $1 billion of less limit that was procured.
Now as part of their focus on bringing their capacity down to 300 to the one and $3 50 from their previous level. So that is freed up capacity that we can take advantage of.
There have been a few earthquake programs that were rolled into all perils programs. So that also frees up capacity.
There have been some large national programs that had underlying quake in them that were nonrenewed or delayed so.
We do feel that there is ample quake capacity to support our growth our guidance reflects pricing that is up along the lines of what we saw when we bought incremental limit.
In the fourth quarter in January but it is there to support our growth.
The level and then again, we're going to continue to take rate and enhanced terms and conditions and use the E&S company to make sure we're getting the.
The rising reinsurance costs covered.
Understood one quick one if I might.
Chris the Attritional losses came in better than last quarter, and I think better than you might have.
<unk> guided to.
And your commentary within the quarter could you talk about that.
Yeah. Thanks, Mark No. Obviously, we are happy with a better loss ratio than it is a little bit better than we expected when we kind of projected out in the middle of December when we looked at the numbers in October and November there was some frequency and severity that was coming in Fortunately December came in a lot better than we expected was able.
To kind of bring that loss ratio back down to what we would expect our normalized loss ratio for the year. It doesn't change our view on guidance, we still expect the loss ratio was call it 22% to 24%.
For 2023, with hopefully that tailing off at the end of the year and into 2024, So no real changes there, but like you we're happy with good loss ratio, but it was hidden within the parameters that we would expect.
Thank you.
Hmm.
Thanks, Mark our next question is from Paul Newsome with Piper Sandler. Please proceed.
Good morning, Jackie.
Follow up on the on your comment on reinsurance and it looks great.
Just to make sure I understood. This.
There is if you wanted to grow an earthquake faster you think theres capacity beyond what you're currently contemplating.
Or is there some kind of limit given.
Capacity out there that if you really wanted to grow faster.
Got myself it will confuse there.
Sure Paul.
Just to elaborate on it.
We have obviously forecasted growth and earthquake this year and there is capacity to support that growth.
We do not want to overstep into the market because we obviously want to maintain the guidepost that we always have with respect to earthquake and making sure that we.
Keep our <unk>.
Tower in line, if not above the 250 year peak zone, PMI, which is California quake.
And we also don't.
Sacrifice too much margin for the sake of bringing on <unk>.
Business that may not be generating the right risk adjusted return.
That being said in a market like this.
Our underwriting expertise the vehicles that we have.
CNS company or the standard company.
Both commercial and residential appetite, we want to maintain our leadership position market cycles change. This is what some are calling the hardest reinsurance market.
Since Andrew maybe it's since Katrina Rita Wilma, we can navigate it and it's going to position us well in the long term to have a market leadership.
Uh huh.
Got in quake, so we're going to grow in quake, we're not going to grow egregious Lee, but we think we can grow and maintain the same type of reinsurance that we've always had in place.
That makes sense, sorry about the confusion on my part.
Good question and it's one we want to make sure people understand.
Any.
Any thoughts about the sort of non attritional losses, the cat loss exposures prospectively.
In addition to what you've already said.
<unk>.
It sounds like you're trying to pull a PMO down but the business is also growing.
Yes.
Anything that would be helpful. As we think about yes.
So yes.
Happy to elaborate on that as well so with respect to the.
Continental Hurricane exposure.
We are going to bring the PMO down from 200.
$50 million at the peak of wind season, and 2000 $22 million to $100 million at the peak of wind season in 2023, and we are well underway. We've also made underwriting changes that are reducing our line size.
And avoiding concentrations.
And counting levels.
And obviously on a regional basis, as well and putting a L caps and at a county level basis, what that is going to allow us to do is manage the reinsurance costs for all perils, which frankly is the most expensive and cat ex ol right now.
Also at predictable earnings in the sense that our AAM is going to meaningfully come down too. So we are getting rate.
Which will help with the Attritional loss ratio for that line of business as I mentioned it was in excess of 40% in the fourth quarter and it's and it's moving higher in the first quarter of this year.
But all of that growth is going to come from in that line of business with that all risk business is going to come from rate.
With commensurate exposure reduction.
So.
Should we think about how should we think about any potential.
Changes.
<unk>.
Well.
Yeah, so with respect to the retention fall I think.
The fact that we are reducing our pms.
Meaningfully on the apparel side that will help with the retention.
We've always said that we want to keep the retention and the parameters of our retention.
Less than 5% of surplus and meaningfully less than a quarter of pre tax earnings maybe call. It a month and a half or two months of pre tax earnings the reduction in the P&L will allow us to maintain that.
One guy post that we've seen in the market is having a retention or the reinsurance wanted to your retention thats equivalent to.
One in 10 year event.
In line with the 10 year and then on the exceedance probability curve that correlates to around a 15% to $17 $5 million level. As we currently sit right now, we'll see how that's priced out and whether or not we want to trade dollars, but I think that's a good construct to operate from now.
Okay.
Just another question as well one other people ask Mr. Q. So thanks for all the help I appreciate it.
Thanks, Paul good questions.
Our next question is from Tracy <unk> with Barclays. Please proceed.
Thank you you know when you hear commentary by your competitive outlook on casualty is pretty cautious.
This is Nick.
Detailed operation you're not a huge piece.
But you are making notable strides on ground it was up 140.
Got it.
That backdrop do you see 2023 is the year to grow casualty and so what parts of the casualty market do you think you can grow and achieve attractive risk adjusted return.
Okay.
Hey, Tracy, yes, that's a good question.
So we do think we can grow in casualty, but like you alluded to it's got to be in specific targeted segments. So I highlighted on the call real estate D&O. We liked that line of business. We have a longstanding history that frankly creates palomar in that market and we did see right. There it was up eight 5%.
In the fourth quarter.
On the other side of the equation, we do have.
A D&O book.
And it's not a large book, but we are riding some there and we're focusing more on private company D&O, where youre still seeing 5% up on renewals at least that's what we saw in the fourth quarter versus the public side, which is 5% down so we want to be targeted there and so professional liability.
Miscellaneous professional liability.
General casualty, which is kind of flat to plus 5%. That's what we saw in the fourth quarter. Those are probably the segments that we're going to go deeper in and then we are talking to a handful of underwriters that can help broaden.
The franchising casualty it might be like a new segment that we enter into but it will be very specific.
Great.
When you think about your fronting business an important piece is achieving the fee income is the ceding Commission.
Phoebe.
Question on ceding commission and with that compression limit your growth trajectory.
So Tracy that's a good question.
We are consistently renewing our fronting programs throughout the year.
The ultimately the pressure on the ceding commissions might fall back more on the distribution partner not on the fee that we get we get a 5% to 7% that's based on us taking potentially can tail risk.
Obviously.
Lending our balance sheet from a collateral managing collateral and then also the licensing associated with a given product. So we have not seen any pressure on our structure.
I think the fact that most of our fronting business has not property.
Also lends itself well to sustainability of that margin.
On the whole the fronting business has terrific visibility on growth into 'twenty three.
<unk> added a new partnership and.
Advanced <unk> and <unk>.
We believe that.
We should sustain the margins and have a nice visible fee income stream.
To grow in 'twenty three.
Just a quick follow up question on that tail risk I thought you see that 100% of those premium.
And any tail risk Gordon this is jed.
<unk>.
<unk> managed to calibrate.
It's ultimately we have the specialty homeowners business that is all reinsured out and they buy beyond the 250 European mall, but we do.
Put some excess amount into our program just for conservatism sake. So there is tail risk there.
Alright, thank you.
Our next question is from David <unk> with Evercore ISI. Please proceed.
Hey, good afternoon.
First question I have is just on the AAN our expectation for 2023, if I think about peak wind season.
If I recall I think it was like $6 million in the third quarter of 'twenty, two but it sounds like you guys are reducing the P&L pretty substantially.
Well over 50% is what it sounds like for a third quarter 'twenty three.
So any any color you can provide there on what the alloys.
As we head into 'twenty three.
Yes, Great question, Dave No, obviously Mac talked about it we are.
Meaningfully decreasing our PMO, we are going to see.
Requisite reduction in our <unk> expectations as well based on a like for like a view of our reinsurance structure that number would be in the force. When we project out to September of 2023. So you are seeing a requisite reduction in that average annual loss calculation. So we like what we're seeing there.
We hope that it reduces the overall volatility in the catastrophe exposure that we have.
Got it thanks.
And then I guess.
I guess, maybe following up on that so I think the cat loss was was obviously a bit higher in the third quarter of 'twenty two.
From Ian which you know it wasn't a normal year.
But when you guys look at that loss.
Is that Oh.
Is that sort of like all one in 50 year event for you guys or one in 200 year event I guess I'm just trying to get a gauge for just triangulating with what Youre doing with PMA was going forward and sort of what are sort of in like event would mean going forward as well.
Yes and was Dave.
150 year, if not a little bit above 150.
Our.
Modeled results in EP curve I think that in developing in line with our original ultimate if not.
Some cautious optimism that it will come in below that the one thing that I'll say is the underwriting actions that we've taken and the reduction of the P&L puts and well below.
The fifth year is much lower today than what it was in September and it will be much lower in September 'twenty three than what it is so.
I think what you would see it in like for like would be.
Equivalent from a retention perspective, if not lower at the end of 'twenty three.
Got it okay. That's helpful.
And then Chris I, just wanted to follow up a little bit on the Attritional loss ratio outlook for 'twenty three.
And I don't want to mean or be splitting hairs here, but I think it was 23% to 24% on the Attritional loss ratio when you spoke about it last quarter.
And now it sounds like you guys are calling for 22 to 24, so maybe a little bit better.
On the low end, but maybe just talk about you know has your view changed at all.
Just given the commentary that you made it sounds like it may have but just wanted to double check.
Yes, I think there is obviously this quarter showed that there is a little more favorability there, but you are correct. We did say 'twenty three to 'twenty four.
He didn't say, 20% to 24, so I would say no material change in that outlook right, but I think when people look at us from a quarterly standpoint, there is concern when it moves around a point or two so I didn't want to give a little bit of leeway there right remember one for a quarter point of loss ratio is only about $800000 of net loss. So not a big number in the Grand scheme of things, but I wont.
To make sure that people are considering that on a quarterly basis, but that annual target for us when we think about it is still call it 20% to 24%, which is well within the same guidepost I would say that we've talked about before.
Got it okay and still the view is that could drift up a little bit as we head into 'twenty four.
No I would say the other way around I expected 'twenty three it is going to obviously go up from where it was in 2022 I would expect by the end of 'twenty three that there is going to be favorable pressure to push that loss ratio down by the end of the year.
Got it okay.
Thank you for that.
As a reminder, this star one on your telephone keypad, if he would like to ask your question. Our next question is from Andrew Anderson with Jefferies. Please proceed.
Hey, good afternoon.
Pick up this quarter in residential earthquake growth and I think in the past mentioned you haven't seen the proposed changes at the CEO .
Really earn into results due to changes made in the last quarter with their reinsurance program.
Give any greater clarity to the timing of that impact and I guess would any impact from CA business be included in the guidance for 'twenty three.
Andrew Yes, that's a great question.
Hi.
The actions to CA took or the actions taken following.
The market downgrades, specifically a M best downgrading them.
It didn't impact the fourth quarter.
I think it has the potential to be a nice catalyst for sustained growth into 'twenty, three and 24.
Ultimately what we're seeing right now is improved production from <unk> member companies that also have a trading relationship with us like an allstate or our farmers.
We are also starting to have conversations with other participating insurers that are exploring their options for alternative solutions.
It's helping us in the high value segment as the CBA is further sub limiting high value accounts and the good thing about that is those high value accounts are now moving more of our E&S company, which gets a better risk adjusted return at a higher rate than what it does in the standard market. So.
CA action.
Is definitely informing the confidence that we have and the growth that's in.
The guidance for 'twenty, three but theres no kind of step change function like a large matriculation out of the CPA by participant and ensure that we pick up from it.
Got it.
And inland Marine growth this quarter picked up again pretty strong can.
Can you kind of help us think about the growth profile in this business and it sounds like builders risk I guess I would've thought.
Perhaps in like a tougher economic backdrop, it could be a bit more pressured but maybe this isn't the case with anything you're currently seeing in results.
Yeah, Andrew it's <unk>.
That you would think that builders risks because it does it is tied to homebuilders.
Would have some pressure on it in this environment I think the one thing thats offsetting that or there's a few things that are offsetting that rather one as we continue to expand geographically.
Whether it's through hiring new underwriters that have regional focus is.
<unk> is broadening distribution ended in the states that we had.
Not been as active in but Furthermore, a lot of what we're writing there is niche segments really like multifamily. So we're still seeing growth in multifamily, especially in a state like Texas and again. This is a non cat exposed segments of Texas.
<unk> or Arizona, and even to a degree in California, the multifamily market remains pretty robust so we.
We do look at the economic impact or potential economic impact on that line of business, probably as close as anyone that we have but it's performing.
Pretty well as you can see by the growth.
Thanks, and maybe one last quick one it sounded like the reinsurance announcement you made in December risk adjusted pricing was up 35% just want to make sure I heard that right and that's kind of the same expectation and the midyear, but it sounds like if you use the E&S carrier a bit more you'll be able to push some rate.
And get inflation adjustments on that as well to offset.
Yes, Andrew.
Was 30% just to clarify.
But if that informs us now though.
Yes, so that is definitely informing us I think there is cautious optimism that six one may not be as draconian as one one but.
We're not going to hang our hat on that right now.
But youre absolutely right, we do have levers the E&S company.
Clearly on the commercial quake side, but also on the admitted the home homeowner side. The residential side, we can use the E&S company and we are in an increasing fashion just as an aside.
And.
Yes.
First part of this year about 20% of our new business on <unk>.
Residential earthquake is E&S, so that lever is being used in an increasing fashion.
Got it thanks for the help.
No good question.
Our next question is from Matt Shields with VW. Please proceed.
Thanks, just a bunch of.
Random questions first Matt can you talk about the distribution force that you have for agriculture.
So sure. So the crop deal we are working with advanced AG protection.
Which is run by two long standing prop executives and so they are acting as the MGA. They are handling the claims as well too and so.
<unk> was the president there has been in this market for 30 plus years he has distribution touch.
Touch points throughout the Dakotas, Illinois, Iowa.
Tennessee, Inc.
In Ohio, focusing on farmers.
And introducing brokers are farmers that crop.
Crop insurance like soybeans and.
Some weak but more.
The beans and corn.
So it's going to be through an MGA with regional producers in those local markets.
Okay. So we can think of it sounds like if I'm interpreting that correctly, we can expect a fairly rapid ramp up in premium because of their.
Existing relationship.
They should have existing relationships.
We've not forecasted a ton of growth in 'twenty three we think it has great promise 'twenty three 'twenty four and beyond.
They just got approval from the RMA and the USDA and right now is when there is.
The majority of the business written up into about March 15th So they are bringing business on.
I think it's really going to be a meaningful contributor in 'twenty four and I think it's.
And to point out that this is a front end deal.
Going to get smarter than the market, Jon Christianson, our president John convincing our chief risk officer have long standing history in the market. They were both crop reinsurance brokers.
Prior to their time to Palomar.
This is going to be purely fee generative yeah, certainly in 'twenty three.
Okay, No that's very helpful.
Second question when you talk about the P&L coming down does that have any impact on your need or desire to renew the aggregate cover.
Yes, that's a good question. Thanks for asking I think what it to me. It makes the aggregate all have more appealing to our existing reinsurance partners there.
The aggregate fundamentally.
<unk> is designed around for Chinese protection from a frequency of severe property cat events, and then obviously, providing a row four so by reducing the wind P&L you are reducing the continental wind exposure, that's in that aggregate and really making it look more like a third or fourth of that.
Cover for Hawaiian Hurricane or earthquake.
So the reinsurers that have made money to data in it.
I think they find it more attracted by the underwriting changes and the change in the book of business we are.
In the market on that and underway with discussions I think we believe.
We can get it done.
Economically compelling.
Levels, if thats not the case there are alternative structures that we could put in place that served the purpose of protection from multiple severe events and ostensibly put that row floor on it may not be in aggregate, though.
But we will.
Our investors and the market know as.
As we get closer to 401.
Okay. That's very helpful. And then final question.
I don't know how this works from a rating agency perspective, but does the changing reinsurance market have any impact on your targeted net written premium to equity.
Surplus goals.
Yes, no. It does not our view is still the same obviously, we use a heavy amount of excess of loss and so really I feel that that ratio is more pertinent to quota share even though we do use it for the cat business, but we still feel comfortable with a net written ratios targets for <unk>.
Catastrophe being one to one and then for the newer lines of business that are subject to more attritional cat expose such as the casualty lines in the inland marine as builders risk type lines getting that ratio up to like a one five to one type ratio. So we still feel very good about those ratios and there has not been any pressure.
Pressure or view changed from our standpoint on how those reviewed yes, just to add on to Echo what Chris is saying if you look at just our <unk> scores from fast they are well above our a minus level, they're closer to an a plus level.
More excess of loss actually helps to be car too so.
Ultimately, we're going to manage the ratios, what we feel best and others are comfortable with from a long term perspective, if theres. Some deviation in the short term as proxy frankly going to be additive to how much premium we could right.
Okay perfect. Thank you so much for all the information.
Thanks, Matt.
Our next question is from Pablo <unk> with Jpmorgan. Please proceed.
Hi, Thank you I had a couple so mackie touched on this already but I just wanted to get more color on your line of sight and comfort in the reinsurance costs, you're embedding in the guidance given that you don't renew your for you mean programs within the year, but it seems like you're in discussions in the market.
You obviously did the.
Go to share early this year, but just perfect.
It's an awkward level and.
Getting the reinsurance cost that you're embedding in your expectations.
Yes Pablo.
Youre absolutely right.
We are focused on it right now we were in London, a couple of weeks ago I'm heading to Europe next week to meet with the host of our Continental European Reinsurers.
John can knudsen, and Christopher Wheeler, and Jon Christianson, and I are spending a lot of time on it we feel very good about the reinsurance assumptions that are in the guidance that we provided and like I said in like you've just touched upon it is informed by what we procured and paid at one one.
Sure.
Again, we feel that we have.
A lot of different ways to play the reinsurance market.
And manage the cost, but we're not going to deviate from.
The guide posts of the 250 year P&L retentions inside of 5% of surplus and lessen.
Quarter half a quarter of pretax earnings somewhere in that level.
We feel very good.
The capacity is there and the assumptions that in the guidance.
Are achievable.
Got it thanks, and then second one for Chris.
22% to 24% guidance on the loss ratio.
Just wanted to confirm that that includes first the higher insurance costs are going to be the tier REIT. So half a year of higher reinsurance costs through the seating and then I think in the past you guys have talked about some books, you're trying to run off that might produce elevated claims but.
I just wanted to confirm that the 20% to 24 is an all in view incorporating those two items.
Yes, no thats a very good view.
View on the loss ratio, obviously, there is pressure on the loss ratio because of the excess of loss costs of the quota share obviously that impacts the denominator in that calculation, but yes, our target of 20% to 24% does contemplate that type of change in that type of pressure right as the excess of loss changes. It does push up the loss ratio was actually not changing any of the net dollar so.
That is a very astute view on that but would you contemplate that contemplate that obviously, especially in the second half of the year.
Okay.
Just to follow up on that comment Chris maybe this question is for Mac as well so as we think about so you start providing your view for 23, alright, but just sort of think about 'twenty four and 'twenty five.
24 will essentially have a full year of higher insurance costs and it seems like at.
At least Nathan.
Numbers you gave you think you can hold the line in 'twenty three but in 'twenty four like do you see that gap.
Do you see yourself pulling the line or is the gap going to increase or and you sort of have to think about reinsurance versus what youre doing on the primary side right, but sort of any.
Any thoughts on how one full year of higher reinsurance pricing might compare against what they're doing on the primary side I've been thinking about 'twenty four.
Yes, Pablo thinking out to 'twenty four I actually think you're going to have only five months of the 23 costs. My my expectation is 24.
Start to rationalize a little bit, but I'm not going to make a call that our market will end, but I don't think the rate increases will be as pronounced.
We're seeing some snippets.
Snippets of some capital coming in or more retro support than what was initially expected and thats a positive certainly for the primary industry and I think it's a positive for the industry broadly so I think as it relates to 'twenty four.
We feel there is no need for us to deviate from what we're doing in 'twenty three 'twenty four would look a lot similar from a complexion and mix of excess of loss versus non excess of loss business hold aside that there might be a little more rapid growth from some of the casualty lines are fronting lines.
Okay, and then last for me.
E Mail that you offered the $4 million that doesn't include a two and a half fluid losses in California, right. That's more that's right okay.
Okay Alright. Thank you. Thank you guys.
Thanks Pablo.
And our final question is from Mark Hughes with <unk> Securities. Please proceed.
Okay.
Yes.
Mark when you look at the profit on your new business.
Is it as profitable as it was last year before the reinsurance costs went up obviously with the business you had written on older pricing as you pay higher reinsurance costs, that's going to have some impact on your bottom line, but is the new business with.
Updated pricing with used in the E&S.
Any more frequently.
It.
As profitable as what you are writing last year.
Mark it won't be as profitable as what we're writing last year some of that frankly, driven by the fact that the good portion of our residential book is in.
Stay in the standard market is written on an admitted paper.
Paper, so we're getting a 10% renewal.
Our automatic increase due to the inflation guard.
But we can only use the E&S company for a portion of that where you can recoup those rising loss costs in the commercial you can recoup a good portion of those rising loss costs, but new business that we write this year will not have the same margin as new business that we wrote in 'twenty three I think though its important for us to reiterate.
We want to maintain our market leadership position in an earthquake.
It's still a very profitable line of business.
Cycles change and so there could be a point, where reinsurance pricing could conceivably decline and then youre going to see some pretty elegance and the margins.
But on the whole, we're taking a long term view, we think that.
This year for.
For 2003 were projecting 23, 5% net income growth at the midpoint of the guidance.
Yes.
Very hard reinsurance market, we will still generate a 20 plus Roe.
Have a combined ratio that's in the low 70 so.
We want to maintain our leadership position in the quake market, because it's still going to contribute to those numbers that I just gave you.
Chris what is the what's a good tax rate for 2023.
Yes. Good question, Marc obviously your tax rate is higher this quarter and higher for the year, then we've kind of talked about a 21% the big driver of that we do add back executive comp that exceeds the <unk>.
<unk> provided by the IRS and then Q4 it was driven by the fact that stock options not many stock options were exercised so drove a little bit higher and I think if that trend continues and I expect the tax rate to trend a little bit higher as well I think if we go with that trend is probably going to be in the 22 to potentially 23% range, but call it stock.
Price.
What we wanted to do then I think options come back into the table that can push it back down to 21%, but I would probably say today, 22% is probably a good target for 2023.
Thank you very much.
Thanks Mark.
We have reached the end of our question and answer session I would like to turn the conference back over to Matt for closing comments.
Thank you very much operator, and thank you to all who are able to join US. This morning. We appreciate your questions and your continued support.
As always I want to thank the team at Palomar, who remain instrumental.
Into our short and long term success and their productivity is industry leading.
To conclude we had a great year in 'twenty two we produced record written premium record earnings and an adjusted ROE of 18, 3%.
<unk> demonstrates the durability of the business model I think that the durability of the business model is even further evidenced in the guidance that we're giving.
For 'twenty.
Great.
We are confident that we will navigate this.
Its hard reinsurance market.
And we will be able to generate strong net income growth and adjusted return on equity of 21%.
And more importantly, execute on Palomar to act and deliver predictable earnings growth for the long term. So thank you very much and enjoy the rest of your day take care.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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