Q1 2023 Palomar Holdings Inc Earnings Call
Good morning, and welcome to the Palomar Holdings first quarter 2023 earnings Conference call.
During todays presentation, all parties will be in a listen only mode. Following the presentation. The conference line will be opened for questions with instructions to follow at that time.
As a reminder, this conference call is being recorded I would now like to turn the call over to your host Mr. Chris You Cheetah Chief Financial Officer. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate your participation in our first quarter of 2023 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.
Turn time.
The 11th 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.
Such risks and other factors are set forth in our quarterly report on Form 10-Q filed with the Securities and Exchange Commission.
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 the most comparable GAAP measure can be found in our earnings release at this point I'll turn the call over to Matt.
Thank you, Chris and good morning, everyone.
Following a record year in 2022, I'm pleased with Palomar strong start to 2023.
Our first quarter results demonstrate continued momentum in our business and further execution of our Palomar to X strategy.
Highlights for the quarter was 46% gross written premium growth.
Adjusted combined ratio of 73, 3% and an adjusted return on equity of 27%.
Importantly, these results were achieved even with elevated catastrophe activity during the quarter.
Selected strategic and operational accomplishments in the quarter with the purchase of an additional $188 million of excess of loss reinsurance to support our growth and earthquake.
The acquisition of real estate errors and omissions M D. A C O insurance services.
Several key hires in our casualty underwriting data analytics and actuarial department.
The end of 2022 I teach your four key strategic initiatives for 2023.
One sustained our strong profitable growth trajectory.
To manage the dislocation in the global insurance market.
Three deliver predictable earnings and for scale in the organization.
The results of this quarter exemplify our ability to execute on each of those goals.
Turning to our first quarter results our core earthquake franchise grew 31% the residential earthquake book grew 20%, while our commercial earthquake Langer 50 per cent.
The hard market induced dislocation in the earthquake market persisted into the first quarter 40, Palomar have a chance to both grow and optimize its earthquake book of business.
Increased utilization of Palomar excess and surplus insurance company R. E N S carrier in the residential earthquake line is a Prime example of this dynamic.
Specifically, we wrote approximately 27% of our residential earthquake new business on E&S paper in the quarter.
We have approximately 10% of the residential quake book written on an E&S basis.
The E&S lever also optimizes the use of our reinsurance capacity and enables us to maintain our margins.
Also contributing to our topline growth in the quarter were two property lines of business with limited catastrophe exposure in the marine and excess property.
Eliminating grew 70% as compared to the prior year as we continue to expand our geographic reach and distribution footprint.
Our excess property line grew 531% year over year as it build an attractive book of non cat exposed property business.
Both products are generating attractive loss ratios and margins.
All our property parks continue to benefit from rate increases and enhanced terms and condition.
Commercial earthquakes are risk adjusted increases are approximately 20% in the quarter with March with March renewals approaching 25%.
Our U S commercial all risk book, So average rate increases north of 50% and an exposure decrease of approximately 48% year over year.
Our inland Marine book, So a regional variance in pricing with builders risk accounts seen inflation, adjusted new projects priced 7% to 10% above the prior year.
Turning to our casualty business, we continue to see growth in market traction across this business.
Overall casualty growth remains a key strategic imperative as these new lines of business or generate attractive economics with a lower volatility loss profile than our property business and also provide further product diversification.
Our casualty segment grew 142% year over year highlighted by strong production in professional liability and excess liability.
But from an underwriting standpoint, the casualty books loss performance remains down.
Best evidenced by the improved ceding commission attained at the renewal or for one professional liability general casualty quota share.
While we are not seeing rate actions like that of the property market, our casualty business the rate environment is stable.
Casualty lines saw increases in the range of 3% to 10% in the first quarter.
During the quarter, we acquired <unk> insurance services to bolster our professional lines and casualty franchise.
C O M. G E in the real estate, you know space focusing on mid size real estate brokerages in California, and other western States.
<unk> brings in other specialty products power as well as enhances our professional liability margin.
It provides palomar both growth and predictable earnings stream.
Yeah.
Tom or front continue to deliver rapid growth generating $91 8 million of premium versus $29 8 million in the prior year quarter.
While we are pleased with the growth from funny remain acutely focused on compliance oversight and collateral management of our less than 10, a bunching partners.
Fronting strategies premised upon providing value added services to a select group of M G as carriers and reinsurers.
This approach allows us to provide a comprehensive and additive service prudently learned a line of business and importantly avoid surprises.
An example of our funds and strategies are annuities Dimensioned partnership Advanced Act protection.
A leading crop MGA.
In the quarter Palomar became one of only 14 approved insurance providers known as it AIP with access to the $20 billion shared crop marketplace.
Partnership also establish a new growth vectors and a specialized line of business.
Like our other fronting arrangement Advanced Act protection Diversifies, our product mix, while adding to our fee income base of key tenants Palomar to ask.
Premium this year it'll be modest, but the potential for growth is significant.
Turning to our reinsurance program. The first quarter was a demonstration of the quality of our book of business and our ability to navigate the choppy waters of this hard reinsurance market.
During the quarter, we were pleased to successfully placed 188 million of incremental excess of loss reinsurance limit to support the growth of our residential and commercial earthquake business.
We are encouraged by the pricing approximately 27% up on a risk adjusted basis.
And the terms that we secured as they were in line with the assumptions used to formulate our adjusted net income guidance.
Additionally, as previously mentioned, we renewed our main casualty quota share and improved economics from the expiring treaty terms.
At April 1st we elected not to renew our aggregate cover after determining that the utility that protection was materially diminished by the considerable reduction in our continental hurricane exposure in probable maximum loss.
To provide more context on the impact of our material P email reduction and the underwriting changes made over the last several years.
'twenty 'twenty 'twenty 'twenty 'twenty wind season were to transpire in 2023.
64 million of net losses incurred from the numerous storms in the 'twenty 'twenty vintage will be less than $10 million in aggregate today.
The only one of the stores are qualified for a recovery under the expired aggregate.
Well there was reinsurance capacity available to support the I can recover.
It did not make economic sense to renew.
Therefore, we will explore alternative coverages to protect protect.
Protection from higher frequency of severe events.
We are currently in the midst of our six one reinsurance placement with firm order terms out of the market. This week.
As always we intend to share comprehensive details once complete.
Additionally, we are marketing a multiyear earthquake only catastrophe bond for such issuance from Torrey Pines re that will provide incremental limit support our growth and our bellwether line of earthquake.
We continue to see value in the corporation of multiyear ILS solutions into our comprehensive reinsurance program.
We are encouraged with the progress to date on the core program and are confident that we can secure the capacity to.
To achieve our strategic objectives in 2023 and beyond.
We are optimistic that we will exit or six one reinsurance placement with a risk transfer programs similar to that of years past and if the cost of reinsurance will be in line with assumptions used to provide our full year 2023 guidance.
From a capital management standpoint.
Main conservatively capitalized with a net premium earned a surplus ratio below one times.
As such we will continue to allocate capital towards both growth initiatives and opportunistic share repurchase.
We repurchased 134680 shares at a total cost of $6 8 million in the first quarter and another 84547 shares at a total cost of $4 6 million, thus far in the second quarter.
Returning to 2023 guidance, we reiterate our expectation to generate adjusted net income of $86 million and $90 million.
This guidance reflects catastrophe losses incurred in the quarter and Moreover incorporates our current expectations for our reinsurance renewal, which remains at a risk adjusted increase of approximately 30%.
With that I'll turn the call over to Chris to discuss our results in more detail.
Thank you Matt. Please note that during my portion when referring to any per share figure I'm, referring to per diluted common share as calculated using the treasury stock method. This.
This methodology requires us to include common share equivalents, such as outstanding stock option during profitable periods exclude them in periods, where we incur a net loss.
As a reminder, 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.
We have modified the current and prior period figures accordingly.
For the first quarter of 2023, our net income was $17 $3 million or <unk> 68 per share compared to net income of $14 5 million or 56 per share for the same quarter last year.
Our adjusted net income was $24 million or <unk> <unk> per share compared to adjusted net income of $18 6 million or $17 72 per share for the same quarter of 2022.
Our first quarter adjusted underwriting income, which we believe is the best financial indicator for evaluating Palomar to X was $22 2 million compared to $21 $2 million last year.
Our adjusted combined ratio was 73, 3% for the first quarter compared to 72, 1% in the first quarter of 2022.
For the first quarter of 2020.
Our annualized adjusted return on equity was 27% compared to 19, 2% for the same period last year.
The first quarter adjusted return on equity performance in stills further confidence in our strategy of sustaining top line growth with a predictable rate of return.
Gross written premiums for the first quarter were $250 1 million, an increase of 46, 3% compared to the prior years first quarter.
Net earned premiums for the first quarter were $83 2 million, an increase of nine 5% compared to the prior year's first quarter.
The first quarter of 2023 our ratio of net earned premiums as a percentage of gross earned premiums was 37% compared to 54, 7%. That's the first quarter of 2022.
Compared sequentially to 38, 9% in the fourth quarter of 2022.
Selecting the expected decrease from the overall growth of printing and lines of business they use quota share reinsurance.
Losses and loss adjustment expenses for the first quarter were $27 million, including $1 $8 million of catastrophe losses from the previously disclosed, California flood activity slightly offset by favorable prior year development of catastrophes.
The loss ratio for the quarter was 24, 8% comprised of an attritional loss ratio of 22, 6% and a catastrophe loss ratio of two 2%.
Attritional losses for the quarter include unfavorable development from Winter Storm Elliot while the development of Elliott This quarter would meet our definition of a catastrophe. We continue to include this event and our attritional losses stance consistent with other ammonia catastrophe events in the past.
As we have done historically our guidance expectations include many catastrophes.
A large catastrophe event.
We continue to expect an attritional loss ratio for the year of 22% to 24%.
Our acquisition expense as a percentage of gross earned premium for the first quarter was 11, 4% compared to 22% in the first quarter last year and compared sequentially to 12, 7% in the fourth quarter of 2022.
Additional ceding commission from hunting fees continue to drive the improvement.
The ratio of other underwriting expenses, including adjustments to gross earned premiums for the first quarter was six 8% compared to 9% in the first quarter of last year and compared sequentially to six 9% in the fourth quarter of 2022.
Our net investment income for the first quarter was $5 1 million, an increase of 98, 5% compared to the prior year's first quarter.
Year over year increase was primarily due to higher average balance of investment held during the three months ended March 31, 2020, due to cash generated from operations and a shift of invested assets from lower yielding investments investment assets into higher yielding investment assets with a similar credit quality.
Our yield in the first quarter was three 4% compared to $2 3423, 4% in the first quarter last year.
Average yield on investments being in the first quarter remains above 5%.
Our exposure to the bank failures in March was immaterial to our overall portfolio.
Oh $2.2 million with Silicon Valley Bank senior debt of which we recorded an expected credit loss of $660000 you are seasonal reserve.
Additionally, we note our commercial real estate exposure in our investment portfolio is minimal and less than 3%.
No. It does not include any direct loan.
We continue to conservatively allocate our positions two asset classes that generate attractive risk adjusted returns.
During the quarter, we repurchased 134680 shares of our stock for a total of $6 8 million.
Under our two year $100 million share repurchase program.
We have approximately $58 $8 million remaining under the authorized program as of the end of the quarter.
As Mac mentioned, we are reiterating our adjusted net income guidance range of <unk> $86 million to $90 million. This range includes approximately $1.8 million of net catastrophe losses incurred during the first quarter.
But does not include any additional catastrophe losses for the year.
On a gross earned premium basis, we expect our net earned premium ratio and acquisition expense ratio to continue to decrease in 2023 from the level reflected in the first quarter of 2023.
Additionally, based on the current market our effective tax rate for the year may remain elevated between 22 and 24%.
Before opening the call for questions I would like to note that Jon Christianson President of Palomar will be joining the question and answer session of this call.
With that I'd like to ask the operator to open the line for questions operator.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you 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 star keys, one moment, please while we poll for questions.
My first question is from Tracy Bengie with Barclays. Please proceed with your question.
Thank you.
Just wanted to discuss the decision not to renew the aggregate reinsurance treaty.
Thinking about this the right way, so essentially you removed and army floor, when youre thinking about guidance.
Hey, Tracy it's Matt Yeah.
Fair question.
We did opt to non renew the aggregate.
One of the utilities of the aggregate was essentially putting in row floor.
On the book, assuming that there was a multitude of frequency.
Frequent severe events I think it's important to.
Go into a little more depth on what I brought up in my prepared remarks and that is really.
The lack of utility from the aggregate on the heels of all of the underwriting changes.
And that we've made and really the significant reduction in the wind.
And Ah Quake P M L.
So just to put it a little more color around that or wind P. M. L has come down from $650 million to a $100 million.
At the peak of Windsor win season, this year, they're continental hurricane risk is going to be less than 5% of our total P&L.
No hurricane premium will be less than three or four years was three 3% of the premium for the quarter. So.
Ultimately if you get look at 2020 only.
Hurricane Sally would have qualified for the aggregate four as a potential for recovery.
In 2021 eyed would've only caused against $3 $4 million loss. So there really is not a great use from that we can explore alternative covers like potentially a third event.
That would potentially put a floor on the row after.
More than two or three retained losses that solves a similar.
Function.
Purpose, rather, but the aggregate relative to the risk adjusted returns and the cost and frankly the need just didn't make sense. So we can we can construct a floor with.
With some other tool.
Cool.
Would you be prepared I recognize that you have a lot less exposure to win but would you be prepared to provide a range of potential outcomes. Given you no longer have a floor.
Yeah.
Yes, I mean again, if you just run the ads if analysis for 2020, which was the worst one season on record our losses would have been in totality would have been $10 million from the six or seven storms that we had retained losses. So that would've changed what was it $60 million loss in total to 10, which would've.
Put the ROE, but it would have put our Roe.
Well in the 20% range.
Got it.
With the bore is with premise after three retained events. So we can put some type of.
Third event protection.
That solves it but that is going to be something that will ascertain after we complete the six one.
Renewal.
Got it and then just sticking with reinsurance I'll say Erin layers you've added on top.
Earthquake is that because your P. M. ALS are rising given all your gorilla.
He didn't want to wait until the renewal season to do that.
Yeah. So that's a good question as well so we are buying the incremental limit that we bought the $188 million that we bought.
At four one and some is accepting a six one is to accommodate the growth that we're seeing and the earthquake market currently and a little bit prospectively, you know obviously in the first quarter total earthquake grew 30% commercial 50 residential 20.
We're being mindful of the growth and making sure that we have the requisite reinsurance to support it and so as the PMA was growing we want to make sure that we have.
That's in line or if not above the 250 year peak zone, which is California quake and so that's what we bought too.
Okay. So it sounds more perspective, or you didn't care stereo I wanted to say no no no.
No. It is you know it's not a just in time, it's more of a staying ahead of it.
Got it thank you.
Our next question is from Matt <unk> with JMP. Please proceed with your question.
Hey, good morning.
Mac I just want to ask a couple of questions on the hunting business, particularly.
Particularly with at least one of your peers have publicly.
A few months ago had some issues with the mismatch on it it sounds like some reinsurance language can you just paint us a little bit of a picture on on both just whether it's today or kind of what you expect the book to look like for the year in terms of mix of business, you know AG cyber kind of the other kind of major lines that you have there and then maybe just a quick refresher on kind of how are you.
Guys go about it from that risk management side, whether it be experienced contract language collateralization.
That sort of stuff.
Yeah, Matt Thanks for the question.
I think it's worth reiterating that our Franklin strategy is one where we are looking to have a concentrated back so to speak with a I guess less than two handfuls of partners that are subject matter experts.
Whether they be rated insurance companies or unrated insurance companies or M. G H or working on behalf of reinsurers. So you know it's a concentrated strategy that really allows us to manage effectively the risk profile the reinsurance placement associated with it and then feel confident mainly exposure and potentially how we.
Participate right now we're only participating on two of the programs the workers comp and the cyber where we take a 5% co part.
And ultimately I think that concentrated strategy allows us to avoid surprises the way we manage the programs as if we are.
On risk and again, we are in and in a couple of them and.
And so what we are doing is performing a range of audits, our compliance audit and underwriting audit and Sarbanes Oxley audit claims audit and then were instrumentally involved in the placement of the reinsurance all of these programs have.
A diverse reinsurance panel.
You know the cyber program Thats over eight reinsurers on there all of them are passed.
The security committee requirements of the large brokers that help arrange that.
Additionally, on the on the collateral side it depends on the nature, but typically I don't let Chris chime in that we are either collateralized in the unearned premium or a certain amount, but I'll, let Chris explain that further yeah, obviously, the collateral requirements depends on the counterparty risk involved deals.
With a name brand reinsurer.
Not collecting collateral upfront, but if we are doing dealing with a smaller captive type reinsure. Then we are evaluating their overall exposure, we have an internal model that evaluates any size capital structure history licensing.
Its authorization and in the type of collateral they want to use and then depending on where those factors fallout than we will determine the amount of collateral to collect as mark indicated usually we're collecting unearned premium and expected losses in the 100% to 150% range.
Those captive reinsurance parties.
I think Matt the only two of the things that I would add is one we have in house subject matter experts that are overseeing these.
Arrangements, whether they be our property underwriters that are involved with the property programs or casualty leadership that is involved with the casualty or cyber program. So.
Theres a good cross organizational collaboration there and then to your point of where we're going to see growth I mean, I think we feel good about all of them, having embedded growth prospects, which means we don't have to lean in and find.
New partnerships, we can grow with the existing one and grow with them meaningfully, especially as we're helping place their reinsurance.
Because we can bring reinsurance relationships to bear that others don't because we are not only in a range of reinsurance we.
We buy a lot of it.
Great. That's very helpful. And then one quick one if I can follow up on capital and leverage any Matthew commented on feeling like you have very conservatively capitalized now kind of below one to one on earned premium capital basis.
What what is I guess, what does the goldilocks capital look like and what what sort of leverage should we think about as being where you're comfortable feel you continue to grow but maybe maybe you're not buying back stock or not you like you have excess per se.
You know, Matt the book is evolving which is kind of a unfortunately is pushing.
I guess, the the potential leverage some.
It has historically had said that a one to one target was what we're looking at a net premium into surplus ratio of one to one.
As the casualty book has grown.
And you no longer tail lines or less cat business like in the marine and some of the excess property that probably pushes add up to a one two to one three range and that's something that we discussed with best and when you're looking at.
Our rating and our ratios. So I think that's probably if I had to say where we are today I would say, it's probably get a 1.2.
Level.
Perfect very helpful. Thank you.
Thanks, Matt.
Our next question is from David Martyr Madden with Evercore ISI. Please proceed with your question.
Hi, Thanks. Good morning, just had a question on the AR. So it looks like the adverse development was $3 4 million.
It sounded like Chris in that there was some elliot.
Adverse from from Winter Storm Elliott is is is that all the adverse or was there anything else that was that was contributing to that.
Hi, David Good question and I did indicate yes, most of the lost or if not all of the prior period development for the quarter was really driven by Elliot.
<unk> was obviously a late quarter event at the end of the year. Most of the increase was related on the commercial side that did have some severity.
That was a little unexpected we did have one full limit losses, there that kind of came in late so.
Nothing what I would call too surprising it is something that we contemplate when we think about our overall loss ratio pick our attritional loss ratio pick for the year of 22% to 24% overall for the quarter everything was in line with that and feel very comfortable to us and one other thing I would note on Elliott and the type of the losses that is.
As for business that was re underwritten last year and so when you think about our loss ratio and I talked about the fact that I expect our loss ratio to start to improve let's call. It. The end of this year and definitely by this time next year some of that or a lot of that Elliott loss would not be there next year. So we feel very good about that and the trends, but overall we see.
The Attritional loss ratio was right in line with our expectations.
Early in our mind is still a minicab and that is something that we've talked about before is something we budget for something we planned for and something that is definitely contemplated in our loss pick.
Okay. Great. Thanks, Yeah that was a that was helpful. Yeah. It sounds like you guys have you guys have also made the underwriting adjustments on those specific on those specific policies that caused the loss were there any other adjustments that you made as a result of that that little higher severity that you experienced.
Well, Dave this is Mac and to just to put a little more specificity on on Chris's point there.
The Big pop if you would from Elliott was from a discontinued mines that we exited post and you just had policies that were enforced. So that's why we have that the heightened sense of.
Confidence and that loss ratio ticking down and.
So it's really the majority of the Al EBIT development was from a discontinued mine.
Got it Okay. That's helpful. And then also sort of Relatedly I've seen you know it does look like the the commercial all risk premium continued gross written premium continues to drop.
I'm wondering and also you gave some good detail on the Pms are that the loss are assuming a 'twenty 'twenty AR type event happens happens this year.
I'm just curious you know hows your one in 10, South East win P. M L falling even more than I think it was in the 15 to 17 and a half range is that does that still hold or has that come down even more.
Yeah, David that's still holding and that's kind of informing where we think retention will go to on the wind side at a 1111.
You mean at six one so the commercial all risk book.
So if it has.
Declined.
Year over year.
It's declined close to 25%, but the exposure has decreased more than 50 or close to 50. So.
It shows that we're getting a good with what were maintaining a nice risk adjusted increase and therefore also it gives us the confidence to stay with the $100 billion PMO book of business, that's going to get a much better return than it did.
At 12, and 24 months ago.
Okay, great. Thank you.
Our next question is from Paul Newsome with Piper Sandler. Please proceed with your question.
Hello, Thank you for the call.
Any additional color or thoughts on how the acquisition will work its way into the financial statements and may be some.
Hello thoughts just on M&A and how you are thinking about.
What polymer Miami.
Yeah. Thanks, Paul that's a great question, obviously, when we look at the acquisition.
Did announce it because it's not a gigantic acquisition is something that's going to be.
Productive for us and it's going to help our overall margins on that book of business. So we're very happy with it but I wouldn't expect a material change for 2023, I think there's going to be a little more upside when you get into 2024, but theres going to be a slight margin improvement on that book of business for 2023, but I would say is youre going to be looking at.
$5 million range for the year.
Some expansion or expansion of that next year, especially with the growth we're going to be pushing even looking at for that line.
I think the just the strategic rationale.
It was of the acquisition and like Chris said its.
Pretty small not immaterial, but but what it does afford us as the a chance to go deeper in a segment, where we already were participating in that is in the <unk> space and bring on incremental subject matter expertise, particularly in the real estate section. So we now have a group of us.
The riders that specialize in a targeted lines of business that we can grow.
I mean.
Beyond the Western U S, but not changing the risk profile. So it just gives us the ability to really hum.
I don't see supercharge predicts extend the franchise and casualty.
Hot M&A, Paul I think.
Simply put we do really fancy ourselves as an organic growth strategy.
<unk> story we.
Have grown this business almost entirely organically save for our book of business purchase and this deal. So that's going to continue to be our plan. That's not to say, we won't opportunistically look at things, but we're not going to become a rollout.
We're going to be.
Organic growth story with several identifiable growth vectors in front of us.
Okay.
Guys I appreciate it all helps.
Thanks, Paul.
Yeah.
Our next question is from Mark Hughes with Truth Securities. Please proceed with your question.
Yeah. Thank you.
Mac you mentioned a.
A couple of programs, we have co participation on the fronting business.
What proportion of the total fronting premium do you have that are potential exposure.
So mark.
The two that we take.
The 5% or one 4% one 5% risk on the 4% is on the workers' compensation and the 5% is on.
Ah the cyber program and those two constitute approximately half of the premium may be a little bit more than that probably 60%.
So those are two of our larger programs.
Yeah.
Craig It's already I don't know if you touched on this earlier in the call, but have you noticed anything different in their behavior in terms of the.
Competition, new business marketing that sort of thing.
Sure Mark.
What I would say broadly on earthquake as there is.
A limited competition in that market right now whether that be because of the changes.
I'll, let Jon Christianson our R. R.
The president speak to that but then also in the commercial side capacity pull back. So that's why we are.
Very confident in our ability to grow that line.
We are very pleased to buy the incremental limit that support our growth not just where we've arrived at today, but prospectively, but I'll, let John offer his thoughts on <unk> and the earthquake market. Thanks.
Thanks, Matt good to speak with Mark This is John Christiansen.
So the CA has publicly disclosed over the last few months that it has reduced its total reinsurance limit by approximately $1 4 billion since December .
So that's another couple of things in the market one it's Palomar has been the beneficiary of freed up.
The supply of earthquake reinsurance capacity.
But it's also prompted a rating downgrade by and best during the first quarter, which some producers.
<unk> is a level below what their security committees.
Require so theyre looking for stronger options.
And Palomar fits into that category of stronger options as a way to participate in the earthquake market.
So that's allowing.
Allowing us as Matt talked about earlier to both grow and optimize our book being able to seek out that business that fits our model well and we feel like we're getting good risk adjusted returns on.
That said you don't see a still plays an important role in the California earthquake market.
Based on those recent decisions made by the CAA and and what they've made and will continue to.
Preview.
Really provides palomar with greater market opportunities.
Understood and then the inland marine you're getting good growth. There is that economically sensitive are you noticing any changes around the margin in terms of the.
Either maybe audit premium or opportunities for new business.
So Marc Yeah, we're pleased with the growth in inland Marine it was 70% year over year.
By definition, it's a builders risk.
Heavy book, So there is some exposure to.
Macroeconomic.
Changes are cyclicality, but we tend to be very heavy in.
Multifamily and kind of mid sized commercial projects and then writing in a handful of large commercial projects in there has not been a slowdown in construction and opportunity. Some of that's a function of where we are writing we write in Texas, we write in the Carolinas right in California, where there is a a their need for housing product Oh.
Sure ample activity.
And just overall commercial construction or mid size commercial construction. So we do watch it but right now we're not seeing.
Any slowdown there.
Very good thank you.
Thanks Mark.
Our next question is from Andrew Anderson with Jefferies. Please proceed with your question.
Hey, Good morning was hoping you could educate me a bit on the zero Attritional business is that booked at like a mid single digit loss ratio and I'm, just thinking given the rate of improvement here and perhaps the shift to E&S has that changed year over year those initial picks for that.
Yeah, Hey, Andrew Great question, Yeah. So when we think about let's call. It our binary book or zero Attritional book, that's really for US earthquake in Hawaii and because those are relatively easy to define events generally speaking we're looking at it at a zero percent loss ratio. If there was something that happened in the quarter that was maybe smaller or.
Larger, we'd probably put a pick around that but at this stage because these are pretty well defined events. We usually are booking that at a zero and that is especially true for Hawaii, where even to trigger coverage you have to have a named hurricane watch or warning for the islands or for the counties in Hawaii.
Before any coverage has been triggered so we are not generally going to be booking any type of loss pick for either of those lines of business.
Got it that's helpful and maybe on Hawaii seems to be slowing down a bit quarter over quarter or can we kind of just talk about the opportunity there or is it just looking for rate and not growing exposures.
Yes, so that's exactly what we're doing there Andrew we are just looking to grow.
Through rate and inflation guard so.
We have been.
We're satisfied with where we are from a market share perspective, and from a spread of risk perspective. So that line has kind of reached steady state.
And as we think through the June one renewal.
A cost of reinsurance for wind exposure is higher than that for earthquake. So we want to be mindful of making sure. We preserve our economics as best we can.
In a state like Hawaii.
Where.
The cost of risk transfer is not.
Not quite as elegant as it is an earthquake.
Got it thank you.
Our next question is from mainly with K B W. Please proceed with your question.
Thank you for taking my question just a question on funding the parent has some color.
How did demand full funded premiums has involved.
Do these trends imply any changes to how much Panama It gets paid for the fund to premium.
So yes. Thanks for the question what I would say is we continue to see sound growth with our <unk>.
Fronting partners as I mentioned earlier.
We have a very.
Concentrated and healthy relationship with these fronting.
<unk> that have nice embedded growth in them, whether it's because they have books of business that are rolling over this year or we help them find more reinsurance capacity to drive growth because due to market demand and the performance of the book of business.
As it relates to our economics, we have been able to maintain our economics.
And.
The fronting fees have not come under pressure nor will we allow them to you I mean, we in some cases.
Our putting our balance sheet at risk from a tail perspective, if it's a property line or beyond whatever the negotiated last cap can be for our casualty lines. So our economics are.
Are sacrosanct, and we're going to hold them and we've not seen any pressure for them.
Pressure on them excuse me.
Got it thanks.
One more question if I can.
I'm trying to Panama has established strong relationships with other carriers to distribute its Dan Shull that's.
That's quite policies.
So what are the opportunities are affiliated with these on carriers for other lines.
Yes, that's a very good question.
We have established ourselves as the earthquake specialists in a state like California, or any state frankly, where there's real quake exposure and it's been a nice channel for growth for US I think we have over 20, maybe 22 partnerships and there are others that are coming online.
We have been able to in certain areas.
Like Hawaii, we extended partnerships for both earthquake and Hawaiian Hurricane we've exported that also to flood too. So it's really going to be more of the residential side of the book that's going to.
Yes, because we have the ability to cross sell.
And it's something that our team does look at but.
For the most part it's been an earthquake strategy.
We are trying to export into Hawaii and flood.
Got it.
Thank you for the color.
No. Thank you for your questions.
Our next question is from Pablo things on with J P. Morgan. Please proceed with your question.
Hi, Thank you. So the first question I had is if you look at the net written premium growth. It was negative this quarter and that's down from I think 50%, 56% growth in 'twenty, 114% growth of 22.
I think some of that is from the line is running off and also reinsurance quota share is increasing so the question is given that backdrop, how do you see that being growth developing from here and I guess sort of the same question for grocery index fronting where you're seeing slower growth as well.
Yes, so I'll start off with.
The net written and net earned obviously there has been a change in our overall the overall mix of our book of business, primarily driven by a fronting so that hasnt had an impact on it when you think about it and look at it the overall growth and I'll look at it excluding fronting and excluding the homeowners' book that we have the primary.
Portion of that Texas has been moved into a front and then the other portion. We are currently running off the growth without those where its about 27% for the quarter. So still very strong overall growth in the written premium.
Ceded premium has also gone up primarily driven by a fronting but overall, we feel very good about where it's going and what happened when you look at it from a quarter over quarter comparison.
This is the first quarter that the specialty homeowners book has been moved over to a front when you're comparing the quarters and then you also look at it we have one deal that we were able to cut off at the beginning of the year. So there was an unwinding of that premium so that does impact a little bit of the growth, but it's just something that we think about it and we're moving on from from that.
So overall, we're very happy with the way the book looks I think everything is moving as we had expected, especially on the net earned premium ratio standpoint for the quarter of about 37% down from Q4 of last year from 38, 9% and kind of trending towards the mid 30 is kind of what we projected with our guidance. So overall.
Oh no concerns, but there is has been a mix shift in our business in fronting and also lines of business like in the marine and casualty.
I use a heavy amount of quota share reinsurance to help to drive fee income have grown and are now a larger part of our portfolio.
Yes, just to expand upon Chris's point.
The areas that we are investing heavily and from a people perspective from a reinsurance perspective from our systems.
And infrastructure perspective are growing rapidly.
Earthquake, our largest line grew 30% in the marine grew 70% of the casualty grew 140%.
All risks, we are pruning that back relative to the exposures.
Bringing the female down to 100 million, we mentioned earlier on the call Hawaii, we like where we are from an exposure standpoint, so we're only going to grow through radar inflation guard.
And then we have the fronting side. So the mix is really is changing respective to the.
The book and the relative participations that we have.
But the top line is there, which frankly gives us the ability to over time increase our participation and retain more.
So on the whole, we're very pleased with how the complexion of the book and the embedded growth in the core franchise.
Okay.
And then second question, maybe for you Mac so for.
From a new business standpoint can you talk about there.
Brokers and clients to retail you know sort of fit garbage where terms and conditions may be less the Denver restaurant appliance standpoint, and then as a follow up to that as you think about that and of course, we get earthquake book is their intent to migrate most of that to E&S and if yes. What are some of the puts and takes in achieving that outcome.
Sure. So I think as it relates to the E&S and our ability to use that in residential quake.
Roughly.
30%, 27% of our new business.
In the first quarter for residential quake was E&S.
And there.
There has not been pushed back from markets. There the way we have used it has been.
On a.
Well from a <unk> standpoint, so an eligibility criteria based on the size of the limit.
Procured we've used it for specific producers, whether they tend to concentrate more on high value and then we've also used it.
Geographically specifically so.
There has not been pushed back there it does afford us the ability to get enhanced terms and conditions.
And right as well.
It's something that we're going to continue to use.
Based on the cost of reinsurance based on aggregations in certain zones.
And based on concentration.
High net worth channel.
It's a great tool that we're using and I don't see that relenting anytime soon.
Alright, Thank you Matt.
Thanks, Bob It's a good question and it's something that we're very mindful of.
Yeah.
We have reached the end of the question and answer session I would now like to turn the call back over to Mac Armstrong for closing comments.
Great. Thank you very much operator, and thank you to all who joined US This morning.
We appreciate first and foremost your participation as well as your questions and most of all your continued support I would like to also express my sincere appreciation to our dedicated employees for their hard work.
As evident in the strong results of the quarter.
This is an exciting time for Palomar as we continue to build out our specialty franchise and build it into extended into attractive areas of the market, where we can earn strong risk adjusted returns.
We remain optimistic around all of our prospects and initiatives.
Other b the casualty business.
We are maintaining our earthquake leadership.
We're placing our reinsurance program and ultimately delivering the full year guidance for this 2023 and beyond.
So we look forward to speaking with you next quarter and thank you very much for your time today.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.