Q2 2023 Palomar Holdings Inc Earnings Call
Good morning, and welcome to the Palomar Holdings, Inc. Second quarter 2023 earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation. The conference will be opened for questions with instructions to follow at that time as a reminder, this conference call is being recorded.
I'd now like to turn the conference call over to Mr. Christopher Cheetah, Chief Financial Officer, Chris. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate your participation in our second quarter 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 PM Eastern time on August 10 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 1095.
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 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 I'm very pleased with the strong results of Palomar second quarter, our team successfully executed our Palomar to X strategy of profitable growth even.
Even in the teeth of elevated catastrophe activity and historically hard reinsurance market that significantly impacted the insurance industry.
In the quarter, we focus our capital and resources towards targeted segments of our book of business like earthquake in the marine and casualty to maximize our risk adjusted returns, while we continue to reduce exposure to segments of our book that add volatility to our results.
This prudent approach resulted in gross written premium growth of 25%.
When excluding the drag from runoff and deemphasize products. This growth rate was an even more impressive 44% importantly, we delivered an adjusted return on equity of 21, 3% in the second quarter.
Beyond the strong financial results of the quarter featured several noteworthy accomplishments that position us well for near and long term success.
Namely we successfully placed our six one reinsurance program in line with our expectations and subsequently raise our adjusted net income guidance for the full year.
We hired a team of professional liability underwriters to extend our cash the franchise and attractive niches like real estate, even though.
And lastly in July we received a revised positive outlook of our rating from Am best.
Over the course of the second quarter, we made incremental progress in 2023 has identified strategic objectives.
<unk> profitable growth managing the dislocation in the global insurance market.
Enhancing earnings predictability and scaling the organization.
Looking forward, we will continue to execute these imperatives, but look to convey their progress by a few lines of business that will drive the value Palomar over the medium term.
Those lines of business our earthquake in the marine and other property casualty fronting and crop our newest products.
So with that I'd like to walk through each business beginning with the earthquake franchise, which I expect to remain our largest line of business.
Our core earthquake franchise grew 24% in the second quarter as our residential earthquake book grew 20% in line with the first quarter and our commercial earthquake book grew 29%.
The dislocation in the earthquake market, whether it be a function of rising reinsurance costs reductions in claims paying capacity and coverage if the <unk> or the exited some homeowners markets in California is becoming more pronounced which continues to afford palomar the opportunity to both grow and optimize its book of business.
During the quarter, we saw commercial accounts renewed at a risk adjusted increase of 24%, which was a 25% sequential increase from the prior quarter.
Additionally, our E&S residential earthquake business grew 75% year over year at.
At the end of the second quarter E&S policies constituted a total of eight 8% of enforce California residential earthquake premium.
Yeah.
We expect this environment to remain a tailwind for our business through the second half of this year and into next year.
Lastly in the quarter, we entered into a partnership with USAA, who will now offer our residential earthquake products in California.
New arrangement not only expands our reach but also validates our residential earthquake franchise.
Turning to inland marine and other property products in the marine experienced growth of 54% year over year through a combination of rate increases and.
And new underwriters, allowing us to expand our regional distribution footprint builder's risk or largest in marine product saw 7% to 10% rate increases and expanded its quota share support allow.
Allowing us to write larger limits without taking on disproportionate risk as well as add incremental ceding Commission.
Our excess property lines at 10% rate increases and over 600% year over year growth as it build a niche of non cat exposed property business.
Importantly, both of these products are core to our strategy of maximizing our margins and using prudent risk management to achieve favorable loss ratios.
As it pertains to other property products, such as commercial O S.
Hawaii Hurricane and flood, we're hyper focused on exposure management and contracting the existing book where necessary.
In the case of commercial all risk, we made a significant progress reducing our continental hurricane came out of $100 million.
Separate led to a 45% reduction in premium year over year. However, commercial all roads policies that remain on our books renewed at an average increase of 60% and allowing us to recoup the rising cost of reinsurance.
Turning to our casualty business. We grew this segment, 92% year over year highlighted by strong premium growth professional liability.
During the quarter, we integrated our tuck in acquisition <unk> insurance services and hired a group of experienced underwriters and claim professionals to help extend the real estate, you know and miscellaneous professional liability franchises.
Taking a surgical approach to the build out of the casualty business that involves hiring underwriting talent with long standing history, and expertise and targeted niches and geographies.
From an underwriting standpoint, the casualty books loss performance continues to remain stable our focus on limit management and avoiding severity expose risks has enabled this performance.
Our thoughtful underwriting approach was validated with improved terms and conditions at the renewal of our four one casualty quota share treaty.
Turning to Palomar front, we grew this business at a strong pace delivering 82% growth over the prior year.
During the second quarter two of our fronting programs renew their reinsurance with incremental capacity support a demonstration of their quality and sound underwriting performance.
While our growth confronting as favorable we want to reiterate our strategic approach to fronting detailed last quarter. The goal of our funding effort is to provide services to a select group of Mga's carriers and reinsurers.
While we can gain experience on the lines of business to further our diversification into specialty markets.
We closely manage the compliance oversight reinsurance the collateral of our 715 partners. This is a focused and strategic approach.
Maintain our risk participation on selected partners with the current maximum participation of 5%.
Our approach has allowed us to quickly assess and limit our counterparty exposure to the potentially project letters of credit and transactions arranged by vast you. Fortunately our exposure is limited to a single counterparty and it's immaterial.
Our foray into the crop market with VA fronting arrangement with advanced AG protection and leading crop MGA.
As I mentioned last quarter. This is a partnership that we are particularly excited about.
This time, we are finalizing a strategic investment in advanced Act protection that further aligns our organizations and our prospects of building a meaningful presence in crop insurance.
Two members of our executive management team, John Christiansen, and John Knudsen have extensive experience in the crop market. Upon consummation of the deal Jon Christianson will join the board of directors of advanced that protection.
Palomar is now one of only 13 approved insurance providers with access to the $20 billion share crop marketplace.
We expect to generate crop written premium in the third quarter and that crop insurance will be a significant contributor.
Two our growth in 2024, as we generate a combination of both fee and underwriting income.
Our goal is for crop to prove the core pillar of Palomar two acts.
Turning to our reinsurance program as announced in June we successfully completed our six core reinsurance program renewal.
Pricing was in line with our expectations and we're able to preserve event retentions and exhaustion points at historic levels that we view are sacrosanct or retention of $17 $5 million remains less than one quarters earnings in less than 5% of the company surplus coverage now exhausted $2 68 billion for earthquake events 900 million for Hawaii Hurricane events and.
100 million for all Continental United States Hurricane events.
$550 million of incremental.
Reinsurance limit procured over the course of 2023 provides ample capacity for our growth in the subject business line as well as coverage to a level exceeding Palomar is one in 250 year peak zone probable maximum loss.
Importantly, our <unk> program is in place until June one 2020 for the.
The reinsurance placement combined with our strong first half results led to the recent upgrade of Palomar and our subsidiaries to a positive outlook by a M best.
Lastly, we are updating our 2023 adjusted net income guidance.
To $89 million to $93 million.
This updated guidance reflects catastrophe losses incurred in the first and second quarter of approximately $4 million.
With that I'll turn the call over to Chris to discuss our results in more detail.
Thank you Mac. Please note that during my portion when referring to any per share figure I'm, referring to per diluted common share as calculated using the treasury stock method. This methodology requires us to include common share equivalents, such as outstanding stock options during profitable period and 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 have modified the current and prior period figures accordingly.
For the second quarter of 2023, our net income was $17 6 million or 69 per share compared to net income of $14 6 million or.
<unk> 57 per share for the same quarter last year, our adjusted net income was $21 8 million or.
Or <unk> 86 per share compared to adjusted net income of $22 4 million.
Or <unk> 87 per share for the same quarter of 2022.
Our second quarter adjusted underwriting income was $23 1 million compared to $24 $8 million last year.
Our adjusted combined ratio was 72, 2% for the second quarter compared to 69, 1% in the second quarter of 2022 for the second quarter of 2023, our annualized adjusted return on equity was 21, 3% compared to 23, 7% for the same period last year.
The second quarter adjusted return on equity is further validation of our ability to maintain top line growth with a predictable rate of return above our Palomar to X target of 20%, even during a quarter with very active severe convective storms and historically hard reinsurance market.
Gross written premiums for the second quarter were $274 3 million, an increase of 25, 4% compared to the prior year second quarter.
Excluding deemphasize and current runoff products, a written premium growth rate was 44% for the quarter.
Net earned premiums for the second quarter were $83 1 million.
An increase of three 5% compared to the prior year's second quarter.
For the second quarter of 2023, our ratio of net earned premiums as a percentage of gross earned premiums was 34, 3% compared to 58% in the second quarter of 2002 and compared sequentially to 37% in the first quarter of 2023.
These results reflect the expected decrease due to our growth of lines of business that use quota share reinsurance, including Friday, and the increased cost of our excess of loss reinsurance.
Losses and loss adjustment expenses for the second quarter were $17 9 million.
Including $2 2 million of catastrophe losses from severe convective storms during the quarter slightly offset by favorable prior year catastrophe development.
The loss ratio for the quarter was 21, 5% comprised of an attritional loss ratio of 18, 9% and our catastrophe loss ratio of two 6%.
Based on our year to date loss ratio of 23, 2%, we expect a loss ratio of 21% to 24% for the year.
Including the catastrophe loss from the first half of the year.
The expected range excludes large catastrophe events in the second half of the year, but includes many catastrophes and aligns with how we provided our adjusted net income guidance.
Our acquisition expense as a percentage of gross earned premium for the second quarter was 10, 8% compared to 18, 1% in the second quarter last year and compared sequentially to 11, 4% in the first quarter of 2023 additional.
Additional ceding commission and fronting fees continued to drive the improvement.
The ratio of other underwriting expenses, including adjustments to gross earned premiums for the second quarter was six 9% compared to eight 5% in the second quarter last year and compared sequentially to six 8% in the first quarter of 2023.
The continued improvement compared to last year and in line with our go forward sequential expectations as we invest in underwriting through people and operations.
We continue to expect long term scale in this ratio.
Our net investment income for the second quarter was $5 5 million and.
An increase of 76, 5% compared to the prior year's second quarter.
The year over year increase was primarily due to higher average balance of investments held during the three months ended June 32023, due to cash generated from operations and a mix shift of invested assets from lower yielding investment assets into higher yielding investment assets with a similar credit quality.
Our yield in the second quarter was 361% compared to 261% in the second quarter last year.
The average yield on our investments made in the second quarter remains above 5%.
Our commercial real estate exposure in our investment portfolio is minimal.
Less than 3% of our portfolio and does not include any direct loan.
We continue to conservatively allocate our position two asset classes that generate attractive risk adjusted returns.
During the quarter, we repurchased 166 482000 shares of our stock for a total of $8 $7 million under our two year $100 million share repurchase program.
As we ended the quarter, we had $50 million of our authorized share repurchase remaining that we will continue to use opportunistically as we view our share prices undervalued.
At the end of the quarter, our net written premium to equity ratio was $0 88 to one times, we are well capitalized and have ample capital to support our Palomar <unk>, our organic growth objectives, and opportunistically buy back shares.
As Mac mentioned, we are updating our 2023 adjusted net income guidance range to 89% to $93 million.
An increase from $80 million to $92 million.
This range includes approximately $4 million of net catastrophe losses incurred during the first half of the year, but does not include additional catastrophe losses for the remainder of the year.
On a gross earned premium basis, we expect our net earned premium ratio and acquisition expense ratio to continue to continue to decrease in the second half of 2023 from the levels reflected in our second quarter results.
After our recent successful reinsurance placement our net earned premium ratio should be at its lowest point in the third quarter. The first full quarter under the new reinsurance placement.
Additionally, based on the current market our effective tax rate for the year may remain elevated between 22% to 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 any questions operator.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. 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'd like to move your question from the Q1 moment. Please while we poll for questions.
First question is coming from Tracy Bengie from Barclays. Your line is now live.
Thank you good morning.
Or good afternoon, your Attritional loss ratio of 18, 9% was below.
Your guide of 22% to 24% for 'twenty three.
Unpack that a little bit.
Yes, Thanks, Tracy that's a good question when we look at our loss ratio for the quarter. Obviously, we're happy with the results. The overall loss ratio was 21, 5%.
<unk> put back in the prior period development that loss ratio moves up a little bit to 22, 3% for the quarter, which I would say is in the low range of the guideposts, we gave out of 22% to 24%.
Many cats for us were elevated this quarter, causing us to put those losses are a severity and magnitude of those events that caused us to put some of those losses into catastrophes as you saw that loss ratio for the quarter being about two 6%. So overall, we feel good about those results.
<unk> was a little bit better I think many cats are a little bit higher.
Causing the loss ratio probably to be about one six points higher than we would've expected so still better than expected, but overall everything is in line with how we feel about the year I think the one thing you'll notice on the prepared remarks, we did decrease the bottom of the range for the full year, we went to 20% to 24% reflecting.
What we've seen in the first half of the year, but still expecting those loss ratios to improve in the latter half of the year and then into Q1 next year.
Thank you this is pricing.
Go ahead, I think yes, I think excuse me I think pricing is contributing to that I think it's also part of our concerted efforts to.
Run off.
Certain segments of the book and that's why I know what are the things that you were focused on was the growth.
We grew 44% in the areas that we are investing and we're thrilled with that but one of the benefits of running off.
Some of these lines are deemphasizing some of the volumes like all risky as it does improve the loss ratio.
Even in the second quarter, all risk, which was declined close to 40% year over year.
It still had a million cat loss and it has a higher attritional loss and certainly the 21% that we blend out too. So one of the positives and one of the reasons why we are running off some of these books that have higher volatility.
They also have higher loss ratio. So that's also a meaningful contributor to why the loss ratio.
What is what it was this quarter and why we think and Chris has always said, we expect it to continue to go down somewhat over the course of this year and certainly into 'twenty four.
Okay.
And my next question I would like to talk about the durability of your fronting program in light of higher reinsurance costs and increase market concern about reinsurance counter party risks, particularly on collateral.
Yes, so I'm happy to do so Tracy.
It's a timely and smart question.
We're seeing strong growth from targeted frontier partners, we have as I mentioned in my remarks, we have seven of them. So we take a rifle shot approach, which allows us to manage these partners closely and frankly collaboratively it's more like an underwriting relationship.
So.
Pillar in segment, where we're seeing nice considerable growth, but that percentage of the premium that it can constitutes is not the same from an adjusted net income. So it's a nice segment for us it allows us to be disciplined and prudent with new partners and who we bring on we can be very selective.
I think the one thing that certainly with the shake out of what's happening in the fronting market broadly with vast U.
Our exposure is immaterial, we are able to get in front of this really quickly and we understand.
And that does our exposure, but our remedies and those remedies are several.
I think for us.
We continue to.
Look closely at how we manage these programs and how the industry.
Will.
Shakeout to our reinsurance.
Programs.
Our pharmacy partners renewed with increased capacity and support its is inconsistent economics in the second quarter. We also had one successfully renewed.
At the first part of the third quarter and 17 in July one.
I think there will be consequences I think for us, though it's probably a net positive for Palomar because first and foremost we're an underwriting organization.
We're already seeing submissions from program submissions from MGA that are looking for essentially a new frontier partner. We're also in seeking potentially more stable fronting partner. We've also seen submission flow uptick in a few casualty lines from.
<unk> from <unk>.
MGA back.
Rather renewals coming away from MGA that have potential collateral exposure to us just in the open market with our casualty segment. So all in all we won't deviate from our fronting strategy if anything our blended strategy.
Our targeted strategies have firmed here.
I think it also overall validates our model as a reinsurer excuse me as a <unk>.
Underwriting organization.
Thank you.
Thank you next question today is coming from Mark Hughes from <unk> Securities. Your line is now live.
Yes. Thank you good afternoon.
The earned premium.
You alluded to the top line our top line growth.
You certainly were influenced this quarter by the run off and deemphasize lines, what should the earned premium grew b given.
Your mix of fronting.
<unk>.
Underwritten business.
How should the earned premium trajectory.
Well, Chris can chime in Mark this is Mac and what I would say is that you.
You look at those kind of five segments that we've talked about.
We see very strong sustained growth in earthquake, it's growing 20% I think thats good.
Good rule of thumb for that line and then I think when you look at casualty and inland Marine there is considerable growth fronting.
<unk>.
It's hard to say, it's going to sustain at 90% growth rate, but what we like is there is embedded growth with most of our partners here. Some are kind of hitting their critical mass in steady state but.
But thats all right for us because there is still a nice earned premium ramp for so long winded way of saying.
I think the growth is going to continue to be strong.
Expecting it to be 44% might be a bit ambitious, but we feel like that it's a healthy growth factor. When you look at the underlying contributors like in the marine casualty and obviously equate.
Yeah, and Matt talked about.
Topline growth of the written premium and obviously that will influence how the gross earned premium growth I talked about this a lot that the.
With the change in the mix of business with a lot of fronting and business uses quota share and with the increased excess of loss costs that will youll see for the first full quarter in Q3 that the net earned premium ratio will continue to decrease it was 34% in the second quarter.
Wanted to get into the low thirties for Q3 and potentially a little bit in Q4 as well right. So I just want to make sure people think about that as a model it because the excess of loss reinsurance costs that we've talked about before was up about 30%, which is as expected as we've modeled into our guidance, but I want to make sure people are thinking about that and modeling it correctly.
When you think about our net premium ratio and the results that we're going to see in the second half of the year right Q3 will be.
The lowest point of that and then we will start to scale more as we continue to grow the business, but the excess of loss cost is flat and in place until six months to 24.
When you look at the renewals that are coming up.
You're describing at about a 20 point differential between what would've been other than the deemphasizing runoff business.
What's going to be the marginal impact in Q3 and Q4, if it was 20 points in Q2, how much of these.
These risk management adjustments going to impact the second half.
I think it's probably more.
Markets in and around.
The difference between maybe it's 10% to 14 points overhang of the growth.
Most of the specialty homeowners business will be out by the third quarter.
All risk is over the course of the year.
Okay.
All right.
We're really trying to solve for is getting the PMO down to $100 million and it's basically there and at that level.
We feel that it is a sustainable level, where we can.
Maintain.
<unk>.
<unk> reinsurance expense, obviously was up meaningfully and I think there's one thing that I would point out is if you look at the.
The relative cost of all apparel and wind reinsurance versus earthquake, it's Doug.
So we're focusing more of our cat dollars on earthquake for when we want to get it down to a $100 million Hurricane PMO and I think at that point, we can justify our retention is a $4 million at that level.
It has minimal severe convective storm exposure. So that means that there is an opportunity for us to take rate and optimize that book continues to grow, but that's really not going to start until the.
The first quarter of 'twenty four.
And then finally, the commercial quake business better pricing, but a little bit of deceleration at the.
Topline.
The sellers.
Very strong growth.
Loan growth.
Anything noteworthy there.
No that markets and John <unk>.
But I would say I mean, it grew 30% and 29% in the quarter.
We wanted to be mindful of where reinsurance costs were going to shake out and that would inform the PMO and frankly, we wanted to make sure that we could procure the incremental $550 million of reinsurance support to support the growth that we're seeing well I'll tell you right now is our metrics have never been better.
The capacity in the market is dwindling so.
We feel very good about sustaining strong growth in commercial earthquake, but John anything you'd add.
Yes, no I agree with all of that I think we've seen now.
Many quarters in a row of that strong rate appreciation of our commercial earthquake segment.
And as we look forward to the next few quarters, there's no signs that would suggest that it will decelerate.
Great. Thank you.
Thanks Mark.
Thank you next question is coming from David <unk> from Evercore ISI. Your line is now live.
Right.
Hi, Thanks.
Just a question on the crop opportunity. It sounds like you think that will start coming in in the third quarter.
I guess, how how big do you think that has the potential to be as a as another growth.
Lever that we haven't really seen here and in the first half.
And then how should we think about the profitability profile of that business versus your existing business.
Dave This is Mac again, I'll, let John speak.
<unk> I think there are a few things that I would want to get across to you is.
For this year, it's really a startup we will generate some premium.
In the third quarter and in the second or the second half of the year, but it's more fronted so it's really going to be a fee generation.
Product for 2024, we think it can be meaningful premium.
<unk>.
$20 billion market, we're one of 2014 proved insurance providers.
We have terrific in house expertise and a terrific distribution partner in advance AG protection. So.
We are optimistic that it can become.
A large contributor to premium in due time, but in 2024 it has a chance to.
B high high double digit millions in premium.
And with regard to the profitability aspect of the question.
It is a historically profitable line and importantly is non correlated with our existing core lines.
And it has a short tail on a combined exposure period, where stronger answer with.
With strong reinsurance support back into it so.
From a profitability standpoint falls in nicely with the <unk>.
The other lines of business that we have.
I think the one thing that I would add to that David I should have brought this up next year, we expect it will take risk on it but youre talking about just call. It conservatively at 10% participation. So it's still going to be a nice balance of fee and underwriting income like we've done with all of our new products. So we're not going to deviate from that strategy. So.
Nice fee income stream.
Well as a nice underwriting income component to it so.
May end up being like <unk> and.
An 8% to 10% margin.
In that year.
Got it understood that's helpful.
And then just on.
Yeah on the on the best you are the one counterparty, where you have exposure or was that something where.
Just you know it sounds like it's immaterial in size.
Was that something where you just absorbed the what you had reinsured or is that something where you just replace the.
<unk> question.
Yes.
No.
It's for a prior.
A treaty period that has expired and so we're looking at just what's what's entrust and what would be our exposure. If it goes beyond trust and so if it goes beyond the trust.
We have full control of.
That's where our exposure would be and again, it's immaterial.
For everything Thats in place right now that you is there is nothing.
He is not an issue.
That a reinsurer.
Got it thanks, and then maybe just finally.
It sounds like capacity is.
It's definitely not been an issue for the seven programs existing programs, but just wondering on like you have to grow the future growth of adding new program partners is they're just yeah have.
Have you seen a slowdown in the conversations that you've been having with capacity providers it sounds like.
Yeah Mg as want to partner with you guys, but are you able to secure the capacity on the back end for for newer partners.
No I mean, I think for US we've been we've had successful reinsurance renewals were being very selective and talking to potential new fronting partners.
Ultimately we view these funding partners as people there that we're going to take a risk on at some point in time, so we hold them to a different standard than maybe other markets too.
So as a result.
We are getting a lot of inbounds, we expect that we will add to them in time, but it's going to be a very deliberate edition.
But I would say.
But what's been in the press the last week or a few weeks.
We're seeing a lot more imbalanced.
But the productivity has not changed if not increased.
Yep understood. Thank you.
Thanks, Dave.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Andrew Anderson from Jefferies. Your line is now live.
Hey, good afternoon, just with regards to the fronting program Max I'm not sure. If I heard you mentioned cyber, but it seems from my industry pricing surveys kind of softening a bit can you just kind of talk about the appetite there for the fronting program with regards to Ciber.
Sure Andrew Yes, cyber is one of our.
Yes large partners in the fronting arena.
And that was the renewal that I referred to that.
Early third quarter. So it's a 701 and so that was successfully place with great cabinet capacity support we have taken modest risk participation. There we have for the last few years.
Yes, we're watching the pricing I think for that program, it's one that product and that point relationship. If we really do view that like we are the.
Underwriter here and so while it's only.
Low mid single digits participation, we manage it like.
Hey.
Net we're taking 30 40, 50% up so on the whole rates are certainly down from where they were.
Two or three years ago, but we're feel good about the performance we feel great about the reinsurance support they've got the ability to grow.
From a revenue perspective or from a premium perspective to the premium cap was increased so on the whole.
I think it is.
Your line of business that is performing well it certainly requires increasing diligence because of the market conditions, but it's.
It's a great partnership.
Yeah.
Okay and on the casually business you mentioned an uptick in submissions there should we really just think of that as some of the real estate you know or is it perhaps some different lines and can you remind us if that's going to largely be on the E&S entity, which looked like the growth was a little bit slower in this quarter.
Yeah. Good question on the casualty side, we're pleased with the growth there its 92%.
And is now approaching its four plus percent of the book.
We're being deliberate here, though too we are using the E&S company for the predominance of it we do have a handful of.
GL business Thats on the admitted company.
That tends to be focusing on kind of small to mid market commercial contractors.
Call it $5 million to $20 million in annual we're deeply.
Predominantly low and moderate hazard sub so think about like trade contractors or general contractors that are building schools.
We really are trying to avoid classes that have severity on the admitted side or high severity exposure.
What I will say is on the professional lines, where that's most of the E&S it's growing.
Really nicely, but also deliberately its targeted niche is that we're going into real estate and <unk> is the one you highlighted but.
When we brought on some underwriters in the quarter a lot of them. They spent the quarter ramping up and now we're starting to see them.
Leverage their expertise leveraged their distribution relationships GERD Vander canfor oversees our professional lines.
Were talking recently about a collection agency.
Program.
<unk> already started right with one of his underwriters that just is just coming on and it has nice potential to be a great supplement to the email franchise, but very targeted and itchy that's what we're looking to do.
I think if we can take that delivered approach from a reach and distribution appetite perspective, the book not only will grow but it will be profitable and predictable.
Great. Thank you.
Thank you. Thank you. Your next question today is coming from Pablo <unk> from Jpmorgan. Your line is now live.
Hi, Thank you. So my first question is on guidance.
<unk> twice over the past several months I was hoping you could impact those changes a bit here to what extent was the.
<unk> guidance based on first half performance and to what extent is there.
A reflection of what you think will happen in the second half of the year.
Pablo I think it's a combination of the two it's a good question and thanks for asking it what I would say is the.
The first guidance raise was.
Potentially it was a little bit of a delay off of Q1, but we wanted to see where reinsurance pricing shook out and so that informed the raise that we did in June this.
Quarter.
On the heels of Q2, we raised guidance again to reflect the results in the first quarter, but also what we expect to see in the.
First the second half of the year, Chris pointed out you've taken down the loss ratio range.
So that's informing it we're also.
The business that we're running off.
Has.
You could argue could argue that certainly some of it was unprofitable and certainly with the reinsurance load that we're seeing on when business. It would've been unprofitable on a prospective basis. If we had stayed on so.
A long winded way of saying, it's a combination of the two but we feel like there's great momentum in the business and our.
Our goal is to.
Uh huh.
Beaten race, that's that's our operative focus.
Okay.
Then second question, maybe for Chris I heard what you said about expense ratio is going down on a gross basis right.
<unk>.
The expense ratio against net earned premiums I think this is the first quarter of the past four or five where it actually went up year over year.
And that's probably more a function of net earned going down.
Do you see that trend persisting through the second half because of what you describe right essentially the reinsurance cost sticky.
<unk>.
Will that essentially inflate.
The expense ratio on a net basis as well for the second half of the year.
Yes, So you pointed it out well Pablo right. When you think about the friendship even the loss ratio on a net earned basis. It is severely impacted by the excess of loss rate I don't think my view is combined ratio doesn't do a good job of measuring those ratios. When you have an excess of loss load like we do in <unk>.
The excess of loss load going up by.
Close to 30% like we've talked about is going to impact that with really no overall change in potentially the expense ratio or the loss ratio. So it's kind of why we take it out, especially on the expenses, we think about it on a gross basis you can model a little bit easier you can look at it and so when I look at the acquisition expense ratio I see that continuing to tick down because of the exchange whether it would be.
Fronting things of that nature, but then the same with the expenses.
A little bit flatter.
Talked about and so.
Feels like everything is heading the right direction and it kind of when I look at on a gross basis. It takes out the noise of the excess of loss and Thats why when we talk about the gross earned premium ratio and think about that we talk about that separately. So that you guys can think about how the excess of loss is going to impact it and that's going to go from 34.
Down to the low <unk> in the second half of the year and so thats, how we think about it but youre absolutely right the modeling impact of those ratios and call it being a little bit higher this quarter impacted by the excess of loss costs and so like I said that cost is going to be higher in Q3, which is going to be the first full quarter with that loaded in.
I think yes.
Add Pablo Chris.
Chris described well just as a reminder, we brought on a lot of underwriters in the second quarter.
Great talent and claims professionals alike that will generate a return whether it be top line or improving the bottom line.
Through cost containment and loss management.
But that will take a little bit of time. So there was a decent amount of some cost.
Some cost but.
Cost that should generate a return.
24.
Okay.
Then last question for you Mac so.
Heard your comments about disruption in the California earthquake.
California market potentially being an opportunity for you to grow earthquake.
I guess the question is just given.
Given what's happening right again, the amount of disruption is there a risk that the.
The market gets really disrupted where for.
For whatever reason the uptake of earthquake insurance goes down right and then thank you Anthony.
<unk> massively gross capacity.
More people going to the client for example.
If the destruction reaches that level is that still good for your earthquake business.
Yes.
Hello, and I'll, let Jon Christianson offer this to the disruption in the earthquake. The homeowners market I think it remains good for our business whether it be the non renewing policies. They may have had an earthquake endorsement or substitute or.
<unk> Standalone companion policy attached to it we get to compete on that whether it be the CA, taking their deductibles up to 15% on anything over $1 million of cover Jay or reducing the amount of coverage, which is your personal property. Those are all good dynamics for us.
I don't think we've reached a point, where theres a precipice that we've gone beyond I think this is just.
A bit of kind of a slow burn change in the California market that we are going to be benefiting from.
Yes, I'd add with the <unk>.
The disruption that we've seen to date and that homeowners market in California.
Has not translated into anything unusual with our residential earthquake book, our book has been very predictable.
And our partnerships remain very strong in the state of California. So.
We have not seen.
Anything that would indicate.
Disruption to a very predictable and profitable line of business for us.
And even with the homeowners pricing going up double digits. It seems like from what Youre, saying there is still appetite for earthquake insurance as a writer basic homeowners product is that fair.
Sure Yeah, I mean again.
Our buyers tend to be mass affluent.
Have a lot of equity value in their home so they're protecting an asset.
And we have not seen people reduce coverage.
We offer.
Multiple deductible options that hasn't deviated, where they move their deductible up to manage the expense so.
We look at that but if you look at just a.
The continued growth of 20% in residential quake, but also increasing take up in E&S, which frankly E&S on E&S, whereas EQ policy cost more on a per dollar basis or per dollar of insurance basis.
In the admitted side.
I think that's a reflection.
The appetite.
Okay. Thank you.
Thank you we reached end of our question and answer session I would like to turn the floor back over to macro Armstrong for any further or closing comments.
Alright, Thank you very much operator, and thanks to all who joined this morning. We appreciate your participation certainly your question Dan as well most of all your continued support.
As always I wanted to thank the great team here at Palomar for their diligent work and all that we accomplished this quarter and all the work that was done to.
Further expand the franchise into new specialty segments and further extend the power of our <unk> strategic initiatives.
Initiative.
Listen we are growing where we want to we are hitting our ROE targets and our earnings targets and we're raising guidance, we'll look to continue to do this but I think.
What we have in front of US is really exciting and we're going to continue to build an industry leading franchise. So thanks very much and speak to you next quarter.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.