Q3 2023 Palomar Holdings Inc Earnings Call
Good morning, and welcome to the Palomar Holdings third quarter 2023 earnings Conference call.
During todays presentation, all participants 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 would now like to turn the conference over to your host Mr. Chris Your Cheetah Chief Financial Officer. Please go ahead.
Yeah.
Thank you operator, and good morning, everyone. We appreciate your participation in our third quarter 2023 earnings call with me here today is Mac Armstrong, our chairman and Chief Executive Officer.
Additionally, Jon Christianson, our president is here to answer questions during the Q&A portion of the call.
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 November nine 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.
<unk> 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 Securities and Exchange Commission.
We do not undertake any duty to update such forward looking statements.
Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U S. GAAP.
A reconciliation of these non-GAAP measures to their most comparable GAAP measure can be found in our earnings release.
At this point I will turn the call over to Matt.
Okay.
Thank you, Chris and good morning, all I am pleased with our strong third quarter. These results were record quarterly written premium adjusted net income growth of 153% and adjusted return on equity of 22, 3%.
Our concerted efforts over the last several years to reduce the volatility in our book of business and earnings base.
It will display in the third quarter as we incur a negligible loss from catastrophes.
Elevated activity across the industry.
The execution of our Palomar to execute to plan during the quarter. There was a high level of confidence the Palomar will produce this thing profitable growth in the quarters and years ahead, and certainly as we enter 2024.
In addition to the quarters strong underwriting results. We also continued to invest in growth across the organization during.
During the third quarter, we saw 24% growth in gross written premium ex.
Due to the impact of the emphasize products or grocery it wasn't even more stellar at approximately 31%.
As discussed last quarter, we are channeling, our capital and resources towards targeted lines of business that we believe will generate optimal risk adjusted returns.
This quarter, we continued the strategic focus in key lines of business, such as commercial earthquake, but casualty in crop.
We are adhering to our grow where we want approach concentrating on existing and new growth vectors that will enable the success of Palomar to act.
The simple mantra has helped build palomar to an attractive specialty insurance company with a diverse book capable of delivering a return on equity exceeding 20%.
42, 3% this quarter and 21, 7% year to date to be exact.
At this point I'd like to review, our five key business lines, starting with the earthquake franchise.
Core earthquake franchise grew 23% in the third quarter as our residential earthquake book grew 16% and our commercial earthquake Bruce grew 35% a nice acceleration from the second quarter's growth of 49%.
Favorable market conditions, such as the ongoing California homeowners market dislocation.
Reduced coverage offerings from the California earthquake authority, Italian excess and surplus lines market conditions, as well as new and existing partnerships continued to drive our residential earthquake portfolio.
And it was we saw excess and surplus premium increased 10% of total enforce California residential earthquake premium as compared to 9% in the prior quarter.
During the quarter commercial earthquake rates increased approximately 26% on a risk adjusted basis.
We're pleased to see our commercial earthquake book grow from a rate and exposure standpoint, as we utilized a portion of the incremental capacity procured on June 1st of this year.
Commercial earthquake metrics like average annual loss.
250 year, probably maximum loss premium are at the best level since our formation in 2014.
We remain bullish on the growth and profitability prospects of both the residential and commercial our commercial earthquake lines as we approach 2024.
Turning to inland Marine and other property. This category is the Prime example, world wherever you want.
We are investing in certain lines of business, such as builders risk excess property and flood, while deemphasizing or transitioning lines of business like all risks and Hawaiian hurricane.
Builder's risk our largest tenant friendly marine products grew 37% year over year, so 5% to 10% rate increases and brought on new underwriting talent to expand our geographic reach and distribution footprint in the quarter.
Our excess property lines are approximately 7% rate increases in the 185% year over year growth as it builds a portfolio of non cat exposed property business.
But written premiums grew 36% year over year importantly saw minimal losses from the catastrophe activity in the quarter, including tropical storm Hillary in Southern California.
As mentioned last quarter, we expected to reduce our condiment Hurricanes 250 year problem maximum loss to $100 million by September 30th.
One derivation of this accomplished goal was the contraction of our commercial all risk premium base by 28% year over year.
Importantly, the remaining commercial all risk book is attractive with policies renewing in an average increase of more than 55% in the third quarter.
It's also worth highlighting that the commercial all risk book performed well from a law standpoint, as it incur minimal losses atrophies in the quarter, including tropical storm Hillary Burkina data, yet and the severe convective storm activity experienced throughout the country.
With respect to wind hurricane I'd like to reiterate that we incurred no losses from the line of wildfires and then our thoughts are with our clients and partners impacted by the event.
During the quarter Hawaiian Hurricane premiums grew 17% with all the growth coming from rate increases and our inflation guard.
An exciting note during the quarter before Lehman exchange a fully licensed reciprocal insure for which we will serve as the attorney in fact manager.
This new vehicle allows us to transition our business model for the Hawaiian Hurricane products from one that is risk bearing one that is fee generative.
It will also reduce our corporate excess of loss reinsurance costs, and all but eliminated balance sheet exposure to wind losses from hurricanes hitting Hawaii.
We also pleasing, though la Lima allows palomar to remain a meaningful player in the Hawaiian market, albeit with a different long term risk profile.
As I mentioned earlier, we incurred negligible cat losses in the quarter and we firmly believe that the underwriting exercises commenced in 2020.
Including exiting an admitted all risk and specialty homeowners, reducing gross and net line sizes.
Shifting layered insured limits.
Any geographic concentration caps not only bore sound results in the third quarter, but also limited catastrophe losses year to date.
This work in addition to allowing this should help perpetuate this trend into 2024.
Casualty business grew 57% year over year highlighted by strong premium growth from our professional liability products.
As previously discussed we're 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 geography.
Our foray into the environmental Arena is another strategic imperative to bolster our casualty franchise in September we hired a 15 year industry veteran Brian pushing to spearhead this venture.
The deliberate building of our casualty business permits us to be mindful of social inflation as well as areas of the business, where they have been meaningful adverse court decisions.
We employ prudent risk management to minimize loss potential in the classes, we write and believe we are minimally expose social inflation.
The book is seen blended rate increases of approximately 5% year over year.
With rates doing a bit higher in excess liability.
Casualty books loss ratios performing in line with our conservative loss picks as we built up a sizable loss reserve base that we expect to favorably develop over time.
Yeah.
Turning to Palomar five.
We delivered 30% year over year growth in the third quarter, having remained selective and highly engaged with their strong fronting partners. Our goal is to provide <unk> services to a select group of M. D as carriers and reinsurers, writing specialty lines of business and industry segments, where we have a developed investment thesis in some measure of domain expertise.
We actively manage the compliance oversight reinsurance and collateral our country partners and maintain your risk participation in certain instances with the current maximum participation of 8%.
In October we saw.
Final two new fronting arrangements that are fully collateralized reinsurance.
These new partnerships or are in lines of business that leverage the in house expertise and our 100% fee generative when they commence writing business in the fourth quarter.
Yeah.
In the third quarter, we are excited to write our first crop premiums our crop insurance business is comprised of multiple peril crop insurance or M. P C, which we expect to be approximately 90% of our premier and livestock and private products insurance.
The premium in the third quarter was from MPC I dived into 2020 three growing season.
MPC I program offered in conjunction with U S Department of Agricultures risk Management Agency RMA is a federally subsidized insurance program that covers revenue shortfalls or production losses due to natural causes like drought hail and wind.
As previously stated we expect the crop insurance will be a significant contributor to our growth in 2020 four as we generate a combination of fee and underwriting.
We are encouraged with the opportunities identified for 2024 growing season, and believe we will generate high double digit millions of premium next year.
Our strategic partner in crop advanced back protection as extensive sector experience and distinct technology that allows us to target risk its producer and regional level and more importantly compete effectively even without immediate scale.
We are targeting business throughout the Midwest on a variety of crops with the goal of minimizing exposure to a single event or heavy accumulation passes any single region.
We expect crops core pillar of Palomar to X over time and are pleased with the progress to date.
As it pertains to our reinsurance program the third quarter's Leiden activity, because we have just completed a successful renewal of our core excess of loss tower in June.
During the quarter.
We renewed cyber and real estate errors and omissions quota share facilities and expiring tours with incremental reinsurance support.
Additionally, it is worth noting that going forward, our core excess of loss will be increasingly single apparel earthquake as we transition on wide hurricane exposure to La Lima. This.
This should bode well for pricing and overall expense in next year's renewal.
Overarching me, we feel particularly good about the quality of our portfolio and the results that we have delivered to our broad reinsurance panel.
Lastly regarding reinsurance we are pleased to announce the Mac Rudolph has joined Palomar to oversee our assumed reinsurance efforts.
Proven record of accomplishment navigating complex reinsurance landscape, Matt will play a pivotal role in enhancing our specialty market franchise.
To help diversify our book of business.
His expertise and insights will not only bolster our reinsurance capabilities, but also contributed significantly to our overall growth and profitability in the long term.
We update our 2023 adjusted net income guidance of 90 million $93 million.
Tightening of the guidance range and marks our third beaten raise this year and importantly includes catastrophe losses incurred of approximately $3 4 million year to date as.
As a reminder, our original guidance range of 86 million and $90 million, excluding catastrophe loss.
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, which is outstanding stock options during the comparable period and excluding the periods when we incur a net loss.
As a reminder.
Beginning in the fourth quarter of 2022, we have modified their definitions of adjusted net income diluted adjusted earnings per share and an adjusted return on equity, we adjust for net realized and unrealized gains and losses.
We have modified the current and prior period figures accordingly.
For the third quarter of 2023, our adjusted net income was $23 3 million or <unk> 92 per share compared to adjusted net income of $9 2 million.
<unk> 36 per share for the same quarter of 2022.
Third quarter adjusted underwriting income was $25 million.
Compared to $7 $5 million last year.
Our adjusted combined ratio was 79% for the third quarter compared to 98, 3% for the third quarter of 2022.
For the third quarter of 2023, alright annualized adjusted return on equity was 22, 3% compared to 99% for the same period last year.
The third quarter adjusted return on equity continues to validate our ability to maintain top line growth with a predictable rate of return above our Palomar to X target of 20%.
Gross written premiums for the third quarter were $314 million, an increase of 24% compared to the prior year's third quarter.
Excluding deemphasize products, a written premium growth rate was 36% for the quarter <unk>.
Additionally, our fronted results.
One $6 million of crop premium.
It is important to remember the seasonality of the crop premium.
We expect some crop premium in the fourth quarter with sequentially more in the first quarter, but based on the nature of that business. The third quarter will represent the majority of written premium on an annual basis.
Next year, we will likely separate property premium into its own category.
Net earned premiums for the third quarter were $85 8 million, an increase of 1% compared to the prior year's third quarter.
Third quarter of 2020, our ratio of net earned premiums as a percentage of gross earned premiums was 31, 6% compared to 41, 7% in the third quarter of 2022.
Sequentially and a 34, 3% in the second quarter of 2020.
Reflecting the expected decrease due to our growth.
Our funding and lines of business or to use quota share reinsurance and in the first full quarter with our renewed excess of loss reinsurance program.
With the mix of business mature and our excess of loss reinsurance program in place. Our net earned premium ratio should be at its lowest point in the third quarter and we expect this ratio to increase in future.
Losses and loss adjustment expense for the third quarter were $16 1 million, including $45 million of favorable prior period catastrophe loss development.
While there was elevated catastrophic activity during the quarter the company exposure and losses from these events not rise as a magazine to warrant breaking out those losses as catastrophe loss.
Said differently <unk>.
Losses equate to what we described as May incur test.
And something we budget and our loss ratio assumptions.
The loss ratio for the quarter was 18, 8%, excluding the favorable catastrophe loss development. The Attritional loss ratio was 19, 4%.
Based on our year to date loss ratio of 21, 7%.
Now extend a 20% to 23% loss ratio for the year, including catastrophe losses to date.
This range excludes future large catastrophe event, but it includes many catastrophes and aligns with how we provide our adjusted net income guidance.
Our acquisition expense as a percentage of gross earned premium for the third quarter was nine 9% compared to 14, 6% in the third quarter last year and compared sequentially to 10, 8% in the second quarter of 2023.
Additional ceding commission and fronting fees continue to drive that improvement.
Similar to our net earned premium ratio the acquisition expense ratio may be flat to modestly up in future quarters as our business mix matures.
The ratio of other underwriting expense, including adjusted gross written premiums for the third quarter was six 7% compared to seven 3% in the third quarter last year and compared sequentially from six 9% in the second quarter of 2023.
Continued improvement compared to last year and in line with our go forward sequential expectation as we invest in our organization as we continue to grow.
We expect long term scale and this ratio, while we may see periods of sequential flattening as we continue to invest.
The organization.
Our net investment income for the third quarter was $6 million.
And 61% compared to the prior year's third quarter a.
The year over year increase was primarily driven by higher average balance of investments over the three months ended September 32023.
And the mix shift of invested assets from lower yielding investments investment assets into higher yielding investment assets with a similar credit quality.
Our yield in the third quarter was three 9% compared to two 8% in the third quarter last year.
The yield on investments made in the third quarter was six 3%.
We continue to conservative conservatively allocate our position two asset classes that generate attacks attractive risk adjusted return.
During the quarter, we repurchased 117739 years of our stock.
For a total of $6 $6 million under our two year $100 million share repurchase program.
At the end of the quarter, we have $43 $5 million of our authorized share repurchase remaining.
As Matt mentioned, we are increasing our 2023 adjusted net income guidance range to 90% to $93 million. This range includes catastrophe losses incurred to date.
On a gross earned premium basis, we expect our net earned premium ratio to increase in the acquisition expense ratio to be flat to modestly up in the fourth quarter of 2023 and beyond from the levels reflected in our third quarter results additions.
Additionally, based on the current market our effective tax rate for the year may remain elevated between 22% and 24%.
Lastly, Matt mentioned the formation of <unk> a license as typical in sure.
While we May exchange is owned by its members and not Palomar, we are providing the funding for the initial surplus note.
As such <unk> will be consolidated as part of our operating results in.
In the future.
After it has sufficient operating history, we expect to separate La Lima exchange from our consolidation.
With that I'd like to ask the operator to open the line for any questions operator.
Thank you.
At this time well be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
Press Star two if you'd 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.
Our first question comes from Mark Hughes with Truest Securities. Please proceed with your question.
Yeah. Thank you good afternoon and good morning.
The change in Hawaii did you say, whether that was going to be accretive neutral or dilutive to earnings.
Hey, Mark this is Mac.
So simply put with from our Lima in 2024, we expect it to be a net neutral to earnings I.
I think there is potential upside if we can drive more business on the la Lima than what we're willing to write right now on Palomar paper, the real strategic rationale for that new endeavor is.
To allow us to transition a line of business that has potential for material losses to something that's more fee generative.
It will help produce and manage reinsurance costs on a prospective basis.
Furthermore, it allows us to stay in the Hawaiian market and lastly, you know it.
It will reduce.
Material cat exposure on Palomar specialty so we're very excited about it I think on the whole, it's net neutral and 24 and 25 it has the potential to drive be accretive.
Understood.
And.
What kind of behavior, you're seeing out of the California earthquake authority I think he might have had in earlier quarters.
It didn't appear to be having a real material impact on your ability to grow.
At.
Jean <unk>.
Yeah.
So mark I would say they see a.
Certainly as having no impact on our ability to grow the residential earthquake side, we grew 16% in the quarter, which frankly is our hardest from a comparable perspective. It just so happens, it's our largest quarter and so the stable levels of new business that we're writing.
It has a disproportionately lower impact in this quarter versus others, but on the all the CA continues to call back its coverages.
It continues to encourage us participating insurers to explore alternative arrangements, we remain a very collegial compare with the Caa and try to collaborate with them.
But we have not seen some type of a step function increase in production because a participating insurance decided to leave the C E, but rather the business is coming over any more organic policy by policy fashion as it calls back it's as I said calls back its coverages.
And tries to manage or reduce its exposure.
Understood and then last question Chris.
Chris the.
Current ratio of earned to growth any thoughts on how that will trend in coming quarters is that expected to continue to.
Taper off go down or will that stabilize how do you see that.
Yes based on the results of the third quarter the gross to earn ratio was 31, 6%.
Just on the excess of loss reinsurance renewal at six one.
You only have one month of that in the Q2 results Q3 of this year is the first full quarter. We have the full effect of that increase in excess of loss cost as we've stated before that was about a 30% increase which equates to about a $13 million increase on a call it a quarter comparison.
<unk>.
622 excess of loss risk transfer period, so that $13 million was fully in <unk>.
That number will be stable until six one of 24 at the next renewal and so I expect the net earned premium ratio to improve from where it's at right. Now. So it was 31, 6% in Q3 I would expect it to tick up moderately in Q4 Q1, and then Q2, depending on how that.
Renewal goes we'll let you know what we expect that ratio to go but overall I expect Q3 to be the low point for that ratio to.
Improve going forward.
I appreciate that thank you.
Thanks Mark.
Our next question comes from Andrew Lamberg with Piper Sandler. Please proceed with your question.
Hey, guys Andrew round here for Paul Congratulations on the quarter.
Thanks, Andrew.
Yeah I was just looking at your results and your press releases and there were some expansion in the casualty space in the quarter I'm. Just wondering if you could give some insight into how you look at the balance of the property versus casualty as part of your Palomar <unk> plan.
Yeah, Andrew Thanks for that question, yes.
We were pleased with the continued traction in casualty market and we.
We were also excited to make incremental investments in that franchise, most notably with the launch of the environmental practice.
Premium for the environmental practice, we should we hope to generate some are in the fourth quarter, but it's really going to drive our growth.
Growth in 'twenty, four and frankly 25 for that matter.
Long term, we think we have segments in the casualty arena that can be meaningful from a scale perspective, you know.
I don't know right now if we're in a position to say that we think casualty you'll be a 40% of the book I don't think it'll be to that level, but we do think that we have segments, whether its in professional lines or contractors liability or environmental that can get to scale.
And kind of replicate the scale that we've achieved in a segment like builders risk so.
You know.
Long term, it's going to be a meaningful contributor it's going to continue to be a nice diversified and it's also going to be one that we take a very tactical approach and a conservative approach Jew as we built up a nice book of reserves or base of reserves.
And use a considerable amount of reinsurance do you avoid a disproportionate impact.
The impact of a shock loss.
Great. Thanks, and then just following up on that you guys commented earlier in the call about the acquisition expense ratio going up I was just hoping you could provide some color on how you guys are thinking about M&A prospectively.
Yeah sure. So I'll, let Chris speak to our acquisition expense in terms of customer acquisition, and really commissions and the like I think M&A for US we have not been.
We've not been a serial acquirer by any stretch the imagination. We are very much more focused on organic growth. We will opportunistically look at deals, but I think if you look at what we have in our product suite, we have ample room for growth we have multiple growth factors. So we will remain.
Organic growth story for the indefinite future.
Speaking about the acquisition expense specifically right. It was nine 9% for the quarter an improvement sequentially from last quarter, we do see that ratio starting to flatten out to potentially moving up modestly as we look at the growth rates and the mixes of the business fronting is starting to come in line.
With some of our other lines of business from a growth rate standpoint. So overall, we feel that the acquisition expense will now start to potentially pick up or be flatter as all of our lines start to grow at a little more a similar rate whether the casualty whether be fronting, but overall, we feel very good about it.
Just a reminder, we usually look at those on a gross basis, just because of the impact that the increased excess of loss can have on combined ratio type ratios.
Great. Thanks for that congrats again on the quarter.
Thank you very much.
Our next question comes from David Martin Madden with Evercore ISI. Please proceed with your question.
Hi, I.
Just had a question just how your you know I know you guys renew most of your reinsurance.
At six one but I'm just wondering are you know how your view has changed if at all as we head into the one one renewal I'm focused both on property cat and on a on the casualty side and I'm I'm wondering if something has happened that has caused you guys to move.
Yeah, more wind risk off balance sheet.
Through the exchange for the Hawaiian Hurricane business.
Yeah, Hey, Dave This is Mac.
I'll be happy to address all of that is there.
Good questions and things that were frankly are encouraged about.
So let me start with just casualty, we did have two casualty treaties renew in the quarter.
And they as I mentioned, they renewed at expiring terms and we did have incremental.
Reinsurers support whether it's supporting us from a capacity standpoint, or new reinsurers coming on to the panel those were both again quota shares and they were for professional lines and one of our fronted casualty arrangements. So.
Business as usual there and are encouraging.
Today that both of those treaties continued to perform very well from a loss perspective.
And are building up a nice base of reserves.
La Lima exchange and.
Our our decision there is in this current market environment from a reinsurance and excess of loss pricing. We believe we can generate equivalent returns as a attorney in fact manager as opposed to a risk there and so all things being equal if we can.
Generate a similar level of return and not put that pressure on our balance sheet, we would prefer to do that so.
So the transition from Palomar specialty to La Lima for a good portion of our book will help reduce reinsurance expense. It will help also.
Make our program frankly, more single apparel, which I think will result in not just lower expense as we remove expense out from exposure reduction, but also just more attractive to reinsurers as once you get above $100 million of all payroll exposure, it's got to really be all earthquake and from an excess of loss standpoint.
So.
I think la Lima was just sound capital management, and the ability to generate an equivalent risk adjusted return.
Well not an equivalent risk adjustment generate in turn with the very different risk profile. Lastly, we do not have anything from an excess of loss renewing at one one we do have a quota share for our commercial earthquake and we feel very good about the success in placing that at a equip.
Once if not superior economics as I mentioned, the underlying metrics in our commercial earthquake book are at all time, best So that makes us very appealing to quota share reinsurers.
Role looking forward.
We are very confident that our book is going to stand out to our reinsurance panel from a performance perspective, which leads us to believe that at six one and I guess, what we're hearing at 112 as if it's flat to modestly up.
That is very digestible for us and so.
There are certainly some leading indicators that make us very comp at two modestly up is achievable and attainable and I think that there are also some peak factors the palomar that make us more confident that that's attainable.
Got it understood that that makes sense on a on the reciprocal so understood there.
And then I guess, just maybe you know with all the changes.
Chris Yeah. So heard you on the lowering the attritional loss ratio outlook for this year.
I guess how are we how should we think about it going forward into 'twenty 'twenty, four and 'twenty twenty-five would you still expect.
Improvement off of the full year 'twenty three levels.
Yes, David that's a great question, obviously, we've talked about previously that we did expect the loss ratio to improve maybe it's proving a little earlier than we expected, but obviously, we're happy with the results of all of our lines.
Our performing all of our I guess I should say continuing lines are performing as expected you will notice that in the earnings release, we did have some unfavorable prior period development that was really driven by lines that were running off so it helps validate the decision to run off those lines.
The favorable catastrophe development that you saw.
It was actually from this year. It was the Q1 events were the primary driver of that so the California flooding that happened earlier. This year, we did have favorable development. There. So overall, we're happy with where the loss ratios. This quarter. We do expect some potential improvement from that maybe in Q4 and Q1, but overall, we're starting to get to what I would say is.
<unk>.
Bottom of that loss ratio improvement right. We're still growing a lot of lines that are very one profitable, but do you have attritional losses with them. So that can be casualty that could be in the marine and so as those lines continued to grow and as we get there.
Runoff lines out of our portfolio as you expect to see the loss ratio tick up over time, so maybe let's call. It Q2 ish of next year, maybe Q3 of next year I wouldn't be surprised to see the loss ratio start incrementally moving back up but it's really going to be driven by the overall mix of those business and the <unk>.
And those lines of business. So it's going to happen I think as expected, but no surprises is not going to as I've said before jump.
30% overnight, but it is going to incrementally.
And still anchored by that strong.
<unk> business that has a zero percent loss ratio and Dave I think.
Pointed out that at two onex.
And I completely agree with Chris is saying it will it may modestly tick up the second half of 2024, but that will be on the heels of higher earned premium from those lines of business that are contributing a higher attritional loss ratio.
So the combined you know, which on an adjusted basis was <unk>.
78% will stay relatively in line.
Furthermore, the Roe.
We'll continue to trend above 20%.
And Furthermore.
Earthquake is now kind of indexing the growth rate and we feel very good about earthquake growth into 2004 two so.
They are not to be wide vacillation, we're very pleased with the loss ratio.
We think it's kind of.
In a nice steady state right now.
Got it understood. Thank you.
Thanks, Dave.
Our next question comes from Meyer Shields with K B W. Please proceed with your question.
Great. Thanks, so much I was hoping you could outline maybe the cause of it.
That you have for assumed reinsurance.
And the timeframe for getting that started does that.
We'll be running one one.
Yes, thanks for asking the question.
As you know we have written assumed reinsurance throughout our history and.
A lot of our earthquake partnerships actually our assumed reinsurance arrangements, especially in geographies.
That's.
The average premium is pretty modest so it's more effective from a cost and administrative structure as an assumed re deal so bringing on Matt is really helping us institutionalize, what we already have in place what we did at one one of 'twenty three for instance, where we set up a lot of for a lack of kind of swaps, where we were taking some.
And correlated property exposure in exchange for getting excess of loss for it on a core quake program and then Matt, bringing joining us will allow us to see more.
Deals he has a long standing track record in this space, what we will look to write will be.
Again uncorrelated specialty.
Some property business.
And we will write some at one one in addition to what we already have renewing at one one.
And.
I think it will kind of really extend our specialty insurer strategy and franchise. So hopefully some premium at one one definitely at six one in four one of next.
And it's going to look.
What we've done historically with probably a little bit more specialty business folded folded in.
Okay perfect that's very helpful.
Any question, but we've been hearing some homeowners insurers this ability on the standard line side.
Talk about maybe slowing inflation guard related increases and I'm wondering whether there's any reason to expect that on your book.
Yes. Thanks for the question, we have not seen that but I'm going to let John efficiency can speak to that yes. So we continue to push through the <unk>.
<unk> inflation guard.
Increases each year and we monitor the premium retention as you know.
And watch how that renewal book performs as we push through that.
Those inflationary factors.
To date, we have no reason to change our current direction with regard to continuing to push strong inflation guard.
Regardless of what some of our homeowner carrier partners decided to do independent of of our renewal activity. So really no reason for us to change at the moment, yeah, and the thing that I would add there is that two things one first and foremost.
We want to underwrite our companion products alongside a homeowners, but we can come up with what the requisite insurance to value would be so if you're a homeowner as Gary has one sense of it we may have a different one.
But its premise on what our underwriting and what our analytics are.
Determining is the appropriate replacement costs bore.
The structure and then secondly, we are writing our inflation guard is probably most pronounced and a state like Hawaii or California, where.
Yes.
Inflation, maybe it has not moderated quite as rapidly as maybe other parts of the country. So I think that's going to inform it too.
Okay excellent. Thank you so much.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, one moment, while we poll for questions.
Our next question comes from Andrew Anderson with Jefferies. Please proceed with your question.
Hey, good afternoon, just thinking about the Hawaii Recip recall do you view this as kind of a proof of concept for other opportunities, perhaps and I'm thinking of specialty homeowners and I think theres. Some reciprocal exchanges there or is this kind of a one off opportunity.
Andrew Yes, that's a good question I think having a reciprocal certainly gives us the ability to export that strategy to other lines, but for now we are acutely focused on in Hawaii and this is again.
A very sound strategic rack theres, a very sound strategic rationale to putting la Lima and place in Hawaii.
We have you know a 12 to 18 months exercise to transition our exposure offer palomar specialty onto La Lima.
At that point, we will pick up our heads and see where we can export it elsewhere.
Because the model does work, but for now it is.
A one trick pony.
Got it and on a residential flood can you maybe just give us an update of what that business is maybe the size of the market and loss ratio that you're underwriting to in this line.
Yeah.
Sure, Yes, so our inland flood strategy and I'll, let John come over the top on me is exactly what I would describe it as an inland flood. So we are not writing outside of the state of Hawaii really co store.
Exposure, we are trying to avoid stacking limit so wherever we have some continental hurricane exposure, we're not going to write the flood so it tends to be more inland flood in western and Midwestern States.
And then in the northeast muscle, Pennsylvania it.
It's all primary limits.
That's kind of competing with the NFIB, what we're looking to do is really underwrite risk in a more granular level rewriting the 30 by 30.
Geo code and.
That factors in elevation as well as proximity to flood plains and floods on location.
So we've been deliberate in how we've grown from a geographic perspective, and I think we will continue to do so we are targeting to use the E&S company.
In an increasing fashion as well but.
This is one where we don't want to stack limit sac exposure.
From a loss perspective, but John you want to say that yes. So I mean really we're targeting from a loss perspective.
Predictable.
Expected losses, so as Mac mentioned, we do not currently right.
In the southeastern United States in coastal areas to avoid the volatility of loss and so we're able to price the product to a profitable level.
Poland exposure from lower hazard zones, we will write some higher hazard zones, but really targeting those risks that fit.
Predictable profitable loss ratio and the business is priced.
Granular level too.
To ensure consistency and delivering results I think the even in a heightened loss year of 2023 from a flow perspective.
The product performed as we would expect I think our loss pick on that is going to be around a 40% typically.
Yeah, and I would say one good example of that to add on is.
This quarter, we did have exposure to Hillary right and so we performed our book performed very well and that we will have some losses from that but based on the performance of our bookings did not rise to the magnitude that it needs to be separated as a catastrophe. So overall, we're very happy with the performance of the book.
Broadly and during the quarter.
Great. Thank you.
Thanks, Andrew.
Our next question comes from Pablo <unk> with Jpmorgan. Please proceed with your question.
Hey, Pablo you there are.
Are you muted Pablo.
Pablo is your line muted.
Yes, sorry about that it wasn't me right.
Sorry, but no problem.
Yes. The first question is for Chris right. So you.
You described a lot of things that are happening in the company right.
Improving the loss ratio in the first half of next year and nothing in the second half after that any of the acquisition cost ratio.
<unk> change.
I guess, if youre sort of to simplify it and put everything together right. What's the the combined ratio look like Directionally as we go into 'twenty four 'twenty five I think in the past you had talked about a gradual uptick every year, maybe half a point a point is that first still the trajectory you're thinking about given.
Everything that you guys are doing at this point.
Yes, no I think directionally, that's still accurate right. One thing I want to think about and talk about is the impact that the excess of loss cost does have on our ratios and one of the reasons, we try and talk about acquisition expense ratio other underwriting expense ratio on more of a <unk>.
OS basis, and when you looked at it this year.
About $30 million of additional costs earlier that $13 million of additional cost is in the denominator of the expense ratio and so this year or this quarter excuse me that does add to the overall.
Ratio that youre going to get so when you look at it the ratios this quarter would have been probably about 13% lower than they were if that additional expense was not in there right. The expense ratio would have probably been around 45% to 46% in the loss ratio would have been about 16% to 17%. So we try.
<unk> not <unk>.
Give too much specific combined ratio guidance, but to your point I do expect it to tick up modestly as things improve but overall, we try and think about those expense ratios on a gross standpoint that nine 9% right I do for acquisition expense as you expect that to be flatter to potentially up that can be driven.
By mix right the growth rates for a lot of our lines of business are starting to come more in line fronting is a big piece of that river is not going to get 150% front end growth.
Previously and so that ceding commission will not outpace the acquisition expense. So I expect the acquisition expense ratio to be a little bit flatter.
When you look at the other underwriting expenses. It was about six 7% this quarter versus six 9% in Q2. So it did go down, but we're not going to stop investing right. We're just Matt talked about and we have some new.
Team members on the underwriting side to help drive the environmental and some of the assumed re business. So we will invest in those teams we will invest in their systems and so while that ratio might be flat or potentially up on a sequential quarter basis over the long term, we do expect to see some scale and the other underwriting expenses.
So overall everything is performing as we'd expect but I do want to make sure I pointed out that the excess of loss cost in the denominator for those ratios does impact and can push those ratios a little higher and if youre looking at it with flat excess of loss cost.
Yeah, that's a fair point.
And then the second question I had.
This one in premiums right. So if we look at net earned premiums are they're.
They are on track to grow about 9% this year, which is down from 35% last year because of various reasons you've covered in the past like reinsurance and the runoff of certain lines.
I think before Mac, yet offered 20% have suffered rule of thumb for growth in the earthquake and my guess is you can probably grow faster than the newer attritional lines. So if.
Can you surf assume a manageable stable choose you won't be interested environment here would it be reasonable to think that your net room growth will certainly improve from here, but maybe track closer to you know the.
The grocery and growth of visa lineup as they grow thank you.
Yes, Pablo that's a great point you raised yes. The answer is yes. So.
Reinsurance pricing doesn't go up 30%.
And that should <unk>.
Each other pretty closely.
Especially now is fronting won't be disproportionately growing.
They're growing at a disproportionately faster rate. So yes, we think there is great promise for operating leverage in our model, especially as reinsurance pricing.
Stabilizes, which I think it will this year <unk> has the potential to decrease in future years. So your point is a good one and one worth noting net.
Net earned premium has the chance to scale nicely, yes, I think just from a modeling standpoint, I think the best way to think about it is little more sequentially on a quarter over quarter basis, It's really off of Q3 and Thats. A dollar amount like you said should be going up right. It's a little harder to compare to prior years because of the excess of loss costs that we've talked.
But I would like to try and model out a little more sequentially and seeing how those things are the dollars will move on a quarter over quarter basis, especially let's call. It using Q3 as a good base now that all of the excess of losses fully baked in and those dollars should not change until six one of 24 based on the next reinsurer.
Sure Neal.
Yes.
Yeah, that's clear thank you.
Thanks, Bob.
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.
Yes. Thank you operator, and thank you all to join US. This morning, we appreciate your participation your questions and your support.
<unk> I wanted to reiterate excuse me, how pleased I am with our third quarter results and how proud I am of our team who have allowed us to achieve them.
We are focused on profitable growth and predictable earnings and believe we are well positioned to accomplish these objectives for the remainder of this year 2024, and beyond and before closing I just want to take a moment to thank Bob Dow Dell and member of our board of Directors, who recently passed away Bob has been involved as an advisory member of our board since before the company.
Some 10 years ago, he was a mentor coach and friend all on our leadership team. He was also Pemex greatest cheerleader, we'll miss him dearly. So thank you again and enjoy the rest of your day take care.
Yes.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Okay.