Q4 2023 Palomar Holdings Inc Earnings Call
Operator: Good morning, and welcome to Palomar Holdings Inc.'s fourth quarter and full year 2023 earnings conference call. During today's presentation, all parties will be in a listen-only mode.
Good morning, and welcome to the Palomar Holdings, Inc, fourth quarter and full year 2023 earnings conference call. During today's presentation, all parties will be in unless you'd only mode.
Operator: Following the presentation, the conference line will be open 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 Mr. Chris Uchida, Chief Financial Officer. Please go ahead.
Following the presentation. The conference line will be opened for questions with instructions to follow at that time.
A reminder, this conference call is being recorded I would now.
Now I'd like to turn the call over to Mr. Christie Shea Chief Financial Officer. Please go ahead.
Christopher T Uchida: Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me here today is Mac Armstrong, our Chairman and Chief Executive Officer. Additionally, Jon Christensen, 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 February 22nd, 2024. 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 Exchange Commission. We do not undertake any duty to update such forward-looking statements.
Christie Shea: Thank you operator, and good morning, everyone. We appreciate your participation in our 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.
Speaker Change: As a reminder, the telephonic replay of this call will be available on the Investor Relations section of our website through 11 59 P. M. Eastern time on February 22024.
Speaker Change: 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 of.
Speaker Change: These include remarks about management's future expectations beliefs estimates plans and prospects.
Speaker Change: 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.
Speaker Change: Such risks and other factors are set forth in our quarterly report on Form 10-Q filed with the Securities Exchange Commission.
We do not undertake any duty to update such forward looking statements.
Christopher T Uchida: Additionally, during today's call, we will discuss certain non-GAAP measures which we believe are useful in evaluating our performance. However, 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 report. At this point, I'll turn the call over to Mac. Thank you, Chris. Good morning.
Speaker Change: During today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance.
Speaker Change: 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.
Speaker Change: 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 Matt.
Matt: Thank you, Chris and good morning.
Mac Armstrong: The fourth quarter provided a strong end to what was a stellar 20- Quarterly results included record growth rates in premium and adjusted net income, premium adjusted net income growth of 27% and 33%, respectively. And importantly, a majestic return on equity of 25 percent. When looking at the full year, we're equally proud of record gross written premium and adjusted net income, strong top and bottom line growth, and numerous initiatives that led to diversification and reduced earnings volatility, reintroduced multiple new lines of business, namely crop, environmental liability, and soon reentry. This robust and disciplined growth translated into an adjusted return on equity well above the 20% benchmark level espoused in our Palomar 2X strategic plan Before I go into detail on the fourth quarter, I want to take a moment to recount the accomplishments of our terrific 2023. At the beginning of last year, we outlined four strategic objectives for the year. One, sustain strong growth. Two, manage dislocation.
Fourth quarter provided a strong end to what was a stellar 2023.
Matt: Our quarterly results, including record gross written premium and adjusted net income premium and adjusted net income growth of 27% and 33%, respectively and importantly, an adjusted return on equity of 25%.
Matt: When looking at the full year.
Matt: Proud.
Our record gross written premium and adjusted net income strong top and bottom line growth and numerous initiatives that led to diversification and reduce earnings volatility.
Matt: We introduced multiple new lines of business, namely crop environmental liability in June reinsurance.
Matt: As robust and disciplined growth translated into an adjusted return on equity well above the 20% benchmark levels bounced in her Palomar to X strategic plan.
Speaker Change: Before I go into the detail on the fourth quarter I want to take a moment to recap the accomplishments of our terrific 2023.
Speaker Change: At the beginning of last year, we outlined four strategic objectives for the year, one sustained strong growth to manage dislocation three enhance earnings predictability and fourthly scaled the organization I'm pleased to report we execute all of these objectives and the execution not only led to record gross written premium and earnings but also put us in a position for long term success.
Mac Armstrong: Three, enhance earnings predictability, and fourthly, scale the organization. Please report that we executed all these objectives, and the execution not only led to record growth in premium and earnings but also put us in a position for the long term. The highlights of 2023 are numerous, but selected achievements include a 29.4% growth rate in premium growth that is closer to 40% when excluding de-emphasized or discontinued lines of business. Thank you all for joining us today for the successful navigation of a generationally hard property catastrophe reinsurance market in which we renewed our reinsurance program in line with the expectations implied in our full year 2023 earnings guidance, and have procured more active sublossum to support our growth in earthquakes. The completion of a multi-year effort to reduce our continental wind and severe convective storm exposure that resulted in reduced volatility in our earnings. This is best exemplified by our minimal catastrophe losses this year.
Speaker Change: Highlights of 2023 are numerous but selected achievements include.
Speaker Change: 29, 4% gross written premium growth that are closer to 40% when excluding the emphasize or discontinued lines of business.
Speaker Change: Our successful navigation of a generation, we hired property catastrophe reinsurance market and which we renewed our reinsurance program in line with the expectations implied in our full year 2020 earnings guidance.
Speaker Change: Procured more access to blossom and to support our growth and earthquake.
Speaker Change: The completion of a multi year effort to reduce our continental wind and severe convective storm exposure that resulted in reduced volatility in our earnings base. This is best exemplified by our minimal catastrophe losses. This year as an aside if the 2020 wind season were to happen again, our total losses from the cohort of stores will be less than $10 million in it.
Mac Armstrong: As an aside, if the 2020 wind season were to happen again, our total losses from the cohort of storms would be less than $10 million on an epic scale. The introduction of three new lines of business in crop insurance and verifiable liability and assumed reinsurance, and incremental traction in newer lines like excess property and gas. These nascent products will enhance our specialty insurance franchise and create shareholder value. The addition of best-in-class underwriting, reinsurance, data, actuarial, and technology talent to our team, and Best changing the Outlook in their rating of Palomar to positive from stable. Last but not least, the successful beating and raising of our quarterly adjusted net income targets every quarter of the year.
Speaker Change: That basis.
Speaker Change: The introduction of three new lines of business in crop insurance in Burma, or liability and assumed reinsurance and incremental traction in newer lines like excess property and casualty. These nascent products will enhance our specialty insurance franchise and create shareholder value.
Speaker Change: The addition of best in class underwriting reinsurance data actuarial technology talent to our team.
Speaker Change: A M best changing the outlook in their rating of Palomar to positive from stable.
Last but not least successful beaten raise of our quarterly adjusted net income targets every quarter of the year.
Mac Armstrong: These accomplishments allow us to exit the year energized by our prospects for profitable growth in 2024 and beyond. With that, I'd like to discuss our fourth quarter results in our 2024 strategic priorities for our five product quarters. Overarchingly, the quarter saw robust growth, with gross written premium increasing 27% year-over-year and a nice sequential acceleration for 24% gross written premium growth delivered in the third quarter. Including the emphasized lines of business, gross written premiums increased 32%.
Speaker Change: These accomplishments allowed to exit the year energized by our prospects for profitable growth in 2024 and beyond.
Speaker Change: With that I'd like to discuss our fourth quarter results and our 2024 strategic priorities for five product categories.
Speaker Change: Overarching lead the cortisol robust growth with gross written premium increased 27% year over year, a nice sequential acceleration from 24% gross written premium growth delivered in the third quarter.
Speaker Change: Excluding the emphasize lines of business gross written premiums increased 32%.
Mac Armstrong: Likewise, net earned premiums grew 14% in the fourth quarter, which is an acceleration from the 10% that we delivered in the third quarter of 2020. Chris, we'll discuss the Net Earned Premium Trend for 2024. Looking at our five key business lines in more detail, our core earthquake franchise grew 29% in the fourth quarter, up from 23% in the 2023 third quarter. The Residential Earthquake Book grew 18%, and our Commercial Earthquake grew, crew, a healthy 44%... The growth in Q4 for commercial earthquakes favorably compared to the third quarter's growth of 35% and the second quarter's growth of 29%. Our Residential Earthquake Portfolio remains our largest single line of business and a consistent performer. The market backdrop is still attractive as the California homeowners market dislocation persists.
Speaker Change: Likewise net earned premiums grew 14% in the fourth quarter, which is an acceleration from the 10% that we delivered in the third quarter of 2023.
Speaker Change: Chris will discuss the net earned premium trend for 2024.
Speaker Change: Looking at our five key business lines in more detail our core earthquake franchise grew 29% in the fourth quarter up from 23% in the 2023 third quarter <unk>.
Speaker Change: The residential earthquake book grew 18% and our commercial earthquake brew grew a healthy 44%.
Speaker Change: The growth in Q4 for commercial earthquake favorably compared to the third quarter's growth of 35% in the second quarter's growth of 29%.
Speaker Change: Our residential earthquake portfolio remains our largest single line of business and a consistent performer the market backdrop is still attractive as California homeowners market dislocation persists existing California earthquake authority policyholders are seeing reduced coverage offered at renewal and an increasing amount of historically standard lines business is moving to excess in surplus.
Mac Armstrong: California Earthquake Authority policyholders are seeing reduced coverage offered at renewal, and an increasing amount of historically-standardized businesses moving to excess and surplus not. At quarter end, our E&S premium is 9% of total California residential. We believe Hiteen's growth is sustainable in the year ahead and that a new partnership with the Top 25 Insurance brand, offering earthquake insurance to their E&S policyholders, could provide a further catalyst for sustained, profitable growth. During the quarter, commercial earthquake conditions remained attractive as we achieved rate increases of approximately 26% on a risk-adjusted basis, at record best levels for average annual loss and 250-year probable maximum loss to premium. Our most important portfolio management, We did see the level of rain increases start to moderate from the prior year and expect that to be the case in 2020.
Last night.
Speaker Change: At quarter end, our E&S premium was 9% of total, California residential earthquake premium.
Speaker Change: We believe high teens growth is sustainable in the year ahead and that a new partnership with the top 25 insurance brand offering earthquake insurance to their E&S policyholders can provide a further catalyst for sustained profitable growth.
Speaker Change: During the quarter commercial earthquake conditions remained attractive as we achieved rate increases of approximately 26% on a risk adjusted basis.
Speaker Change: And record best levels for average annual loss and 250 year problem.
Speaker Change: Maximum loss to premium.
Speaker Change: Our most important portfolio management metrics, we did see the level of rate increases start to moderate from the prior year and expect that to be the case in 2020 for this dynamic is more pronounced in large layered in shared accounts that it is in the middle market.
Mac Armstrong: This dynamic is more pronounced in large-layered and shared accounts than it is in the middle markets. We remain positive on the growth and profitability prospects of our earthquake franchise as we enter 2024, and are in the Marine and our other property products by 8% year over year, as this remains our product segment where we are judiciously managing, and in certain cases, reducing our exposure. It is the product group that best typifies our grow where we want mantra.
Speaker Change: We remain positive on the growth and profitability prospects of our earthquake franchise as we enter 2024.
Speaker Change: Alright, and the marine and our other property products grew 8% year over year. As this remains our product segment, where we are judiciously managing and in certain cases, reducing our exposure.
Speaker Change: It is a product group the best episode Typifies, our grow or we want mantra, we continue to invest in lines at all at attractive risk adjusted returns like builders risk excess property and flood fill it.
Mac Armstrong: We continue to invest in lines that hold attractive risk-adjusted returns like Builder's Risk, Excess Property, and Flood. Builder's Risk, our largest inland marine product, exited the year with over $115 million of in-force premium and added several new underwriters to help expand our geographic reach and distribution footprint in the corridor. We are confident the investments in Builder's Risk Infrastructure will sustain the growth of the business through 2024.
Speaker Change: There is risk our largest emory and the marine products exited the year with over $115 million of enforced premium and added several new underwriters to help expand our geographic reach and distribute distribution footprint in the quarter.
Speaker Change: We are confident the investments and builders risks infrastructure will sustain the growth of the business through 2024.
Speaker Change: Our excess property lines of approximately 5% rate increases in the quarter and 136% year over year growth as it builds a portfolio of non cat exposed property business.
Mac Armstrong: Our Excess Property line saw an approximately 5% rate increase in the quarter and 136% year-over-year growth as it builds a portfolio of non-catexposed property business. Like Builders Risk, the Excess Property Line is adding talent and infrastructure to profitably grow in 2024. Flood-ridden premium grew 25% year-over-year in the fourth quarter and 38% for the full year as we continue to expand the product's geographic footprint. We've now reduced our continental hurricane probable maximum loss to 100 million and the average annual loss to 4 million.
Speaker Change: Like builders risk the excess property line is adding talent and infrastructure to profitably grow in 2024.
Speaker Change: Slide written premium grew 25% year over year in the fourth quarter and 38% for the full year as we continue to expand the products geographic footprint.
Speaker Change: We've now reduced our continental hurricane probable maximum loss to $100 million and the average annual loss to $4 million. This concerted effort meaningfully lowered the volatility in our book, but did lead to the decline in our commercial all risk premium by 13% year over year imports.
Importantly, the remaining commercial hours book of business is attractive with policies renewing in an average increase of more than 30% in the first quarter.
Speaker Change: We have completed the triage as the book, we expect commercial hours premium to grow in 2024, albeit it will come exclusively through rate increases.
Mac Armstrong: This concerted effort meaningfully lowered the volatility in our book but did lead to a decline in our commercial all-risk premium by 13% year over year. Importantly, the remaining commercial hours booked in business are attractive, with policies renewing at an average increase of more than 30% in the fourth quarter. As we have completed the triage of the book, we expect Commercial Auris Premium to grow in 2024, albeit it will come exclusively through rate increases. Hawaii Hurricane premiums grew 13% in the fourth quarter, with most of that growth from rate increases and our Inflation Guard. As we discussed last quarter... We have formed the Laulima Exchange.
Hawaii Hurricane premiums grew 13% in the fourth quarter with most of that growth from rate increases and our inflation guard as we discussed last quarter.
Speaker Change: We have formed La Lima exchange Boy license reciprocal insurer for which we serve as the attorney in fact manager.
Speaker Change: This new vehicle allows us to transition our business model for the Hawaiian Hurricane product from one that is risk bearing to one that is fee generative.
Speaker Change: We're in the process of rolling our policies and the La Lima and expect to have this completed by the fourth quarter of 2020 for our customers have been receptive to that allow Lima transitioned with 90% of our policy successfully converting.
Speaker Change: Once this transition is completed we will all but eliminate balance sheet exposure to win losses from Hurricanes here in Hawaii.
Speaker Change: Turning to our casualty business, we are pleased to see premiums grew 165% year over year.
Mac Armstrong: Fully licensed reciprocal insurer for which we serve as the attorney and fact mayor, this new vehicle allows us to transition our business model for the Hawaiian Hurricane product from one that is risk-bearing to one that is speed-generating. We're in the process of rolling out our policies, and middle out, we expect to have this completed by the fourth quarter of 2024. Our customers have been receptive to the LALIMA transition, with 90% of our policies successfully converted.
Speaker Change: Production was highlighted by strong growth from our excess liability professional liability lines as well as our first premium from our recently hired environmental liability team.
Speaker Change: During the quarter that books, a blended rate increase of approximately 5% year over year with rates skewing a bit higher in excess liability.
Speaker Change: Importantly, we continue to take a surgical approach to the build out of our casualty business, where we focus on niche segments of the market that offer healthy risk adjusted returns and can firewall exposure to social inflation.
Mac Armstrong: Once this transition is completed, we will all but eliminate balance sheet exposure to wind losses from Hurricane Tidian in Hawaii. Turning to our casualty business, we are pleased to see premiums grow by 65% year-over-year. Production was highlighted by strong growth from our excess liability and professional liability lines, as well as our first premium from our recently hired environmental liability team. Thank you for listening.
Speaker Change: We employ prudent risk management tactics, such as modest gross of net line size avoidance of heavily heavy bodily injury exposure and conservative reinsurance to minimize loss potential in the classes we write.
Speaker Change: Feel our approach of bringing on subject matter experts, who are comfortable walking before they run we'll build a well underwritten book of business with limited exposure to large shock loss and significant adverse court rooms for the quarter. The casualty books loss ratio remained in line with our conservative loss pick as the predominance of the book is less than two years old we are focused on.
Mac Armstrong: We appreciate it. During the quarter, the book saw a blended rate increase of approximately 5% year-over-year, with rates skewing a bit higher on excess liability. Importantly, we continue to take a surgical approach to the build-out of our casualty business, where we focus on niche segments of the market that offer healthy risk-adjusted returns. Findable exposure to social employee, We employ a prudent risk management tactic, which is Modus Grosso net line size, avoidance of heavy bodily injury exposure, and conservative reinsurance to minimize loss potential in the classes we write. If you like our approach of bringing on subject matter experts who are comfortable walking before they run, we'll build a well-underwritten book of business with limited exposure to large shock losses. And we'll make sure you're ready to go.
Speaker Change: Building sizable reserve base that we expect to favorably develop over time, we expect our casualty business to be meaningful contributors to premium growth in 2024, primarily driven by our real estate D&O excess liability and professional lines.
Speaker Change: Our fronting business outperformed our expectations in 2023 growing premiums, 63% to $364 million and delivered 24% year over year growth in the fourth quarter.
Speaker Change: We also finalized two new fronting programs in the quarter.
Speaker Change: And recognize the modest level of premium from these new deals.
Speaker Change: And are optimistic about their potential for 2024.
Speaker Change: As we've said on past calls our Golan Fuzziness to provide fee generative services to a select group of M. G as carriers and reinsurers, writing specialty lines of business and industry segments, where we have a developed investment thesis and some measure of domain expertise.
Speaker Change: We actively manage the compliance oversight reinsurance and collateral of our funding partners and maintain our risk participation in certain instances.
Mac Armstrong: Thank you, if you have to get an adverse course. The core of the casualty books loss issue remained in line with our conservative loss pick. As the predominance of the book is less than two years old, we are focused on building a sizable reserve base that we expect to favorably develop over time. We expect our casualty business to be meaningful contributors to premium growth in 2024, primarily driven by our real estate E&O, excess liability, and professional liability business on Frontier Business, Outperform Our Expectations. 2023 growing premium 63% to $364 million and delivered 24% year-over-year growth in the fourth quarter. We also finalized two new front-team programs in the quarter, and we recognize a modest level of premium from these new deals and are optimistic about their potential for 2024.
Speaker Change: The current maximum participation of 8% remained selective of our strong foundry partners and apply that selectivity to our healthy pipeline of prospects.
Speaker Change: We continue to be very optimistic about the potential for our newest product group crop insurance as a reminder, Palmer's leadership team has extensive experience in the crop insurance market and we are now one of only 13 approved insurance underwriters or AIP and $20 billion industry.
Speaker Change: Our strategic partner advanced that protection has extensive sector experience and a distinct technology that allows us to target risk at the producer and regional level more importantly compete effectively even without immediate scale.
Speaker Change: We are targeting business throughout the Midwest and a variety of crops with the goal of minimizing exposure to a single event or heavy accumulation of losses in any one region.
Speaker Change: Fourth quarter is seasonally light period for crop insurers and one in which most AIP Palomar included right negligible premium during.
Mac Armstrong: As we've said on past calls, our goal in fronting is to provide degenerative services to a select group of MGAs, carriers, and reinsurers, writing specialty lines of business in industry segments where we have a developed investment thesis and some measure of domain. We actively manage the compliance, oversight, reinsurance, and collateral of our funding partners and maintain our risk participation and service. The current maximum participation of 8% will remain selective of our strong fronting partners and apply that selectivity to our healthy pipeline of prospects.
Speaker Change: During the quarter, we focused on generating premiums that will be booked at the start of the year. Thus.
Speaker Change: Thus far the market's receptivity is encouraging and we now expect.
Speaker Change: Liver more than $100 billion $100 million of premium in 2020 for Chris.
Speaker Change: Chris will provide more detail on the seasonality of the business.
Chris: As it pertains to our reinsurance program, we were pleased with the outcome for our reinsurance treaties renewing in January one.
Chris: Only a few treaties renewed at one one we did have a commercial earthquake quota share small earthquake only excess of loss layer and the casualty quota share renewed at the start of the year. So while limited compared to what renews June 1st these renewals offered a decently broad perspective on the market the.
Chris: The earthquake quota share renewed at an improved economics with an increased ceding commission that implies a risk adjusted decrease of approximately 5%.
Mac Armstrong: We continue to be very optimistic about the potential for our newest product group, Crop Insurance. As a reminder, Palomar's leadership team has extensive experience in the crop insurance market, and we are now one of only 13 approved insurance underwriters, or AIPs, in the $20 billion industry. Our strategic partner, Advanced Ag Protection, has extensive sector experience and a distinct technology that allows it to target risk at the 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 of losses in any one region.
Chris: The X ol layer, we needed a similar if not slightly better risk adjusted decrease casualty quota share renew with improved economics, and our ceding Commission increase from the expiring level, while the outlook for reinsurance has certainly improved from a year. Prior we are conservatively budgeting for modest price increases in our June 1st renewal, we're confident at the apex of a historically hard mark.
Chris: That is behind us, which bodes well for net earned premium growth and margin expansion.
Chris: <unk> 2023 has been a banner year of profitable growth and consistent earnings for Palomar.
Chris: We continue to invest in both of our core lines as well as new lines of business to ensure we are positioned to achieve our palomar to UX skills, notably doubling our underwriting income over a three to five year period, while delivering an adjusted return on equity above 20%.
Chris: As we set our sights on 2024, our steadfast commitment to profitable growth remains unwavering our strategic imperatives in many ways emulate those of 2023 or 40 minutes conviction.
Mac Armstrong: The fourth quarter is a seasonally light period for crop insurers and one in which most AIPs, Palomar included, write negligible. During the quarter, we focused on generating premiums that will be booked at the start of the year. Thus far, the market's receptivity is encouraging, and we now expect to deliver more than $100 million of premium in 2024. As it pertains to our reinsurance program, we are pleased with the outcome for our reinsurance treaties renewing in January. While only a few trees renewed at 1-1, we did have a commercial earthquake quota share, a small earthquake-only excess loss layer, and a casualty quot So while limited compared to what renewed on June 1st, these renewals offered a decently broad perspective on the market. The Earthquake Quota Share renewed under improved economics with an increased seating commission that implies a risk-adjusted decrease of approximately 5%. The XOL layer we needed a similar, if not slightly better, risk adjustment.
Chris: And Theyre Executability.
Chris: High level strategic imperatives for 2024 summarized in the following four rubrics.
Chris: One grow where we want to manage dislocation and diversification three provide consistent earnings and for scale of the organization.
Chris: Considerable progress has commenced across these directives. We are pleased to offer our full year 2024, adjusted net income guidance of $110 million to $115 million. Importantly, this range includes losses incurred in the first quarter from California flooding of approximately $3 5 million as well as full year.
Chris: Loss estimates for severe convective storm in many cat events.
Chris: Our guidance does assume.
Chris: A low single digit risk adjusted increase on our external renewable at six one.
Chris: The midpoint of our guidance implies an adjusted ROE of 21% level above our Palomar to X target with that I will turn the call over to Chris to discuss our results in more detail.
Chris: 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.
Chris: This methodology requires us to include common share equivalents, such as outstanding stock options during profitable periods and exclude them in periods, we incur a net loss.
Mac Armstrong: Cassidy Quotas share renewed with improved economics, and our seeding commission increased from the expiring level. While the outlook for reinsurance has certainly improved from a year prior, we are conservatively budgeting for modest price increases in our June 1st renewal. We are confident the apex of a historically hard market is behind us, which bodes well for net-earned premium growth in markets.
Chris: For the fourth quarter of 2023, our adjusted net income was $28 million.
Chris: Or $1 11 per share compared to adjusted net income of $21 1 million or <unk> 82 per share for the same quarter of 2022.
Chris: Our fourth quarter adjusted underwriting income was $29 3 million compared to $23 $5 million last year or.
Chris: Our adjusted combined ratio was 68, 8% for the fourth quarter compared to 71, 4% in the fourth quarter of 2022.
Mac Armstrong: 2023 has been a banner year of profitable growth and consistent earnings for Palomar. We continue to invest in both our core lines as well as new lines of business to ensure we are positioned to achieve our Palomar 2X goals, notably doubling our underwriting income over a three to five-year period while delivering adjusted return on equity above $20 billion. As we set our sights on 2024, our steadfast commitment to profitable growth remains unwavering. Our strategic comparators, in many ways, emulate those of 2023, avoiding us conviction and their executability.
Chris: For the fourth quarter of 2023, our annualized adjusted return on equity was 25, 1% compared to 22, 4% for the same period last year.
Chris: The fourth quarter adjusted return on equity continues to validate our ability to maintain top line growth with a prudent predictable rate of return above our Palomar to X target of 20%.
Chris: Gross written premiums for the fourth quarter were $303 $2 million, an increase of 26, 8% compared to the prior year's fourth quarter.
Chris: Excluding deemphasize products, our written premium growth rate was 31, 7% for the quarter.
Mac Armstrong: High-Level Strategic Imperatives for 2024, summarized in the following four groups. One, grow where we want. Two, manage dislocation and diversification. Three, provide consistent earnings. And four, scale the organization.
It is important to remember the seasonality of our crop premiums as anticipated we did not have any crop written premium in the fourth quarter.
Chris: Based on our current book the majority of our crop premiums will be written in the third quarter of each year, followed by the first quarter, which should see about a quarter of the year as premium.
Chris: The second and fourth quarters, Youll see only modest premiums.
Mac Armstrong: As considerable progress has commenced across these directives, we are pleased to offer full year 2024 Adjusted Income Guidance of $110 million to $115 million. Reportedly, this range includes losses incurred in the first quarter from California flooding of approximately 3.5 million, as well as full year loss estimates for the Severe Convective Storm and Mini-Catacts. Our guidance assumes a low single-digit risk-adjusted increase on our XNL renewal at 6-1. The midpoint of our guidance implies an adjusted ROE of 21% level above our Palomar 2X target. With that, I will turn the call over to Chris to discuss our results in more detail. Thank you, Mac.
Chris: As our crop premiums grow through the year, we plan on splitting out our crop premium into its own category and will provide an update on our first quarter's earnings call.
Chris: Net earned premiums for the fourth quarter were $93 7 million, an increase of 14% compared to the prior year's fourth quarter.
Chris: For the fourth quarter of 2023, our ratio of net earned premiums as a percentage of gross earned premiums was 33, 9% compared to 38, 9% in the fourth quarter of 2022 and compared sequentially to 31, 6% in the third quarter of 2023.
Chris: The year over year decrease is reflective of our growth in fronting and lines of business. They use quota share reinsurance and the second full quarter with our renewed excess of loss reinsurance program.
Christopher T Uchida: 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 periods and exclude them in periods we incur a net loss. For the fourth quarter of 2023, our adjusted net income was $28 million, or $1.11 per share, compared to adjusted net income of $21.1 million, or $0.82 per share for the same quarter of 2022. Our fourth-quarter adjusted underwriting income was $29.3 million, compared to $23.5 million last year. Our adjusted combined ratio was 68.8% for the fourth quarter, compared to 71.4% in the fourth quarter of 2022. For the fourth quarter of 2023, our annualized adjusted return on equity was 25.1%, compared to 22.4% for the same period last year.
Chris: With the mix of business maturing and our excess of loss reinsurance program in place. Our net earned premium ratio was at its low point in the third quarter of 2023, and an increase in the fourth quarter. We continue to expect a slight improvement in this ratio for the first part of the year and relatively consistent patterns for 2024.
Chris: Losses and loss adjustment expenses for the fourth quarter were $17 9 million comprise.
Chris: Comprised almost entirely of non catastrophe attritional losses.
Chris: The loss ratio for the quarter was 19, 1%, which compares to a loss ratio of 22, 4% a year ago in the fourth quarter, which was comprised of a catastrophe loss ratio of two 3% and an attritional loss ratio of 21%.
Chris: For the full year, our loss ratio was 21% in line with our previously expected range and which compares to 24, 9% in 2022.
Chris: Based on our mix of business and growth, we expect our loss ratio to move up incrementally from the 2023 levels.
Chris: Our acquisition expense as a percentage of gross earned premium for the fourth quarter was 10, 5% compared to 12, 7% in the fourth quarter last year.
Christopher T Uchida: The fourth quarter adjusted return on equity continues to validate our ability to maintain top-line growth with a predictable rate of return above our Palomar 2X target of 20%. Gross written premiums for the fourth quarter were $303.2 million, an increase of 26.8 percent compared to the prior year's quarter. However, it is important to remember the seasonality of our crop.
Chris: Compared sequentially to nine 9% in the third quarter of 2023.
Chris: Additional ceding commission and fronting fees continue to drive the year over year improvement.
Chris: The acquisition the acquisition expense ratio may be flat to modestly up in future quarters as our business mix matures. This quarter, our acquisition expenses, a little higher but it was completely offset by a higher commission and other income for the quarter both related to our crop business.
Chris: The ratio of other underwriting expenses, including adjustments to gross earned premiums for the fourth quarter was six 9% compared to six 9% in the fourth quarter of last year and compared to sequentially to six 7% in the third quarter of 2023.
Christopher T Uchida: As anticipated, we did not have any crop written premium in the fourth quarter. Based on our current book, the majority of our crop premium will be written in the third quarter of each year, followed by the first quarter, which should see about a quarter of the year's premium. Second and fourth quarters, we'll see only a modest premium. As our crop premiums grow through the year, we plan on splitting out our crop premium into its own category and will provide an update on our first quarter's earnings. Net earned premiums for the fourth quarter were $93.7 million, an increase of 14% compared to the prior year's fourth quarter.
Chris: In line with our expectation as we continue to invest in our organization as we continue to grow we continue to expect long term scale and this ratio while we may see periods sequential flatness as we continue to invest in scaling the organization.
Chris: Our net investment income for the fourth quarter was $7 million, an increase of 58, 9% compared to the prior year's fourth quarter. The year over year increase was primarily driven by a higher average balance of investments held during the three months ended December 31, 2023, and a mix shift of invested assets from lower yielding investment assets.
Christopher T Uchida: For the fourth quarter of 2023, our ratio of net-earned premiums as a percentage of gross-earned premiums was 33.9%, compared to 38.9% in the fourth quarter of 2022 and compared sequentially to 31.6% in the third quarter of 2023. The year-over-year decrease is reflective of our growth in fronting and lines of business that use quota share reinsurance and the second full quarter with our renewed excess of loss With the mix of business maturing and our excess of loss reinsurance program in place, our net earned premium ratio was at its lowest point in the third quarter of 2023 and increased in the fourth quarter. We continue to expect a slight improvement in this ratio for the first part of the year and relatively consistent patterns for 2024. Losses and loss adjustment expenses for the fourth quarter were $17.9 million, priced almost entirely on non-catastrophe attritional law.
Chris: Higher yield investment assets with a similar credit quality.
Chris: Our yield in the fourth quarter was four 1% compared to three 3% in the fourth quarter of last year.
Chris: The average yield on investments made in the fourth quarter was five 9% we.
Chris: We continue to conservatively allocate our position as the asset classes that generate attractive risk adjusted returns.
Chris: During the quarter, there were no share repurchases and we have $43 $5 million of our authorized share repurchase program remaining as of December 31, 2023 that we will continue to use opportunistically.
Chris: At the end of the quarter, our net written premium to equity ratio was <unk> 87 to one.
Chris: For the year, our strong topline performance continued to translate to the bottom line. Our adjusted net income grew 31% to $93 $5 million. Our adjusted EPS grew 33, 5% to $3 69.
Christopher T Uchida: The loss ratio for the quarter was 19.1%, which compares to a loss ratio of 22.4% a year ago in the fourth quarter, which was comprised of a catastrophe loss ratio of 2.3% and a nutritional loss ratio of 20.1%. For the full year, our loss ratio was 21%, in line with our previously expected range and which compares to 24.9% in 2022. Based on our mix of business and growth, we expect our loss ratio to move up incrementally from the 2023 level. Our acquisition expense as a percentage of gross earned premium for the fourth quarter was 10.5%, compared to 12.7% in the fourth quarter last year and compared sequentially to 9.9% in the third quarter of 2023. Additional seating commission and fronting fees continue to drive the year-over-year improvement. The acquisition expense ratio may be flat to modestly higher in future quarters as our business mix matures. This quarter, our acquisition expense was a little higher, but it was completely offset by higher commissions and other income for the quarter, both related to our property.
Chris: Our adjusted combined ratio was 71, 2% made up of a loss ratio and an expense ratio of 21% and 52% respectively. Both improvements from 2022.
Chris: Ultimately, resulting in an ROE of 21, 9% our adjusted underwriting income grew 29, 1% to $99 5 million positioning us to achieve our Palomar <unk> objective from 2021 and less than four years.
Chris: As Mac mentioned, we are initiating our full year 2024, adjusted net income guidance of $110 million to a $115 million.
Chris: Implying 20% adjusted net income growth at the midpoint of the guidance. This range includes our current estimate of the catastrophic, California flood losses incurred in the first quarter of approximately $3 $5 million.
It is important to remember that our loss estimates and guidance include our expectations of many cats, such as severe convective storm activity.
Chris: For the year, we expect our loss ratio to be approximately 21% to 25%, including the first quarter flood losses incurred to date and our estimate of many cats, which represents approximately two to three points of our expected loss ratio.
Speaker Change: With that I'd like to ask the operator open the line for any questions operator.
Speaker Change: Thank you she would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Christopher T Uchida: The ratio of other underwriting expenses, including adjustments to gross earned premiums, for the fourth quarter was 6.9%, compared to 6.9% in the fourth quarter of last year, and compared sequentially to 6.7% in the third quarter of 2023. This is in line with our expectation as we continue to invest in our organization and as we continue to grow. We continue to expect long-term scale in this ratio while we face these periods of sequential flatness as we continue to invest in scaling the organization. Our net investment income for the fourth quarter was $7 million, an increase of 58.9% compared to the prior year's fourth quarter.
Speaker Change: Our first question is from Paul Newsome with Piper Sandler. Please proceed.
Jon Paul Newsome: Hey, good morning, congratulations on the quarter.
Jon Paul Newsome: Just to make sure you start with a little bit of a modeling question can you give us a little bit more thoughts on the relationship between gross and net and over.
Speaker Change: Over the course of the next year.
Obviously crop is a big reinsurance related.
Speaker Change: Product and.
Speaker Change: Mix shifts there and so a lot of pieces that thing to think about that.
Speaker Change: Maybe you can just talk to us about that and sort of increasing and decreasing pieces of the reinsurance.
Christopher T Uchida: The year-over-year increase was primarily driven by a higher average balance of investments held during the three months ended December 31, 2023, and a mixed shift of invested assets from lower-yielding investment assets into higher-yield investment assets with a similar credit quality. Our yield in the fourth quarter was 4.1%, compared to 3.3% in the fourth quarter last year. The average yield on investments made in the fourth quarter was 5.9%.
Speaker Change: Yeah. Thanks, Paul Good question, when we think about it right. We've said this all along that the gross to net ratio.
Speaker Change: It was probably at its lowest point after Q3 of this year.
Jon Paul Newsome: For the full reinsurance placement was put in place you did see that improve slightly in the fourth quarter.
Speaker Change: I would expect with that is I'd expect that trend to continue in Q1, So I'd expect that to move up a little bit in Q1 that I'd expect potentially a little bit of movement up in Q2, and then when we buy reinsurance again in the at the end of the second quarter I would expect kind of that stair step the relationship that you saw in 2023 to happen.
Christopher T Uchida: We continue to conservatively allocate our positions to asset classes that generate attractive risk-adjusted returns. During the quarter, there were no share repurchases, and we have $43.5 million of our authorized share repurchase program remaining as of December 31, 2023, that we will continue to use opportunistically. At the end of the quarter, our net written premium to equity ratio was 0.87 to 1. For the year, our strong top-line performance continued to translate to the bottom line. Our adjusted net income grew 31% to $93.5 million.
Speaker Change: Again in 2024. So overall 2024 is going to have a higher overall load on the reinsurance costs. So I would expect the full year net earned premium ratio to be a little bit lower than what you saw in 2023, but I would expect it to kind of when you get to the second half of 2024 I would expect it to look very.
Speaker Change: Similar to what you saw in 2023, so those same relationships starting to play out from what you saw.
Christopher T Uchida: Our adjusted EPS grew 33.5% to $3.69. Our adjusted combined ratio was 71.2%, made up of a loss ratio and an expense ratio of 21% and 50.2%, respectively, both improvements from 2022, ultimately resulting in an ROE of 21.9%. Our adjusted underwriting income grew 29.1% to $99.5 million, positioning us to achieve our Palomar 2x objective from 2021 in less than four years. As Mac mentioned, we are initiating our full year 2024 Adjusted Net Income Guidance of $110 million to $115 million, applying 20% adjusted net income growth at the midpoint of the guide. This range includes our current estimate of the catastrophic California flood losses incurred in the first quarter, of approximately $3.5 million.
Speaker Change: The other part of your question.
Speaker Change: It was related to crop right and there is definitely some seasonality in our crop business. Because we will have for 2023 were all full front for crop. So really of all the seasonality that you saw was in the written premium.
Speaker Change: I would expect that to be very similar in 2024, right. We're only participating 5%. So it will start contributing to the bottom line, but that bottomline contribution will not be as material as the seasonality that you see in the written premium the written premium as I mentioned in the prepared remarks, I would expect to see.
Speaker Change: About 60% of that written premium in Q3, probably 25% of that written premium in Q1, and then a little bit spread out between Q2 and Q.
Speaker Change: For 2024, but that seasonality you see in that written premium isn't going to be a driving factor in maintenance of our bottom line move significantly.
Christopher T Uchida: It is important to remember that our loss estimates and guidance include our expectations of minicats, such as severe convective storm activity. For the year, we expect our loss ratio to be approximately 21% to 25%, including the first quarter flood losses incurred to date and our estimate of minicasts, which represents approximately 2 to 3 points of our expected losses. With that, I'd like to ask the operator to open the line for any questions. Operator?
Speaker Change: <unk>.
Speaker Change: Material win I think that noise that you guys were expecting or isn't going to be material to our overall results, but you will see it in the written premium and then it'll just net out in the net earned.
Speaker Change: Paul One thing I'd add on crop, though long term, we do expect to take a more meaningful risk participation.
Speaker Change: But that wouldn't accept until.
Speaker Change: January one of 25, so we'll have ample opportunity to you.
Operator: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: Guys, Yeah, our analysts on how that does.
Speaker Change: Change the relationship of earned premium in the life, but.
Speaker Change: Again 2020 for like Chris described.
Jon Paul Newsome: And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star 2. Our first question is from Paul Newsome with Paper Sandler. Good morning.
Speaker Change: It's one where we're still more of a fee generator with a modest 5% risk participation.
Speaker Change: That makes sense I hate to beat the crop a little bit more but I will anyway.
Christopher T Uchida: Congratulations on the quarter. Just to start with a little bit of a modeling question, can you give us a little bit more thoughts on the relationship between gross and net and over the course of the next year? Obviously, crop is a big reinsurance-related product, and there's makeshift in there. And so there are a lot of pieces, I think, to think about, but maybe you could just talk to us about that and sort of the increasing and decreasing pieces of the reinsurance. Yeah, thanks, Paul. That's a good question.
Speaker Change: So crop is interesting in that at least amongst the companies I cover.
Speaker Change: There are different opinions upon.
When the profits should emerge so like a chubb tends to.
Speaker Change: So all of their profits in the third quarter aligned with revenue.
Speaker Change: The American financial group tends to show its profits.
Speaker Change: Essentially as favorable reserve development in the fourth quarter after that.
Speaker Change: Any thoughts about sort of how you might handle screening.
Christopher T Uchida: When we think about it, right, we've said this all along that the gross-to-net ratio was probably at its lowest point after Q3 of this year and after the full reinsurance placement was put in place. You did see that improve slightly in the fourth quarter. What I would expect with that is I would expect that trend to continue in Q1, so I'd expect that to move up a little bit in Q1, and I would expect potentially a little bit of movement up in Q2, and then when we buy reinsurance again at the end of the second quarter, I would expect kind of that stair-step relationship that you saw in 2023 to happen again in 2024. So overall, 2024 is going to have a higher overall load on the reinsurance cost, so I would expect the full-year net-earned premium ratio to be a little bit lower than what you saw in 2023, but I would expect it to kind of, when you get to the second half of 2024, I would expect it to look very similar to what you saw in 2023, so those same relationships are starting to play out from what you saw. The other part of your question was related to crops, right, and there is definitely some seasonality in our crop business because, you know, for 2023, we will be a full front for crops, so really all the seasonality that you saw was in the written premium. I would expect that to be very similar in 2024, too, right?
Yeah, I don't know if the right answer to either way.
Speaker Change: Yeah, I think when we look at it.
Speaker Change: The hard thing about it and the way Chubb does it or American financial does it right is not necessarily going to be a right or wrong I think when we look at it we plan on having most of the written premium in the third quarter because of the fact, that's when we expect the acreage reports to come in and so when we tie the risks and the premium.
Speaker Change: Together, we expect probably be a little bit more like Chubb. If we were a full underwriter of this right and so that's when we think about it. So there will in time as Mac mentioned, we will start taking more and so in time I would expect us to probably look a little bit more like Chubb that where you would see a little bit of that catch up in Q.
Speaker Change: Three from some of the earning of that premium the writing of that premium and then also the losses to come in but our goal isn't to have a significant swings in our reserve we wanted to keep it a little bit smoother. So that you would argue it's probably going to be more a little bit more like American family. There's not we're not expecting to have a giant catch up period.
Speaker Change: For something like that but we.
Speaker Change: We expect our premium to come in more in Q3, because that's when we're going to tie to the acreage reported knowing having better confidence in what that written premium is.
Speaker Change: It makes sense to me. Thanks, I'll, let some other folks ask questions, but always thankful for their help.
Speaker Change: Thanks, Paul I appreciate it.
Speaker Change: Our next question is from Peter Knutsen with Evercore ISI. Please proceed.
Peter Knutsen: Good afternoon, Thanks for taking my questions.
My first question, there's been some noise in the industry recently on construction oriented liability lines and.
Mac Armstrong: We are only participating 5%, so it will start contributing to the bottom line, but that bottom line contribution will not be as material as the seasonality that you see in the written premium. The written premium, as I mentioned in the prepared remarks, I would expect to see about 60% of that written premium in Q3, probably 25% of that written premium in Q1, and then a little bit spread out between Q2 and Q4 of 2024, but that seasonality that you see in that written premium isn't going to be a driving factor in making our bottom line move significantly in a material way. I think that noise that you guys are expecting isn't going to be material to our overall results, but you will see it in the written premium, and then it will just net out in the net earnings. Paul, the one thing I'd add on crop, though, long-term, we do expect to take in more meaningful risk participation. But that wouldn't accept until, you know, January 1 of 25.
Peter Knutsen: And I believe Palomar started writing contractors Chelan early 2021, which I know is after some of the more concerning years, but I'm. Just wondering if you could talk a little bit about that and how you guys are getting comfort growing in that line.
Yeah sure Peter Thanks for the question.
Speaker Change: We did we have started writing contractors general liability really at the in the early part of 2022, we hired a great leader and tie Robyn towards the tail in that year.
Speaker Change: So.
Speaker Change: It's a nascent effort led by someone that's a 20 year veteran.
<unk> joined Us from American financial group.
Speaker Change: With longstanding distribution relationships that keen sense of the exposure and as such we feel very good about what we're writing now mind you. We are conservative in our approach to this we are riding a modest line sizes typically on average $5 million gross net where were our net participation is.
Speaker Change: Between 35% to 40% we are avoiding heavy auto liability there and as a result, the book has performed very well.
Mac Armstrong: So we'll have ample opportunity to guide our analysts on how that does change the relationship of earned premium and the like. But again, 2024, like Chris described, is one where we're still more of a fee generator with a mod of 5 percent risk participation. That makes sense. I hate to beat the crop a little bit more, but I will anyway.
Speaker Change: That also being said.
Speaker Change: We are still booking everything in our loss picks. So we are building up a nice loss reserve base that we have not touched and don't intend to touch.
Speaker Change: But we do expect it to develop favorably based on the quality of the underwriting and the underwriter leading the team.
Jon Paul Newsome: So crop is interesting in that, at least amongst the companies I cover, there are different opinions about when the profits should emerge. So like a chub tends to show all its profits from the third quarter aligned with revenue, where an American financial group tends to show its profits, essentially as a favorable reserve development in the fourth quarter after the, um, any thoughts about sort of how you might end up treating it? Yeah, I don't know if the right answer is either way.
Speaker Change: Okay, great. Thank you and then my second question. It sounds like you guys saw rate in casualty remained at around 5% this quarter.
Speaker Change: Flat sequentially, and I guess I would've expected that to moderate slightly so I'm. Just wondering if you could talk a little bit more about what you're seeing with regards to casualty rate and maybe what your outlook is for that in 'twenty four.
Speaker Change: Yeah, I mean, it's a good question I would say on the casualty side.
Speaker Change: The 5% was kind of the blend across the multiple lines that we have it does vary by line of business.
Christopher T Uchida: Yeah, I think when we look at it, the hard thing about it, in the way Chubb does it or American Financial does it, isn't necessarily going to be right or wrong. I think when we look at it, we plan on having most of the written premium in the third quarter because of the fact that's when we expect the acres reports to come in. And so, you know, when we tie the risk and the premium together, we expect to be a little bit more like Chubb if we were a full underwriter of this, right? And so that's how we think about it.
Speaker Change: Our real estate D&O book of business.
Speaker Change: As you know right now are heavily concentrated in California, because of slower transaction activity the rates were a little bit down.
Speaker Change: Excess liability rates were 5% plus.
Speaker Change: And then if you're going back to your contractors GL, depending on the size of the account. It was 327% up. So our view is that you are going to see casualty rates flattish to modestly up over the course of this year at least in the niche segments, where we write.
Christopher T Uchida: So there will, in time, you know, as Mac mentioned, we will start taking more. And so, in time, I would expect us to probably look a little bit more like Chubb than where you would see a little bit of that catch up, right, in Q3 from some of the earning of that premium, the writing of that premium, and then also the losses that come in. But our goal isn't to have, you know, significant swings in our reserve. We want to keep it a little bit smoother. So you and I are probably going to be more, a little bit more like American Family.
Speaker Change: Great. Thanks, so much.
Speaker Change: Thank you.
Our next question is from Mark Hughes with Charlie Securities. Please proceed.
Mark Hughes: Yes. Thank you good morning, and good afternoon.
Mark Hughes: The <unk>.
Mark Hughes: Thank you had mentioned that the layered in shared pricing.
Mark Hughes: Might moderate.
Mark Hughes: The greatest gain might decelerate or do you see that flattening out or perhaps going up.
Mark Hughes: Negative.
Speaker Change: Yes, Mark good question and I should clarify it's the rate of increase it's you know we have seen and you know in the fourth quarter, we still saw commercial earthquake across the all of our book both layered in shared and mid market blend out at a 26% rate increase what you are seeing now is risk adjusted increases.
Christopher T Uchida: There's not, We're not expecting to have a giant catch-up period for something like that. But we expect our premium to come in higher in Q3 because that's when we're going to tie it to the acres report and knowing, having better confidence in what that written premium is makes sense to me. Thanks. I'll let some other folks ask questions, but I'm always thankful for the help. Thanks, Paul. I appreciate it. Our next question is from Peter Netzen with Evercore ISI. Good afternoon.
Speaker Change: Coming under a little bit of pressure year over year from the amount of increase so we do think that's going to come down that being said you will still see risk adjusted increase.
Speaker Change: That's a function of price as well as enhanced terms and conditions, whether it be a deductible or attachment. So I don't want to paint a picture of a circumstance where rates are going to start to decline. It just going to be the level of increase is decelerating.
Peter Netzen: Thanks for taking my questions. My first question is, there's been some noise in the industry recently on construction-oriented liability lines. And I believe Palomar started writing contractors GL in early 2021, which I know is after some of the more concerning years. But I'm just wondering if you could talk a little bit about that and how you guys are getting comfortable growing in that line. Yeah, sure.
Speaker Change: And then could you talk about the quake business, you had mentioned some bankers driving that well.
Speaker Change: Let's break authority critical limit.
Mac Armstrong: Peter, thanks for the question. We started writing Contractors General Liability insurance really in the early part of 2022. We hired a great leader in Ty Robbin towards the tail end of that year.
Speaker Change: And you also mentioned new distribution.
Speaker Change: How far along are you in those.
Speaker Change: Those drivers I think yeah, the high teens growth in sustainable kind of where are we at.
Mac Armstrong: So it's a nascent effort led by someone that's a 20-year veteran that joined us from American Financial Group with longstanding distribution relationships and a keen sense of exposure. And as such, we feel very good about what we're writing. Now, mind you, we are conservative in our approach to this. We are writing modest line sizes, typically on average $5 million gross, where our net participation is between 35% and 40%. We are avoiding heavy auto liability there, and as a result, the book has performed very well.
Speaker Change: Cycles. So yeah. So good question and I would say that the two that you bring up new distribution partnerships as carrier partnerships, let's touch on that first that has been a tried and true distribution strategy of ours and we are pleased that we have.
Speaker Change: Two new carrier partnerships that have gone that are going live this quarter.
One focusing on high value E&S in California, another more of a nationwide partnership both of those are early innings, if not the top of the first so we think that there is good potential there, especially the one that's focusing on high value E&S business in California.
Mac Armstrong: That being said, we are booking everything at our loss picks. So we are building up a nice loss reserve base that we have not touched and don't intend to touch. But we do expect it to develop favorably based on the quality of the underwriting and the underwriter leading the team. Okay, great.
Speaker Change: It's with an entrenched operator in this space.
Speaker Change: As it relates to the CA <unk>.
Speaker Change: I would say that the changes in coverage that they are now offering to their policyholders at renewal.
Speaker Change: Didn't really start kicking into gear the renewals werent received by those policyholders until late Q4, so whether that be.
Mac Armstrong: And then my second question, it sounds like you guys saw rate and casualty rates remain at around 5% this quarter, you know, flat sequentially, and I guess I would have expected that to moderate slightly. So I'm just wondering if you could talk a little bit more about what you're seeing with regard to the casualty rate and maybe what your outlook is for that in 24. Yeah, I mean, it's a good question.
Speaker Change: I T I V. That's over $1 billion now having to move.
Speaker Change: Move up it is deductible from 5% to 10% to over 15 or 15% to 20 or it would be the reduction of the coverage senior personal property protection moving down.
Speaker Change: 25000 from 200000 that dynamic is just starting to also emerge for us and we think that is going to allow us to.
Mac Armstrong: I would say on the casualty side, the 5% was kind of the blend across the multiple lines that we have. It does, however, vary by line of business. Our real estate E&O book of business, which is right now heavily concentrated in California because of slower transaction activity, the rates were a little bit down, but excess liability rates were 5% plus. And then, depending on the size of the account, it was 3% to 7% higher. So our view is that you are going to see casualty rates flattish to modestly higher over the course of this year, at least in the niche segments where we write. Great, thanks so much.
Speaker Change: <unk> continued to take share from policies that are being either shopped by Jimmy that our policies are being shopped or are being ostensibly nonrenewed. So we think that both of those are good dynamics to sustain that high teens growth in residential quake.
Speaker Change: For the immediate future.
Speaker Change: And then Chris could you give a kind of an overall thought about written premium for this year in light of the crop insurance. Some of these other drivers that you.
Mac Armstrong: Thank you. Yeah, thank you. Good morning.
Speaker Change: Kind of consolidate that into one number or range.
Mark Hughes: Good afternoon. The Mac, you mentioned that the layered and shared pricing might moderate it. Is that the rate of gain might decelerate, or do you see that flattening out, or perhaps... Negative.
Chris: Yes for 2023, obviously the crop premium is in our fronting portfolio.
Chris: I think overall for the year, we're very pleased with how it all.
Chris: Played out I think the one thing that we pointed out in the prepared remarks is that we do expect that crop will be broken out in the future it will still from a.
Mac Armstrong: Yeah, Mark, good question. And I should clarify, it's the rate of increase. It's, you know, we have seen and you know, in the fourth quarter, we still saw a commercial earthquake across all of our books, both layered and shared, and mid market blend out at a 26% rate increase. What you are seeing now is risk-adjusted increases coming under a little bit of pressure year over year from the amount of increase. So we do think that's going to come down. That being said, you will still see a risk adjusted increase. That's a function of price as well as enhanced terms and conditions, whether it be a deductible or an attachment.
Chris: The fee generation standpoint, or an underwriting risk standpoint, it's still look more like a front, but we are making significant investments there we are very.
Chris: Pleased with the opportunities are there so we would expect to break that out in.
Chris: In the future.
Chris: Probably starting with Q1 2024, we expect to start splitting out crop into its own line of business, we will participate in about 5% on that.
Mark Hughes: So I don't want to paint a picture of a circumstance where rates are going to start to decline; it's just going to be the level of increase is decelerating. And then, could you talk about the quake business? You mentioned some factors driving that, the Earthquake Authority, cutting limits, and you also mentioned new distribution. How far along are you in those? those drivers.
Chris: As I said earlier in response to one of the other question from Paul that yes, there will be some seasonality there, but the overall impact on the earnings for the year.
Chris: We will still be small and it shouldnt be as material and caused any significant swings from quarter to quarter at least for 2024 split Mark I think to your question around broadly we feel great about topline growth for the company.
Mac Armstrong: I think you said the HITE team's growth is sustainable. Where are we at in that cycle? Yeah, so that's a good question.
Chris:
Chris: <unk>.
Chris: We are not giving guidance on premium growth historically, but I will say that we feel that.
Mac Armstrong: And I would say that the two that you bring up, new distribution partnerships slash carrier partnerships, let's touch on that first. That has been a tried and true distribution strategy of ours. And we are pleased that we have two new carrier partnerships that have gone live this quarter. One focusing on high-value ENS in California, another more of a nationwide partnership. Both of those are in the early innings, if not the top of the first. So we think that there is good potential there, especially the one that's focusing on high-value ENS business in California. It's with an entrenched operator in the space.
Chris: We can certainly have.
Chris: Strong growth that's in excess of 20 plus percent for sure and think that our crew.
Chris: <unk> is going to be a nice contributor as I mentioned previously we thought we could we saw ourselves to doing high double digits of millions of premium now, we're saying that we can do over $100 million. So I think thats a good indicator.
Chris: But we don't want to be overly prescriptive on premium growth, we do want to be very prescriptive on bottom line net income growth because I think thats, what all of our investors and certainly us as investors and shareholders in the business are more focused on ROE in the Bottomline growth.
Speaker Change: I appreciate that thank you.
Our next question is from Andrew Anderson with Jefferies. Please proceed.
Mac Armstrong: As it relates to the CEA, I would say the changes in coverage that they are now offering to their policyholders at renewal didn't really start kicking into gear. The renewals weren't received by those policyholders until late Q4. So whether that be a TIV that's over a million dollars now having to move up its deductible from 5 to 10% to over 15 or 15 to 20, or it be the reduction of the coverage for your personal property protection moving down to 25,000 from 200,000, that dynamic is just starting to emerge for us. And we think that is going to allow us to continue to take share from policies that are being either shopped by, excuse me, that our CEA policies are being shopped or are being ostensibly non-renewed.
Andrew Anderson: Hey, good morning, maybe going back to the N P to GPA ratio. Chris You had mentioned you think in 'twenty four it would be.
Andrew Anderson: Be a little bit lower.
Andrew Anderson: Hoping you could just unpack that a bit more for me because I suppose 24, you're.
Andrew Anderson: Bearing the full cost of the 23 ex ol program, so perhaps a benefit that.
Andrew Anderson: That we would see at midyear 'twenty four renewals what didn't really come up until 2025, and then we would see the ratio increase again is that the right way to think about it.
Mac Armstrong: So we think that both those are good dynamics to sustain that high teens growth in residential quake for the immediate future. And then Chris, did you give kind of an overall thought about written premium for this year in light of the crop insurance, some of these other drivers that you kind of consolidate that into one number or range? Yeah, for 2023, obviously, the crop premium is in our fronting portfolio. I think overall for the year, we're very pleased with how it all played out.
Andrew Anderson: No.
Andrew Anderson: Would describe is that let's say 2023 had seven months of that forecast versa and so over the first five months of 2023. It was at a lower rate and then if you remember we had about a 30% increase at our six one renewal so that full weight. We saw for seven months in 'twenty three you'll continue to see that.
Andrew Anderson: For five months in 2024, and then as Mac mentioned in our guidance we have in our assumption we are assuming a low single digit type increase in our reinsurance. So you'll have five months at the current rate and then let's call it.
Christopher T Uchida: I think the one thing that we pointed out in the prepared remarks is that we do expect that crop will be broken out in the future. It'll still, you know, from a fee generation standpoint or an underwriting risk standpoint, still look more like a front, but, you know, we are making significant investments there. We are very pleased with the opportunities that are there, so we expect to break that out in the future, probably starting with Q1 of 2024. We expect to start splitting out the crop into its own line of business.
Andrew Anderson: Less than 5% type increase at six one of 2024, so a little bit up right and so when you look at think about that 2024, we'll just have a much or not much but it will have a higher overall reinsurance load in 2023 that has the first five months at a lower reinsurance price.
Mac Armstrong: We will participate in about 5% of that, and so, you know, as I said earlier in response to one of the other questions from Paul, that, yeah, there will be some seasonality there, but the overall impact on the earnings for the year will still be small and shouldn't be as material and cause any significant swings from quarter to quarter, at least for 2024. But, Mark, I think your question around broadly. We feel great about top-line growth for the company. You know, we... We have not given guidance on premium growth historically, but I will say that, you know, we feel that we can certainly have strong growth that's in excess of 20-plus percent for sure and think that crop is going to be a nice contributor. As I mentioned, previously, we thought we saw ourselves doing high double digits of millions of premium. Now we're saying that we can do over 100 million.
Andrew Anderson: And so with all of that when you look at the cycles right, we buy our reinsurance our excess of loss reinsurance for growth right and so it's six one of this year, we will have a slight or we expect to have a slight increase plus we will buy it for the growth that we expect throughout 2024 and into 2025.
Andrew Anderson: So those factors together kind of create that stair step function. When you look at the net earned premium right. The net earned premium in Q4 was 33, 9% and it was up from Q3 of 31, 6%. So I expect Q1 of 2024 that 33, 9% I expect it to move up a little bit I expect there to be that same little.
Mark Hughes: So I think that's a good indicator. But we don't want to be overly prescriptive about premium growth. We do want to be very prescriptive on bottom-line net income growth because I think that's what all of our investors and certainly us as investors and shareholders in the business are most focused on. It's the ROE and bottom-line growth. I appreciate that. Our next question is from Andrew Anderson with Jeff. Hey, good morning.
Andrew Anderson: But a benefit into Q2, but then youll get one month of that new reinsurance and so then in Q3 with the full reinsurance with a little bit of price increase also buying for growth I expect that ratio to then come back down a little bit. It was kind of that same stairstep are much more I guess muted stairstep probably.
Andrew Anderson: Maybe going back to the NPE to GPE ratio, Chris, you mentioned you think in 24 it would be a little bit lower. I was hoping you could just unpack this a bit more for me, because I suppose 24 you're... bearing the full cost of the 23XOL program, so perhaps a benefit that we would see at mid-year 24 renewals wouldn't really come up until 2025, and then we would see the ratio increase again. Is that the right way to think about it?
Andrew Anderson: In 2023, but still a little bit of a stair step function. So let's say, it's 34 plus in Q2 and Q1 I would expect you to go back down to something that as you saw similar to Q1 or Q3 of 2023 Q3 was 31 six if its somewhere around there.
Andrew Anderson: That's probably the right way to think about it because it's going to start smoothing out as things start to.
Christopher T Uchida: Now, so what I would describe is that, let's say, 2023 had seven months of that full cost. And so for the first five months of 2023, it was at a lower rate. And then, if you remember, we had about a 30% increase at our 6-1 renewal. So that full wait we saw for seven months in 23, you will continue to see that for five months in 2024.
Andrew Anderson: Mature and the mix starts to mature a little bit in our overall portfolio.
Andrew Anderson: Andrew.
Andrew Anderson: Yeah, Andrew one thing I would add Chris described it very well.
It does somewhat hinge on X ol and we like to think that we're being conservative and assuming that there is going to be a slight rate increase annex that renews at 6061.
Christopher T Uchida: And then, as Mac mentioned in our guidance, we have, in our assumptions, we are assuming a low to single-digit type increase in our reinsurance. So you'll have five months at the current rate, and then let's call it a less than 5% type increase at 6-1 in 2024. So a little bit higher, right?
Andrew Anderson: What we saw at the start of the year is encouraging but it's on a it's on a very small sample set.
Andrew Anderson: When you add up the quota share and excess of loss.
Andrew Anderson: Renewed at one one.
Andrew Anderson: Constitutes about 10%, maybe a little bit more of the total limit that we buy.
Andrew Anderson: It was down but I don't want to like 10% inform the totality. So.
Andrew Anderson: If.
Andrew Anderson: It mirrors.
Christopher T Uchida: And so when you look at, think about that, 2024 will just have a much, or not a much, but it'll have a higher overall reinsurance load than 2023 had, which had the first five months at a lower reinsurance price. And so with all of that, when you look at the cycles, right, we buy our reinsurance, our excess of loss reinsurance for growth, right? And so at 6-1 this year, we will have a slight, or we expect to have a slight increase, plus we will buy for the growth that we expect throughout 2024 and into 2025. And so those factors together kind of create that stair-step function when you look at the net earned premium, right? The net earned premium in Q4 was 33.9%.
Andrew Anderson: What we saw at one one.
Andrew Anderson: The inverse of what Chris described.
Andrew Anderson: To your point that you'll say, we're expecting a little bit of increase that if it goes the other way that margin, let's call it expansion.
Andrew Anderson: <unk> happening in the same thing in Q3 into.
Andrew Anderson: Q2 and fully in Q3.
Speaker Change: Very helpful. Thank you for the expanded answers there and maybe going back to cat losses here in recognizing the.
Speaker Change: The improvement over the years and the Derisking of the book.
Speaker Change: Year to date, three and a half million of cat losses, including included in the guidance, but you're also kind of talking about a $4 million a L, which I suppose isn't exactly the same as like a cat loss ratio, but can you kind of help us square the two in the context of guidance and.
Christopher T Uchida: It was up from Q3 of 31.6%. So I expect Q1 of 2024, that 33.9%, I expect it to move up a little bit. I expect there to be that same little bit of benefit into Q2, but then you'll get one month of that new reinsurance. And so then in Q3, with the full reinsurance, with a little bit of a price increase, also buying for growth, I expect that ratio to then come back down a little bit. It was kind of that same stair-step, a much more muted stair-step that you probably saw in 2023, but still that little bit of stair-step function.
Speaker Change: Cat losses here.
Andrew Anderson: So Andrew.
Andrew Anderson: A couple of things. It's a good question, the three and a half million or losses related to floods in California.
Andrew Anderson: The atmospheric river.
Andrew Anderson: El Nino, what you saw kind of a front page news in San Diego and other parts of the state.
Andrew Anderson: The $4 million, we are referring to is tied to our continental hurricane. So that is our continental hurricane average annual loss.
Andrew Anderson: Mud losses, as a separate peril and it's something that we budget for so we budget. So when Chris refers to his point.
Andrew Anderson: Two to three points in our loss ratio for many cast that includes floods.
Andrew Anderson: So let's say it's 34 plus in Q2, and in Q1, I would expect you to go back down to something that you saw similar to Q1 or Q3 of 2023. Q3 was 31.6. If it's somewhere around there, that's probably the right way to think about it because it's going to start smoothing out as things start to mature and the mix starts to mature a little bit in our overall portfolio. Yeah, Andrew, one thing I would add. Chris describes it very well. It does somewhat hinge on XOL, and we like to think that we're being conservative in assuming that there is going to be a slight rate increase in What we saw at the start of the year is encouraging, but it's on a very small sample set.
Andrew Anderson: This is just an elevated amount that's crossed a threshold that we are disclosing.
Chris: Yeah, and maybe I'll add onto that a little bit for just the overall loss ratio right. When you look at it from a guidance standpoint, we set our loss ratio for the year should be about 'twenty one to 'twenty five.
Chris: <unk> percent and that includes the $3 $5 million of flooding loss that is going to be in the first quarter, so that first quarter.
Chris: Loss ratio will be a little bit higher from a quarter standpoint, that's three to four points of loss ratio for the year, it's probably less than one point of overall loss ratio, but when we think about our loss ratio in that 21% to 25%.
Chris: Loss ratio target or expectation, we believe and we feel that we do have a cat load in there that cat load is made up of many cats, which is going to be severe convective storm, it's going to be normal flooding, it's going be tropical storms, we believe that of that 21%, 25%. There are two to three points in there that is related to <unk>.
Andrew Anderson: You know, when you add up the quota share and the excess of loss that we renewed at 1.1, it constitutes about 10%, maybe a little bit more of the total limit that we buy. It was down, but I don't want to let 10% inform the totality. So if it mirrors what we saw at 1.1, then it's the inverse of what Chris described. Yeah, and to your point, you'd say we're expecting a little bit of an increase. If it goes the other way, that margin, let's call it expansion, it'll start happening again in Q3, again, in Q2 and fully in Q3. Very helpful.
Chris: Tasha because that's what we would say other companies' bucket as catastrophes, we could bucket as catastrophes, but its something thats just part of our planned loss ratio. When it does not include as a large major hurricane or earthquake impacting our portfolio, but we believe.
Christopher T Uchida: Thank you for the expanded answers and clarification there. And maybe going back to cat losses here and, you know, recognizing the improvement over the years and the de-risking of the book, year-to-date 3.5 million cat losses included in the guidance, but you're also kind of talking about a $4 million AAL, which I suppose isn't exactly the same as a cat loss ratio, but can you kind of help us square the two in the context of guidance? Cat loss is here.
Chris: Similar to the prior year, so that the cat load is in there we call it mini cats, because they're usually smaller for us because of the way we use reinsurance because of the way, we underwrite and do all different sorts of things, but we believe that we have a two to three point cat load in our guidance for next year.
Speaker Change: Very helpful. Thank you.
Speaker Change: As a reminder, the starwood on your telephone keypad, if you would like to ask a question. Our next question is from Meyer Shields with <unk>. Please proceed.
Mac Armstrong: So, Andrew, let's do a couple things. It's a good question. The $3.5 million is losses related to floods in California, the Atmospheric River, and El Nino, what you saw kind of on the front page news in San Diego and other parts of the state. The $4 million we are referring to is tied to our continental hurricane. So that is our continental hurricane average annual loss.
Meyer Shields: Great Thanks, and good morning.
Meyer Shields: Mac and I Wanna misinterpreted, but it sounded like you were a little cautious on.
Meyer Shields: Fronting appetite for 2024, I mean, I understand that theres the crop.
Speaker Change: Uh huh.
Meyer Shields: Issue, because it'll be broken out.
Mac Armstrong: The flood losses are a separate peril, and it's something that we budget for. So when Chris refers to his point, two to three points in our loss ratio for MINICAP, that includes floods. This is just an elevated amount that's crossed the threshold that we are disclosing. And maybe I'll add on to that a little bit for just the overall loss ratio.
Meyer Shields: Am I misreading, what you were thinking about the growth potential there.
Speaker Change: Hey me here, yes, thanks for the question.
Speaker Change: With fronting.
Speaker Change: You take this very much more of a rifle shot approach and so we.
Speaker Change: We want to go deep with existing partners that have high credit quality that we feel terrific about the collateral with that we can orchestrate the reinsurance and we can frankly acutely manage from an underwriting and claims handling and compliance standpoint.
Christopher T Uchida: When you look at it from a guidance standpoint, we said our loss ratio for the year should be about 21 to 25 percent. And that includes the $3.5 million of funding losses that's going to be in the first quarter. So that first quarter loss ratio will be a little bit higher. From a quarter standpoint, that's three to four points of loss ratio for the year. It's probably less than one point of overall loss ratio. But when we think about our loss ratio and that 21 to 25 percent loss ratio target or expectation, we believe, and we feel that we do have a cat load in there. That cat load is made up of many cats, which are going to be severe convective storms, it's going to be normal flooding, and it's going to be tropical storms.
Speaker Change: What that means as you know.
Speaker Change: We kind of elephant hunting to some degree so we think we can grow our fronting this year.
Speaker Change: But it's not one that's going to grow 63% like it did in 'twenty three it's going to index the growth rate.
Speaker Change: Of the overall operation So I think thats, what I would say, it's not to say that we don't have a pipeline that's not to say that we are not in discussions with a range of partners, but our bar is high.
Speaker Change: And I think the other thing it helps when its one of five product categories. So we can be selective it's a nice fee generator, but we also have crop that we think will do over $100 million. This year. We also have quake, we feel great about high teens, 20% growth and then we have a casualty franchise, that's really coming in.
Christopher T Uchida: We believe that of that 21 to 25 percent, there are two to three points in there that are related to catastrophes. That's what we would say other companies bucket as catastrophes. We could bucket them as catastrophes, but it's something that's just part of our planned loss ratio. What it does not include is a large, major hurricane or earthquake impacting our portfolio. But we believe, similar to previous years, that the cat load is in there. We call it many cats because they're usually smaller for us because of the way we use reinsurance, because of the way we underwrite and do all different sorts of things. But we believe that we have a two to three point cat load in our guidance for next year. Very helpful, thank you.
Speaker Change: Its own so it's.
Speaker Change: It's a great line of business does not that totality of what we do which allows us to be selective.
Speaker Change: Okay. That's very helpful. Thanks, so much.
With regard to the crop obviously as an approved carrier.
You have the ability to buy.
Speaker Change: Reinsurance from the government me insurance plan is that does that responsibility rests with palomar or with the <unk>.
Speaker Change: Companies that you'll be sharing the premiums.
Speaker Change: Hey Merrill this is Jon Christianson I can take that one so.
Jon Paul Newsome: That is you're referring to the SRA.
Jon Paul Newsome: Our reinsurance treaty with the FDIC that is.
Jon Paul Newsome: A benefit to Palomar so.
Jon Paul Newsome: We buy reinsurance through the government program, but then also we have.
Meyer Shields: As a reminder, there's star one on your telephone keypad if you would like to ask a question. Our next question is from Meyer Shields with KBW. Great, thanks, and good morning. Um, Mac, I don't want to misinterpret it, but it sounded like you were a little cautious about... fronting appetite for 2024. I mean, I understand that there's the crop issue because it'll be broken out.
Jon Paul Newsome: Supporting private market reinsurance.
Jon Paul Newsome: That completes the totality of that 90, 495% risk transfer that we have in place for our reinsurance so.
Jon Paul Newsome: <unk>.
Jon Paul Newsome: That is the.
Jon Paul Newsome: That is a benefit of Palmer with regard to the risk transfer.
Jon Paul Newsome: And I think mayor as we said 125, the complexion of our participation will be different and therefore.
Mac Armstrong: But am I misreading what you're thinking about the growth potential there? Hey, Mayor, yeah, thanks for the question. I think with fronting, you know, we take this very much more of a rifle shot approach. And so we want to go deep with existing partners that have high credit quality, that we feel terrific about the collateral with, that we can orchestrate the reinsurance, and that we can, frankly, acutely manage from an underwriting and claims handling and compliance standpoint. So what that means is, you know, we kind of elephant hunt to some degree.
Jon Paul Newsome: The reinsurance structure will be.
Jon Paul Newsome: Different as well, but we.
Jon Paul Newsome: We've got time to put that in place and that you can't you guys on that.
Speaker Change: Okay perfect I just wanted to be.
Speaker Change: Well the bottom line.
Speaker Change: Final question is just with regard to the guidance you talked about considerably anticipating higher.
Speaker Change: Property cat rates online I guess, our reinsurance costs.
Speaker Change: At June does the guidance anticipate a meaningful change in the attachment point I apologize I missed that before.
Mac Armstrong: So we think we can grow fronting this year. But it's not one that's going to grow 63% like it did in 23. It's going to index the growth rate of the overall operation. So I think that's what I would say. But it's not to say that we don't have a pipeline.
Speaker Change: No. Good question there no it's assuming the same attachment.
Speaker Change: Okay.
Speaker Change: I would expand on that just a little bit when you think about our overall book in quota shares and things like that.
Speaker Change: Our guidance estimates are basically static from a risk participation status.
Mac Armstrong: It's not to say that we are not in discussions with a range of partners, but our bar is high. And I think the other thing is that it helps when it's one of five product categories, so we can be selective. It's a nice fee generator, but we also have Crop that we think will do over $100 million this year. We also have quake that we feel great about, high teens, 20% growth, and then we have a casualty franchise that's really coming into its own. So it's a great line of business. It's not the totality of what we do, which allows us to be selective. Okay, that's very helpful. Thanks so much.
Speaker Change: Obviously, we mentioned crop that 5% is in there, but when we think about our overall portfolio.
Speaker Change: Our loss ratio acquisition expense rate as all of these things and then we kind of guide to and net earned premium.
Speaker Change: Those all assume let's call it static participation or underwriting to.
Speaker Change: <unk> 2023 sort of the end of 2023.
Speaker Change: Okay phenomenal that's very helpful. Thank you.
Speaker Change: Our final question is from Pablo <unk> with JP Morgan. Please proceed.
Pablo: Hi, Thanks first question when thinking about the growth in underwriting income that's implied in your guidance for 'twenty four would it be fair to assume that the improvement there will be driven by net growth.
Jon Paul Newsome: With regard to the crop, obviously, as an approved carrier, you have the ability to buy reinsurance from the government reinsurance plan. Does that responsibility rest with Palomar or with the companies that you'll be sharing the premium? Hey Mayor, this is Jon Christensen.
Pablo: It seems like you're implying some deterioration in the combined ratio, which is consistent with what you said in the past given your changing business mix are therefore would it be fair to assume that the uptick that really can be driven by net earned premium growth.
Jon Paul Newsome: I can take that one. So that is the SRA reinsurance treaty with the FCIC. That is a benefit to Palomar. So we buy reinsurance through that government program, but we also have supporting private market reinsurance that completes the totality of that 95% risk transfer that we have in place for our reinsurance.
Speaker Change: Yeah, No. That's a great question Pablo we do expect our net earned premium to continue to grow.
Speaker Change: We've talked about it that reinsurance increase that we saw at six one of this year it was about 30% or $13 million a quarter. So now, let's say that we've got that fully in our results for Q3 and Q4, you saw that growth show up in either Q3 Q4 results.
Mac Armstrong: So that is the benefit of Palomar with regard to the restrictions. And I think, Mayor, as we've said, 1-125, the complexion of our participation will be different, and therefore the reinsurance structure will be different as well, but we've got time to put that in place and to educate you guys on that. Okay, perfect. I just wanted to show you the way the dominoes lie.
Speaker Change: I would expect those dollars to continue to grow into Q1, and Q2, right and where we're not expecting the same type of rate increase so I would expect the growth in the top line too.
Meyer Shields: Final question. This is just with regard to the guidance. You talked about conservatively anticipating higher property tax rates online, I guess, for reinsurance costs, in June. Does the guidance anticipate a meaningful change in the attachment point? I apologize if I missed that. No, good question, Mayor. No, it's assuming the same attachment.
Speaker Change: To better translate to the growth in net earned premium throughout the year.
Speaker Change: Because of that factor. So overall, we feel very good about it do we.
Christopher T Uchida: I would expand on that just a little bit when you think about our overall book and quota shares and things like that. Our guidance and estimates are basically static from a risk participation perspective. Obviously, we've mentioned crop, that 5% is in there, but when we think about our overall portfolio and loss ratio, acquisition expense ratio, all these things that we kind of guide to and net earned premium, those all assume, let's call it static participation or underwriting to 2023 or the end of 2023. Okay, phenomenal. That's very helpful.
Speaker Change: Tried to project that and share with everyone. What we expected to happen during 2023, and we think we did a good job of that but we are expecting.
Speaker Change: <unk> to see net earned premium continued to grow throughout 2024, even with potential slight increase at six one of this year.
Speaker Change: Okay.
Speaker Change: And then Chris I.
Chris: Just a follow up did the loss expectation you gave for 24, I think 20, 21% to 25%.
Meyer Shields: Thank you. Our final question is from Pablo Singson with. Hi, thanks. First question.
Pablo Singson: Thank you for writing, for what it would be fair to say by Seems like we're implying some there. Be prepared to assume that. Yeah, no, that's a great question, Pablo.
Speaker Change: If you didn't ask the surf and place a wider range than the 110 to 115 years, giving for 2024. So I was wondering how you sort of forget from the wider loss ratio range to a tighter range on income.
Christopher T Uchida: We do expect our net earned premium to continue to grow. We've talked about it before. That reinsurance increase that we saw at 6.1 this year was about 30%, or $13 million a quarter. So now, let's say that we've got that fully in our results for Q3 and Q4. You saw that growth show up in the Q3, Q4 results. I would expect those dollars to continue to grow into Q1 and Q2, right, and where we're not expecting the same type of rate increase.
Speaker Change: And just if you could provide more context.
Speaker Change: But just two things.
Speaker Change: Yes.
Speaker Change: Ryder range part of that is strategic just to make sure that we give those ranges out there for people because one thing while I view that range as a good range for the year I think some people like to apply that to every single quarter and so on a quarterly basis, our loss ratio could I.
Christopher T Uchida: So I would expect the growth in the top line to better translate to the growth in net earned premium throughout the year because of that factor. So overall, we feel very good about it. We tried to project that and share with everyone what we expected to happen during 2023, and we think we did a good job of that. But we are expecting to see net earned premium continue to grow throughout 2024, even with a potential slight increase at 6.1 this year. And then Chris, I guess this is a follow-up, the last expectation you gave for 24, I think, due to the math, that sort of implies a wider range than the 100. So, I was wondering how you sort of get from that wider loss ratio range to a tighter one to provide more information, you know.
Speaker Change: I would expect to be probably in between those numbers right, but for the year I would expect something closer to the middle of that range, let's say right, but because some people interpret that differently I would like to give a little bit of a wider range there right, but that is.
Speaker Change: To your point.
Speaker Change: Even on an after tax basis that is probably wider than the $5 million adjusted net income range.
Speaker Change: But overall.
Speaker Change: That's why we do it that way because different people interpreted different ways.
Speaker Change: For some reason it was a little higher or a little lower it doesn't mean, it's not going to be close to that at the mid fourth quarter, it's not going to close to that to the midpoint. When you get there for the full year, that's kind of the philosophy, there, but youre absolutely right that is from a dollar standpoint, probably a little wider range than what we give with the guidance.
Christopher T Uchida: Yeah, no, it's a wider range. Part of that is strategic, just to make sure that we give those options out there for people. Because one thing, while I view that range as a good range for the year, I think some people like to apply that to every single quarter. And so on a quarterly basis, our loss ratio could, I would expect to be probably in between those numbers, right? But for the year, I would expect something closer to the middle of that range, let's say, right? But because some people interpret that differently, I would like to give a little bit of a wider range there. But that is, to your point, even on an after-tax basis, that is probably wider than the $5 million adjusted net income range.
Speaker Change: Alright that makes sense and then last one for me just a smaller question.
Speaker Change: And definitely I think it's clearly been a demand for Palomar.
Speaker Change: All the other insurers but.
Speaker Change: And just given your run rate in the fourth quarter right I think he printed seven or you can just multiply that you can reach the high twenty's in 'twenty four easily.
Speaker Change: Could you just give a sense of your current book yield and the new money yields you're investing at thank you.
Speaker Change: Yes, so for the fourth quarter, our investment yield was about four 1% it's been improving throughout the year.
Speaker Change: Which is very similar to other folks right.
Christopher T Uchida: But overall, that's why we do it that way, because different people interpret it differently. And if, for some reason, it was a little higher or a little lower, it doesn't mean it's not going to be close to that for a quarter. It's not going to be close to that for the midpoint when you get there for the full year. That's kind of the philosophy there. But you're absolutely right.
Speaker Change: The new money yield in the fourth quarter was about five 9% so still above that number. So we still think there is upside and investment income I think the one thing I'd point out and so there is a little bit of improvement from our view in our 2024 results, but when we go back to anything like Palomar.
Christopher T Uchida: That is, from a dollar standpoint, probably a little wider range than what we would give with the guy. That makes sense. And then last one for me, just a smaller question.
Pablo Singson: So, you know, investment income has clearly been in the interest of Palomar like..., and all the other insurers. And, you know, just given your run rate in the fourth quarter, right, I think you printed seven. By that, you can reach the heights. Uh, could you just give a sense of your current book yield and... Yeah, so for the fourth quarter, our investment yield was about 4.1%. It's been improving throughout the year, which is very similar to other folks, right? I think the new money yield in the fourth quarter was about 5.9%, so it is still above that number.
Speaker Change: <unk> or adjusted underwriting income and the improvements we're seeing there that's before investment income Brian.
An underwriting company first we want to be a valued on the results of our underwriting right and that we think investment income is something that you kind of put on top of that we are.
Speaker Change: Performing well.
Speaker Change: We are doing everything we need to do to help keep that performance at a very high level, while still being very conservative, but overall the growth we're seeing in the bottom line is being delivered by our underwriting results by our investment income. So guess I do feel there is upside investment income, yes, but I am happy.
Christopher T Uchida: So we still think there is upside in investment income. I think the one thing I'd point out, and so there is a little bit of improvement from our view in our 2024 results, but when we go back to anything like Palomar 2X or adjusted underwriting income and the improvements we're seeing there, that's before investment income, right? We are an underwriting company first. We want to be valued on the results of our underwriting, right? And then we think investment income is something that you kind of put on top of that.
Speaker Change: With the overall organization and the improvements that we've made and the growth in the underwriting income that we're seeing for the organization.
Speaker Change: Thank you for your answers.
Speaker Change: Thanks Pablo.
Speaker Change: A question and answer session I would like to turn the conference back over to Beth.
Beth: Closing cabinets.
Christopher T Uchida: We are performing well. We are doing everything we need to do to keep that performance at a very high level while still being very conservative. But overall, the growth we're seeing in the bottom line is being delivered by our underwriting results, not by our investment income.
Great. Thank you operator, and thank you to all who joined US. This morning. We appreciate your participation your questions and your sustained support of Palomar to conclude I'd like to just reiterate how pleased I am with not only our fourth quarter, but also our full year results.
Beth: Moreover, how proud I am of the team at Palomar, who allowed us to achieve these results.
Pablo Singson: So yes, I do feel that there is upside investment income, but I am happier with the overall organization and the improvements that we've made and the growth in the underwriting income that we're seeing for the organization. Thank you for answering. Thank you, Pablo. We have reached the end of our question and answer session. I would like to turn the conference back over to Mac for closing.
Beth: I'm confident that 2024 will generate equally strong.
Beth: Performance and results and our guidance indicates as much I am equally confident that Palomar sound and consistent execution that will be recognized by the market and hence will deliver real value to our shareholders. So thank you all.
Mac Armstrong: Great. Thank you, operator, and thank you to all who joined us this morning. We appreciate your participation, your questions, and your sustained support of Palomar. To conclude, I'd like to just reiterate how pleased I am with not only our fourth quarter but also our four-year results, but moreover, how proud I am of the team at Palomar who allowed us to achieve these results. I'm confident that 2024 will generate equally strong performance and results, and our guidance indicates as much. I am equally confident that Palomar's sound and consistent execution will be recognized by the market and hence will deliver real value to our shareholders.
Speaker Change: Enjoy the rest of your day, we'll talk to you next quarter.
Speaker Change: Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
[music].
Operator: So, thank you all, and enjoy the rest of your day. We'll talk to you next quarter. Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation. The Ultimate Parody Site! This is a production of NASA's Jet Propulsion Laboratory, California Institute of Technology.