Q3 2024 Palomar Holdings Inc Earnings Call
The New Year's Eve
Speaker Change: Good morning and welcome to the Palomar Holdings Inc. 3rd quarter 2024 earnings conference call.
Speaker Change: During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference line will be open for questions with instructions to follow. 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, sir.
Chris 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.
Speaker Change: Additionally, John 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 1159 p.m. Eastern Time on November 12, 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.
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 and Exchange Commission.
We do not undertake any duty to update such forward-looking statements.
Speaker Change: Additionally, during today's call, we will discuss certain non-GAP measures which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAP.
A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release. At this point, I'll turn the call over to Mac. Thank you, Chris, and good morning.
Mac Armstrong: I'm very pleased with our third quarter results, as they clearly demonstrate our successful efforts to deliver consistent earnings and returns. In a quarter that experienced a heightened level of CAD activity, we delivered a 39% adjusted net income growth, a 77% adjusted combined ratio, and a 21% adjusted ROE.
Speaker Change: Our results further validate the concerted efforts that we have undertaken to diversify the business, reduce the volatilities in our earnings base, and profitably grow.
Speaker Change: This quarter strong financial results also reflect the sustained execution of our 2024 strategic imperatives, grow where we want, manage dislocation and diversification, provide consistent earnings, and scale the organization.
Speaker Change: Our first imperative is centered on achieving strong premium growth across the portfolio with an emphasis on those segments that generate the strongest risk-adjusted returns.
Speaker Change: For the third quarter we delivered top line growth of 32% driven by solid execution across our book of business, highlighted by continued strong growth from our Earthquake and Casualty books of business, as well as significant growth in our Young Crop book. It's worth noting that the same store sales growth was 38%.
Our second strategic mandate requires navigating and capitalizing on dislocation in the market while further diversifying our business.
Speaker Change: During the quarter, we raised $160 million through a primary equity issuance to help further diversify our specialty insurance franchise and strengthen our position in the existing classes of business where we see both opportunity and dislocation.
Speaker Change: We earmarked a portion of the proceeds to finance our acquisition of surety insure first indemnity of American insurance company or FIA
Speaker Change: Proceeds also strengthen the balance sheet to support our rapidly growing crop business.
Speaker Change: Lastly, we are using the remaining portion of the capital for organic growth and targeted increase in risk participation in lines like earthquake. Our third imperative is a steadfast commitment to delivering consistent earnings. As I mentioned, we achieved adjusted net income growth of 39% with an adjusted return on equity of 21% despite elevated catastrophe losses in the quarter.
Speaker Change: Steps taken to reduce the volatility in our portfolio is best exemplified by Palomar being a consensus for the eighth straight quarter even in a period of atypical hurricane activity and the associated catastrophe losses incurred.
Speaker Change: Separately, our crop business and the pending entry into the surety business will lead to earnings from products uncorrelated with the traditional P&C cycle. The fourth imperative is scaling the organization and making the requisite investments to accomplish our Palomar 2X objectives.
This effort starts with an investment in people, and I'm proud to say that we've continued to recruit industry-leading talent to join Palomar this quarter. Notable additions to our team include David Sapia, head of ENS Casualty, Benson Latham, head of CROP, and Althea Garvey, Chief Claims Officer.
Speaker Change: In addition to our entrepreneurial and innovative culture, a key factor in attracting experienced industry veterans is the growth scale and reputational heft that Palomar is achieving. Highlighted by AMBESS upgrading our financial strength rating to an A from an A-. I'm humbled and thrilled by the talent that we've been able to recruit in 2024.
Speaker Change: I would now like to review the performance and market conditions of our five product categories.
Speaker Change: Firstly, our core earthquake franchise grew gross written premium 19%. Our residential earthquake business continued to generate strong new business growth and high policy retention.
Speaker Change: Additionally, our Residential Earthquake E&S book saw 74% growth year-over-year as personalized business continues to flow into the non-admitted market in California. It's worth noting that our E&S rates are considerably higher on a like-for-like basis. In peak zones like West Los Angeles, they are more than 50% higher.
Speaker Change: We feel that growth in residential earthquake business will sustain, given the continued dislocation in the California homeowner's market, combined with the CEA continuing to reduce their exposure and coverages.
Speaker Change: This can be seen by the CEA's decision not to renew $750 million of expiring excess of loss re-insurance on October 1st.
Speaker Change: As the CEA continues to reduce coverage and claims-paying capacity, Palomar will remain the primary option in the California residential earthquake market. Our commercial earthquake business saw solid growth in the quarter. In the third quarter, commercial rates did plateau as the average account renewed flat on a risk-adjusted basis.
Speaker Change: Terms and conditions continue to improve and the underlying profitability metrics such as average annual loss to premium and 250 year probable maximum loss to premium are at the best levels in our company history.
Speaker Change: Current market conditions in earthquake affirms our strategy of riding both commercial and residential earthquake business to navigate any market cycle. The 10% inflation guard in our residential policies provides a meaningful cushion above inflationary levels and therefore enhances our margins in a flat to down reinsurance market.
Speaker Change: Our commercial book allows us to generate meaningful risk increases when market conditions permit or demand. Ultimately, the performance of our earthquake franchise remains strong and we are confident that earthquake premiums will grow in the high teens to 20% range for the full year 2024.
Speaker Change: Our Inland Marine and Other Property category, which consists of seven property products – Builder's Risk, Excess National Property, All Risk, Motor Truck Cargo Contractors Equipment, Hawaiian Hurricane, and Residential Flood –
Speaker Change: grew 22% year-over-year. As a reminder, this is a product category where we are investing in growth and reducing exposure as we continuously measure risk-adjusted returns line-by-line. During the quarter, we saw strong performance from our excess national property and Hawaiian Hurricane lines of business, whereas our all-risk book continued to contract.
Speaker Change: a trend that we expect in 2025 as well. The ALRIS book was the primary driver of catastrophe losses in the quarter and is expected to be the same for Hurricane Milton. On the heels of this robust and active hurricane season, we continue to assess our options to reduce the potential losses from continental U.S. windstorms.
Speaker Change: Builders' risk, our largest in the marine product and our excess national property line, which typically writes business in non-catastrophe-exposed regions, continue to experience robust premium and submission growth, as well as higher regionally focused underwriters.
Speaker Change: During the quarter, we implemented a new facultative reinsurance treaty for the Excess National Property Team that allows them to write large limits while keeping a small net line size and do so in an automated fashion.
Speaker Change: This new reinsurance agreement will enhance our servicing and quoting capabilities and ultimately production. Hawaii hurricane premiums grew 74% in the third quarter as the 23% rate increase approved last quarter is now flowing through our renewals.
Speaker Change: We have rolled over 90% of our Enforce Palomar Specialty Insurance Company policies onto our Laulima Reciprocal. This effort meaningfully reduces Palomar's exposure to a large loss from a hurricane in Hawaii and enhances our fee income base.
Speaker Change: From a pricing standpoint, rate activity varies widely by region and product. For instance, our builder's risk rate increases nationwide where flat, but in Texas, we're seeing increases of 5 to 10%.
Speaker Change: Hawaii hurricane, as previously mentioned, is up 23%. In the circumstance of flood, pricing was flat in California, although we are waiting on a rate increase approval. But in states impacted by Hurricane Helene, we are renewing policies up 10%.
Speaker Change: All risk policies were down 6.4% in the quarter, but that level of decline is likely to decelerate, at least in Florida and Texas, on the heels of losses from Hurricanes Milton, Helene, and Beryl. It really does vary product by product and territory by territory.
Speaker Change: Shifting to casualty, the product group had another strong quarter of growth with premiums increasing 91% over the previous year.
Speaker Change: Standout performers this quarter included niche casualty classes, such as real estate errors and omissions, which grew 40 percent, commercial contractors general and excess liability, and environmental liability, both of which grew greater than 100 percent.
Speaker Change: We are growing these lines of business, and all casualty segments for that matter, by adding underwriting talent, broadening our distribution footprint, and increasing our submission and taking quoting activity.
Speaker Change: Our approach to the casualty market, which now comprises 14% of our total book, remains anchored in underwriting targeted niche segments of the market.
Speaker Change: We employ prudent risk management tactics such as modest gross and net line size, avoidance of heavily bodily injury, and other high severity exposure, and conservative reinsurance to cut our loss potential in the classes we write.
Speaker Change: During the quarter, our average gross line for miscellaneous professional liability, contractors general liability, real estate E&O, and environmental liability was $2.1 million that netted down to $890,000 after the application of reinsurance.
Speaker Change: The excess liability book was up 11%, and the contractor's general liability book saw an increase of 6%, with those accounts that have auto coverage up 17%.
Speaker Change: Beyond the rate increases, we limit auto liability and include many exclusions in the policy language in both general and excess liability policies.
Speaker Change: For the quarter, the casualty books loss ratio remained in line with our conservative loss picks with reserves continuing to build. It's worth noting that nearly 80% of our reserves are IBNR, which is higher than industry averages for casualty.
Speaker Change: At the same time, we are quick to recognize outsized large loss activity, and we have experience in conservatively reserved force to do shock losses.
Speaker Change: We are optimistic that as the book seasons, reserves will develop favorably. Lastly, and most importantly on casualty in September,
Speaker Change: David Sapia joined Palomar as head of E&S Casualty. David brings 30 years of casualty underwriting field management experience, most recently having run E&S Casualty for Hanover RE's HDI subsidiary. His strategic vision will not only bolster our current operations, but also fuel our growth initiatives.
Speaker Change: Turning to our fronting business, we experienced an 11% decline in premiums given the separation from Omaha National.
Speaker Change: The termination of the contract will impede the fronting group's growth over the next several quarters as we work to replace the lost business with new partnerships. Our prospects are healthy with quality fronting partners in the pipeline.
Speaker Change: This quarter, we forged a new partnership with an affiliate MGA of an international reinsurer. We will remain selective as we closely manage the risk of this segment, though.
Speaker Change: On an exciting note, we turned to crop. We were at $60 million of premium in the seasonally strong third quarter. Year-to-date, we've written over $100 million of premiums compared to just $12.1 million last year. Overall, it has been a good planting season and market acceptance has been strong.
Speaker Change: During the third quarter, we experienced product mix shift, which will move a portion of our production to crops that are planted in the fourth quarter. This will result in a portion of our gross written premium shifting to the fourth quarter as well.
Speaker Change: We also plan to write livestock premium in the fourth quarter given our strong expertise in the sector and the availability of new capital to support this diversifying initiative.
Speaker Change: Additionally, I'm pleased to report that Benson Latham has joined Palomar as Executive Vice President and Head of Crop. With an impressive 30 years in the crop industry, Benson brings a wealth of experience and expertise to our team. He is responsible for founding the Validus Insurance Group's agricultural practice and has held executive roles at ProAg, Crop Risk Services AIG, and Great American Insurance Company.
Speaker Change: With Benson's addition to the team, there is even more conviction that Palomar will become a market leader in the $19 billion crop insurance market.
Speaker Change: Turning to reinsurance, the third quarter is light from a placement standpoint, but we are pleased with the quarter's accomplishments and feedback received from our broad panel of reinsurers after several marketing trips.
Speaker Change: As previously mentioned, we successfully placed an automatic facultative reinsurance program for our excess national property line this quarter.
Speaker Change: Additionally, our real estate E&O quota share treaty successfully renewed and improved economics.
Speaker Change: Lastly, we also put in place a quota share for a new E&S general liability program targeting security guards. Importantly, we were able to leverage the relationships with key trading partners to get support for our de novo casualty program at Competitive Economics. Palomar's stature in the global reinsurance market proved a competitive advantage in this instance.
Speaker Change: While it's only November, and as such, we are more than six months away from the renewal of our XOL program, we do think it's worthwhile to offer our current views on the prospects for our renewal following the CAT losses year to date.
Speaker Change: It's our expectation
Speaker Change: The catastrophe excess of loss pricing for Palomar should be flat to down next year. The reasons are several. One we currently are not putting any losses into our XOL program.
Speaker Change: Two, we continue to reduce the hurricane exposure in the treaty, and our expectation at 6-1 is that 97% of the treaty will be earthquake only. Three, the CA non-renewing over $750 million of earthquake excessive loss limit will create excess capacity that can conceivably support our growth.
Speaker Change: Fourthly, earthquake catastrophe bonds raised after Hurricane Milton were issued at prices down year-over-year. Again, these items are germane to Palomar's placement only and inform our view on Palomar's unique position at the 6-1 renewal.
Speaker Change: I also want to briefly discuss our pending acquisition of FIA, the contract surety insurer. We expect to receive regulatory approval by year end and close the acquisition in early 2025. As a result, we do not expect to receive any financial contribution in the fourth quarter. Overall, FIA is performing very well and the integration should be straightforward.
Speaker Change: Chris will go into detail on our guidance for the remainder of the year, but it is important to point out that despite the catastrophe losses from this hurricane season,
Speaker Change: We not only beat consensus in the third quarter, but also with our tightened guidance range of $124 million to $128 million of adjusted net income.
Speaker Change: We are affirming the low end of our guidance range.
Speaker Change: The consistency in our financial performance affirms our Palomar 2X strategy and the quality of our team and operation. With that, I'll turn the call over to Chris to discuss our financial results in more detail. Thank you, Mac. Please note that during my portion referring to any per share figure, I'm referring to per diluted common share as calculated using the Treasury stock method.
Chris Uchida: This methodology requires us to include common share equivalents, such as outstanding stock options, during profitable periods and exclude them in periods when we incur a net loss. For the third quarter of 2024, our adjusted net income was $32.4 million, or $1.23 per share.
Speaker Change: compared to adjusted net income of $23.3 million, or $0.92 per share, for the same quarter of 2023, representing adjusted net income growth of 39 percent.
Speaker Change: Our third quarter adjusted underwriting income was $31 million compared to $25 million last year.
Speaker Change: Our adjusted combined ratio was 77.1% for the third quarter compared to 70.9% in the third quarter of 2023. Excluding catastrophes, our adjusted combined ratio was 67.6% for the quarter compared to 71.5% last year.
Speaker Change: For the third quarter of 2024, our annualized adjusted return on equity was 21%, compared to 22.3% for the same period last year.
Speaker Change: The third quarter adjusted return on equity continues to validate our ability to maintain top-line growth with a predictable rate of return above our Palomar 2x target of 20%. Even in the face of elevated CAD activity like what we experienced in the third quarter and with the additional capital raised during the quarter.
Speaker Change: Gross written premiums for the third quarter were $415 million, an increase of 32% compared to the prior year's third quarter. 38% growth excluding runoff business.
Speaker Change: In the quarter, we have continued to regroup our written premium to align with our five key specialty insurance products, earthquake and the marina of the property, casualty, fronting, and crop.
Speaker Change: It is important to remember the seasonality of our crop premium.
Speaker Change: The majority of our crop premium is written and earned in the third quarter of each year, with only modest premium in the second and fourth quarters. That said, as Mac indicated, the market changes and as we write more livestock premium, we would expect to see a bit more premium written in the fourth quarter relative to our original expectations.
Speaker Change: Additionally, the crop premium written and earned in the third quarter has a seasonal effect on our ratios calculated as a percentage of gross earned premium in the third quarter. Specifically, the ratios for net earned premium, acquisition expense, and other underwriting expenses.
Speaker Change: Since the majority of our crop premium is seeded, the net impact to our financials has been small and will look similar to previously shared expectations.
Speaker Change: Debt-earned premiums for the third quarter were $135.6 million, an increase of 58% compared to the prior year's third quarter.
Speaker Change: For the third quarter of 2024, our ratio of net earned premiums as a percentage of gross earned premiums was 34.3% compared to 31.6% in the third quarter of 2023 and compared sequentially to 37.4% in the second quarter of 2024.
Speaker Change: The year-over-year increase in this ratio is reflective of improved excess of loss reinsurance and of the higher growth rate of our non-fronting lines of business including earthquake that seed less premium. These results include the first full quarter new excess of loss reinsurance placement that started June 1st.
Speaker Change: While the dollars associated with this placement are higher to facilitate continued earthquake growth, the risk-adjusted rate online is lower than the previous year.
Speaker Change: With our excess of loss reinsurance in place and the majority of our crop premiums written and earned during the third quarter, for which we currently see about 95%, we expect the third quarter to be the low point of our net earned premium ratio.
Speaker Change: From there, we expect the net-earned premium ratio to increase to the remainder of the reinsurance treaty in a similar pattern to last year.
Speaker Change: While there is some expected seasonality in our Net Earned Premium Ratio, we expect Net Earned Premium to continue to grow.
Speaker Change: Losses and loss adjustment expenses for the third quarter were 40.3 million dollars, comprised of 27.4 million dollars of non-catastrophe attritional losses, and 12.9 million dollars of catastrophe losses from Hurricanes Beryl, Debbie, and Helene.
Speaker Change: The loss ratio for the quarter was 29.7%, made up of a nutritional loss ratio of 20.2% and a catastrophe loss ratio of 9.5%.
Speaker Change: As MAC indicated, we believe this quarter's results were a testament to our continued effort to de-risk our portfolio over the past few years.
Speaker Change: This percent has decreased sequentially primarily from strong growth from crop that has primarily ridden and earned in the third quarter. Most of the crop premium is seeded resulting in higher seeding commission and a lower acquisition expense ratio for the quarter. We expect this ratio to move up from the low point in the third quarter.
Speaker Change: The ratio of other underwriting expenses, including adjustments to gross earned premiums for the third quarter, was 5.9%, compared to 6.7% in the third quarter last year, and compared sequentially to 7.3% in the second quarter of 2024.
Speaker Change: As expected, the lower result for the quarter was influenced by the crop premium written in the quarter. As demonstrated by our new hires over the last six months, we are extremely committed to investing in all aspects of our organization as we continue to grow profitably.
Speaker Change: We continue to expect long-term scale in this ratio, while we may see periods of sequential flatness or increases as we continue to invest in scaling the organization within our Palomar 2X framework.
Speaker Change: Our net investment income for the third quarter was $9.4 million, an increase of 56% compared to the prior year's third quarter.
Speaker Change: The year-over-year increase was primarily due to higher yields on invested assets and a higher average balance of investments held during the three months ended September 30, 2024, due to cash generated from operations.
Speaker Change: Our yield in the third quarter was 4.6% compared to 3.9% in the third quarter last year.
Speaker Change: The average yield on investments made in the third quarter was 5.7%.
Speaker Change: We continue to conservatively allocate our positions to asset classes that generate attractive risk-adjusted returns.
Speaker Change: Our stockholders' equity has reached $703.3 million, a testament to consistent profitable growth and the capital raise. At the end of the quarter, our net rent premium-to-equity ratio was 0.84 to 1.
Speaker Change: Turning to our Full Year Adjustment and Income Guidance.
Speaker Change: We initiated 2024 with a range of $110 to $115 million at the beginning of the year.
Speaker Change: Given our strong performance and execution through the second quarter, we increased that guidance range to $124 to $130 million.
Speaker Change: Now, we are tightening our full-year 2024 Adjusted Net Income Guidance to $124 to $128 million, including approximately $8 million of catastrophe losses from Hurricane Milton in the fourth quarter.
Speaker Change: Significantly ahead of our original full-year guidance outlined in February that did not include any estimate for catastrophe losses.
Speaker Change: The midpoint of our updated guidance range represents adjusted net income growth of 35% compared to 2023 and an adjusted ROE greater than 20%, including the capital raise in August.
Speaker Change: Which puts us well on the path to achieving our Palomar 2x goal of doubling adjusted underwriting income in three years With that I'd like to ask the operator to open the line for any questions operator
Speaker Change: Thank you. We will now be conducting a
Speaker Change: 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 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
Speaker Change: Toshio Uchida University of Waterloo www.universityofwaterloo.ca University of Waterloo Faculty of Social Sciences Faculty of Social Sciences University of Waterloo University of Waterloo Faculty of Social Sciences
Speaker Change: Our first question comes from the line of Mark Hughes with Truist Securities. Please proceed with your question.
Mark Hughes: Yeah, thank you. Good morning. Good afternoon.
Mark Hughes: When we think about the quake business for next year, you talked about the Earthquake Authority not renewing a portion of its reinsurance. What are the growth prospects next year? I guess maybe thinking about commercial versus residential as well.
Speaker Change: Hey Mark, this is Mac. Good question. And I think overall we feel very good about the growth prospects for earthquake broadly. You know, as I said in my remarks, we really like the fact that we have a balanced book of residential and commercial quakes. So right now it's probably about 55 residential, 45 commercial.
Speaker Change: We, as I've mentioned, rates are plateauing in commercial, but the metrics still remain very attractive, so we want to continue to grow in commercial earthquake, even if there is some degradation in rate, because, again, the metrics are compelling.
Speaker Change: But again, it'll be a balanced approach. But I think the one thing that I want to emphasize is with residential quake, you know, we have flat rates that renew with a 10% inflation guard.
Speaker Change: which again is covering inflation at this current day so it's providing scale as reinsurance pricing is flat and certainly nice scale and at quite elegant scale if reinsurance pricing declines.
Speaker Change: We feel good about the prospects for Quake, like our balance book of residential and commercial, and you'll continue to see us invest, especially, as you pointed out, reinsurance capacity becomes even more available on the heels of the changes that the CEA just made.
Speaker Change: And Chris, some nice improvement in the earned premium ratio. And you may have touched on this, but how much of that is...
Speaker Change: mix of business versus
Toshio Uchida: Toshio Uchida
Speaker Change: I won't go beyond that, but in the 25.
Chris Uchida: Yeah, thanks, Mark. Great question. Obviously, we talk about net-earned premium, and there's just the growth in the dollars that we're seeing there from the overall performance of the business.
Speaker Change: When you get down to the overall fundamentals of what's underlying, right, it's kind of all of the above of what you talked about. It's going to be driven by rate, it's going to be driven by mix, and then also driven by the strong performance that we saw in the excess of loss placement at 6-1 of 2024.
Speaker Change: from this point in Q3 to Q4 and Q1 of next year and then
Speaker Change: Reset a little bit at the next excess of loss renewal just with the normal placement where we buy to fund Let's call it the growth in our cat exposed lines primarily earthquake But overall we expect to see that same trend But the tea leaves are showing strongly that we should see favorability and strong growth in our netted and premium dollars as we go through 20 to 24 and through 2025
Mac Armstrong: Mark this is Mac one thing I would add and Chris talked about it You know the fact that our front team business now is growing slower than our other lines That's going to also drive netter and premium growth so
Mac Armstrong: That's one silver lining, so to speak, of the slowdown in fronting and the expiration of our one fronting partnership with Omaha National. So that's also a catalyst that is encouraging.
Mark: Appreciate it. Thank you.
Speaker Change: Thanks, Mark.
Speaker Change: And Paul, are you on mute?
Speaker Change: A little bit of a big picture question about your property businesses.
Speaker Change: or has it actually been something where it really hasn't been profitable and that's what you needed to deal with.
Speaker Change: over time, not just last four hours.
Speaker Change: Yeah, Mark, or excuse me, Paul.
Paul: You know, we look at all across the board, our property portfolio and casualty portfolio like to look at risk-adjusted returns and the volatility that they can bring. And also in the case of property, what we call our cap payback. So how long would it take if there are losses?
Paul: Hawaiian hurricane flood
Paul: commercial equipment, and 17, all risk.
Paul: And I think what you could say, within any portfolio, you're going to have some strong performers and some that are underperforming. Builder's Risk has been exceptional, Excess National Property, exceptional. Hawaiian Hurricane is now becoming more of a fee generator. So we're long that product, so to speak.
Paul: And then Motor Truck Cargo is a consistent small limit performer as well. I think the ones that we are watching have been Flood and the All Risk book. And so Flood has been profitable, losses have been a bit amplified this year by the atmospheric rivers in California and then some of the storms.
Paul: and that all risk is one that's been probably disproportionately volatile. And so we have done a very good job of reducing our limits in that line of business. For instance, if you look at
Paul: Haleen, the average exposed net limit there was about $400,000 dollars. Same for Hurricane Milton. So, we're not taking big pops, but if you get 40 claims, and the average exposed limit is...
Paul: Ah
Paul: $400,000 and it's a 50% damage ratio, that's where you get the $8 million of losses from Milton. So, that puts a little bit of pressure on something that's only, you know, 3% of our premium or something along those lines.
Paul: So, long-winded way of saying, generally speaking, the property book has been very offerable and performed well. There are a couple of underperformers that we're continuing to look at and likely will pull back exposure to.
Paul: Touch
Speaker Change: Somewhat related, the crop business, is that a net diversifier for your PMLs, or is it additive to them?
Speaker Change: for property exposures.
Speaker Change: Yeah, Paul, this is John Christiansen, I can take that one. No, it's a great diversifier for us. So as you think about the types of impacts...
Speaker Change: that can affect a negative crop year, it's really drought. And so that's an uncorrelated risk with, as you think about the rest of the property book.
Paul: So it's a really nice diversifier and a compliment to everything that we've built over the past decade. So we have a lot of conviction in that line and believe it'll be a great source of diversification on a go-forward basis.
Speaker Change: And I think the other thing that I would add to John's point is that it is uncorrelated and it's uncorrelated to PNC market cycles too. So it can be a nice, you know, steady contributor to earnings on a go-forward basis. And on the heels of us raising
Paul: Capital in August, it is our intention starting 1-1-25 to take some more risk in that line. The balance sheet affords it. The team that we brought on has the competence and then some to do it so we are again really enthused about what we can do in crop.
Speaker Change: Fantastic. Thank you very much. Appreciate the help as always.
Speaker Change: Thanks, Paul.
Speaker Change: Thank you. Our next question comes from the line of David Multimatum with Evercore ISI. Please proceed with your question.
David Multimatum: Hey, thanks. Good afternoon. I had a question just on the catastrophe losses.
David Multimatum: It looks like this year it'll sort of settle out in the 5 to 6 point of an impact on the on the
Paul: on the combined ratio.
Paul: expected level that you guys would would expect in a given year given the mix of business you know or any sort of commentary you could provide on the AAL or your expected Cat load would be helpful because you know a lot of a lot of things have changed over the last several years in terms of your mix
Speaker Change: Yeah Dave, it's a good question and what I would say it's a slightly elevated this year to what the AALs had whether that was because of
Paul: that's something that we feel good about from an ongoing capital or reinsurance support standpoint.
Paul: 25 and therefore bring down that cat load some so I think you know if we've talked about it being three to four points I think that's a good steady state number especially with some of the underwriting changes or yeah underwriting changes we expect to make
Speaker Change: Got it. Thanks. That's helpful.
Speaker Change: And then, Chris, on the other underwriting expense ratio at 5.9%, you know, obviously a bunch of moving pieces this quarter. Could you just help us give us a sense of what's the sort of run rate?
Paul: underwriting expense ratio as we think about as the business scales and sort of adjusting for some of the mixed impacts that may have flattered this quarter's result.
Speaker Change: Yeah, no, good question, and we've talked about it. The crop premium that comes in in the third quarter, and when you look at the ratios, the expense ratios on a gross basis.
Paul: called Stettier in the mid-sixes, the mid-six to seven, right? And so that's probably the right way to think about it on a call of run-rate basis and say the one thing I would continue to emphasize is that we are adding talent.
Paul: We are adding scale to the organization. So we are still building, right? So I am not beholden to try and hold the other underwriting expenses at a certain level to call it hit profitability. We are very profitable. We can afford to invest in all of our teams and our people, and so we will continue to do that. Overall, I still expect strong scale in the other underwriting expenses as we continue to grow over the long term, but we are not going to slow down in trying to build this organization to continue to grow in scale. So overall, it is performing well. It is performing within our expectations, but I will point out we will continue to invest, but I don't expect this.
Toshio Uchida: Toshio Uchida
Speaker Change: Yeah, and just to add some color to Chris's comments, you bring someone on like a David Sapieh.
Toshio Uchida: extend our footprint and our growth long-term, so that's an investment that you're making up front that you get great returns on long-term. Same thing for Benson Latham. So like Chris was saying,
Toshio Uchida: in earnings to maintain that ratio in the short term, but it's not going to vacillate wildly. I think Chris has given very good direction on where it will go to.
Speaker Change: And I'm wondering if maybe you could provide a little bit more detail on where that incremental competition is coming from. We've heard the London market being a little bit more competitive. I know you guys don't.
Speaker Change: directly right in the London market, but I know that that is another avenue for some of the commercial quake business. So I'm just wondering, is that really driving that plateauing in the commercial earthquake rates?
Speaker Change: Yeah, I think the plateauing and earthquake rates are is driven by a few things. One is you've had four years of consecutive rate increases on loss-free business. And so when you look at what's called a homeowner's association in California, kind of a small midsize account risk, they're getting what we call, you know, fatigue.
Speaker Change: sacrifice rate but hold terms and conditions, move up deductibles, or make it name peril of earthquake only as opposed to a DIC policy. So that's contributing to it somewhat, but yes, there has been new capacity that's come in. It's been a few MGAs that have brought in capacity.
Speaker Change: guilty in that instance of some of that new capacity and then there's been some business in the DNF market that's been aggressive.
Toshio Uchida: year and a half.
Speaker Change: Got it. Understood. Thank you.
Speaker Change: Thanks Dave.
Speaker Change: Thank you. Our next question comes from the line of Andrew Anderson with Jeffries. Please proceed with your question.
Andrew Anderson: Hey, good afternoon. I think you had previously pointed to 125 to 150th crop premium for the year. I know you mentioned some shift to 4Q and some new products online, but do you still expect that to be the case for the full year?
Speaker Change: Hey, Andrew. Yeah, I don't think we said 150. I think we said 100 to 125. If I said 150, that may have been my bold ambition. But nonetheless, I think we feel good about getting to that close to that 120 number. And, you know, I think importantly with
Andrew Anderson: The addition of Benton Latham and James Long, two terrific hires in the last quarter and a half.
Andrew Anderson: We feel very good about building it into a not, you know, half billion dollar plus franchise in the next several years We do we think we're going to be a market leader here
Speaker Change: Yeah, and Andrew, you know, John Christensen here, one thing I'd add is...
Andrew Anderson: You know, we are really proud of our achievements in crop year to date, you know, Mac and Chris both talked about it Surpassing that milestone of a hundred million dollars in the nine months of you know, the first nine months of the calendar year Despite commodity prices being down year over year
Andrew Anderson: and mentioned that we had some favorable, what I call favorable product mix shift throughout the year, and as a result, we'll see a bit more in Q4 being written, but as it was mentioned before, just to reiterate, Q3 will remain the seasonally high quarter for crop, followed by Q1, and Q4 and Q2 will make up the difference.
Speaker Change: Thanks. And then on excess liability, I think I heard 11% rate increase. It seems like a deceleration to the 20% in the prior quarter. Was that just a mixed shift or is there anything else going on there we should be thinking of?
Speaker Change: Well, it's a bit of a mixture, but it's also...
Speaker Change: We remain very tight on the excess liability, keeping the auto either out of it altogether or tightly constrained from a fleet size and range of activity standpoint.
Speaker Change: It's a combination of rate and then constriction of coverage, which is something that we and our reinsurance panel are strongly endorsing.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. As a reminder, if anyone has any questions, you may press star 1 on your telephone keypad. Doing so will ensure that you are joined into the queue to ask a question.
Speaker Change: Our next question comes from the line of Mayor Shields with KBW. Please proceed with your question.
Mayor Shields: Great. Thanks so much. Really a couple of follow-ups on earlier questions.
Mayor Shields: One of the things we've heard over the course of this earnings season is that rate trends for smaller commercial property risks are rising. Are you seeing that in the earthquake space too or is that just a different market?
Speaker Change: I would say that's a different market, Mayor. I think smaller risks, and particularly Arbuck, are the ones that you're starting to run into budgetary constraints, especially in California where you also have, you know, fire premiums rising. So we are not seeing that in commercial earthquakes.
Speaker Change: Okay, that's helpful. Thank you.
Speaker Change: So, the personal loss issue in the third quarter, obviously fantastic and I think better than guidance. Does that have any impact on your expectations for 2025?
Speaker Change: Thank you.
Speaker Change: One thing and one key thing I'd point out there is that we are not touching any of our casualty reserves, right? So there is no call it takedown of a casualty reserves in there This is really driven by strong performance in our property lines of business that had a very strong quarter of some minor prior period development in there But overall casually writ loss ratios are being held steady as we continue to build on that book So that's the first thing I'd point out
Speaker Change: Thank you very much.
Speaker Change: But mayor I would just add and I and I kind of want to make sure I give credit where credit's due to our underwriting team, you know, if you look at just
Speaker Change: from 19.4% to 20.2% while the casualty growth grew 90% year-over-year. So I think that shows the quality of the underwriting on the property side and with not touching reserves on the casualty side. So while I agree with everything Chris said, it's going to tick up. It's not going to tick up like a step function. It's going to tick up very gradually and subtly and I think this third quarter was a prime example of the great job our team did underwriting.
Speaker Change: Yeah, no, that makes perfect sense. And a final question, I guess, for you, Matt. Do you have any thoughts on the availability or seating commissions on casualty reimbursement for 2025?
Speaker Change: well hey you know I think I was just in Bermuda
Speaker Change: two weeks ago and saw about 20 reinsurers there and
Speaker Change: I think, on the whole, they continue to have capital. You know, when I look at our casualty book, we're in the market now on one treaty. We got two done in the third quarter.
Speaker Change: expiring or improved economics.
Speaker Change: We got a de novo, one done, market consistent and frankly attractive economics to us.
Speaker Change: We feel like there is capacity for niche casualty lines.
Speaker Change: And I think the other thing that we feel good about that's unique to Palomar's
Speaker Change: And we have over, I guess now, 100 reinsurers that we're working with. So our ballast in the market certainly helps us feel good about, you know,
Speaker Change: and the rest of the 24 and 25. We have not seen any pressure on our seating commissions at this point so we feel good about our prospects individually and I think the market is
Speaker Change: On the whole, there is still ample capacity in capital, especially with Milton looking more like an earnings event and not a capital event by any stretch.
Speaker Change: Okay, fantastic. Thank you so much.
Speaker Change: Thanks, Mayor.
Speaker Change: Thank you. And our next question comes from the line of Pablo Singleton with JPMorgan. Please proceed with your question.
Pablo Singleton: Hi, good afternoon guys. First question, could you offer your latest views and you sort of talked about this already, but, you know, something more specific, your latest views on how fast the attrition loss ratio will increase?
Pablo Singleton: Pick up over the next couple of years as you shift the business mix.
Speaker Change: Yeah, no, I think, you know, I've talked about it, you know, it would be.
Pablo Singleton: Based on this quarter's strong results, I'd probably say, expect to see that on the lower end, you know, what's called the 22 to 23 range. So, well within the guidepost, I would expect.
Pablo Singleton: 26 to 28 percent type range by the end of next year as we think about the growth and diversification of our own lines of business. So overall still feel really good about that and that type of loss ratio still gets you into a sub 80 combined ratio overall.
Speaker Change: Another question, can you talk about how the COVID dropping rate between this and recent EMS earthquake is actually dropping.
Pablo Singleton: that this is growing, and then if you sort of take a step back, right, you know,
Speaker Change: To what extent, in your opinion, is growth in Resi earthquake being influenced by this?
Toshio Uchida: Toshio Uchida
Pablo Singleton: your growth profile will change.
Speaker Change: There's a bunch in there, but...
Speaker Change: Yeah, Pablo, let me just kind of give you my views on growth in residential quake, and I think we'll probably be able to touch on it. I think first and foremost, we feel very good about the growth prospects for residential earthquake, both admitted and E&S. When we talk about E&S, you know,
Pablo Singleton: outer bounds that can probably be about 20% of our book. It's going to be concentrated in higher value risk, it's going to be concentrated in selected geographic areas like West Los Angeles and certain pockets of the Bay Area.
Pablo Singleton: where the housing stock is expensive and the exposure is more pronounced.
Pablo Singleton: If you look at our new business right now...
Pablo Singleton: It is very consistent across
Pablo Singleton: Both admitted
Pablo Singleton: and ENS. Now ENS, we're getting more risk-adjusted rate, and so we'd like to continue to...
Pablo Singleton: But I don't want you to think that we are going to, even as the market grows increasingly ENS in California, you're going to see us not write as much on just the standard residential earthquake.
Pablo Singleton: we'll go through the market, but also the changes in the homeowners market where
Pablo Singleton: and other companies like State Farm are non-renewing large swaths of their book. That means they have to leave the CEA, and that means we get the chance to compete for them.
Pablo Singleton: So, that's going to be standard policies.
Pablo Singleton: again.
Pablo Singleton: driver of the standard residential value select products growth. I think the other thing that we are
Pablo Singleton: cautiously optimistic about, which might be a 25 growth driver, might be a 26 growth driver. As interest rates come down we do expect to see housing sales
Pablo Singleton: in Transaction Activity Pickup.
Pablo Singleton: It was pretty close to the same level as commercial in this quarter. You know, it's a high teens grower on a bigger base, and I think we feel that that is sustainable, especially when you do have a 10% inflation guard and policy retention in the high 80s, low 90s, depending on the month.
Speaker Change: Yep, that makes sense, Mac. And then, just last for me, as you're going outside of Earthquake, I'd be curious to hear the investments you're making outside of underwriting, and basically what I have in mind is something like claims rights, as you say, right, Mark Ashley business.
Speaker Change: What's happening outside of the new business underwriting functions?
Pablo Singleton: Thank you.
Speaker Change: Yeah, great question and thanks for asking. It gives me a chance to do a little bit of a commercial for someone we just brought on. We just hired Althea Garvey as our new Chief Claims Officer.
Speaker Change: work alongside Angela Grant, our Chief Legal Officer on the claims side.
Speaker Change: is growing, and there are certain areas that we will probably be leaning into and taking more active control of, especially on the casualty side.
Speaker Change: Good question. You'll probably be hearing more over the course of 25 about the investments we're making on the claims side and certain actions that we're taking to further invest in loss management, prevention, and control.
Speaker Change: Thank you.
Speaker Change: Thank you. And there are no further questions at this time. I would like to turn the floor back to Mack Armstrong for a closing remarks.
Speaker Change: Please, you know what, I'm not sure I can give –
Speaker Change: The speaker line went on mute
Speaker Change: And, Mac, are you still there?
Speaker Change: He was a member of the A.N.C.A. The American People's Coalition for the Protection of the A.N.C.A. He was a member of the A.N.C.A. He was a member of the A.N.C.A. And he was a member of the A.N.C.A. We all know that the A.N.C.A. Is a global organization
Speaker Change: Ladies and gentlemen, we do apologize for the technical difficulties. However, this does conclude today's teleconference, and we do thank you for your participation. You may disconnect your lines at this time.
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