Palomar Holdings Inc (PLMR) 2024 Q1 法說會逐字稿

Good morning, and welcome to the Palomar Holdings first quarter 2024 earnings conference call. (Operator Instructions) 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.

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 Christiansen, 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 PM Eastern Time on May 10, 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 and Exchange Commission. We do not undertake any duty to update such forward-looking statements.

Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to their most comparable GAAP measure can be found in our earnings release.

At this point, I'll turn the call over to Mac.

Thank you, Chris, and good morning. During the first quarter, Palomar celebrated its 10th birthday and this quarter is a terrific illustration of how much we've accomplished in our young history. We produced another quarter of profitable growth and again demonstrated our ability to grow where we want while delivering predictable earnings. Five product categories generated gross written premium growth of 47.2%, with especially strong contributions from our crop and casualty products. Likewise, we delivered net earned premium growth of 30% in the first quarter, a nice increase from the 40% growth we achieved in the fourth quarter of 2023, crop casualty and certain other property lines, combined with our market-leading earthquake franchise drove adjusted net income growth of 36% and adjusted return on equity of 22.9%.

Another exciting result of our financial performance this quarter as our stockholders' equity surpassed $500 million, moving us into a invest financial size category 10. This level should help us open new market segments, distribution channels and attract talent year's off to a strong start, and we are on track to achieve the power of our two X goal of doubling our adjusted net income over a three to five year period fiscal was first introduced at our Investor Day in June 2022, which means we are tracking towards the shorter end of the timeframe objective. We remain steadfast in our commitment to maintain profitable growth with best-in-class risk-adjusted returns. First quarter puts us well on our way to attaining this objective in 2024 and beyond.

Before I dive into our results I'd like to point out that this quarter and going forward will provide performance commentary, including but not limited to, gross written premium and market conditions on our five product categories, earthquake in the marine and other property casualty, fronting and crop. We believe this will help our investors better understand how our portfolio of businesses are performing as we move forward.

Starting with the earthquake franchise, we grew premium 13% in the first quarter of 2024. It is important to point out that the first quarter of 2023 benefited from a nonrecurring premium transfer that came over in conjunction with the strategic key strategic carrier partnership. Excluding this one-time benefit, our earthquake book grew 18% on a same-store basis. We are confident that our quick premiums will grow in the high 10s 20% 2024.

Our confidence stems from several factors, most notably a residential earthquake partnership with Cincinnati Financial consummated in the fourth quarter of 2023 that did not go live until April as well as new partnerships, one residential one commercial that should increase production in the second half of the year. The earthquake market remains stable and attractive. From a pricing perspective, commercial rates increased 11.6% this quarter as compared to 18.9% in the fourth quarter, the 8.9, the 8% to 9% inflation guards of Residential Earthquake policies are now providing a cushion above inflationary levels and provide annual increases regardless of market condition.

While rate increases have moderated from 2023 levels. Our key portfolio metrics, average annual loss and 250 year probable maximum loss to premium ratio are at all-time best levels. This should translate into strong net earned premium growth as the cost of excess of loss reinsurance moderates from previous levels over the near term.

Looking forward, we remain positive on the growth and profitability prospects of Arcelik franchise. Our inland marine and other property products business grew 46% year over year, driven by our Access National Property like hurricane and Builder's Risk line of business. While growth in this product set has accelerated from the pace that we saw in recent quarters.

I wanted to reiterate that this is a category that best typifies our Grow, where we want mantra and where we are judiciously managing and in certain cases reducing our exposure. Specifically, we are not adding limit and Continental hurricane prone areas and reducing our balance sheet exposure in Hawaii as we transition our policies to our that Lima reciprocal exchange builder's risk, our largest in the marine product at 16% same-store growth in the quarter.

Our Access National Property line saw approximately 78% year-over-year growth and 6% rate increases in the quarter as our teams build a portfolio of non-cat exposed property business for both builder's risk and excess national property. We hired experienced regionally focused underwriters that we believe will sustain the growth in these lines of business for 2024, our U.S. business grew 21% while increasing rates 18%, down from 36% in the prior quarter. Flood written premium grew 18% year over year in the first quarter.

The growth was somewhat muted by new business moratoriums throughout the quarter in California due to the heightened rain and flood activity. Importantly, catastrophe losses associated with the major floods in California in January were in line with the estimate provided on last quarter's call.

While Hurricane premiums grew 30% in the first quarter, a combination of rate increases or inflation guard and new business written on the Lehman paper. Importantly, our policyholders are embracing loudly and with approximately 92% of policies converting for Palomar specialty insurance company in the quarter. It is worth reiterating that the migration of policies to our Lima transitions, our business model from one that is risk-bearing to one that is fee generative. Once complete, we will all but eliminate balance sheet exposure to hurricane losses.

In Hawaii casualty product set saw robust growth in the first quarter as premiums increased 300, 27% over the previous year. Strong-performing lines in the quarter were commercial contractors, general and excess liability, real estate errors and omissions and miscellaneous professional liability excess liability, particularly stood out as the investments made in talent and distribution over the course of 2023, allowed the Group to grow fivefold year over year and 65% sequentially. Our contractors' general liability book had close to an identical sequential growth rate at 64% while growing 300, 75% year over year.

Our professional liability line grew premiums 81% year over year while seeing a 28% sequential increase. Our strong growth in casualty products, which still comprise less than 15% of our total book, remains anchored in a conservative approach to our underwriting targeted niche segments of the market. We employ prudent risk management tactics such as modest growth in net line size, voids of heavy bodily injury and other high severity exposure and conservative reinsurance car loss potential in the classes we write. Additionally, we continue to see decent rate increases across the casualty book.

Our professional liability products, a blended increase of 6.5% with real estate errors and omissions rates increasing 10.6%. The excess liability book was up 6.7% and the contractors' general liability book saw an increase of 9.9%. While there are certain pockets of our casualty book that are softer from a pricing perspective, private company D&O was up 2.4% we continue to believe our rates are staying ahead of loss costs for the quarter. The casualty books loss ratio remained in line with our conservative loss picks as the predominance of the book is less than two years old. We are focused on building a sizable reverse reserve base and we believe will develop favorably over time.

Our Frontier business modestly grew premiums 3% year over year in the first quarter. Growth in the quarter was impacted by a few things. First, our cyber funding program continued to see heightened competition and soft pricing that has its average renewal decreased 6.7%. Second two new partnerships were slower to ramp than initially forecast. Lastly, while our pipeline is strong, we did not add any new clients this quarter. As a reminder, we take a very selective approach, securing our fronting partner portfolio to ensure comprehensive management of the programs and no surprises.

We do expect to bring on new frontier relationships in the second half of the year, but this product set will experience slower growth in 2024 than the others. Conversely, our newest product group crop had a very strong start to 2020 for writing $38.7 million of premium in the first quarter. Our success and market acceptance, our function of our expertise and our strong partnership with advanced act protection. We successfully marry Palomar's data-driven risk management underwriting model with advanced ag protections, long-standing market relationships, technology and customer service to assemble them attractive and geographically diverse book this quarter.

As a reminder, for 2020 for our crop business as a participatory front, where we are taking 5% risk, the expectation is that we will take a more meaningful risk participation in 2025. Production exceeded our expectations, and we are now forecasting more than 100, 25 million of premium in 2024 up from the previous guidance of more than 100 million, also crop written premium seasonal. So Sheila, so you should not expect much in the way of written premium next quarter. We are pleased with the traction to date and are confident that we will generate meaningful net earned premium in the years ahead.

Turning to reinsurance, the first quarter is lighter and activity. That said, we were still engaged on several placements, including our June first core excess of lost placement and to quota share treaties, casualty and builder's risk. We are pleased that the ceding commission on the casualty quota share renewed a slightly better terms and expiring, and we enhanced the 33 treaties terms and conditions. We also improve the economics on our Builder's Risk quota share while increasing our gross and net line capacity.

We have made the six one core XOL placement as well as marketing, Tory Pines Re. Our fifth catastrophe bond. We are encouraged by the progress to date on both key endeavors. As we discussed last quarter, we had two earthquake treaties renewed on January first at risk, adjusted decreases of approximately 5%. As we sit here today, certain layers of our core tower are bound and the implied risk adjusted decreases. Directionally similar to the earthquake treaties renewed on January first, while most of the placement is still outstanding, we are encouraged with the results so far it affords us confidence that we'll meet or beat the 5% price increase embedded in our 20, our full year 2024 guidance.

To conclude, we are encouraged by the trends in our business and are raising the guidance range for our full year 2024 adjusted net income to $113 million to $118 million from 110,000,215 million. And to reiterate our guidance does assume a 5% risk adjusted increase on our six one core excess of loss program.

Lastly, the midpoint of our guidance implies an adjusted ROE above our Palomar to ex target of 20%.

With that, I'll turn the call over to Chris to discuss our results in more detail.

Thank you, Mac. Please note that during my portion, when referring to any per share figure I'm referring to per diluted common share as calculated using the treasury stock method. This methodology requires us to include common share equivalents such as outstanding stock options during profitable periods and exclude them in periods when we incur a net loss.

For the first quarter of 2024, our adjusted net income was $27.8 million or $1.9 per share compared to adjusted net income of $20.4 million or $0.8 per share for the same quarter of 2023. Adjusted net income and earnings per share growth of 36%. Our first quarter adjusted underwriting income was $29.2 million compared to $22.2 million last year. Our adjusted combined ratio was 73% for the first quarter compared to 73.3% in the first quarter of 2023. Excluding catastrophes, our adjusted combined ratio was 69.8% for the quarter compared to 71.2% last year. For the first quarter of 2024, our annualized adjusted return on equity was 22.9% compared to 20.7% for the same period last year.

The first quarter adjusted return on equity continues to validate our ability to maintain top line growth with a predictable rate of return above our tower Palomar two times target of 20%. Gross written premiums for the first quarter were 368.1 million, an increase of 47.2% compared to the prior year's first quarter. Along with breaking out crop, we also regrouped our written premium to align with our five key specialty insurance products. First, quake in the marine and other property casualty, fronting and crop is important to remember the seasonality of our crop premiums based on our current expectations. The majority of our crop premium will be written in the third quarter of each year with only modest premium in the second and fourth quarters. The 38.7 million of crop premium written in the first quarter should represent about 30% of the premium expected for the year.

Net earned premiums for the first quarter were 107.9 million, an increase of 29.6% compared to the prior year's first quarter. For the first quarter of 2024, our ratio of net earned premiums as a percentage as a percentage of gross earned premiums was 35.6% compared to 37% in the first quarter of 2023 and compared sequentially to 33.9% in the fourth quarter of 2023. The year-over-year decrease is reflective of our growth in fronting and lines of business use quota share reinsurance and the increased cost of our excess of loss reinsurance program that renewed last June with the mix of business maturing and our excess of loss reinsurance program in place our net earned premium ratio has continued to increase from its low point in the third quarter of 2023.

Based on our assumption that the excess of loss reinsurance costs will increase modestly our risk adjusted on a risk-adjusted basis, we expect our net earned premiums ratio to follow a similar pattern as last year. We expect a slight decrease in the net earned premium ratio from the second quarter with the low point of this ratio in the third quarter, the first full quarter of our June first reinsurance renewal from there, we expect the ratio to increase through the treaty year, similar pattern to what we have seen over the current treaty year.

Losses and loss adjustment expenses for the first quarter were 26.8 million, comprised of 23.4 million of non-catastrophe attritional losses and 3.4 million of catastrophe losses from flood activity. The loss ratio for the quarter was 24.9% compared to a loss ratio of 24.8% a year ago. For the first quarter, our attritional loss ratio was 21.8% and our catastrophe loss ratio was 3.1%. And we continue to expect our loss ratio to be approximately 21% to 25% for the year.

Our acquisition expense as a percentage of gross earned premium for the first quarter was 10.5% compared to 11.4% in the first quarter last year. And in line with the fourth quarter of 2023. Additional ceding commission and fronting fees continue to drive the year-over-year improvement with our growth and mix of business. We expect this ratio to be flat for the full year with some potential for improvement. The ratio of other underwriting expenses, including adjustments to gross earned premiums for the first quarter was 6.8%, the same as the first quarter last year and compared sequentially to 6.9% in the fourth quarter of 2023, in line with our expectations as we continue to invest in our organization as we continue to grow, we continue to expect long-term scale in this ratio. While we may see periods of sequential flatness as we continue to invest in scaling the organization.

Our investment income for the first quarter was 7.1 million, an increase of 39.4% compared to the prior year's first quarter. Year-over-year increase was primarily due to higher yields on invested assets and higher average balance of investments held during the three months ended March 31st, 2024, due to cash generated from operations.

Our yield in the first quarter was 4.2% compared to 3.4% in the first quarter last year. The average yield on investments made in the first quarter was 5.6% compared. We continue to can certainly allocate our out our positions to assets that generate attractive risk-adjusted returns. There were no shares repurchased during the quarter. While the previous plan has expired. As a matter of good corporate governance, we will be authorizing a new share repurchase program at the end of the quarter.

Our net written premium to equity ratio was 0.94 to one. Our stockholders' equity has reached 501.7 million, a testament to our profitable growth as Mac mentioned, we are raising our full year 2024 adjusted net income guidance to a range to 113 million to 118 million, implying 23.5%. Adjusted net income growth at the midpoint of the range is important to remember that our loss estimate and guidance include our expectations of mini cap such as severe convective storm activity for the year, we expect our loss ratio to be approximately 21% to 25%, including our estimate of many cash, which represented approximately two to three points of our expected loss ratio.

With that, I'd like to ask you to ask the operator to open the line for any questions. Operator?

(Operator Instructions) Paul Newsome, Piper Sandler.

Tom. Good morning. Congrats on the quarter? And is it is it fair to say as we look out past '24, that the attritional loss ratios should continue to rise as I think that was you answered in the past, but I just wanted to confirm that was still the case of all.

Thanks for the comments. Yes, no, good point. We still expect the attritional loss ratio to continue to tick up throughout 2024 and then obviously into 2025 as well as the overall mix of business does change. We continue to grow in mines like, yes, property, inland marine and specialty property casualty and also across those lines will have attritional losses associated with them. And so we expect that to tick up moderately again, we don't expect that to go from, let's call it 21% this quarter to 40% next quarter is going to just go up moderately, maybe a point or two a quarter?

Yes, Paul, this is Mac. I would agree. The only thing that I would add is like Chris said, it won't swing wildly because of our use of quota share and our balanced risk participation in the lines that he referenced. And then our Quake business, we still feel like it's going to grow 18% to 20% this year. So it's not going to meaningfully under-indexed to growth, and that provides a nice anchor with its attritional loss ratio of zero.

Great. And could you maybe big picture, give us your most recent thoughts on the competitive environment for of specialty commercial and E&S. There's lots of talk of the last several weeks because of the mixed data that came out of the stat data from E&S. And I know that's a very simple way to look at growth in E&S, but down, your thoughts would be great. And just an update on your most recent guidance. What you think you're seeing out there from competitive percentage?

Yes, sure, Paul. I would say the term that I would use broadly to describe the market right now in this it was a year ago, I probably would lean more on the property side, but now I would say it's broad-based and that there's rate integrity in the market. I would say that there is discipline in pricing on you're still seeing rate increases in property that may not be at the same level that you were seeing a year ago when it was more severely dislocated. And then in casualty and as I highlighted, we did see consistent rate increases really with the exception of cyber and the private company D&O component of our NPL that was up and in excess of loss costs. So I would say that there is rate integrity in the market and there's stability there.

The other thing as it pertains to the E&S side, what we are writing on the E and S on our with our E&S company is traditionally in U.S. business and we are not seeing flows out into the admitted side and I think what I would say or specifically point out like for earthquake, for instance, our residential book has always been admitted from business, but Commercial Earthquake since before Palomar's formation has always been an E&S product. And even if you can write it on a limited basis, you deal with the filing that basically mirrors the E&S market from a coverage flexibility and rating flexibility. So as it pertains to our book and we are not seeing flows out of E&S into the admitted market, I think we're seeing rate integrity.

Maybe a little bit to go, but on any impact you see from that would lose, Craig. We had an East Coast and then down and either from a product interest perspective or anything else that we might officially. I've just got a question this morning.

Yes, we jokingly call those marketing events, um, and so and there's actually an earthquake in the Inland Empire, California densely populated part of the state, about 4.3 magnitude enough to come beyond that to cover the newspapers and the evening news and enough for people to feel it. So we like those because it drives awareness and it does lead to a little bit of a tick-up in new business. Sales of earthquake in New York is we don't write a lot New York. So that does garner some media attention.So that's not a bad thing for you to help us always.

Thank you.

Thanks, Paul.

Mark Hughes, Truist Securities.

Yes, thank you. Good morning, Cory. Marty, a net earn net earned premium ratio, do you think it'll bottom out? I think last year's third quarter's 33%. Will it would one anticipate that or maybe a little bit better this year, maybe 34, of course, that's a great question.

And I think as we indicated in the prepared remarks, we are still expecting a increase in our reinsurance costs as we go into the six one renewal. I think there are some favorable winds out there. But right now in our guidance and our expectations, we are still expecting a slight increase there.

So with that type of mechanic and you kind of know the stair-step that you see with our excess of loss and how that plays out through the net earned premium, I would expect that let's call it, Q2 net earned premium ratio would might go down a little bit from where it was in Q1. But then as you pointed out, Q3 should still be the low point of our net earned premium ratio based on our current assumptions, I think last year it was low 30s. I would expect a similar trend to play out in Q2, three of this year as well.

But similarly up over that the next treaty year, I would expect very similar pattern to what you saw in our net earned premium ratio this year, really obviously dependent on what that renewal looks like but in our model, we have a slight increase. So I would expect slightly lower net earned premium ratio compared to last year or very, very close to what you saw this year or the last three years.

Okay. And then when we think about 2025, should that be migrating up a little bit kind of offsetting some of the higher losses.

Yes, Mark, this is Mac. I would say. So some of that's going to be driven, frankly, by crop. So crop right now is really more of a participatory front as we describe it with the 5% risk participation going forward in 2025, we will take you more meaningful. So that would help drive it up if reinsurance pricing starts to decelerate or decline that would be a driver of it. So you should expect decent net earned premium growth this year and that ratio potentially to tick up in 25 because our risk participation in lines like crop and maybe a selected group of casualty business that that is beginning to mature and seasoned more that will help inform that as well.

And when you think about it, we say it's going to step up 5%. What's the trajectory on that? If it all goes as planned, what would the next the next step drop sorry, the 5% for crop.

Is that what you're asking?

Yes, you are right, yes.

Yes, I would say 15% to 20% type participation. And we're and we're bullish on the prospects for that line and think we can build a very meaningful franchise there. And for what it's worth, it was a very modest amount of premium that we wrote in 2023, but it was a very profitable book. We'd like to eat our.

Yes, exactly via the commercial Quake. So how much is that tied to just broader commercial property supply and demand come for capacity in demand. Is there a separate dynamic within commercial Quake for us? Does that tend to parallel the broader markets?

I think earthquake is a unique line for Commercial Earthquake, especially layered and shared business. You need to you need to have that coverage for them to satisfy a large commercial loan. I think you're right in an areas where people are very mindful of protecting assets that have considerable equity value. So I don't think it mirrors on the broader property market, especially because it is the tried and true layered and shared market where you have multiple participants on a singular risk.

If you have a $500 million property schedule, you're not going to have one quake, I'm sure you're going to have 10 to 15. So because of that nature, I think it's pretty nuanced. And on the it does follow the cost of reinsurance to some degree reinsurance pricing in the primary market, but not in sense of coverage and our participants.

Thank you. Appreciate it.

Thanks, Mark.

Peter Knudson, Evercore ISI.

Hi, good morning. My first question is on midyear renewals. I believe you mentioned an increased expectation of costs in the prepared remarks, but I'm just wondering if you could expand a bit on those updated views and how that's shaping up?

Yes, happy to do so and thanks for the question. What I would say is, again, our guidance for the year to start of the year. And what we just affirmed assumes a 5% increase in the cost of reinsurance. We are in the midst of our placement right now and we are encouraged by the prospects of, as I said, beating that number, we did renew two small treaties at January one that were down plus or minus 5% we have found some coverage in early April that incepted six one, but is down and covered, and that is about plus or minus down 5%. So that constitutes roughly 10% to 15% of the total towers with a lot more to do. So we want to be conservative on what we are assuming, but all indications, including with what we are hearing in the initial price that we put out in the market on our cat bond is it feels gives us confidence that we will certainly achieve that level if not exceed it.

Yes, great. Thank you. That's helpful. And my second question is around the strong acceleration in the casualty growth. I know you mentioned a little bit of Alliance and the rate that was driving that. But I'm hoping you could talk a little bit more about the current market in some of those lines and how you guys are feeling about rate and loss trend in that space.

And then also, if you have if you're expecting that same strong growth to continue, I'm sure you do.

We do expect to see good growth from casualty throughout the year. We've made considerable investments in casualty from most importantly, have the talent and leadership perspective from people like tie Robin, Brian project and Galvanic and have come across and with great pedigrees and great followings, a great experience in the market. So we are investing in them from a system standpoint from a balance sheet standpoint from your incremental underwriting resources and want to build a meaningful franchise in these niche market segments.

So what we I would say right now, though, is we are going into the market and we are doing so in a meaningful fashion, but also a conservative fashions, conservative from a risk selection standpoint, whether we are avoiding severity exposed classes on the general liability side or the professional liability side, it limits management, um, whether our MAC roast line is 5 million, net is $2 million. When you think about nuclear verdicts and that are in the $100 million range like that, a $5 million gross line doesn't materially swing our balance sheet or our earnings base for that matter.

And then we have a lot of different underwriting controls. Again, that's informed by the strong leadership that we have in place from where we sit right now. We feel that we are getting adequate rate to cover our loss costs of you know, our general casualty book was up 9.9%. We think that's against last cost. That's probably four to five. That excess liability was up 6.7%. I think it's a similar type of loss cost. It's not to say again, as I mentioned earlier, that all lines and casualty are getting the same level of rate or have that term rate integrity. Financial Lines are tough and we do not write a lot of that, but we do write some private company D&O inside of our miscellaneous professional liability suite, and that's not getting the rate that we'd like. So we have to be mindful of how much we exposure we have there.

I think the last thing that I would say is when you look at our loss picks, we think they're conservative. They were just vetted by our reinsurance panel at six one or excuse me, at four one with the renewal and we got improved terms and conditions and improved pricing there. So I think that's a validation. I think the greatest validation is our loss picks meaningfully above the historical results of these underwriters that we brought on. So I know that's a lot. But what I would say is we do feel good about our casualty strategy. The niche focus feel exceptional about the leadership. We have helping us execute upon that. And we don't, you know, I think that we will re reserve releasing excuse me, releasing reserves anytime soon so we're going to be conservatively building the reserve base.

That's really helpful color. Thanks so much.

Matt Carletti, Citizens JM.

Thanks for mining format macros of mine. I was hoping to ask a high-level question on your on your residential Quake book on your particularly things like California and other areas where on the homeowners market have gotten super tight and rates have gone up a bunch.

What have you seen in terms of retention in that resi Quake book and kind of as that happened, you my thought process is being people are paying a ton more for homeowners. How how how sticky have you seen retention has changed at all? Or are they or are they beyond the wallet get a little tight and maybe retention, they're sliding a little bit?

Yes, Matt, that's a great question. Yes, I'm pleased to say that our retention has been consistent. It's always been a mid to high 80s level, Tom and you know, we have been able to continue to grow the quake book by taking share by having great partnerships. But I would say that new home sales right now and increasing Homeowners premiums is a headwind. It's no question that it is. But because of our franchise because of our partnership strategy. And also because of the changes at the California Earthquake Authority, we've been able to sustain this kind of high 10s, mid 10s growth in residential quake, we're optimistic and we've been studying it as rates come down and new home sales in more earthquake exposed areas pick up again on the inventory starts.

Turning over a bit more that could be turn from a headwind into a tailwind. I'm just not going to call when I'm not there, a lot of people that are focused on win rate changes are going to happen. We're going to just play with the current market as it is and hope that when rate changes come, it provides a nice tailwind for us.

Thanks, much appreciated.

Thank you, Matt.

Andrew Andersen, Jefferies.

Hey, good morning. On a frontier a little bit lower growth in the quarter. You mentioned some partnerships were slower to ramp. I think you had previously pointed to for full year, perhaps growth in fronting indexing growth of overall company is that still the case?

Yes, Andrew, good question. Thanks for asking it up. I think it's not the case. I think it's going to under-index the growth. So the good thing is we have a portfolio of products in five different categories. Some are firing in all cylinders, um, some are indexing the growth, but I would say Frontier is the one that is now under indexing, a few of our new partnerships are slower to ramp up. There is a little bit of rate headwinds and one of our larger relationships that I brought up we have a pipeline and we do expect to add to our portfolio of fronting partnerships. But it's going to slow its growth is going to look more like the first quarter than it will the broader growth rate of the Company.

Got it.

Okay. And then on earthquake, it sounds like high 10s, 20% ish for full year. If I think about the expense ratio here does the mix of product between residential and commercial have an impact on the expense ratio is one lower than the other.

You know, historically residential earthquake had been a bit of a higher margin on the cost of acquisition is maintenance might be a little bit lower right now in this market just because of the rate increases that we've seen in Commercial Earthquake, the underlying my unit level economics are almost at parity. So Hill, a residential earthquake quality or Commercial Earthquake policy in 2024 are going to have the same margin.

One follow up on that. When you look at our acquisition expense ratio on a gross basis, right, I think 10.5% for the quarter we expect that to be pretty flat for the year. Right? So overall mix of business, whether it be business earthquake, Commercial Earthquake or even changes in the fronting dynamic, we don't expect to have a material impact on that ratio as we go forward.

Thank you.

Thanks, Peter.

(Operator Instructions) Meyer Shields, KBW.

Great. Thanks. Good morning. A bunch of quick questions if I can. First, I know Cincinnati targeting higher net worth homeowners. And I'm wondering, is that translate into maybe writing a company residential earthquake on non-admitted paper?

Meyer, I apologize. We lost you for a second. Would you mind repeating that question. I heard the second half on non-admitted paper business in the first part.

Yes, no problem. I know Cincinnati is looking to grow it high net worth homeowners and yes, weather that affords you the opportunity to write the earthquake on non-admitted paper?

Yes, I'm sorry. It is on an automated basis. So we are writing that as any and as policies in the company to their high net worth E&S offering in California.

Okay, perfect. On crop, I think Chris said 30% of the written premiums come in the first quarter and the balance in the third, is that a normal run rate or when you're ramping up, should we see higher percentages in the first quarter than this year?

Yes, then Eric, Jon Christianson, some of the over the next few years, we'd expect that to be fairly consistent. And so you'll see you'll see in the third quarter be by far the largest quarter of rental income. The second largest will be the first quarter and then there'll be a little bit in the second in the fourth quarter. But really the third quarter is going to be we'd expect to see the largest opportunity share for the year.

Okay, perfect. And I know the retained premiums are going to be really, really low, but there are different approaches that a lot of the competitors take in terms of booking profitability for that line of business, others waiting till, let's say, the fourth quarter before taking the combined ratio on the retained book below 100. How is Palomar funding on, I guess, booking that line?

No, it's a good question. I think third quarter premium that we book will have a little bit of a catch-up effect with it. A lot of that premium is originated earlier and then we wait for the acreage reports to come in and which generally we started coming in June-ish mostly in July.

And so at that point in time, we will book of the written premium and then there will be a slight catch-up of earned premium, which obviously comes with a combined ratio. So there will be some earning of it in the third quarter as well. And then throughout the remainder of the year, as most of that does and the end of the year. So we will be booking most of written premium, but then some of those call the profitability through the third and the fourth quarter for that book of business?

Yes, Amir, I too, will look similar to others in the market in terms of how we on the timing of when those profits are taken and are recognized. Usually the modeling becomes clear at the end of the third quarter and into the fourth quarter, which gives you more confidence on the loss ratio for the year.

Okay. Perfect. And last question, and I'm not exactly sure how to ask this. But Matt, you talked about being bigger and how that should allow for growth on some more accounts. Is there any way of I don't know, ballparking it describing the relevant of the higher size category?

Yes, you know, dumb Meyer, I think it's hard for us to quantify right now, we had Canon. We did we had a commercial underwriting meeting a week or two ago, and our underwriters were pleased that with the increase in financial size quarter it's probably most relevant for our environmental team and our professional liability team. But then they immediately asked when are we going to get to an A. rating.

So that might be more impactful. So I would love to say it's a lot like what it was in 2020 when we got up over 200 million and that opened up a few different distribution, our channels that we couldn't see previously now it's just more about insured appetite and on the credit rating exposure requirements for certain larger accounts. So I can't quantify it right now. I think it's going to open up a lot, and I think we're doubling up from recruiting standpoint, but I'd love to give you a dollar number. I just can't right now.

Fair enough. Thank you.

Thanks, Meyer.

Pablo Singzon, JP Morgan.

Hi. Good morning. Maybe for Mac or Chris, you mentioned about 5% price increase on reinsurance embedded in the guidance. What dollar benefit would you get if prices go up by, say, only 4% or 3%. I know the dollar cost of XO will also depend on exposure to structure, but holding also constant, how much dollar savings that you get if reinsurance pricing is more favorable than what you're assuming?

Yes, that's a great question. When you look at our book and we've talked about it before, that the cost of risk transfer last June one and it was about $230 million, right? So we will be buying more excess of loss reinsurance to cover the increase in our exposure. So let's say where our exposure went up 10%, let's call it 250 ish million, 283 million that were being only spending, right? We're expecting some sort of rate increase right now, we're saying 5% on top of that. So you can kind of do that math. So just kind of working backwards, if you gave a 1% savings on $250 million at $2.5 million over the full treaty year.

So from our standpoint, that's probably the right way to think about it when you go into now saying that's our exposure change or anything like that. But just when you'd want to do the math and when it's a good rule of thumb, that $200,000 is probably the right base to think about what our opportunity is or what our potential additional cost is going to be at the next renewal.

Yes, that makes sense. And then second question, just thinking about the business mix change. I think, Chris, you had said on this call about one to two points of deterioration in the attritional per quarter. And my memory might be wrong here, but it seems like that's maybe a tad faster than what you said before. Is that because attritional lines are growing faster? And then as a follow-up to that and the 2022 Investor Day you guys had given and all in combined ratio guidance for earthquake. And let's just call it non-risk, it does like a margin, does that margin guidance still stand? And as we think about the mix here?

Yes, that's a good question, a yes, I think maybe one to two points is I would say a little bit conservative. I think if we get up to the midpoint of our range of 21 to 25, which is kind of in that 23% range. We feel good about where it is for the full year. I think it does move around on a quarterly basis. You guys are very familiar with the insurance business. Obviously, we don't control the losses if it swings up a point or two points in a quarter that meaning is going wrong and naturally where things go and it could also go the other direction, one or two points down. But overall, we're very comfortable with where things are going. We are seeing very good, strong growth in our lines of business that you have attritional that's going to be the inland marine and special property that's going to be some casualties. So everything is going the way we expected strong growth there.

When I look back and think about Investor Day, I would have to go into a lot of memory have it does feel pretty consistent with how we've lined up. We haven't made significant changes to any of our quota shares. We started taking a little bit more on some of those, but not what I'd call a material variation from what we shared with Investor Day. And some of that thesis in Investor Day was maintaining the same participation.

And so that is still, I would say, a lever we have to pull over time and we can start as our balance sheet growth, we can start taking more and more from Sun Life, which will obviously help profitability for the bottom line continue to grow because of either a problem, the lines of business where we are, I would say, sharing a lot of that margin with the reinsurers that overtime we will start putting on our balance sheet. That's not going to happen all next year. But I'd say over a five to 10-year horizon, more and more of those start coming onto our balance sheet, which will help continue to grow that bottom line.

And probably the thing that I would add is we still feel very good about a sub 75 combined, even if that loss ratio moves up one or two points that Chris is describing.

Yes, the dynamic answer. And then last for me, I know you had referenced a better ceding commissions and the casualty quota share, but then you also said that I think as a percentage or a percentage of gross earned, you think acquisition expenses stay flat. So it doesn't seem like that have a benefit on the ceding is that meaningful, right? Is that the correct read? And then with the overall number, I guess that's the it's a more appropriate thing to say. Is that is that fair?

Yes, I mean, I think it's just a matter of business mix, right or earthquake. And the other property or casualty is only 14% of the business. And what was in that quota share probably constitutes about 40% of that number. So that's called 5% of that overall did see slightly improved ceding commission. It's just business mix.

Okay. Thank you.

If there are no further questions at this time, I would like to hand the floor back over to Mac Armstrong for any closing.

Thank you, operator, and thank you to all who joined us this morning. We appreciate your participation, your questions and most of all your continued support. And to conclude, we're off to a strong start to the year and I would be remiss if I didn't thank our team at Palomar for their continued dedication and hard work, which is ultimately the driving force behind our terrific results and success not just this quarter, but the past 10 years, I remain confident in the growth trajectory of our business, combined with our continued focus in our ability to deliver predictable earnings and returns area.

And as an aside, in addition to our 10 year anniversary, we recently celebrated our 5th year as a public company. And so I want to thank our investors for your support these last five years. We will continue to work in earnest on your behalf and will drive shareholder value. Thank you very much. Have a nice day and speak to you next quarter.

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.