Palomar Holdings, Inc. (NASDAQ:PLMR) Q3 2023 Earnings Call Transcript

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Chris Uchida: I’d say one good example of that, to add on, is this quarter we did have exposure to Hilary. And so our book performed very well in that. We will have some losses from that, but based on the performance of our book it did not rise to the magnitude that it needed to be separated as a catastrophe. So overall, we’re very happy with the performance of the book broadly and during the quarter.

Operator: Our next question comes from Pablo Singzon, with JPMorgan.

Pablo Singzon: The first question is for Chris. So you described a lot of things that are happening to the company, improving the loss ratio in maybe the first half of next year and up to in the second half, a flattening of the acquisition cost ratio, this reciprocal exchange. I guess, if you were sort of to simplify it and put everything together, what’s the combined ratio look like directionally as you go into ’24 and ’25? I think in the past you had talked about a gradual uptick every year, maybe 0.5 point, 1 point. Is that sort of still the trajectory you’re thinking about, given everything that you guys are doing at this point?

Chris Uchida: I think directionally that’s still accurate. One thing I want to think about and talk about is the impact that the excess of loss cost does have on our ratios and one of the reasons we try and talk about acquisition expense ratio, other underwriting expense ratio on more of a gross basis. And when you looked at it this year, I talked about the $13 million of additional costs earlier. That $13 million of additional cost is in the denominator of the expense ratio. And so this quarter, that does add to the overall ratio that you’re going to get. So when you look at it, the ratio this quarter would have been probably about 13% lower than they were if that additional expense was not in there. The expense ratio would have probably been around 45% to 46%, and the loss ratio even would have been about 16% to 17%.

So we try not to give too much specific combined ratio guidance. But to your point, I do expect it to tick up modestly as things improve. But overall, we try and think about those expense ratios on a gross standpoint. That 9.9% for acquisition expense, I do you expect that to be flatter to potentially up, and that’s going to be driven by mix. The growth rates for a lot of our lines of business are starting to come more in line. Fronting is a big piece of that. We’re not going to get 150% fronting growth like we did previously. And so that ceding commission will not outpace the acquisition expense. So I expect the acquisition expense ratio to be a little bit flatter. When you look at the other underwriting expenses, it was about 6.7% this quarter, versus 6.9% in Q2.

So it did go down, but we’re not going to stop investing. Mac talked about we have some new team members on the underwriting side to help drive environmental and some of the Assumed Re business. So we will invest in those teams. We will invest in their systems. And so while that ratio might be flatter to potentially up on a sequential quarter basis, over the long term we do expect to see some scale in the other underwriting expenses. So overall, everything is performing as we’d expect. But I do want to make sure I pointed out that the excess of loss cost in the denominator for those ratios does impact it and can push those ratios a little higher than if you were looking at it with flat excess of loss costs.

Pablo Singzon: That’s a fair point. And then the second question I had, this one [indiscernible], if we look at net earned premiums, they’re on track to grow about 9% this year, which is down from 35% last year because of various reasons you’ve covered in the past, like reinsurance and the runoff of certain lines. I think before, Mac had offered 20% as sort of a rule of thumb for growth in earthquake, and my guess is you can probably grow faster in the newer lines. So if you sort of assume a manageable stable [indiscernible] environment here, would it be reasonable to think that your net earned growth will certainly improve from here, but maybe track closer to the gross premium growth of these lines as they grow?

McDonald Armstrong: Pablo, that’s a great point you raise. The answer is yes. So if reinsurance pricing doesn’t go up 30%, gross and net should follow each other pretty closely, especially now as fronting won’t be disproportionately growing — growing at a disproportionately faster rate. So yes, we think there is great promise for operating leverage in our model, especially as reinsurance pricing stabilizes, which I think it will this year, and has the potential to decrease in future years. So your point is a good one and one worth noting. Net earned premium has the chance to scale nicely.

Chris Uchida: And I think just from a modeling standpoint, I think the best way to think about it is a little more sequentially on a quarter-over-quarter basis, essentially off of Q3, and that the dollar amount, like you said, should be going up. It’s a little harder to compare to prior years because of that excess of loss cost that you talked about. But I like to try and model it out a little more sequentially and seeing how those things of the dollars will move on a quarter-over-quarter basis, especially, let’s call it, using Q3 as a good base now that all the excess of loss is fully baked in. And those dollars should not change until 6/1/24, based on the next reinsurance renewal.

Operator: We have reached the end of the question-and-answer session. I’d now like to turn the call back over to Mac Armstrong for closing comments.

McDonald Armstrong: Thank you, Operator, and thank you all who joined us this morning. We appreciate your participation, your questions and your support. To conclude, I want to reiterate how pleased I am with our third quarter results and how proud I am of our team who allowed us to achieve them. We are focused on profitable growth and predictable earnings and believe that we are well positioned to accomplish these objectives for the remainder of this year, 2024 and beyond. And before closing, I just want to take a moment to thank Bob Dowdell, a member of our board of directors who recently passed away. Bob has been involved as an adviser and a member of our board since we formed the company some 10 years ago. He was a mentor, coach and friend to all on our leadership team, and he was also Palomar’s greatest cheerleader. We’ll miss him dearly. So thank you again, and enjoy the rest of your day. Take care.

Operator: This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.

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