Palomar Holdings, Inc. (NASDAQ:PLMR) Q4 2024 Earnings Call Transcript

Palomar Holdings, Inc. (NASDAQ:PLMR) Q4 2024 Earnings Call Transcript February 13, 2025

Chris Uchida: Good morning, and welcome to the Palomar Holdings, Inc. Fourth Quarter and Full Year 2024 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference line will be open for questions and 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.

Mac Armstrong: Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me here today is Mac Armstrong, our Chairman and Chief Executive Officer. Additionally, Jon Christianson, our President, is here to answer questions during the Q&A portion of the call. 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 February 20, 2025.

A real estate investment banker sitting in a plush office, reviewing financials and papers.

Chris Uchida: 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 we believe are useful in evaluating our performance.

Presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with US GAAP.

Mac Armstrong: Thank you, Chris, and good morning. I’m eager and very pleased to discuss our outstanding fourth quarter and 2024 results. The across-the-board success of the quarter and full year is a testament to the hard work of our exceptional team. The Palomar team more than effectively executed the four strategic objectives that we outlined to start the year: sustain our strong and profitable growth, manage dislocation and diversification, deliver predictable earnings, and scale our organization. As a result, we delivered 23% gross written premium growth, 39% when excluding runoff lines of business, 48% adjusted net income growth inclusive of $8 million catastrophe losses, and an adjusted return on equity of 23% in the fourth quarter.

Q&A Session

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Importantly, Q4 2024 is the ninth straight quarter that we have beaten expectations. Our strong execution is also seen in our full year 2024 results, which included record gross written premium and adjusted net income. Gross written premium growth of 35% and 43% on the same-store basis. Adjusted net income growth of 43% and adjusted ROE of 22%, even when saddled with the short-term drag of the capital raised in August this year.

Chris Uchida: As it relates to our capital, our stockholders’ equity increased 55% year over year, 30% when excluding the equity issuance. From an operational perspective, the accomplishments in 2024 were several and meaningful, highlighted by our acquisition of the surety company, First Indemnity of America or FIA, closed at the start of 2025. And our upgrade to A Excellent by AM Best. But I’m most excited by the significant additions made to the Palomar team. 2024 saw us recruit respected industry professionals, including but not limited to a Chief Operating Officer, Chief People Officer, Chief Claims Officer, Head of Crop, and Head of the NSGAS. These achievements enabled us to reach our Valomar 2 target of doubling 2021 adjusted underwriting income in three years, the shorter end of our intermediate timeframe.

Mac Armstrong: 2024 was a banner year for Palomar. At this point, I would like to touch on the devastating Los Angeles wildfires. I personally like to pass along my sympathies to all those impacted, including our employees, trading partners, families, and friends. It has been a historic catastrophe for our region and state, and we’re focused on doing our part to help our customers and communities through this challenging time. As a reminder, we do not write homeowners insurance in California as we define our residential property exposure in the state to monoline earthquake and flood policies. Similarly, the majority of our commercial property exposure in California is a commercial earthquake or difference in condition policy that does not cover wildfire.

We do have builders risk and builders owner package products that have exposure to fire losses. Fortunately, our losses from the Eaton and Palisades fires are very modest and within the scope of our 2025 guidance in ordinary course attritional losses. We have indirect exposure through our residential earthquake franchise, as slightly less than 1% of our residential earthquake book is in the Eaton and Palisades burn zones. We are working closely with our insurers and producers to quickly cancel and refund those policies impacted by the fires, and unfortunately, no longer need our coverage. Our focus is to help our insurers in their time of need. Due to the recency of the event, it’s hard to forecast what the medium and long-term market impact will be.

That said, it is amplifying the dislocation and challenges in the California homeowners market as well as heightening the awareness of natural disasters in our state. We’ve seen a modest uptick in residential earthquake new business to start the year. We suspect the dislocation in the homeowners market will lead to further attrition out of the California Earthquake Authority as member companies claw back their exposure to California. This could prove a tailwind for our residential earthquake business. As it pertains to reinsurance, it is also hard to handicap the market impact as the losses seeded in the reinsurance market are likely to be from a concentrated group of seedings. Wildfires may slow the pace of rate decreases at Palomar and the broader market experienced on January 1st.

That said, recent activity in the catastrophe bond market suggests this event has not diminished investors’ appetite for single peril exposure like earthquakes.

Chris Uchida: As long as this market dynamic continues, it would likely prove advantageous to Palomar. I will touch more upon our reinsurance pricing expectations toward the end of my remarks. Turning to the fourth quarter performance of our five product categories, I will start with our earthquake franchise. Exiting 2024 as the third largest writer of earthquake insurance in North America, we are a category leader. In the quarter, our core earthquake franchise grew gross written premiums 20%. Our balanced approach to providing both residential and commercial earthquake insurance allows us to play through market cycles and optimize capital allocation in soft or hard markets. Specifically, this strategy enables us to preserve our overall margin in a climate of rate softening in the commercial earthquake market.

For example, our residential earthquake product features a 10% inflation guard, offering a strong cushion against inflation and a consistent rate increase as policies are renewed annually. Whereas in the quarter, our commercial earthquake products experienced an average rate decrease of approximately 5%. This dynamic is likely to persist throughout the year, but the California wildfires could reduce the pace of rate decrease. That said, as mentioned on previous calls, the portfolio profitability, theoretical loss, and aggregation metrics for the Air Liquide franchise are strong.

Mac Armstrong: At any point in our history, a reflection of this balanced book approach, as we look to 2025, the prospects of our earthquake franchise remain strong, and we are confident the earthquake premiums will grow in the mid to high teens for the full year. Our inland marine and other property category, which consists of seven distinct property products, grew 36% year over year. Over the course of 2024, we are investing in talent and geographic expansion selectively while simultaneously reducing exposure to the more volatile classes of business in this category. Strong premium growth contributors during the quarter were our builders risk, access national property, and Hawaii hurricane lines of business. Overall, this category delivered exceptional results from an attritional loss perspective.

The low loss ratio was a function of a multiyear effort of significant rate increases and underwriting changes that combined with moderate weather activity hold aside Hurricane Milton. The loss ratio is not negatively impacted by softening commercial property rates. Commercial property pricing is showing a moderate downward trend like that we are seeing in commercial earthquakes. Importantly, we remain steadfast in holding firm on key terms and conditions as rate declines at a low single digit clip. Like our earthquake products, the Inland Marine and Other Property portfolio is balanced by a mix of residential and commercial lines. Rate increases we are getting from our Hawaiian hurricane and residential flood products are helping offset the rate softening in the commercial property market.

Our casualty segment saw another period of significant growth with premium increasing 112% year over year.

Chris Uchida: Strong performers in the casualty group included contractors GL, real estate E&O, miscellaneous professional liability, and environmental liability. The quarter also saw a nice contribution from our new E&S casualty team, headed by David Zapier. Group was able to take advantage of a hardening market in segments like primary and excess construction liability. Casualty now represents 50% of our total portfolio, and we remain focused on conservative underwriting within targeted niche markets. Our approach includes prudent risk management tactics, such as shorter tail liability focus, modest line sizes, avoiding supply severity exposures, and conservative reinsurance. The end of the quarter, our casualty book’s average gross limit was $2.4 million and our average net limit was $1.1 million.

Casualty book’s loss ratio remained in line with our conservative loss pick and reserves continue to grow. Notably, over 80% of our casualty reserves are IVNR, meaningfully higher than the industry average, one would expect for a nation franchise like ours. In terms of pricing and rate adequacy, we are seeing strong rating in excess of loss costs across the casualty book. Environmental liability rates increased by 8%, and E&S casualty and excess liability rates climbed 7% to 12%. And contractors’ GL accounts with auto coverage saw rates increase just below 20% for the quarter.

Mac Armstrong: Our casualty franchise is well positioned for profitable growth in 2025. Turning to our fronting business, this was the first full quarter where we experienced the complete effect of our separation from Omaha National, the Fronting Group’s premium declined 33%. We are pleased with the growth of our existing partners and the prospects of our newer relationships. Continue to vet opportunities and have a healthy pipeline of potential partnerships. Fourth quarter was the first quarter where Benson Latham was leading the charge for Palomar Crop. During the quarter, talented professionals in marketing and claims joined the crop team, bolstering the efforts made over 2024 to build the foundation for a much larger business.

Our fast-growing Palomar Crop franchise delivered $15.7 million in premiums in the seasonally low fourth quarter and $116 million in premiums for our first full year in the business. Importantly, the underwriting results were strong as a top line growth with an estimated underwriting gain on MPCI or multi-peril crop insurance. Approximately 20%. These results affirm our risk selection approach and, moreover, our intention to increase our risk participation over time. To that end, we finalized our 2025 reinsurance treaty. Putting in place quota share and stop loss programs. We will retain 30% of the subject matter premium going forward as compared to 5% on the expired treaty.

Chris Uchida: I have every confidence that we’re building the industry-leading crop business at Palomar, continue to believe Palomar Crop will eclipse $500 million of premium in the intermediate future. We aim to be among the top ten crop premium writers in the US by the end of 2025, projections exceeding $200 million in premium for the year ahead. Lastly, we closed on our acquisition of FIA at the start of 2025. FIA’s results will be included in the Casualty Product Group for the immediate future. Surety is an attractive market segment that, like crop insurance, is not correlated to the PNC cycle and one that we believe can be an important growth vector Palomar over the longer term.

Mac Armstrong: While FIA’s contributions will be modest in 2025, we will ensure it will be a meaningful market segment over time. Quickly turning to reinsurance, we were active on January 1st across the portfolio with successful placements in our earthquake, crop, which I already discussed, and casualty groups. First off, we renewed our commercial earthquake quota share in about a $155 million of incremental excess of loss limit to support the growth of the earthquake book. Until the main excess of loss renewal on June 1st. These treaties were priced at risk-adjusted decreases of approximately 15%. On the casualty part, we renewed two treaties at either expiring or improved economics. We also put in place two new treaties for our casualty group, which were both well-received with strong support from Blue Chip Reinsurers, who already support Palomar and other lines of business.

Despite the industry’s losses from the wildfires, we remain cautiously optimistic on the prospects of our 6/1 renewal as we have seen leading indicators such as recent cap on issuances in secondary market pricing, that suggest strong appetite from investors for single peril exposures like earthquake. Looking ahead to 2025, we have four strategic initiatives. First, integrate and operate. We must monetize the investments that we have made throughout 2024. Second, we will build new market leaders deliberately. Our crop and casualty lines have strong leadership and the capital support necessary to become market leading franchises. But we will not overextend our appetite and risk management approach in the short term. Execute deliberately in 2025 to have an entrenched franchise in 2029.

Third, we must remember what we like and more importantly, what we don’t like. It’s a natural migration from the grower we want mantra. We’ll stick to our conservative and well-defined appetite in the market and focus on the profitable growth, the product portfolio affords us. We continue to generate consistent earnings, and with the addition of new talent, we find new sources of earnings growth while preserving a healthy reserve base. As we execute our strategic initiatives, I’m confident in our ability to build on 2024’s success and maintain steady growth in returns. While last year’s performance was exceptional, it’s only the beginning. Our heritage products alongside newer offerings like crop casualty and surety provide strong visibility for long-term growth and above-market returns.

We are well positioned to execute our PowerBar 2x strategy in 2025. Our full year 2025 adjusted net income guidance is a range of $180 million to $192 million including the cat load that Chris will discuss in more detail. This range assumes our core 6/1 excess of loss reinsurance treaty renews at a price of flat to down 5% from the expiring 2024 treaty. As the market is still digesting the impact of the wildfires on the reinsurance market, we are taking what we believe is a conservative approach. Certainly when compared to what we saw January 1st. The midpoint of our guidance implies an adjusted ROE of 23%, and puts us in a position to double the adjusted underwriting income of the 2022 Palomar 2x cohort in three years. With that, I’ll turn the call over to Chris to discuss our financial results in more detail.

Chris Uchida: 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. 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 fourth quarter of 2024, our adjusted net income was $41.3 million or $1.52 per share compared to adjusted net income of $28 million, $1.11 per share for the same quarter of 2023. Representing adjusted net income growth of 47.5%. Our fourth quarter adjusted underwriting income was $41 million compared to $29.3 million for the same quarter last year. Our adjusted combined ratio was 71.7% for the fourth quarter compared to 68.8% in the fourth quarter of 2023.

Excluding catastrophes, our adjusted combined ratio was 66.1% for the quarter compared to 68.8% last year. For the fourth quarter of 2024, our annualized adjusted return on equity was 23.1% compared to 25.1% for the same period last year. The fourth-quarter adjusted return on equity continues to validate our ability to maintain top-line growth with a predictable rate of return above our Palomar 2x target of 20%. As a reminder, we do not expect the capital raise in the third quarter of 2024 to be fully deployed until the end of 2025, Gross written premiums for the fourth quarter were $373.7 million, an increase of 23% compared to the prior year’s fourth quarter, 39% growth excluding runoff business. Looking at our five key specialty insurance products, it’s important to remember the seasonality of our crop segment given the majority of the premium is written and earned in the third quarter of the year, with only modest premium in the second and fourth quarters.

Denner premiums for the fourth quarter were $144.9 million, an increase of 55% compared to the prior year’s fourth quarter. For the fourth quarter of 2024, our ratio of net earned premium as a percentage of gross earned premiums was 39%, compared to 33.9% in the fourth quarter of 2023 and compared sequentially to 34.3% in the third quarter of 2024. 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 see less premium. These results include a full quarter of our excess of loss reinsurance claims that started June 1st. While the dollars associated with this placement are higher to facilitate continuing earthquake growth, the risk-adjusted rate online is lower than the previous year.

With the timing of our excess of loss reinsurance, the majority of our crop premium written and earned during the third quarter we continue to expect the third quarter to be the low point of our net earned premium ratio with it increasing throughout the remainder of the reinsurance treaty in a similar pattern to last year. While we expect quarterly seasonality in our net earned premium ratio, we continue to expect net earned premium growth over a twelve-month period of time.

Mac Armstrong: The losses and loss adjusted expenses for the fourth quarter were $37.2 million comprised of $29.1 million of non-catastrophe attritional losses and $8.1 million of catastrophe losses primarily related to Hurricane. The loss ratio for the quarter was 25.7%, made up of an attritional loss ratio of 20.1% and a catastrophe loss ratio of 5.6%. As Mac discussed, we believe this quarter’s results were a testament to our continued effort to derisk our portfolio over the past few years. Our results reinforce our conservative approach to reserving. We continue to hold conservative positions on our casualty reserves, while the same conservative approach on our more seasoned E&S property lines has played out favorably for the quarter and year.

Our acquisition expense as a percentage of gross earned premium for the fourth quarter was 10.9%, compared to 10.5% in last year’s fourth quarter and sequentially to 10.5% in the third quarter of 2024. This percentage increased sequentially primarily from the lower-seating commission from in front. The ratio of other underwriting expenses, including adjustments, to gross earned premiums for the fourth quarter was 7.2%, compared to 6.9% in the fourth quarter last year and compared sequentially to 5.9% in the third quarter of 2024. As demonstrated by our hires over the last year, we are extremely committed to investing in all facets of our organization as we continue to grow profitably. We continue to expect long-term scaling 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, our net investment income for the fourth quarter was $11.3 million, an increase of 61.3% to the prior year’s fourth quarter.

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 December 31st, 2024. Due to cash generated from operations and the capital raise. Our yield in the fourth quarter was 4.6%, compared to 4.1% in the fourth quarter last year. The average yield on investments made in the fourth quarter was 5.3%. We continue to conservatively allocate our positions to asset classes that generate attractive risk-adjusted returns.

Chris Uchida: At the end of the quarter, our net written premium to equity ratio was 0.8821. Our stockholders’ equity has reached $729 million, a testament to consistent profitable growth and the capital raise. For the full year, our strong top-line performance continues to translate to the bottom line. Our adjusted net income grew 43% to $133.5 million. Our adjusted EPS grew 38% to $5.09. Our adjusted combined ratio was 73.7%, with a loss ratio and expense ratio of 26.4% and 51.7% respectively, resulting in an ROE of 22.2%. Our adjusted underwriting income grew 35% to $134.1 million, positioning us to achieve our Palomar 2x objective from 2021 and three years. Adjusted underwriting income, excluding overhead, was $229 million versus an initial milestone of $220 million presented at Investor Day in 2022.

Turning to our 2025 adjusted net income guidance, we are initiating with a range of $180 million to $192 million. The midpoint of our updated guidance range represents adjusted net income growth of 39% and adjusted diluted earnings per share growth of 39%. The midpoint of our updated guidance range represents adjusted net income growth of 39% and an adjusted ROE greater than our Palomar 2x objective of 20%. Including the capital raised in August. This range includes $8 million to $12 million of catastrophe losses in addition to mini cat that we continue to include in our guidance. As we look to fully deploy the capital raised last summer throughout 2020, we will increase our participation in certain lines of business as we continue to build a top-tier specialty insurer.

Our growth and participation expectations will add seasonality to our operating ratios and results while we continue to grow our earnings. The third quarter will continue to stand out based on our crop participation increasing to 30% compared to 5%, cross seasonal premium earning pattern, and the first full quarter of excess loss reinsurance placed June 1st. We expect our net earned premium ratio to increase in 2025 from 36.5% in 2024. With a low point in the third quarter. We expect our loss ratio for the year to move up off of 2024 and in the low thirties. Including catastrophe losses. The apex of our loss ratio and combined ratio will be in the third quarter of the year, primarily from crop. As our loss ratio naturally increases, some of the increase will be offset by an improving expense ratio.

Overall, we expect our adjusted combined ratio to be in the mid to upper seventies for the year. Continuing to show consistent and profitable earnings growth. With that, I’d like to ask the operator to open the line for questions. Operator?

Paul Newsome: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. The participants using speaker equipment may need to pick up the handset before pressing the star keys. One moment please while we poll for a question. Our first question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.

Chris Uchida: Congratulations on the quarter. Just maybe almost a modeling question. You talked about the reinsurance expectations. Just to be clear, in my mind, is this you actually assuming some improvement in pricing for reinsurance over the course of the year, or are you using sort of a steady-state view of reinsurance in the guidance?

Mac Armstrong: Hey, Paul. Yeah, thanks. Good question. So the way we’ve built the guidance range is it’s plus or minus zero to 5%. So if the lower end of the guidance would apply to a flat renewal and the high end of the guidance would be plus or minus 5% down. You know, we did have some excess of loss renew favorably for us down 15% at 1/1. And that also was the equivalent reduction on a commercial earthquake quota share. But, you know, while the market is taking stock of the wildfire exposure, we felt it was prudent to be a bit conservative and not assume that the rate decline would be as meaningful as what we saw at 1/1. And furthermore, you know, we’ve got close to $3 billion renewing at the first of June versus, you know, closer to $400 million or a tenth of that that renewed via the quarter share or excess of loss at 1/1.

Paul Newsome: As a local in California, do you have any thoughts on how this whole thing might shake out, and wondering if you think there are some opportunities that might happen for Palomar as that market seems quite disrupted?

Mac Armstrong: Yes, Paul. Thanks for that question. Yes, it is a disruptive market. I think, you know, speaking to the residential side, you’re gonna continue to see California become increasingly E&S and not just in the high-value segment, but in what had been traditionally more standard. You know, with respect to Palomar and opportunities in E&S from this disruption, I would say it’s gonna be consistent with kind of the third strategic imperative of ’25 as just knowing what we like and growing where we want. So we think there’ll be opportunity, potentially in residential earthquake driven mostly by the continued reduction of CEA participating insurers’ exposure. And then potentially more in the short and intermediate term, heightened awareness caused by the event.

And then, commercially, you know, I think we’re probably will see some opportunities in builders risk both, like, in high-value residential builders risk, and other commercial group builders risk kind of make mid-market-size opportunities. But it’s not an instance where you will see us go into homeowners or start writing traditional commercial multi-peril. You know, we’ll stick to our knitting and find pockets of dislocation that will be there in California in our core franchises.

Paul Newsome: Appreciate the help as always.

Peter Knudsen: Thanks, Paul. Thank you. Our next question comes from the line of Peter Knudsen with Evercore ISI. Please proceed with your question.

Peter Knudsen: Hi. Good afternoon. Thanks for taking my question. On the expectations for 6/1, I was wondering if you could tell us a little bit more about how that feeds into the outlook. I know you just discussed there’s some potential conservatism following, you know, the down 15 you guys saw at 1/1. And so I’m just hoping you could help me think about how much your outlook is levered to the 6/1 pricing assumption, e.g., you know, how much could this outlook change should 6/1 pricing come in materially better?

Mac Armstrong: Yeah. I mean, I think excess of loss reinsurance is our largest expense. And so if it comes in below 5%, like, it will not be inconsequential. Now remember, it’s seven months of the year that will be impacted by it. But, and we are also buying more excess loss limits to support our growth. But that would certainly be a boon to the results if it comes in below 5%. You know, the one thing we’re looking at is post the wildfires the activity in the cap bond market, in particular, secondary pricing of our own bonds, and some recent issuances. And, you know, they are still trending more like 1/1. But as I said just a moment ago, we’ve got, you know, close to $3 billion of limit that is renewing or going to be bought. So we would rather, you know, over deliver, under promise. But, Chris, I don’t know if you wanna offer just some color around that?

Chris Uchida: Just to get a little more detail, we provided this before, but at the 6/1/24 renewal, our total excess of loss spend or cost of risk transfer was about $262 million. As Mac mentioned, we will obviously be increasing that because we buy for growth, and we generally, we only buy one time a year. So when we buy at 6/1/25, we’re buying for another twelve months or think about that in your considerations. But mathematically, if you wanna think about it and look at it, you can look at that $262 million that we spent last year, do call it some sort of 5% savings on that. And even with the growth, that would probably be a low end of what the potential savings would be and apply that to the seven months of the year or remainder of 2025.

Peter Knudsen: Yeah. Great. Okay. Thank you. That’s really helpful. And then, for my follow-up question around top-line growth, I’m wondering if you could talk about, you know, how elastic demand for earthquake insurance is to homeowners pricing, you know, should we expect a headwind to earthquake growth given presumably large homeowners increases in California following the fires? And any other commentary you have on future growth in twenty-five would be helpful. Thank you.

Mac Armstrong: Sure, Peter. So I think as it relates to earthquake, good question. You know, the residential earthquake market is still very underpenetrated in California. So that’s why you see like we have, at the start of the year, an uptick in new business sales because of heightened awareness. I think we are watching the impact of rising homeowners costs. January, we are in line, if not slightly above the trailing eighteen-month average. So we haven’t seen it manifest itself yet. I think the one thing that will counter potentially the increasing cost to carry a home is just going to be the number of nonrenewed homeowners policies that are inside the CEA. You know, you look at the CEA’s participating share base, it’s State Farm, it’s USAA.

They constitute in totality probably 65% of the market. And so if they are just following the logic of what they are permitted to do, nonrenewing 10% of their book, that’s a lot of policies that we have the chance to compete on in the residential earthquake market. So, again, we think that affords us a decent ability to maintain, you know, high-teens growth in Quake. Also, worth reiterating, you know, that while we have high eighties in policy retention, you do have an inflation guard of 10%, which is basically, you know, a cushion for the rising cost of materials, plus a slight price increase. So that gives us a bit of conviction on sustaining that high-teens growth rate as well.

Peter Knudsen: And then, I guess, just your other question, I think it’s just one thing I would highlight, just overall growth. You know, we have a great portfolio of specialty market products now. And, front end obviously has been the laggard. And if you just look at the growth in the fourth quarter, if you take fronting out, it was 45%. And earthquake was the low end of 20. Everything else was above that. So we feel good about our growth prospects in twenty-five, and, you know, even with the headwind that we’re seeing on the fronting franchise. Generally speaking.

Mark Hughes: Our next question comes from the line of Mark Hughes with Truist Securities. Please proceed with your question.

Mark Hughes: Yeah. Thank you. Good afternoon. Chris, on the margin earned earned growth, I think you suggest that’ll keep moving up until you buy the new excess of loss. And then that’ll step down in the third quarter. So 39% this quarter should step up the next two and then drop down to kind of what range would you say in three Q for this year?

Chris Uchida: Hey, Mark. Thanks. Great question. Yeah. So it was 39% for Q4. Like you said, I would expect it to move up a small amount in Q1, and the Q1 or Q2 will kind of represent the high point. Q2 might be a little bit flatter to Q1, so I’d probably say something in the, you know, 40 to 41 range for Q1 and something maybe a little bit higher than that in Q2. Q2 will have the first full month of XOL. We are still expecting strong earthquake growth, so we do expect to buy more excess of loss reinsurance to cover that, which will get one month of that expense, so I think that’ll probably flatten out that ratio a little bit. The one thing or the one new dynamic you’re gonna see a little bit more of in Q3 is really gonna be driven by the crop and how much we’re gonna participate there.

This year, we were 5% participants. For 2025, we are gonna be 30% participants. So that shift will be relatively dynamic in that premium ratio. Right? It’s going to push, obviously, the dollars up, but it’s going to continue to push that ratio down. Right? There’s growth there, and then there’s still a factor where we’re still ceding off 70% of that business. So that’s gonna push that ratio down. The other impact of that is it’s going to impact the combined ratio for that quarter as well. Right? The crop business, while very stable, does have a little bit of a higher loss ratio to it. So the loss ratio for Q3 will also be a little bit higher. There will be some savings on the expense ratio side. Right? That higher net earned premium will lower the other underwriting expense ratio and also the acquisition expense ratio.

So, all in, I still expect the higher loss ratio and then, overall, just a higher combined ratio in the third quarter because of that dynamic with excess of loss and with the crop participation. But, like you said, better premium ratio, low point in Q3. It’s probably gonna be in the low thirties again, but then we’ll start moving up from there in Q4 of this year. So make sure Mark get all of Houston.

Mark Hughes: Yeah. So from low forties in Q1, Q2, and back in the low thirties. I would say maybe low to mid-thirties. For Q3.

Chris Uchida: I would probably consider it with low low thirties. I think that dynamic that you’re gonna see in crops is gonna be gonna move a lot. So, but overall, you know, and this is where I think about it for average for the year. I would still expect high thirties for the year. It’s just that Q3 is gonna stand out and look a little more seasonal with all that or not all, but the majority of the crop written and earned premium coming in that quarter. And as you’re aware, a lot of it is actual policies are actually written in March of the year, but because of the acreage reports not coming in until June, July, we will not recognize that written or written premium until the third quarter. And so that’s why that dynamic is in play.

Mark Hughes: On the commercial quake, are you seeing it sounds like prices are going down. Are you seeing appetite from kind of, you know, carriers that just do a lot of property willing to just take more exposure to quake? Is that one of the dynamics here, or is it just prices going down and Quake is getting caught up on that in commercial property.

Mac Armstrong: Mark. Yeah. That’s a good question. I would say that we have seen the all-risk market come back into kind of large layered and shared commercial earthquake. That has not been as pronounced on the small commercial quake side. And so it’s still an attractive market when you look at the underlying profitability, whether it’s the AAL pre AAL to premium metrics, the PML to premium metrics, and so there’s frankly a little bit of slack that can be given there. But it’s not one where, you know, rates are being precipitously declined. It’s more, you know, kind of, again, high single digits, and it’s more pronounced in large layered and shared accounts. John, anything you want to add?

Jon Christensen: Yeah. You know, I agree. And while certain segments of the commercial earthquake market are accommodating some rate decreases, we’re still seeing really strong integrity in the terms and conditions associated with the forms. Of that commercial earthquake product. So it is not a kind of across-the-board dynamic. And, you know, happy to report that the forms and coverages are holding up.

Mark Hughes: If I might ask one question, Mac, if you take a step back and you think about the strong growth you’re anticipating for 2025, obviously, a nice inflection. You were three-year Palomar 2x, certainly accelerated the initial five-year guidance for this year, what is working so well? What in the model that you feel comfortable giving that kind of guidance. If you had to pick, I mean, you’ve talked about ten things that are working really well. But if you have to take a step back and say, oh, this is where it’s really clicking for us, could you talk to that?

Mac Armstrong: Yeah. Sure. I think it’s a few things. You’re absolutely right. It’s across the portfolio. And it starts with the earthquake. And especially in a property cat reinsurance market that is flat to slightly down, that provides scale, and we’re also continuing to grow. You’re getting margin improvement there. You know, we made a call in 2023 in a very hard property cap reinsurance market to lean in and grow and increase our share, and I think now we’ll see reap the fruit of our labor there. Secondly, you know, on the other side of the property book, we have had considerable rate increases and considerable, enhancements to underwriting, while reducing the volatile exposure from Continental Hurricane, for instance. And so I think what we’re left with in the other property franchise is a fast-growing book of consistent performing non or limited exposed business like Builders Risk in excess national property.

And then amplifying that is as these books have gotten seasoned, we’re taking on a little bit more of a risk on a net basis. So I think those are two big contributors on the property side. The casualty side is growing nicely. You know, we’re not touching our reserves. We’re growing those reserve base considerably while, you know, not seeing a large number of claims come into the fold and really being heavily weighted to IVNR when you look at the total ultimate. So there, it’s good growth in conservative underwriting and a modest risk participation that’s being kind of just a steady contributor. Crop is the other one that, you know, as they that gives us a little bit of conviction based on the historical results and based on our ability to risk select that if we take more risk going from five to call it, thirty, that does afford, you know, some operating leverage and scale there too.

So it’s really across the portfolio, but I say you’re probably most levered on the property side, and then you’re taking a little bit more risk in some of these lines getting seasoned.

Andrew Anderson: Appreciate that. Thank you. Thank you. Next question comes from the line of Andrew Anderson with Jefferies. Please proceed with your question.

Andrew Anderson: Hey, good morning. The eight to twelve cat guide for the year, I think is this is the first year that you’ve given a full-year CAT guide cube, let’s think about how you arrived at that estimate.

Chris Uchida: Yeah. No. Thanks, Andrew. Good question. So the eight to twelve is a new metric like you pointed out. Excuse me. We felt it was important to include that as we continue to grow and get more comfort about how we’ve been managing the book. When you look at our portfolio of business, we’ve really done a great job of making underwriting changes to hopefully minimize the exposure we have to US catastrophes. And so when you look at our AAL and compared to where we were a couple of years ago, that has continued to shrink. We continue to make more changes to that throughout 2024. So we felt comfortable giving a number that was a little bit less than what we had incurred for 2024, but we feel in the range of everything that we’ve done with the book, a good number to provide.

Mac Armstrong: The one thing I’d point out, so that, let’s call it eight to twelve million probably about a one to two points of loss ratio for the year. We still continue to budget for mini cats or smaller PCS events in our portfolio. Those could be SCS events. Those could be small flood events. Those probably still about two to three points of loss ratio for the year. So all in, we’re probably talking, you know, three to four three to five points of minicats and cats in our overall loss ratio for the year. So all those factors come together as kind of how we put together an eight to twelve million dollar number for the year as we look at our cat losses and think that it’s a good estimate. We think we’ve done a lot to help shape the portfolio so that we can achieve that. And we think that the book has been performing well and within that range.

Andrew Anderson: I think just to give a little bit of anecdotal support to this, you know, our wind continental hurricane two hundred fifty year PML is now gonna be closer to $80 million with the predominance of that coming from our builders risk book as opposed to all risk property. And our builders risk book compared to modeled estimates has significantly outperformed. For instance, in Milton, The model losses were a few million dollars. We don’t have any claims. So it gives us even more confidence based on the complexion of the AAL and modeled estimate loss. That our cat load is handled.

Andrew Anderson: Thank you for the detailed answer there. On fronting, I don’t know if you could maybe help us frame 25 if perhaps there’s some new programs coming online or kind of steady state as you exit 24 and maybe this is a single-digit decline in 25. What is a good way to think about fronting?

Mac Armstrong: Yeah. I mean, I think it’s gonna be disproportionately impacted for the next two quarters by the loss of the Omaha national deal, and then it’s probably flattish to slightly up on a same-store basis. We are we have a pipeline. But, candidly, Andrew, like, if you would look at across our four portfolio and where we’re allocating our capital towards, it’s cropped its quake, its the other property and certainly now Surety and the casualty book. So it’s gonna be a bit of a laggard for the year. Thank you.

Meyer Shields: Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question.

Meyer Shields: Great. Thanks so much. Guess this question is on Crop. Is there a sense that you can communicate in terms of where you’ll be exposed, which state? Which quantities?

Jon Christensen: Yeah. Hey, Meyer. It’s Jon Christensen. We are if you think about kind of the in the crop world, you think of group one and group two states. Group one is kind of the core corn and soybean producers in the upper Midwest. We run a lot around those states. And with every year, you know, going into this year, we expect to write more in those kind of core upper Midwest states where you see a lot of corn and soybeans. And so I would not necessarily say our footprint is you know, dramatically different than where you’d see a lot of corn and soybean production. So it ends up being in the Midwest. As well as the states around those core upper Midwest states, where you will not see exposure on the West Coast, you will not see exposure on the East Coast. Predominantly down the center of the country.

Meyer Shields: Okay. Perfect. That helps a lot. Is the reduced reinsurance that you’re expecting for crop this year less government reinsurance or less private reinsurance?

Jon Christensen: That is we are reducing the quota share to the private reinsurance market. And so that’s what the government interaction will be roughly the same in total. In terms of what we seat to the government through the SRA, the standard reinsurance agreement. Where we are taking greater share is after that. So we’re taking greater share from the private market. And we are now moving to a combination of quota share and stop loss. And that structure of having a combination of quota share and stop loss would be fairly durable as we continue to grow this business. And so while the complexion may slightly change in terms of the risk participation, I would expect for the foreseeable future, there’ll be a combination of quota share and stop loss.

Meyer Shields: Okay. Great. That’s helpful. And then final question, I guess, for Mac. I understand that you’ve got the inflation guard in residential earthquake. Is there anything you could do now so that you can respond faster if tariffs have a bigger and more sudden impact than normal inflation?

Mac Armstrong: Yeah. Yeah. As well. We certainly can modify the inflation guards because they are underwriting rules, so they are not required to be approved by the Department of Insurance, in which any state which we’re operating, so we constantly look at the under and we do as we look at our portfolio from a reinsurance portfolio management standpoint, we look at the ITV and the estimated replacement cost. So we can bump up inflation guards. And in fact, it went to ten from five, you know, two, three years ago when inflation started to rear its head.

Meyer Shields: Is there room for an inflation guard on the commercial earthquake?

Mac Armstrong: I mean, it’s more it’s not as automated from an underwriting standpoint. So we are constantly looking at ITV at every renewal and doing an updated valuation. So yes. It’s just not an underwriting rule that is processed when the policy is automatically up for renewal.

Meyer Shields: Okay. Perfect. Thank you so much.

Pablo Singzon: Thank you, Mary. Thank you. And as a reminder, if anyone has any questions, you may press star one on your telephone keypad to join the queue. Our next question comes from the line of Pablo Singzon with JPMorgan. Please proceed with your question.

Pablo Singzon: Hi. Thank you. Mac, in thinking about the incremental limit that you might buy as part of the June XOL renewal. Would it be fair to assume growth that is consistent with the mid to high teens growth you expect for earthquake?

Mac Armstrong: Yeah, Pablo. That’s correct.

Pablo Singzon: Okay. Perfect. And second question. So casualty in the marine are, you know, clearly still ramping up. And then, actually, specifically, I think premiums more than doubled from 2024. Can you provide some perspective on the quantum and length of time you expect excess growth in these lines to last just given market conditions and what you’re doing internally in the company?

Mac Armstrong: Yeah. So I what I would say is, you know, the inland marine and other property, you’re gonna have certain segments that are gonna be nice continual growth drivers. That will probably be high twenties and thirties like Hawaiian hurricane. Where you have policies that are renewing up 22% to 25% and are with an inflation guard, just for recent rate activity and rates rate approval. Within the circumstance of builders risk, we continue to expand our geographic footprint, similarly what we’re doing in excess national property. But, at the same time, there are some businesses that are decreasing like the commercial all risk. So I would say that product is probably gonna grow faster than Quake, but not disproportionately so.

Casualty, you know, we just continue to we we’ve made big pushes in hiring over the course of twenty-four whether it be in the environmental practice, certainly in E and S, CAS, with David Zapier growing. So that’s gonna be after crop, you know, the fastest grower in the product suite and because a lot of it is you’ve got talented underwriters that have come over, and they have books of business. They have long-standing track records. They have reinsurance support, so we expect to have, you know, considerable submission flow.

Pablo Singzon: Okay. That makes sense. And last one for me maybe for Chris. Putting aside the specific impact on, you know, ceder premiums combined ratio and, I suppose, holding premium dollars constant, much incremental dollar and writing income do you expect from the crop book as you move your participation from five to thirty percent?

Chris Uchida: Yeah. We haven’t provided specific guidance on a line of business basis, but I think that’s a business that operates, let’s call it, in the low nineties type combined ratio. You look at that, and Mac said that we could probably get to potentially two hundred million. I’d say most of that is going to be recognized in 2025. Some of that will flow between years. Some will go into a little bit of 26, but I would say, let’s call it 90% of that would probably be recognized in 2025. So using those factors are thirty percent participation, I think you kind of do a little bit of math there and come up with a range for that contribution. A little bit of maybe if we’re below that, above that, where we go, but overall, Mac talked about being very committed to the cross-selling business. We think that could be a half billion at some point in time in the intermediate future in that three to five-year timeframe. So we’re excited about the prospects there.

Pablo Singzon: Yep. And what’s the give-up on the ceding or fronting side there, like, mid-single digits? Right? So you essentially earn more underwriting income, but then you give up I don’t know, five to seven points in seeding. Is that the correct math?

Chris Uchida: Yeah. That’s well, good. Yeah. I was gonna say it definitely has a lower it looks call it override or fronting fee associated with it than typical lines, it’s because of the low margin nature to it. So I would say you’re probably getting from a margin standpoint, if that’s, like, you know, low single digits, two and a half to three percent, you’re probably getting a little hopefully triple that when you take the underwriting risk. In a good year or a normal year, I should say.

Pablo Singzon: Yep. Thank you. That’s clear.

Operator: Thank you. And we have reached the end of the question and answer session.

Mac Armstrong: I’ll turn the floor back to Mr. Mac Armstrong for closing remarks.

Mac Armstrong: Alright. Terrific. Well, thanks, everyone. Just to wrap up, we hope you got the sense that we are really building a unique specialty insurance franchise. You know, our record results in 2024, we feel, are just the beginning. The growth vectors we have are myriad, and the core earthquake and property business continue to profitably grow. You know, the exceptional talent we’ve added over the last eighteen months affords us even more confidence that we will execute in 2025. So I couldn’t be more excited about the future holds for the company. I wanna thank our team and employees for all that they do and continue to do.

Chris Uchida: And then lastly, we hope to see you all March 20th in New York at our 2025 Investor Day. So thanks so much, and hopefully, we’ll see you in the big city. Take care.

Operator: Thank you. And ladies and gentlemen, this concludes today’s conference. You may disconnect your lines. Thank you for your participation.

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