Palomar Holdings, Inc.

Good morning, and welcome to the Palomar Holdings, Inc. Third Quarter 2020 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 with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate your participation in our third quarter 2020 earnings call. With me here today is Mac Armstrong, our chairman, chief executive officer, and founder. As a reminder, a telephonic replay of this call will be available on the investor relations section of our website through 1159 p.m. Eastern Time on November 18, 2020. 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, including but not limited to risks and uncertainties relating to the COVID-19 pandemic. Such risks and other factors are set forth in our quarterly report on Form 10-Q that will be 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 the 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, everyone. I hope those of you with us today continue to be safe and healthy. Today, I'll speak to our third quarter results at a high level and speak to our operations before turning the call over to Chris to discuss the financial results in more detail. For the third quarter, end of September 30th, 2020, we experienced several notable achievements. First, the momentum of our business remained strong, as evident in our year-over-year gross rate and premium growth at 55.4%. A figure that included meaningful growth across several product lines as we have increased our position as a specialty insurance leader. Second, Palomar Access and Surplus Insurance Company, or PESIC, our newly established surplus lines insurer, launched in August and bound policies across several lines of business during the third quarter. We believe PESIC will only enhance our ability to pursue profitable growth and respond favorably to a further hardening rate environment. Third, during the quarter, we continue to expand our distribution network, executing several new partnerships in lines like residential earthquake and flood, and roll out new products to existing and new distribution partners. Fourth, we sustained our commitment to building a world-class team and grew our headcount by 10%. Among the key additions to our team, we welcomed Jason Sears, an experienced E&S casualty and programs insurance executive, as Senior Vice President of Programs to lead our program business as well as the scaling and diversification of PESIC. Lastly, and subsequent to quarter end, we formally launched our ESG Committee of the Board of Directors, which will not only help articulate and measure the company's values, but reinforce Palomar's reputation as a forward-thinking employer and partner. Turning the third quarter, our country experienced an unusual frequency of severe weather, from the Midwest derecho to an unprecedented windstorm season to the devastating wildfires in our home state of California. Palomar and our policyholders were impacted by the spate of hurricanes that made landfall in the United States including Hurricanes Hannah, Isaias, Laura, Sally, and Beta. I'm very proud of our team's rapid response as we work to help our policyholders and their communities recover from these damaging events. Our swift actions are best exemplified by the fact that at the time of this report, 87% of our specialty homeowners' claims from the aforementioned storms are closed or settled. Due in large part to the impact from losses associated with these events, During the third quarter, we reported a net loss of $15.7 million compared to net income of $7.5 million in the third quarter of 2019. This result is disappointing as it clouds the results of an otherwise strong quarter, more so for our lines of business not exposed to the Gulf of Mexico, approximately 80%. While we could go on about the incredibly low probability of the 2020 win season and how the hard market will allow us to take rate and recoup our losses, and that is something we intend to do, I want to discuss the improvements we have begun to execute. Palomar's culture is premised on continuous improvement, problem solving, and agility. It is also analytically driven. As such, we will apply the data we have gathered and lessons we have learned across our organization to enhance our underwriting, analytics, and risk transfer operations, and more overdrive consistency in results and predictability in earnings. As we learn and grow as a business, we will rigorously optimize our reinsurance program, product suite, and geographic mix in light of market opportunity, risk-adjusted return on capital, and payback analysis. With respect to Palmar's reinsurance program, we will look to implement new coverages that further protect the balance sheet and earnings stream from severe and frequent events. It is worth highlighting that Palmar secured incremental reinsurance coverage in October that preserved our $10 million per event retention through June 1st, 2021. As it pertains to underwriting and exposure management, in October we decided to exit commercial all-risk on an admitted basis in Alabama, Louisiana, and Mississippi, as well as specialty homeowners in Louisiana. Additionally, we are reducing our exposure to risk with a short proximity to the coast for commercial all-risk. These actions, among others, reflect our focus on remaining agile, preserving our ability to invest in our core markets and new initiatives like PESIC, and importantly, achieve the requisite payback from a catastrophe for Palomar, our investors, and our reinsurance partners. We feel the achievability of these measures are feasible in light of what we expect will be an incrementally harder insurance market. Operationally, we remain fairly insulated from COVID-19 and continue to believe the pandemic will not have a material impact on our profitability or growth. It is our belief that our exposure to business interruption remains negligible as our commercial property policies require a loss from physical damage to the property from the name peril and future virus exclusions. Turning to third quarter results, we experienced meaningful growth across several product lines as we expanded our position as a specialty insurance leader, driven specifically by our newer lines of business like Inland Marine, which experienced growth of 360% during the third quarter. Our builder's risk and motor truck cargo offerings continue to demonstrate strong traction and an encouraging market opportunity. Another major driver was our commercial earthquake business, which grew 115% compared to the prior year period. Commercial lines growth was a function of new distribution sources, expanded geographic footprint, incremental product traction, and most importantly, sustained pricing increases. Our third quarter commercial policy average rate increase on renewals was 14.1% versus 14.2 in the second quarter. With respect to our residential business, it is worth highlighting the growth of two products, flood and residential earthquake. Flood grew 50% year-over-year across 11 geographically diverse states, while residential earthquake grew 13% year-over-year across with a prior year comparable in the third quarter of 2019 that saw a large surge in new business following the Ridgecrest earthquakes in July of that year. During the third quarter, our book experienced premium retention rates of 90%, which increased from 88% achieved during the second quarter. Premium retention for our residential and commercial earthquake, Hawaii hurricane, and residential flood lines of businesses were all in excess of 92%. This continues to be a testament to the unique value our products offer insureds and distribution partners. Moving on to our newly launched ENS company, PESIC, we expect it will add an additional dimension of capability and growth for Palomar. As previously described, PESIC will also enable us to further leverage our analytically driven underwriting framework to write business on a national scale and to ensure certain risks that our admitted products cannot currently satisfy. For example, PESIC allows Palomar to compete in the layered and shared commercial property market, an area where there is currently a high level of market dislocation. In August, we entered into a new partnership with the Special Risk Underwriting Division of leading wholesaler Amwins to underwrite and produce layered and shared property business for PESIC. We certainly anticipate this partnership and PESIC on the whole will be a growth driver for 2021 and beyond. Expanding our distribution network remains a key priority and we are proud of the progress we made during the quarter. During the third quarter, our retail and wholesale active producers increased 6% sequentially from the second quarter. Carrier partnerships continue to be a differentiated channel for our business, and in the third quarter, we entered into multiple new partnerships, including another residential earthquake partnership motivated by the continued dislocation of the California homeowners market. Our flood business entered into a new partnership with Torrent Technologies, a flood insurance technology company and subsidiary of Marsh. The partnership will give Torrent's distribution access to our residential flood offering in the 11 states we currently write business. These relationships take time to develop, and we are proud to provide valuable solutions to other insurance carriers. Separately, we continue to execute our geographic expansion initiatives by growing the geographic footprint for our emitted carrier to 31 states across the nation. We are also excited to announce the launch of our new real estate errors and omissions product offering. This is a line of business that our team has extensive prior experience with, and we believe it will be a beneficial addition to our product suite. As we grow PESC in all of our business, we believe it is vital that we sustain investments, technology, analytics, and talent. I already mentioned the growth of our team in the addition of Jason Sears to spearhead the execution of our program and E&S efforts. The third quarter also included two developments within our existing leadership team that we believe reflect the ongoing evolution and focus of our business and strategy. In early August, John Christensen, our former Chief Operating Officer, took the role of Chief Underwriting Officer. In concert with his promotion, we subsequently promoted our Chief Technology Officer, Britt Morris, to assume the role of Chief Operating Officer. The vital role that technology plays across Palomar and BRIT's instrumental role in building out our technology team and platform made him a natural choice. We also expect to have BRIT's replacement of CTO in place by the end of the first quarter. Yesterday, we announced a renewal rights transaction with affiliates of Giovera Holdings, whereby Palomar will offer policies to all Giovera Hawaii residential hurricane policyholders upon renewal. This transaction will considerably increase our footprint in the state of Hawaii, a market we first entered into in 2015, and have actively looked to deepen our presence. Lastly, subsequent to quarter end, we formally launched our ESG and Diversity, Inclusion, Community Engagement and Equality, or DICE, committees, which will reaffirm and pursue our efforts and ongoing dedication to the environment, health and safety, corporate social responsibility, corporate governance, and sustainability. The ESG committee will meet on a quarterly basis, led by myself and board members Daryl Bradley and Martha Nateras. This committee will be responsible for holding the company and management accountable for our progress toward ESG goals, as established by Palomar Management and in consultation with our team members. We believe that diversity, equality, and inclusion yield greater organizational creativity and productivity, which helps us serve our customers and partners more effectively. Delivering on our diversity commitment returns greater value to our shareholders and ultimately makes a positive impact on the communities in which we do business. With that, I'll turn the call over to Chris to discuss our results in more detail.