Palomar Holdings, Inc.

Good morning and welcome to the Palomar Holdings Inc. First Quarter 2021 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 this call over to Mr. Chris Fujita, Chief Financial Officer. Please go ahead, sir. Thank you. You may begin.

Thank you, Operator, and good morning, everyone. We appreciate your participation in our first quarter 2021 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 May 13th, 2021. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of 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 and implied by such statements, including, but not limited to, risk and uncertainties related to the COVID-19 pandemic. Such risks and other factors are set forth in our quarterly report on Form 10-Q, followed with the Securities 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, everyone. Today, I'll speak to our first quarter results at a high level and then discuss ongoing efforts to expand our business and drive profitable growth. From there, I'll turn the call back to Chris to discuss our financial results in more detail. We had a strong first quarter. a quarter that generated solid financial results, and a quarter that puts us in a position to reap the long-term benefits of several key initiatives. Highlights of Q1 I'd like to emphasize are as follows. First, our strong growth trajectory not only continued but actually accelerated as our growth rate and premium increased by 45% during the quarter. We grew broadly across both new and existing offerings, including residential commercial earthquake, Hawaii hurricane, and in the marine. Second, Our E&S carrier, PESIC, continues to be an important driver of growth for existing products and diversification in the new lines of business. PESIC grew rapidly, approaching $100 million in annualized gross written premiums in just its second full quarter of operation. Third, we continue to refine our underwriting and risk transfer strategy while benefiting from sustained attractive pricing environment and dislocation in selected specialty insurance markets. We've spoken to this in great length on previous calls, but I'd like to emphasize that we are committed to the ongoing improvement of Palomar across all dimensions of our business and believe that our actions and results this quarter reflect this commitment and capability. Fourth, we remain focused on providing visibility into our earnings base and growth. I am very pleased that the $25 million of aggregate excess of loss reinsurance limit, which we refer to as the aggregate cover, that was secured in the first quarter will protect our balance sheet. Moreover, it establishes a floor for our earnings and return on equity. The aggregate cover is an actionable example of how we are proactively safeguarding our business and our results. Finally, our business model and strategy are architected to support continued profitable growth by addressing several attractive tailwinds and remain confident that Palomar is still in the early stages of executing upon our long-term plan and the associated market opportunities. The launch of two new products and three carrier partnerships this quarter are prime examples of this dynamic. Turning to our results in more detail, as previously mentioned, we delivered strong growth in premium growth, 45% in the first quarter. Overall, earthquake premium grew 44%, while non-earthquake premium increased 46%. Our commercial earthquake products grew up 96% in the quarter, driven by rate and distribution partners accessing PESIC. Our residential earthquake products grew 25%, Other strong contributors were Inland Marine and Hawaii Hurricane with 315% and 128% year-over-year growth, respectively. We've seen very good conversion rates on the book of business in Hawaii we acquired in late 2020. Newer products like our real estate errors and omissions program continue to gain traction and scale. Our commercial lines premiumed under 58% year-over-year during the quarter, a function of PESIX launch, new distribution sources, expanded geographic footprint, incremental product traction, and sustained pricing increases. This growth is more impressive when factoring in the runoff of our admitted all-risk policies, nearly a 7% offset to our premium growth rate. The average rate increase on renewals during the first quarter for our commercial earthquake policies was 18% versus 15% in the fourth quarter of 2020, demonstrating an ongoing hard market. We're seeing the strongest rate increases in the small to mid-sized accounts, with larger accounts showing some deceleration after an earlier dislocation. Our other commercial lines of business are also seeing state rate increases. In certain cases, like small account single-shot or large TID wood-framed builders' risk accounts, increases are well north of 20%. We also continue to use terms and conditions, as well as risk attachment points, to optimize our risk-adjusted returns. This has been most successful in our E&S All-Risk Program. Our premium retention exceeded 90% across our book during the first quarter, excluding the runoff-admitted all-risk business. Most notably, a residential earthquake, commercial earthquake, and Hawaii hurricane experienced retention rates above 93%. The continued high retention rates are a testament to the unique value our products offer insureds and distribution partners. Turning to our E&S company, PESIC, our conviction remains as strong as ever about the added dimension it will provide our business. EMS premiums in the quarter were $23.8 million, which constitutes 16% sequential growth from the fourth quarter of 2020. This considerable growth was driven by a combination of existing property lines of business, such as commercial earthquake, and new lines, such as layered and shared national property. In the quarter, we launched two new products, excess liability and national builder's risk, that while not meaningful in gross rate and premium contribution in the quarter, have meaningful prospects. The excess liability program is PESIC's first casualty line of business. The builder's risk product follows our tested playbook of launching a line of business with an initial focus on regional small commercial accounts and then expanding into national large account business with a well-respected partner. Both products are buttressed by strong quota share reinsurance programs to enable a successful and conservative launch. PESIC provides us with the flexibility to enter new market segments in an expedient fashion and serves as the logical extension of our commercial property franchise. Over the long term, we can see our E&S carrier approaching the size of our admitted carrier, as well as eventually housing the majority of our commercial business, given its superior ability to address changing market conditions. Insurance carrier partnerships continue to be a key growth driver for the company. During the first quarter, we launched a partnership with Travelers involving the marketing of Palomar's residential earthquake products to Travelers agency partners in Missouri, Indiana, and Utah. This partnership further expands our retail distribution footprint in these states and will help diversify our earthquake business. Separately, we consummated another earthquake partnership in the quarter that involved the assumption of an existing book of business via a reinsurance transaction. This new partnership provided a one-time transfer of $3.6 million of unearned premiums an inception as we stepped into the risk. We believe these partnerships deliver sustainable long-term growth and serve as an important point of how Palomar can collaborate and add value to our partners. As it pertains to reinsurance matters, there are two successful initiatives in the quarters worth highlighting. The aggregate cover in our Torrey Pines Re-Catastrophe bond specifically. The aforementioned $25 million of aggregate excess of loss reinsurance limit, effective April 1st of this year, will provide supplemental coverage against losses from multiple severe catastrophe events, including but not limited to earthquakes, hurricanes, convective storms, and floods. The aggregate coverage triggers after $30 million of pre-tax losses from qualifying events, a threshold that could be reached through full retention losses or a number of smaller events. We believe this aggregate cover further enhances visibility into our performance by providing a floor on our earnings and return on equity. At the end of the quarter, we successfully issued a $400 million 144A catastrophe bond. Torrey Pines RE is a multi-year reinsurance agreement whereby Palomar is provided with indemnity-based reinsurance covering earthquake events. It fits seamlessly into our existing traditional CAT reinsurance program. We are pleased to upsize the offering from $300 million to $400 million at compelling pricing and believe the success of the issuance reflects investor confidence in our ability to underwrite residential and commercial earthquake business effectively. The multi-year protection strengthens our robust reinsurance program, broadens our already extensive panel of reinsurance partners, and benefits policyholders, distribution, and investors by providing further transparency into our risk transfer program. As we speak here today, we are sensibly complete with our 6-1 reinsurance renewal. We are pleased with the outcome and greatly appreciate our reinsurance support, and moreover, their acceptance of the underwriting actions taken in 2020. We intend to release an 8 with more detail once all allocations, terms, and conditions are finalized. It is worth noting the cost of the 6 reinsurance renewal is reflected in our revised 2021 guidance. I want to take the opportunity to briefly touch on winter storm area. First, our thoughts remain with all those impacted by the storm, and we'd like to reiterate our commitment to supporting our affected policyholders. While Chris will provide more detail regarding the event and his remarks, I will reiterate that due to our conservative and thoughtfully designed reinsurance structure for events of this nature, our net loss from this event is approximately $1 million, in line with what was signaled on our Q4 2020 earnings call. We are hyper-focused on protecting our balance sheet from both shock attritional losses and catastrophe losses. URI proved to be the rare event where both risk transfer strategies were used simultaneously. I will also point out that Gary did not consume any of our Ag Recover. Finally, in late March, our board approved the share repurchase program effective March 31 of this year. The plan authorizes the repurchase of up to 40 million of our outstanding shares over a two-year period. This program provides the company with the flexibility to opportunistically deploy our capital in an accretive fashion when we believe our shares are underpriced and ultimately drive long-term value creation for our shareholders. That said, this program is opportunistic and does not diminish our growth strategy or our missions. We remain as energized as ever about the long-term opportunity ahead of us to bring unique products to market, to serve a growing footprint of customers, partners, and team members, and to deliver attractive results to our investors for years to come. With the strong start to the year, we are pleased to increase our adjusted net income guidance. For the fall year 2021, we believe that our adjusted net income will be between $64 and $69 million. Additionally, We believe that with our aggregate cover in place, we have established a full of approximately 10.5% adjusted return on equity and $41 million for adjusted net income for the year. With that, I'll turn the call over to Chris to discuss our results in more detail.