Palomar Holdings, Inc.

Good morning and welcome to the Palomar Holdings Inc. Third 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 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 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 November 11, 2021. 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 related to the COVID-19 pandemic. 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 these 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 gap 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 third quarter results, as well as our strategic initiatives and efforts to drive profitable growth for the remainder of 2021 and beyond. From there, I'll turn the call back to Chris to review our financial results in more detail. We are pleased with the sustained premium growth in the numerous strategic initiatives accomplished during the third quarter. Highlights of the quarter include strong written premium growth for yet another quarter with gross written premiums increasing by 48%. Growth across the enterprise was fueled by strong performance among our core products, continued traction of new products and partnerships, and entry into new lines of business and markets. Notable premium growth occurred in our residential commercial earthquake flood, inland marine, and Hawaiian hurricane products. We also saw continued success with our nascent E&S company, Palomar Excess and Surplus Insurance Company, PESIC. PESIC grew its gross written premium 362% year-over-year and 22% sequentially from the second quarter. Second, we further expanded our product offering. Specifically, we launched an E&S residential flood product in a handful of states to complement our admitted offering. And in September, we announced our entrance in the fronting sector of the U.S. insurance market. Palomar Front offers many advantages to Palomar, including access points into attractive lines of business, limited incremental investment, and new sources of fee income. It also enables us to quickly enter new markets as a non-risk-bearing insurance entity with the flexibility to participate in the risk over time. Third, we maintain our commitment to the long-term growth prospects of Palomar through incremental investments in technology and, more importantly, talent. We successfully recruited experienced professionals across the enterprise, including subject matter experts in new and adjacent casualty markets and dynamic additions to our reinsurance and technology departments. I will highlight a few of these key hires later in my remarks. Lastly, while we experienced pre-tax CAT losses of $17.5 million net of reinsurance in the quarter as a result of Hurricane Ida and Nicholas and the PG&E excess liability loss, we take solace in the fact that approximately 61% of the gross losses from these events came from our discontinued admitted all-risk and Louisiana specialty homeowners lines. The residual hurricane loss from continuing operations was modest, well inside of our retention at close to four points of incremental loss ratio on an annualized basis. While the PG&E loss had a catastrophe payback of less than one year, We constantly review our underwriting portfolio to ensure we are earning the appropriate risk-adjusted returns by product and geography, and the actions taken over the course of 2020 and 2021 not only positively impacted the quarter's results, but moreover put us in a very good position for 2022 and beyond. Turning to our results in more detail, highlights included year-over-year gross written premium growth to 48%, When adjusting for runoff discontinued operations, the growth was an even more impressive 66%. Overall, we saw continued momentum across all our lines of business. Our earthquake franchise grew 32% in a quarter, with commercial quake growing 52% and residential earthquake, our largest line of business, growing 24%. Our earthquake franchise continues to benefit from numerous tailwinds, notably California homeowners market dislocation, rate increases, inbound partnerships, and potential regulatory reforms. Additionally, our E&S operation delivered $41.4 million in premium, growing 362% year-over-year and 22% sequentially from the prior quarter. Other strong performers included Inland Marine, which grew at a staggering 343% year-over-year and is approaching an $80 million run rate, and Flood, which grew 49%. We are very excited by the prospects for our Flood products, as not only are we expanding our geographic footprint, appointing new producers, and entering into carrier partnerships, but there is also potential regulatory tailwinds driven by the NFIP's Risk Rating 2.0 program, a repricing exercise undertaken by FEMA. Shifting to market conditions, our strong growth not only speaks to the efficacy of our products, but also the continued dislocation in the specialty insurance market. The average rate increase on renewals for commercial earthquake policies was 9%, And for our E&S all-risk business, the average rate increase is 20%. Builders' risk and course of construction risk are seeing high teen rate increases in base rates that are more than double where they were in 2018. We remain confident that we will be able to maintain material rate increases throughout the remainder of the year and, frankly, into 2022. Separately, our premium retention, excluding discontinued operations, was 87% for the total portfolio in the quarter. again showcasing the unique value our products offer insurers and distribution partners. We continue to execute and make significant progress on extending our reach and product portfolio, striving to improve our underwriting results and visibility into our earnings. Newer products such as real estate E&O and high-value residential builders risk are tracking ahead of plan and demonstrate our ability to rapidly address opportunities in the market. Our nimble operating model enables us to quickly respond to changing market conditions and add new products and distribution partners to fuel our growth. Prime example is our Palomar Front initiative. Our team has already created a robust pipeline in a short period of time, and subsequent to quarter end, we executed two fronting deals with proven partners. Ultimately, we believe this business represents another opportunity to capitalize on changing market dynamics and dislocations while adhering to our focus on predictable and profitable growth. Turning to our team, we are proud to share several notable additions, including Ty Robin and Garrett Vanderkamp, who will be spearheading our expansion into the casualty market, and Chris Sabula, our new SVP of reinsurance. These seasoned professionals bring tremendous industry experience and expertise to Palomar's underwriting and reinsurance teams. Ty, Garrett, and Chris bring a wealth of knowledge and understanding to our already strong team, and are prime examples of Palomar's continued focus on investing in the long-term growth of the business. Expanding our team is critical to our success, and I'm thrilled that we can attract such experienced and talented professionals to the Palomar team. On a related note, I'd like to take a moment to thank my good friend and partner, Heath Fisher, who recently made the decision to resign from his role as president of Palomar to spend more time with his family. Since day one of Palomar, Heath has been instrumental in developing our strategy, building our team, and architecting our distinctive reinsurance program. Thanks in major part to Heath's efforts, we have a very strong and capable reinsurance team led by John Knutson and John Christensen, who will both continue to spearhead our efforts, but we will greatly miss Heath and plan to fully utilize his expertise prior to his departure in April. I am pleased to report that John Christensen, our current chief underwriting officer, will step into Heath's role as president in the second quarter. John was the third employee at Palomar, and similar to Heath, he has been instrumental in our success. He will ably fill Heath's big shoes. I'm also pleased to report that Robert Byerly, our SVP of Inland Marine, will become our CUO. Robert has an incredible underwriting background and is the architect of our highly successful Inland Marine department. Chris and I are thrilled to work side-by-side with John and Robert. Sustainability and responsible governments remain a key component of Palomar's strategy and operations. To that end, we recently launched our ESG portal on our corporate website, which details our ESG efforts and will act as a central repository for all of Palomar's ESG materials. As we move forward, this will continue to be an area of focus for us, and I look forward to updating you on future initiatives. Our strong top-line results and all the initiatives discussed on the call for considerable optimism for the future prospects of Palomar. That said, we also recognize the quarter-generated losses that push net income and ROE below target levels. I mentioned earlier that close to 61% of the gross CAT losses in the quarter were from discontinued lines of business. I will add those same lines contributed 34% of the gross attritional loss in the quarter. So when looking at the losses from a steady-state basis, the attritional loss ratio is closer to 15%. The hurricane losses from the continuing lines of business, namely E&S property, were well below our attention and close to four points of loss ratio based on an annualized earned premium. As for the excess liability policy with PG&E, it had a $735 million attachment point and a 75% rate online. This price point results in a full limit loss payback of less than one year, and this is evidenced by the cumulative profitability incurred in the two treaty periods we have been on risk. When factoring in the acceleration of the earning of premium, the loss reduces net income by 2.3 million in the quarter. While we don't enjoy the noise caused by losses in the quarter, I'll continue to reiterate the impact of similar types of events will have a far lesser impact on a go-forward basis. I believe it is important to point out that the runoff of the discontinued operations will be complete by the end of the fourth quarter. This effort, along with Palomar Front and the aggregate reinsurance cover, are prime examples of the actions we have taken and continue to take to reduce volatility in our book of business and earnings base. At this point, I'd like to touch on our guidance before turning the call back to Chris. We are advising our 2021 expectations and believe our adjusted net income in the fourth quarter will be between $17 and $18.5 million and $51.2 million and $52.7 million for the full year. The full year estimate equates to an adjusted ROE of 13.7% at the midpoint of the range. This range factors in additional investments in talent, systems, infrastructure, and reinsurance we have made or expect to make for the remainder of the year. As a reminder, with our aggregate cover in place, we have established a floor of approximately 11% for adjusted return on equity. With that, I'll turn the call over to Chris to discuss our results in more detail.