Palomar Holdings, Inc.

Greetings and welcome to the Palomar Holdings Incorporated First Quarter 2022 Earnings Conference Call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference line will open for questions with instructions to follow at that time. As a reminder, this conference is being recorded. I would now like to turn a 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 first quarter 2022 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 12, 2022. 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 annual report on Form 10-K, 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. Good morning, everyone. Today, I'll provide a review of our strong first quarter results and an update on the progress achieved executing our near and long-term strategic initiatives. Simply put, it was a very good quarter for Palomar as our top line surged more than 60%. We earned $17.6 million of adjusted net income, inclusive of a $1.3 million realized and unrealized loss from our equity holdings, and generated an adjusted ROE of 18.1%. Obviously, Chris will review these results in more detail, but I wanted to cut the chase before I went into my remarks. When we began the year, we outlined four strategic priorities for 2022. One, generating strong premium growth. Two, monetizing the new investments made over the course of 2021. Three, the sustained delivery of consistent and predictable earnings. And four, scaling our organization. I'm quite happy to report that we made strong progress across all four initiatives during the quarter, and I'd like to spend a few minutes updating you on each. As it pertains to written premium growth, the first quarter is another stout example of our ability to sustain top-line growth. In the first quarter, gross written premiums increased 65% as compared to the first quarter of 2021, driven by continued strength in residential and commercial earthquake as well as in our E&S business, Palomar Excess and Surplus Insurance Company. Looking at our lines of business in more detail, I will start with our earthquake franchise. Our total earthquake book grew 24% in the first quarter, with commercial earthquake growing 18%, and residential earthquake, our largest line of business, growing 29%. Several factors drove the growth in the residential earthquake line, including but not limited to a new partnership with Progressive, the continued dislocation in the California homeowners market, and the California Earthquake Authority officially stating they are reducing their reinsurance purchase by the equivalent of $1 billion. These factors, along with our existing marketing efforts, led to record new business sales for residential earthquake in the first quarter. The partnership with Progressive is one I'm excited about, as it is a solution to provide Progressive homeowners policyholders outside of California with a comprehensive earthquake solution via an assumed reinsurance arrangement. We're thrilled to partner with Progressive and optimistic on the potential for this relationship. As it pertains to the CEA, We believe that continued uncertainty regarding their claims-paying capacity provides considerable room for continued strong growth in this important and profitable line of business. Beyond Earthquake, other product lines performing well in the first quarter include Inland Marine, which grew premiums 133% year-over-year and is now our fourth-largest line. Commercial All-Risk grew 37% year-over-year, with the large majority of the growth coming from rate increases as opposed to exposure. Flood premiums grew 31% year over year as the National Flood Insurance Program's risk rating 2.0 starts to influence market conditions. As previously discussed, the NFIP rating action will likely generate a material price increase at renewal, which we believe creates opportunity for Palomar to capture market share as we work through the year. As it pertains to our nascent casualty franchise, our real estate errors and omissions program is a standout as it continues to grow rapidly with year-over-year growth of 151%. Shifting to our E&S business, Palomar Excess and Surplus Insurance Company had another strong quarter, generating $41 million of gross written premium, representing 71% written premium growth year-over-year. Inclusive of our fronting business, the gross written premium was $67 million. PESX growth was primarily driven by its main products, namely commercial earthquake, national layer and share commercial property, and builder's risk. Our recently launched E&S products, including professional liability, excess liability, and contractor's liability, are beginning to ramp, and we expect them to be significant contributors to our growth. PESA continues to be an important growth driver for Palomar, and we believe that business can become 50% of our premiums over time. Our second 2022 strategic priority is monetizing the investments made over the last year or so in new products and businesses. Along these lines, I'm very pleased with the initial success of Palomar Front. Launched in September, Palomar Front achieved almost $30 million in gross written premiums in the first quarter, One of its initial success stories is a front-team program for an innovative cyber MGA and a world-class panel of reinsurers that has gained strong traction in the market and is taking advantage of the remarkably hard market pricing environment in the cyber market. On the whole, our front-team programs are performing well from an underwriting and collateral perspective, and we continue to believe that adding a fee-based revenue stream to our business will further fortify our earnings base. Given our strong start to the year, We remain confident in our goal of building the front-end business to 80 to 100 million of managed premiums this year. We're also pleased with the progress that our newly hired underwriters are making as they build their franchises in segments like general casualty, professional liability, and non-catastrophe-exposed excess property. While still in their early stages of formation, these businesses will be important growth drivers for Palomar in the year ahead. That said, our focus over the first half of 2022 is to thoughtfully build these businesses while having the necessary talent, infrastructure, and support to enable our underwriters to scale their franchises. During the quarter, considerable efforts were made in the procurement of quota share reinsurance, distribution network build out, and the development of systems, forms, and files. While the premium generated in the first quarter was modest, we encouraged with the quality of business bound. The third strategic priority is focusing on earnings predictability and reducing volatility in our results. While growth is certainly a priority, we are also laser-focused on growing profitably and properly managing the risk in our portfolio. Along these lines, we took three important steps during the first quarter to achieve this goal. First, we renewed our aggregate reinsurance program and, in the process, moved the floor on our adjusted ROE from 10% to 14%. We believe this program creates real value for our shareholders by essentially collaring the downside of our financial results. We successfully placed new quota shares for our new professional lines and capacity products. These quota shares allow us to walk before we run, as we conservatively build the books of business for these important new lines. They not only reduce our net limit exposed to an account and the impact of a shock loss on a nascent book, but also permit us to generate fee income. The architecture of the quota shares enables us to proceed cautiously, and if we write to a 90 combined ratio, generate half of the product's income from seating commissions and half from underwriting. further demonstration of our focus on fee income and earnings predictability. As an example, take a professional liability program where we assume 25% of the risk and seed out 75%. We will earn a 10-point margin on the 25% of risk that we underwrite, assuming a 90% combined ratio. We will then earn a 5% override in excess of our costs on the 75% of seeded premium. So the majority of our profits come from seeding commission. Third, we continue to reduce our continental wind exposure. Our non-Texas homeowners business is now officially in runoff, and we are not growing the exposure of our national layered and shared commercial property business. Our fourth strategic priority is scaling the organization. What makes our platform so attractive to new hires is that we can offer them industry-leading technology and infrastructure, combined with the wealth of talent and expertise that affords our new underwriters the opportunity to build a platform capable of delivering our products and services in the fastest, most efficient way possible. Competitive advantage is a strong selling point to experienced talent in our industry. Our insurance into casualty is being led by market experts with strong track records of success who saw Palomar as an attractive platform to build their business. We continue to bolster the analytical actuarial technology and operating expertise to support our growth. Key hires this quarter included Eric Kennett, VP of Analytics who formerly helped lead the property analytics team of a global reinsurance broker, and Ben Markowski, another actuarial fellow to augment our budding casualty franchise. As you can see, we have made significant strides executing our strategic initiatives in the first quarter as we strive to position Palomar for sustainable growth, predictable earnings, and reduced volatility. At this point, I'd like to spend a few minutes updating you on what we are seeing in the market. From a pricing standpoint, we are seeing sustained rate increases across all lines in pockets of business where rate increases are accelerating. In commercial earthquake, the average rate increase ticked up from the fourth quarter of 2021, as rate increases moved up from approximately 5% to 7% in the quarter. We expect further hardening for the next few quarters in this line of business. As previously mentioned, we are not looking to grow the exposures in our wind-exposed national layer and shared commercial property business, as we believe we can generate sufficient growth from rate. For this line of business, we experienced risk-adjusted rate increases of 22% year-over-year with over 40% risk-adjusted rate strengthening in Q1 alone. This market is becoming increasingly dislocated as the reinsurance market hardens, and we are generally seeing continued rate increases combined with improved terms and conditions. As it pertains to inflation, in addition to the use of third-party license data, we can leverage our builder's risk program that audits construction projects on a monthly basis to inform our perspective on the cost of materials and labor. We are incorporating these factors into our underwriting and marrying them with rate increases and higher inflation guards. For personal lines like residential earthquake, we increased the inflation guards from a historical level of 5% to 8% this year. While our casualty lines remain in their infancy and therefore don't offer much in the way of renewal price increase commentary, we are getting rate increases of approximately 5% to 7% on expiring terms with certain segments of professional lines and general liability seeing greater increase. Turning to our 6-1 reinsurance renewal, We are currently in the market placing our program and believe the combination of rate increases and reduction in our continental hurricane exposure portends a successful renewal. While it is undoubtedly a hard reinsurance market, our unique program that includes ILS market support remains appealing to reinsurers and ILS investors. We are more than 60% placed at this point and expect to finalize the placement shortly. We will provide an update to the market when the placement is complete. Turning to capital allocation, We will continue to see operating leverage in our business model and financial metrics as we scale. Additionally, we are generating cash from operations, which provides sufficient capital to fund our growth initiatives, while providing ample room to execute on our $100 million share repurchase program. As a result, we were active with our repurchase program, as we saw and continue to see our shares at levels we believe are undervalued, especially in light of the numerous growth vectors in our business and the adjusted ROE floor of 14%. To conclude, we are very pleased with our results and the momentum in our business as we look out to the remainder of the year. We are reiterating guidance for the full year 22, where we expect to generate between 80 and 85 million of adjusted net income, representing 54% year-over-year growth, and an adjusted ROE of 19%. This range factors in the additional investments that we need to make in talent, systems, infrastructure, the current projected cost of reinsurance, and the unrealized losses on equity securities in the quarter. With that, I'll turn the call over to Chris to discuss your results in more detail.