Palomar Holdings, Inc.

Good morning and welcome to the Palomar Holdings, Inc. Second Quarter 2022 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.

Thank you, Operator, and good morning, everyone. We appreciate your participation in our second quarter 2022 earnings call. With me here today is Mac Armstrong, our chairman and chief executive officer. 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 August 11th, 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 quarterly report on Form 10Q, filed with the Securities and Exchange Commission. We do not undertake any duty to update such forwarded 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 the non-GAAP measures to their most comparable GAAP measure can be found in our earnings At this point, I'll turn the call over to Matt.

Thank you, Chris, and good morning, everyone. We're very proud of our strong second quarter results, a quarter highlighted by 69% gross written premium growth, adjusted net income of $18.7 million, and adjusted ROE of 19.7%. In addition to strong financial results, during the quarter, we introduced our investors in the market broadly to Palomar 2X, Our intermediate term objective of doubling adjusted underwriting income and maintaining an adjusted ROE of 20 plus percent via organic growth. It's also a philosophy that continually assesses our product suite to ensure there's enough organic growth opportunity to double the adjusted underwriting income of the business in an evergreen fashion. As a reminder, key principles of Palomar 2X include but are not limited to profitable organic growth, a portfolio anchored by binary slash no attritional loss business, namely earthquake, continued reduction of non-binary catastrophe exposure, a conservative reinsurance strategy, fee income build-out, scaling the business with technology and process, and a commitment to ESG. The second quarter results are a clear demonstration of executing on Palomar 2X and the four strategic initiatives that we outlined at the start of the year. We wake up every day thinking about how we will double Palomar's adjusted underwriting income. And I'm pleased to say we are firmly on track to do so as our products continue to deliver strong growth and the investments that we've made in the new lines of business are ramping up as we look to the second half of the year and beyond. Turning to 2022 strategic priorities, we made significant progress across all four components in the second quarter. First priority, generating strong premium growth is abundantly clear in our record gross rent and premium $218.7 million in the quarter, which equates to 69% growth over the prior year. Notably, premium in our earthquake business grew 47%, an accelerated pace from Q1. We saw continued record new business in our largest residential earthquake product and increased demand for our commercial earthquake offerings. It is important to highlight that the strong organic growth achieved in our residential earthquake line was not the result of the proposed changes at the California Earthquake Authority. Looking forward, we continue to believe that the residential earthquake production will remain strong as the California homeowners market remains dislocated and as the CEA ultimately reduces their exposure in the market. Turning to our commercial earthquake product, the hardening reinsurance market has led to capacity pullback and accelerating rate increases. As we procured incremental reinsurance limit at June 1, we are well positioned to not only take advantage of the capacity constraints in the market, but also optimize our book, to cover the incremental reinsurance expense and maintain our margins. While our earthquake lines performed at stellar levels, the strength and top line was broad-based. Our lemon marine product grew 98% year-over-year. Commercial oil risk grew 42% year-over-year, with nearly the entirety of the growth coming from rate increases and portfolio optimization as opposed to exposure additions. Lastly, our newly launched casualty franchise continues to build, with our professional liability lines growing 36% sequentially and 225% year-over-year. PESIC, our E&S business, increased premiums 200% year-over-year, with a total of $102.4 million. PESIC's growth was primarily driven by its main products, namely commercial earthquake, commercial oil risk, and builder's risk. Palomar Front also generated a meaningful amount of premium through PESIC. Excluding Palomar Front, PESIC premium still grew an impressive 107% year-over-year. Palomar Front is the best testament to the success we've achieved on our second priority, monetizing investments made over the course of 2021. Palomar Front recorded $42.2 million of gross written premiums in the second quarter and is tracking well ahead of our 2022 target of $80 to $100 million of gross written premiums. Importantly, this target includes only a modest amount of premium from our Texas homeowners product in the quarter, a product that was converted to a front-end program June 1st. We've been both impressed and encouraged at the response and interest we've received from reinsurers, MGAs, and other carriers since Palomar Front's launch in September 2021. Beyond the strong premium in the second quarter, we had a couple of notable accomplishments, which will drive further growth for the remainder of the year and beyond. We successfully expanded our program partnership with cyber insurer Cowbell, doubling the reinsurance capacity available to our program. In addition to the expanded partnership with Cowbell, we recently announced a partnership with Omaha National, a leader in the workers' compensation market. This program should prove a nice driver of incremental fee income in 2023. These two new arrangements firmly position Palomar Front to trend well ahead of initial expectations. As we continue to grow at Palomar Front, we remain disciplined in evaluating our individual fronting agreements to ensure they are performing well from an underwriting and collateral perspective. Please note that we are trending well ahead of our previously announced plan to generate between $80 to $100 million of managed premium, and we now believe that we can generate $130 to $160 million of managed premiums this year, inclusive of the Texas homeowners business, which adds approximately $45 million of fee-generating premium over the next 12 months. Moving on to our third strategic priority, delivering consistent and predictable earnings, we remain confident in the foundation built and the underwriting actions implemented over the past two years will ensure this directive. In the second quarter, we further reduced the risk profile of Palomar by transitioning the aforementioned Texas specialty homeowner's business to a fronting arrangement, transferring the in-force premium to a fully reinsured fronting quota share facility. Additionally, we successfully completed our June 1st reinsurance placement. Reinsurance is a critical component to our business model, as well as our Palomar 2X framework, and we are pleased to supplement our aspiring program with the risk capital crucial to support our premium and exposure growth. To recap our June 1 renewal, we experienced an approximate 9% rate increase on a risk-adjusted basis as compared to our 2021 program. While the pricing exceeded our expectations, the outcome was favorable as we successfully maintained our $12.5 million per-occurrence retention while securing $430 million of incremental earthquake limit as compared to our program that accepted June 1, 2021. These accomplishments are even more impressive considering the 6-1 treaty renewal period was deemed as challenging of a market as any since 2006. Despite encountering the headwinds of a hard market driven by industry losses and the associated impact of broadcast inflation, Palomar's strong results and efforts to realign its portfolio by reducing exposure to continental U.S. hurricane and other secondary perils was well received by our reinsurance partners. The hard reinsurance market provides for a reciprocal industry action to increase premium rates accordingly in order to cover lost costs and maintain profit margins. While we have historically received attractive rate on our specialty lines portfolio broadly, we have utilized the reinsurance price increase to drive rate increase on renewals and filed rate increases across our business. Our fourth strategic priority is scaling our organization. We've made considerable progress with key hires as noted in our last quarterly earnings call, and we continue developing our platform to attract the analytical, actuarial, technology, and operating expertise to support our robust growth. As we further enhance our infrastructure by adding notable talent and expertise, our industry-leading technology has consistently provided the competitive advantage to Palomar by offering new underwriters and entrepreneurial atmosphere that fosters innovative development tactics, to further benefit our platform and efficiently deliver our products and services. At this point, I'd like to spend a few minutes up to you on what we are seeing in the market from a pricing standpoint. We continue to view rates increasing across all lines with specific lines of business sequentially accelerating the levels of increase. In commercial earthquake, the average rate for large accounts increased to 9% on a composite basis compared to 7% in the first quarter of 22. We expect further hardening this line of business for the remainder of 22. As previously conveyed, we are not looking to grow the exposures in our E&S all risk business as we are generating significant growth from rate. For this line of business, we experienced a composite rate increase of greater than 30% in the quarter. We continue to see a dislocation in the property market broadly as the hard re-insurance market persists and we expect continued rate increases combined with improved terms and conditions will, at a minimum, cover any increase in loss costs for the foreseeable future. As it pertains to inflation, in addition to the use of third-party license data, we leverage our Builder's Risk program that audits construction projects on a monthly basis to rapidly inform our perspective on the cost of materials and labor. We've incorporated these factors into our underwriting to produce accurate insurance-to-value and appropriate rate increases to accommodate for inflation levels. For residential earthquake, we've increased the inflation guards from a historical level of 5% to 8% this year. We've also had a 7% base rate increase in our Hawaiian herding product approved by the Insurance Department of the state. That is in addition to an inflation guard that is now 8%. Again, we remain acutely focused on covering our loss costs and incorporating inflation into our underwriting. Our casualty lines remain nascent in the development stage, and therefore don't apply for pricing commentary similar to that of our property business. But generally speaking, we're getting rate increases of approximately 3% to 10% for casualty lines, with excess liability having the highest average increase. Turning to capital allocation, remain confident the cash we're generating from our robust premium earnings growth provide adequate liquidity for two prongs of capital employment. One, strategically utilizing our $100 million share repurchase program, and two, funding our multiple growth initiatives. During the quarter, we purchased approximately 128,000 shares at a total cost of $7.3 million. To conclude, the progress made in the second quarter firmly positions the company as we look to the second half of the year in the path of Palomar 2X. We are reiterating guidance for the full year 2022, 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% at the midpoint of range. This range factors in the additional investments in talent, systems, infrastructure, the current projected cost of reinsurance, and importantly, 5.9 million of unrealized losses on equity securities year to date. The maintenance of guidance at this level implies a range of 85 to 90 million when excluding unrealized losses on equity. So in essence, the re-edited range is actually a raise of 5 million from the guidance offered in Q1. With that, I will turn the call over to Chris to discuss the results in more detail.