Palomar Holdings, Inc.

Good morning, and welcome to Palomar Holdings, Inc. Third 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 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 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 November 10, 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 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. I'm very proud of our third quarter results as they are a further testament to our commitment to profitable growth and our execution of Palomar 2X, our intermediate term strategic plan of doubling our adjusted underwriting income while achieving a 20% adjusted return on equity. We grew the gross return premium of the business 66%, highlighted by sustained earthquake growth and incremental progress on newer lines of business, such as inland marine and casualty. We made incremental traction in our nascent Palomar Front and excess property franchises, amongst others. We added new talent throughout the organization in the underwriting, actuarial, and technology departments. Perhaps most significant, even with the full retention loss from Hurricane Ian, a major catastrophe that severely impacted our entire industry, We generated an adjusted combined ratio of approximately 90%, as well as an adjusted ROE of 10% when adding back realized and unrealized gains and losses from our investment portfolio. We further validated the resilience in our model as adjusted net income grew over 328% year-over-year, again with a full event retention loss. Taken together, our continued strong momentum through the third quarter provides a clear line of sight to doubling our adjusted underwriting income in an intermediate fashion and at a pace that is accelerated from when the concept was first introduced in June of this year. Turning to our financial results and strategic priorities in more detail, during the quarter, we made strong progress executing on all four components of our 2022 strategic plan. Our first priority is focused on generating strong and profitable premium growth which we accomplished once again this quarter, having increased growth in premium 66% to $253.1 million. Our earthquake business grew 19%, led by strength in our residential earthquake product, which continues to benefit from our marketing and product development efforts, combined with the dislocation in the California homeowners market. This healthy dynamic is best exemplified by the fact that third quarter of 2022, like the first and second quarters of the year, saw record quarterly new business sales. Importantly, The market opportunities related to the proposed changes to the California Earthquake Authority, whether it be coverage offerings or reduction in claims-paying capacity, have yet to come to fruition and as such have not provided meaningful growth catalysts for Palomar's products. We remain excited at the prospects for the residential earthquake market into the year ahead. Outside California, we continue to broaden our residential earthquake partnership slate, whether it be through the addition of three new states to our Travelers Partnership or the addition of a new relationship that will increase our presence in Utah at the start of 2023. While these are smaller market opportunities, these partnerships will be additive to growth in the year ahead. Our commercial earthquake business continued to grow through a combination of exposure growth and rate increase, while improving its underlying metrics through enhanced terms and conditions. Importantly, it saw inter-quarter rate increased acceleration to levels above 10%, which more than offset loss cost increases tied to our June 1st reinsurance renewal. We believe the impact of Hurricane Ian, most notably capacity constraints in the broader U.S. property insurance market, will impact the commercial earthquake market and therefore provide the opportunity for further rate increases in portfolio optimization in the fourth quarter of 2022 and into 2023. Beyond our earthquake franchise, We achieved strong growth across our entire portfolio of products, highlighted by our Inland Marine products, which grew 58% year-over-year, and our commercial all-risk product, which grew 34% year-over-year, with nearly all of the growth due to rate increases and portfolio optimization, as opposed to exposure. The Inland Marine Department continues to perform very well across its multiple segments, including both commercial and residential builders' risk and motor cut cargo. Additionally, our newly launched casualty franchise grew 350% year-over-year, Our real estate E&O and miscellaneous professional liability segments are standout performers as they continue to add conservatively underwritten low volatility risk to the portfolio. Overall, we encourage the launch and ramp of our casualty business and the traction that our team is achieving. Palomar Front was also a significant contributor, generating 32% of our premium this quarter. I'll discuss Palomar Front in a bit more detail when reviewing some of our new initiatives later in the call. A combination of our growth in commercial lines, whether it be earthquake, builder's risk, or select casualty segments in Palomar Front, helped drive considerable growth in Palomar Access and Surplus Insurance Company, our ENS business. PESIC increased its gross written premiums 181% year over year to $163 million as compared to the third quarter of 2022. The accelerating growth in our non-catastrophe exposed lines of business, whether it be casualty or Palomar Front, provide diversification in business mix and business model through fee income across our portfolio and ultimately will lead to further predictability in our earnings base. As such, their success and our execution toward their success are key elements of our second strategic priority, monetizing the capital investments we made in 2021. During the third quarter, Alamar Front recorded 82.2 million of gross written premium, which I previously stated was 33% of total gross written premium in the quarter. We have ramped our Palomar front business very quickly since launching it in the fourth quarter of 2021. The business line has already generated premium of $154 million year to date, which is at the high end of our previously updated guidance range of $130 million to $160 million of managed premiums for the full year. As a reminder, our updated guidance range includes our Texas homeowners business, which adds approximately $45 million of fee generating premium to the base. Based on the year-to-date results and the overall strong performance of Palomar Front, we believe we can achieve $180 to $200 million for the full year. The growth in managed premium from Palomar Front offers an attractive run rate of fee income. As we moved into 2023, as well as a modicum of underwriting income for the two programs where we retain a small amount of risk. Importantly, as we continue to expand through Palomar Front, we remain disciplined through our conservative underwriting and collateral requirements to mitigate risk. I have already mentioned the solid performance of our new casualty lines in the quarter, but I would also like to acknowledge the success of our excess property division. This line of business is led by a terrific, experienced underwriter in Joel Usry, and it concentrates on riding excess property business risk in non-catastrophe-exposed regions. While it's off a small base, we are pleased to see the premium triple sequentially. As the North American property market remains dislocated, we expect this line of business to do quite well. Progress and outperformance of our new initiatives has put us in a position where we believe we are meaningfully ahead of our Palomar 2X Intermediate plan even if the growth may push our attritional loss ratio slightly up. The fee income generated by our front-end business is a meaningful lever of stability that we have created in our portfolio to generate predictable earnings, which is not only a core principle of Palomar 2X, but also our third strategic priority, delivering consistent and predictable earnings. Over the last two years, we've put into place multiple underwriting, portfolio management, and risk transfer programs to reduce volatility and enhance our risk-adjusted returns. I think these efforts were most pronounced with how Ian impacted our results relative to the insurance industry broadly. Over the last two years, we have considerably reduced our continental hurricane exposure. As such, our gross and ultimate loss from Hurricane Ian should under-index the industry due to the underwriting portfolio management actions taken since 2020. Our exposure was limited to our commercial property products that are national in scope with an emphasis on layered and shared accounts with limited geographic concentration. While a full retention loss of $12.5 million is not ideal, we find some solace that we have an adjusted ROE when excluding the impact of unrealized gains and losses of 10% for the quarter and approximately 17% year-to-date. The diversification and profitable growth from lines of business without continental hurricane risk is now providing a considerable earnings base that enables us to have an adjusted combined ratio of 90% and an adjusted ROE, including unrealized gains and losses of 10% in a quarter where we incur a full retention loss. This favorably compares to the third quarter of 2021, when catastrophe losses led to an adjusted combined ratio of 100% and an adjusted ROE, excluding realized and unrealized gains and losses of 2%. Additionally, we are continually improving our underwriting and risk management controls to ensure that we are an appropriate risk-adjusted return for the higher volatility businesses that we continue to write. This approach will result in further adjustments as the market, the reinsurance market especially, absorbs the impact of Hurricane Ian. Our fourth strategic priority is scaling our organization where we have invested in technology and infrastructures that provide the dynamic platform for product innovation as well as new business development. This is very attractive to experienced underwriters who would like to build a new business as can be seen in our newer lines of business like Builder's Risk, Inland Marine, Professional Liability, and Excess Property. During the quarter, we bolstered our underwriting ranks for each of these product lines with the hiring of several industry veterans with proven track records. We will also continue to attract analytics, technology, and actuarial professionals to the team. Before we dive into the financials, I'd like to offer a bit of commentary on the market in particular the property segment, which has entered a new stage of dislocation due to Hurricane Ian. The hardwood reinsurance market persists. Continued rate increases combined with improved terms and conditions will require renewals to cover any increase in lost costs at a minimum. As it relates to our current continental hurricane exposure, we have already reduced our PML by more than 60% over the last two years and still have some exposure and runoff. What we are left with is a national-focused portfolio of property risks, with wind exposure that saw an average rate in excess of 30% in the third quarter, and that was prior to Ian making landfall. The storm, along with other factors such as inflation, bond portfolio losses, and other industry losses, will result in a significant capacity reduction for not just Florida, but throughout the southeast. The magnitude of the capacity pullback will be difficult to assess until the January 1 reinsurance renewal is complete, but our expectation is that rates for southeast and Florida wind will move up commensurately for inflation, reinsurance costs, and supply. The capacity we commit to our ENS commercial all-risk business will take advantage of the market in a disciplined fashion with a refreshed risk-adjusted return target. If accounts don't hit those thresholds, we're fine pulling back as we have numerous growth vectors. As I mentioned earlier, we believe the commercial earthquake market will also see a level of dislocation, albeit not like that of Florida and the rest of the Southeast. The 10% rate increase we saw at the end of the third quarter will increase in the fourth quarter and into 2023. Terms and conditions, whether it be deductibles or attachments, should also improve. Property capacity is going to be a scarce commodity in 2023, and we will judiciously use it in the primary market. As it pertains to reinsurance, we renewed our program on June 1st, with pricing higher by 9% on a risk-adjusted basis. And we do not have excess of lost treaties renewed on January 1st. Our expectation is that post-EON, the hard reinsurance market will indeed persist, and that backdrop informs our approach in maintaining our growth and profitability targets in the year ahead. It is imperative for all of our property products, E&S and admitted, commercial and residential, to cover their loss costs through a combination of rate increase, inflation guards, or terms and conditions. Importantly, it is worth reiterating that we were already reducing our exposure to continental U.S. hurricane and other secondary perils before the storm. And our core earthquake business is a unique line of business for reinsurers, given its non-correlated risk. We think the confluence of those factors, along with the large profit bank we have built up with our reinsurance panel, will help us navigate this cycle. Turning to capital allocation, despite the cat losses that impacted our results this quarter, we remain well capitalized and in a healthy position to fund future growth, as well as opportunistically repurchase shares. During the quarter, we bought over 52,000 shares at a total cost of $3 million. To conclude, this quarter demonstrated further execution of the Palomar 2X strategic plan. We meaningfully grew written premium, we saw considerable progress in new products that add diversification to the earnings base and portfolio, and we demonstrated the resilience in our model as a full event retention did not preclude us from generating a compelling return on equity. While the quarter's losses were elevated, we were encouraged by two factors. One, 29% of the loss in the quarter were from lines that are in runoff or being restructured. And two, a good portion of the quarterly loss was driven by product's written premium outperformance and in-line target rate loss ratios. Chris will provide more detail on both these items. For the full year, we now expect to generate adjusted net income between $82 million and $85 million, a 48% increase from 2021. This range includes additional reinsurance expense resulting from Hurricane Ian incurred in the fourth quarter and excludes catastrophes and unrealized gains and losses. With that, I'll turn the call over to Chris to discuss the results in more detail.