Palomar Holdings, Inc.

Good morning, and welcome to the Palomar Holdings Inc. Second Quarter 2023 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 conference call over to Mr. Chris Uchida, Chief Financial Officer. Chris, please go ahead, sir.

Thank you, Operator, and good morning, everyone. We appreciate your participation in our second quarter 2023 earnings call. With me here today is Matt 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 10, 2023. 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. 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 pleased with the strong results of Palomar's second quarter. Our team successfully executed our Palomar 2X strategy of profitable growth, even in the teeth of elevated catastrophe activity and a historically hard reinsurance market that significantly impacted the insurance industry. In the quarter, we focused our capital and resources towards targeted segments of our book of business, like earthquake, in the marine, and casualty, to maximize our risk-adjusted returns while we continue to reduce exposure to segments of our book that add volatility to our results. This prudent approach resulted in growth rate and premium growth of 25%. When excluding the drag from runoff and de-emphasized products, this growth rate was an even more impressive 44%. Importantly, we delivered an adjusted return on equity of 21.3% in the second quarter. Beyond the strong financial results, the quarter featured several noteworthy accomplishments that positioned us well for near and long-term success. Namely, we successfully placed our 6-1 reinsurance program in line with our expectations. and subsequently raise our adjusted net income guidance for the full year. We hired a team of professional liability underwriters to extend our casualty franchise into attractive niches like real estate E&O. And lastly, in July, we received a revised positive outlook of our rating from AM Best. Over the course of the second quarter, we made incremental progress in 2023's identified strategic objectives, sustaining profitable growth, managing the dislocation in the global insurance market, enhancing earnings predictability and scaling the organization. Looking forward, we will continue to execute these imperatives, but look to convey their progress through five key lines of business that will drive the value of Palomar over the medium term. Those lines of business are earthquake, inland marine and other property, casualty, fronting, and crop, our newest product. So with that, I'd like to walk through each business, beginning with our earthquake franchise, which I expect to remain our largest line of business. Our core earthquake franchise grew 24% in the second quarter, as our residential earthquake book grew 20% in line with the first quarter, and our commercial earthquake grew 29%. The dislocation in the earthquake market, whether it be a function of rising reinsurance costs, reductions in claims paying capacity and coverage at the CEA, or the exodus of homeowners markets from California, is becoming more pronounced, which continues to afford Palomar the opportunity to both grow and optimize its book of business. During the quarter, we saw commercial accounts renewed at a risk-adjusted increase of 24%, which was a 25% sequential increase from the prior quarter. Additionally, our ENS residential earthquake business grew 75% year-over-year. At the end of the second quarter, ENS policies constituted a total of 8.8% of in-force California residential earthquake premium. We expect this environment to remain a tailwind for our business through the second half of this year and into next year. Lastly, in the quarter, we entered into a partnership with USAA, who will now offer our residential earthquake products in California. This new arrangement not only expands our reach, but also validates our residential earthquake franchise. Turning to Inland Marine and other property products, Inland Marine experienced growth of 54% year over year through a combination of rate increases and new underwriters allowing us to expand our regional and distribution footprint. Builders Risk, our largest Inland Marine product, saw 7% to 10% rate increases and expanded its quota share support, allowing us to write larger limits without taking on disproportionate risk, as well as add incremental seating commission. Our excess property line saw 10% rate increases and over 600% year-over-year growth as it builds a niche of non-CAT-exposed property business. Importantly, both these products are core to our strategy of maximizing our margins and using prudent risk management to achieve favorable loss ratios. As it pertains to other property products such as commercial all risk, Hawaii hurricane and flood, we're hyper focused on exposure management and contracting the existing book where necessary. In the case of commercial all risk, we made a significant progress reducing our continental hurricane PMI to 100 million. That led to a 45% reduction in premium year over year. However, commercial all roads policies that remain on our books renewed an average increase of 60% and that allowing us to recoup the rising cost of reinsurance. Turning to our casualty business, we grew this segment 92% year-over-year, highlighted by strong premium growth professional liability. During the quarter, we integrated our tuck-in acquisition, XCO Insurance Services, and hired a group of experienced underwriters and claim professionals to help extend the real estate E&O and miscellaneous professional liability franchises. Taking a surgical approach to the build-out of the casualty business that involves hiring and underwriting talent with long-standing history and expertise in targeted niches and geographies. From an underwriting standpoint, the casualty books lost performance continues to remain stable. Our focus on limit management and avoiding severity exposed risks has enabled this performance. Our thoughtful underwriting approach was validated with approved terms and conditions at the renewal of our 4-1 casualty quota share treaty. Turning to Palomar Front, we grew this business at a strong pace, delivering 82% growth over the prior year. During the second quarter, two of our front-end programs renewed their reinsurance with incremental capacity support a demonstration of their quality and sound underwriting performance. While our growth from fronting is favorable, we want to reiterate our strategic approach to fronting detailed last quarter. The goal of our fronting effort is to provide services to a select group of MGAs, carriers, and reinsurers, while we can gain experience on the lines of business to further our diversification into specialty markets. We closely manage the compliance, oversight, reinsurance, and collateral of our seven fronting partners. This is a focused and strategic approach. We maintain a risk participation on selected partners with the current maximum participation of 5%. Our approach has allowed us to quickly assess and limit our counterparty exposure to the potentially fraudulent letters of credit and transactions arranged by Vestu. Fortunately, our exposure is limited to a single counterparty and is immaterial. Our foray into the crop market was via a fronting arrangement with Advanced Ag Protection, a leading crop MGA. As I mentioned last quarter, this is a partnership that we are particularly excited about. At this time, we are finalizing a strategic investment in Advanced Ag Protection that further aligns our organizations and our prospects of building a meaningful presence in crop insurance. Two members of our executive management team, John Christensen and John Knutson, have extensive experience in the crop market. Upon consummation of the deal, John Christensen will join the Board of Directors of Advanced Ag Protection. Palomar is now one of only 13 approved insurance providers with access to the $20 billion insured crop marketplace. We expect to generate crop written premium in the third quarter and that crop insurance will be a significant contributor to our growth in 2024 as we generate a combination of both fee and underwriting income. Our goal is for crop to prove a core pillar of Palomar 2X. Turning to our reinsurance program, as announced in June, we successfully completed our 6-1 core reinsurance program renewal. Pricing was in line with our expectations, and we were able to preserve event retentions and exhaustion points at historic levels that we view as sacrosanct. Our retention of $17.5 million remains less than one quarter's earnings and less than 5% of the company's surplus. Coverage now exhausted $2.68 billion for earthquake events, $900 million for Hawaii hurricane events, and $100 million for all continental United States hurricane events. The $550 million of incremental Reinsurance limit procured over the course of 2023 provides ample capacity for our growth in the subject business line, as well as covers to a level exceeding Palomar's 1 in 250 year peak zone probable maximum loss. Importantly, our XOL program is in place until June 1, 2024. The reinsurance placement combined with our strong first half results led to the recent upgrade of Palomar and our subsidiaries to a positive outlook by AMBEST. Lastly, we are updating our 2023 adjusted net income guidance to $89 million to $93 million. This updated guidance reflects catastrophe losses incurred in the first and second quarter of approximately $4 million. With that, I'll turn the call over to Chris to discuss our results in more detail.

Thank you, Matt. Please note that during my portion, when referring to any per share figure, I'm referring to per diluted common shares calculated using the Treasury stock method. This methodology requires us to include common share equivalents, such as outstanding stock options during profitable periods, and exclude them in periods where we incur a net loss. As a reminder, beginning the fourth quarter of 2022, we have modified our definition of adjusted net income, diluted adjusted EPS and adjusted ROE to adjust for net realized and unrealized gains and losses. We have modified the current and prior period figures accordingly. For the second quarter of 2023, our net income was $17.6 million or 69 cents per share compared to net income of $14.6 million or 57 cents per share for the same quarter last year. Our adjusted net income was $21.8 million, or 86 cents per share, compared to adjusted net income of $22.4 million, or 87 cents per share for the same quarter of 2022. Our second quarter adjusted underwriting income was $23.1 million, compared to $24.8 million last year. Our adjusted combined ratio was 72.2% for the second quarter, compared to 69.1%, in the second quarter of 2022. For the second quarter of 2023, our annualized adjusted return on equity was 21.3 percent compared to 23.7 percent for the same period last year. The second quarter adjusted return on equity is further validation of our ability to maintain top-line growth with a predictable rate of return above our Palomar 2X target of 20 percent, even during a quarter with very active severe convective storms and in a historically hard reinsurance market. Gross written premiums for the second quarter were $274.3 million, an increase of 25.4% compared to the prior year's second quarter. Excluding de-emphasized and current runoff products, our written premium growth rate was 44% for the quarter. Net earned premiums for the second quarter were $83.1 million, an increase of 3.5% compared to the prior year's second quarter. For the second quarter of 2023, Our ratio of net earned premiums as a percentage of gross earned premiums was 34.3%, compared to 50.8% in the second quarter of 22, and compared sequentially to 37% in the first quarter of 2023. These results reflect the expected decrease due to our growth of lines of business that use quota share reinsurance, including funding, and the increased cost of our excess of loss reinsurance. Losses and loss adjustment expenses for the second quarter were $17.9 million, including $2.2 million of catastrophe losses from severe convective storms during the quarter, slightly offset by favorable prior year catastrophe development. The loss ratio for the quarter was 21.5%, comprised of a nutritional loss ratio of 18.9% and a catastrophe loss ratio of 2.6%. Based on our year-to-date loss ratio of 23.2%, we expect a loss ratio of 21 to 24% for the year. including the catastrophe loss from the first half of the year. The expected range excludes large catastrophe events in the second half of the year, but includes many catastrophes and aligns with how we provide our adjusted net income guidance. Our acquisition expense as a percentage of gross earned premium for the second quarter was 10.8% compared to 18.1% in the second quarter last year and compared sequentially to 11.4% in the first quarter of 2023. Additional seating commission and fronting fees continue to drive the improvement. The ratio of other underwriting expenses, including adjustments, to gross earn premiums for the second quarter was 6.9%, compared to 8.5% in the second quarter last year, and compared sequentially to 6.8% in the first quarter of 2023. Continued improvement compared to last year, and in line with our go-forward sequential expectations as we invest in underwriting through people and operations. We continue to expect long-term scale in this ratio. Our net investment income for the second quarter was $5.5 million, an increase of 76.5% compared to the prior year's second quarter. The year-over-year increase was primarily due to higher average balance of investments held during the three months ended June 30th, 2023, due to cash generated from operations and a mixed shift of invested assets from lower-yielding investment assets into higher-yielding investment assets with a similar credit quality. Our yield in the second quarter was 3.61% compared to 2.61% in the second quarter last year. The average yield on our investments made in the second quarter remains above 5%. Our commercial real estate exposure in our investment portfolio is minimal, at less than 3% of our portfolio and does not include any direct loans. We continue to conservatively allocate our positions to asset classes that generate attractive risk-adjusted returns. During the quarter, we repurchased 166,482,000 shares of our stock for a total of $8.7 million under our two-year $100 million share repurchase program. As of the end of the quarter, we had $50 million of our authorized share repurchase remaining that we will continue to use opportunistically as we view our share prices undervalued. At the end of the quarter, our net written premium to equity ratio was 0.88 to 1 times, We are well capitalized and have ample capital to support our Palomar 2X organic growth objectives and opportunistically buy back shares. As Mac mentioned, we are updating our 2023 adjusted net income guidance range to $89 to $93 million, an increase from $88 to $92 million. This range includes approximately $4 million of net catastrophe losses incurred during the first half of the year, but does not include additional catastrophe losses for the remainder of the year. On a gross earned premium basis, we expect our net earned premium ratio and acquisition expense ratio to continue to decrease in the second half of 2023 from the levels reflected in our second quarter results. After a recent successful reinsurance placement, our net earned premium ratio should be at its lowest point in the third quarter, the first full quarter under the new reinsurance placement. Additionally, based on the current market, our effective tax rate for the year may remain elevated between 22 to 24%. Before opening the call for questions, I would like to note that John Christensen, President of Palomar, will be joining the question and answer session of this call. With that, I'd like to ask the operator to open the line for any questions. Operator?

Thank you. And now we conduct your question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to move your question from the queue. One moment, please, while we poll for questions. Our first question is coming from Tracy Bengigi from Barclays. Your line is now live.

Thank you. Good morning, or good afternoon. Your attritional loss ratio of 18.9% was below your guide of 22 to 24% for 23. Could you unpack that a little bit? Yeah, thanks, Tracy. That's a good question.

You know, when we look at our loss ratio for the quarter, obviously we're happy with the results. The overall loss ratio was 21.5%. If you put back in the prior period development, that loss ratio moves up a little bit to 22.3% for the quarter, which I would say is in the low range of the guideposts we gave out of 22 to 24%. Vinnycats for us were elevated this quarter, causing us to put those losses or severity and magnitude of those events caused us to put some of those losses into catastrophes, as you saw that loss ratio for the quarter being about 2.6 percent. So, overall, we feel good about those results. You know, the loss ratio was a little bit better. I think minicats were a little bit higher, causing the loss ratio probably to be about 1.6 points higher than we would have expected, so still better than expected. But, overall, everything's in line with how we feel about the year. I think the one thing you'll notice on the prepared remarks, we did decrease the bottom of the range for the full year. We went to 21% to 24%, reflecting what we've seen in the first half of the year, but still expecting those loss ratios to improve in the latter half of the year and then into Q1 next year. Tracy, this is Matt.

Go ahead.

Tracy, this is Matt. I think... Pricing is contributing to that. I think it's also part of our concerted efforts to run off certain segments of the book, you know, and that's why, you know, I know one of the things that you were focused on was the growth. We grew 44% in the areas that we are investing in, and we're thrilled with that. But one of the benefits of running off some of these lines or de-emphasizing some of these lines, like all risk is that it does improve the loss ratio. You know, even in the second quarter, All risk, which declined close to 40% year over year, it still had a million dollars of cat loss, and it has a higher attritional loss than certainly the 21% that we blend out to. So one of the positives and one of the reasons why we are running off some of these books that have higher volatility is that they also have higher loss ratios. So that's also a meaningful contributor to why the loss ratio is higher. was what it was this quarter and why we think, and Chris has always said, we expect it to continue to go down somewhat over the course of this year and certainly into 24.

Okay. My next question, I'd like to talk about the durability of your fronting program in light of higher reinsurance costs and increased market concern about reinsurance counterparty risks, particularly on collaterals.

Yeah, so I'm happy to do so, Tracy, and it's a Timely and smart question. You know, we're seeing strong growth from targeted front-team partners. We have, as I mentioned in my remarks, we have seven of them. So we take a rifle-shot approach, which allows us to manage these partners closely and, frankly, collaboratively. It's more like an underwriting relationship. So it's a pillar and segment where we're seeing nice, considerable growth, but that percentage of the premium that it can constitute is not the same from an adjusted net income, so it's a nice segment for us. It allows us to be disciplined and prudent with new partners and who we bring on. We can be very selective. You know, I think the one thing that certainly with the shakeout of what's happening in the frontier market broadly with Vestu, you know, our exposure is immaterial. We were able to get in front of this really quickly, and we understand not just our exposure but our remedies, and those remedies are several. I think for us, you know, we continue to look closely and how we manage these programs and how the industry will, you know, shake out. Two of our reinsurance programs for our fronting partners renewed with increased capacity and support in consistent economics in the second quarter. We also had one successfully renewed at the first part of the third quarter in September and July 1. So I think there will be consequences. I think for us, though, it's probably a net positive for Palomar because, first and foremost, we're an underwriting organization. We're already seeing submissions from program submissions from MGAs that are looking for potentially a new fronting partner. We're also in seeking potentially a more stable fronting partner. We've also seen submission flow uptick in a few casualty lines from MGA-backed or rather renewals coming away from MGAs that have potential collateral exposure to us just in the open market with our cash with you segment. So all in all, we won't deviate from our front-end strategy. If anything, our blended strategy and our targeted strategy is affirmed here, and I think it also overall validates our model as an underwriting organization.

Thank you. Thank you. Next question today is coming from Mark Hughes from Truist Securities. Your line is now live.

Yeah, thank you. Good afternoon. The earned premium, you alluded to the top line growth. You certainly were influenced this quarter by the runoff and de-emphasized lines. What should the earned premium growth be given your mix of fronting versus, you know, underwritten business, how should the earned premium trajectory be?

Well, Chris can chime in, Mark. This is Max, and what I would say is that, you know, you look at those kind of five segments that we've talked about, you know, we see very strong sustained growth in earthquake. It's growing 20%. I think that's a good reference. good rule of thumb for that line. And then I think when you look at casualty and inland marine, there is considerable growth. Fronting, you know, it's... It's hard to say it's going to sustain a 90% growth rate, but what we like is there is embedded growth with most of our partners here. Some are kind of hitting their critical mass in steady state. But that's all right for us because there's still a nice earned premium ramp for us. So long-winded way of saying, you know, I think the growth is going to continue to be strong. expecting it to be 44% might be a bit ambitious, but we feel like that it's a healthy growth vector when you look at the underlying contributors like in the marine, casualty, and obviously quake.

Yeah, and Matt talked about the top line growth of the written premium, and obviously that will influence how the gross earn premium grows. I talk about this a lot, that the you know, with the change and the mix of business with a lot of fronting and business that uses quota share and with the increased excess of loss costs that we will see for the first full quarter in Q3, that the net earn premium ratio will continue to decrease. You know, it was 34% in the second quarter. It's going to get into the low 30s, you know, for Q3 and in potential a little bit in Q4 as well, right? So I just want to make sure people think about that as they model it because the excess of lost reinsurance cost that we've talked about before was up about 30%, which is as expected as we modeled into our guidance. But I want to make sure people are thinking about that and modeling it correctly when they think about our net and premium ratio and the results that we're going to see in the second half of the year, right? Q3 will be The lowest point of that, and then we'll start to scale more as we continue to grow the business, but the excess of loss cost is flat and in place until 6-1 of 24.

When you look at the renewals that are coming up, you're describing about a 20-point differential between what would have been, other than the de-emphasized and runoff business. What's going to be the marginal impact in Q3 and Q4? If it was 20 points in Q2, how much are these... you know, these risk management adjustments going to impact the second half?

You know, I think it's probably, Mark, it's in and around, you know, the difference between, you know, maybe it's 10 to 14 points overhang of the growth. You know, most of the specialty homeowners business will be out by the third quarter. The all risk is over the course of the year. So if you look at all risk, what we're really trying to solve for is getting the PML down to $100 million. And it's basically there. And at that level, we feel that it is a sustainable level where we can maintain a manageable reinsurance expense. Obviously, it was up meaningfully. And I think it's one thing that I point out is if you look at the relative cost of all parallel in wind reinsurance versus earthquake, it's double. So we're focusing more of our CAT dollars on earthquake. For wind, we want to get it down to $100 million of continental hurricane PML, and I think at that point we can justify our retention. It's a $4 million AAL at that level. And it has minimal severe convective storm exposure. So that means that there is an opportunity for us to take rate and optimize that book and get it to grow. But that's really not going to start until the first quarter of 24.

Then finally, the commercial quake business, better pricing, but a little bit of deceleration at the top line. Deceleration from very strong growth to strong growth. Anything noteworthy there?

No, that market, and John Christensen can chime in, but I would say through 30% or 29% in a quarter, we wanted to be mindful of where reinsurance costs were going to shake out, and that would inform the PML. And frankly, we want to make sure that we could procure the incremental $550 million of reinsurance support to support the growth that we're seeing. What I'll tell you right now is our metrics have never been better. The capacity in the market is dwindling. So we feel very good about sustaining strong growth in commercial earthquake. But, John, anything you'd add?

Yeah, no, I agree with all that. And I think we've seen now many quarters in a row of that strong rate appreciation in the commercial earthquake segment. And as we look forward to the next few quarters, there's no signs that would suggest that it would decelerate.

Great. Thank you. Thanks, Mark.

Thank you. Next question is coming from David Motamadin from Evercore ISI. Your line is now live.

Hi. Thanks. Just a question on the crop opportunity. It sounds like you think that'll start coming in in the third quarter. I guess how big do you think that has, you know, the potential to be as another growth?

lever that we haven't really seen here in in the first half um and then how should we think about the profitability profile of that business versus your existing business dave yeah this is mac and again i'll let john um speak to this i think there are a few things that i would want to get across to you is um you know for this year it's it's really a startup we will generate some premium um in the third quarter or the second half of the year, but it's more fronted, so it's really going to be a fee generation product. For 2024, we think it can be a meaningful premium. It's a $20 billion market. We're one of 13 approved insurance providers. We have terrific in-house expertise and a terrific distribution partner in advanced ag protection, so we are optimistic that it can become you know, a large contributor to premium in due time, but in 2024, like, it has a chance to, you know, be high double-digit millions of premium.

Yeah, and with regard to the profitability aspect of the question, you know, it is a historically profitable line, and importantly, it's uncorrelated with our existing core lines, and it has a short tail and a combined exposure period with strong reinsurance. with strong reinsurance support back in it. So from a profitability standpoint, we feel it folds in nicely with the other lines of business that we have.

I think the one thing that I would add to that, Dave, and I should have brought this up, next year we expect, we'll take risk on it, but you're talking about, just call it conservatively, a 10% participation. So it's still going to be a nice balance of fee and underwriting income, like we've done with all of our new products. So we're not going to deviate from that strategy. So, you know, nice fee income stream as well as a nice underwriting income component to it. So, you know, it may end up being like an 8% to 10% margin in that year.

Got it. Understood. That's helpful.

And then just on... you know, on the, on the vestu, uh, the, the one counterparty where you have exposure, was that something where it just, you know, it sounds like it's a material in size. Um, was that something where you just absorbed the, what you had reinsured or is that something where you just replaced the, the LLC in question?

Uh, so it's, It's for a prior, it's for a treaty period that has expired. And so we're looking at just what's in trust and what would be our exposure if it goes beyond trust. And so if it goes beyond the trust, which we have full control of, that's where our exposure would be. And again, it's immaterial. For everything that's in place right now, Vestu is not an issue. They're not a reinsurer.

Got it. Thanks. And then maybe just finally, um, it sounds like capacity has definitely not been an issue for the seven programs, the existing programs, but just wondering on like, you know, the growth, the future growth of adding new program partners is, is there just, you know, have you seen a slowdown in the conversations that you've been having with capacity providers? It sounds like, um, You know, MGAs want to partner with you guys, but are you able to secure the capacity on the back end for newer partners?

No, I mean, I think for us, we've had successful reinsurance renewals. We're being very selective in talking to potential new front-end partners. you know, ultimately we view these fronting partners as people that we're going to take a risk on at some point in time. So we hold them to a different standard than maybe other markets do. So as a result, you know, we are getting a lot of inbounds. We expect that we will add to them in time, but it's going to be a very deliberate addition. But I would say, you know, on the heels of what's been in the press the last week or a few weeks, we're seeing a lot more imbalance.

But selectivity has not changed. If not, increased. Yep, understood. Thank you. Thanks, Dave.

Thank you. As a reminder, that's star one to be placed into question Q. Our next question is coming from Andrew Anderson from Jeffries. Your line is now live.

Hey, good afternoon. Just with regards to the fronting program, Mac, I'm not sure if I heard you mention cyber, but it seems from like industry pricing surveys, it's kind of softening a bit. Can you just kind of talk about the appetite there for the fronting program with regards to cyber?

Sure, Andrew. Yeah, cyber is one of our large partners in the fronting arena. And That was the renewal that I referred to that was early third quarters. It's a 7-1. And so that was successfully placed with great capacity support. We had taken modest risk participation there. We have for the last two years. Yeah, we're watching the pricing. I think for that program, it's one – or that product and that front-end relationship, we really do view that like we are the underwriter here. And so while it's only a – low, mid-single digits participation, we manage it like something that we're taking 30, 40, 50% of. So on the whole, rates are certainly down from where they were two, three years ago, but we feel good about the performance. We feel great about the reinsurance support. They got the ability to grow from a revenue perspective or from a premium perspective, so the premium cap was increased. So on the whole... I think it's a line of business that is performing well. It certainly requires increasing diligence because of the market conditions, but it's a great partnership.

Okay. And on the casualty business, you mentioned an uptick in submissions there. Should we really just think of that as some of the real estate E&O, or is it perhaps some different lines. And can you remind us if that's going to largely be on the ENS entity, which looked like the growth was a little bit slower in this quarter?

Yeah, Andrew, good question on the casualty side. You know, we're pleased with the growth there. It's 92%, and it's now approaching, you know, it's 4 plus percent of the book. We're being deliberate here, though, too. We are using the ENS company for the predominance of it. We do have a handful of GL business that's on the admitted company, and that tends to be focusing on kind of small to mid-market commercial contractors. Call it $5 to $20 million in the annual, predominantly low and moderate hazard stuff. So think about like trade contractors or general contractors that are building schools. We really are trying to avoid classes that have severity on the admitted side or high severity exposure. What I will say is on the professional lines where that's mostly E&S, it's growing really nicely, but also deliberately. It's targeted niches that we're going into. Real estate E&O is the one you highlighted, but, you know, When we brought on some underwriters in the quarter, a lot of them, you know, they spent the quarter ramping up. And now we're starting to see them leverage their expertise, leverage their distribution relationships. Garrett Vanderkamp, who oversees our professional lines, when I were talking. recently about a collection agency E&O program that he's already starting to write with one of his underwriters that is just coming on and has nice potential to be a great supplement to the E&O franchise, but very targeted and itchy. That's what we're looking to do. I think if we can take that deliberate approach from a reach and distribution and appetite perspective, the book not only will grow, but it'll be profitable and predictable.

Great. Thank you. Thank you.

Thank you. Next question today is coming from Pablo Singzon from JP Morgan. Your line is now live.

Hi. Thank you. So my first question is on guidance. You increased it twice over the past several months. I was hoping you could impact those changes a bit here. To what extent was the updated guidance based on your first half performance and to what extent is the reflection of what you think will happen in the second half of the year?

Pablo, I think it's a combination of the two. It's a good question, and thanks for asking it. What I would say is, you know, the first guidance raised was potentially was a little bit of a delay off of Q1, but we want to see where reinsurance pricing struck out. And so that informed the raise that we did in June. This quarter, or on the heels of Q2, we raised guidance again to reflect the results in the first quarter, but also what we expect to see in the second half of the year. Chris pointed out he's taken down the loss ratio range, so that's informing it. We're also, you know, again, the business that we're running off has, you know, you could argue that certainly some of it was unprofitable, and certainly with the reinsurance load that we're seeing on wind business, it would have been unprofitable on a prospective basis if we had stayed on. So, Long-winded way of saying it's a combination of the two, but we feel like there's great momentum in the business, and our goal is to beat and raise. That's our operative focus.

Okay. And then second question maybe for Chris, I heard what you said about expense ratios going down on a gross basis, right? But if you look at the expense ratio against net earned premiums, I think this is the first quarter over the past four or five where it actually went up year over year. And that's probably more a function of net earned going down. Do you see that trend persisting through the second half because of what you described, right? Essentially the reinsurance costs kicking in, Will that essentially inflate the expense ratio on a net-earned basis as well for the second half of the year?

Yeah, so you pointed it out well, Pablo, right? When you think about the expense ratio and even the loss ratio on a net-earned basis, it is severely impacted by the excess of loss, right? I don't think that the, my view is the combined ratio doesn't do a good job of measuring the those ratios when you have an excess of loss load like we do. And seeing the excess of loss load going up by, you know, close to 30%, like we've talked about, is going to impact that with really no overall change in potentially the expense ratio or the loss ratio. So, it's kind of why we take it out, especially on the expenses. We think about it on a gross basis. You can model a little bit easier. You can look at it. And so, when I look at the acquisition expense ratio, I see that continuing to tick down because of the exchange, whether it be fronting things of that nature but then the same with the expenses right it's a little bit flatter which we talked about and so it feels like everything is heading the right direction and it kind of when I look at on the gross basis it takes out the noise of the excess of loss and that's why when we talk about the grocer and premium ratio and think about that we talked about that separately so that you guys can think about how the excess of loss is going to impact it and that's going to go for 34 you know, down to the low 30s in the second half of the year. That's how we think about it, but you're absolutely right. The modeling impact of those ratios and call it being a little bit higher this quarter is impacted by the excess of loss costs. And so, like I said, that cost is going to be higher in Q3, which is going to be the first full quarter with that loaded in.

I think that's a good idea. To add, Pablo, and Chris described it well. Just a reminder, you know, we brought on a lot of underwriters in the second quarter, great talent and claims professionals alike that will generate a return, whether it be top line or improving the bottom line through cost containment and loss management. But that will take a little bit of time. So there was a decent amount of sunk cost – not sunk cost, but – costs that should generate a return, certainly 24.

Okay. And then a last question for you, Max. So I heard your comments about disruption in the California market potential being an opportunity for you to grow earthquake. I guess the question is, just given what's happening, right, like in the amount of disruption, is there a risk that the market gets really disrupted where, you know, for whatever reason, the uptick of earthquake insurance goes down. Right. And I'm thinking of like, you know, massive withdrawals capacity, like more people going to the, the fear plan, for example, like, like if the destruction reaches that level, is that still good for your earthquake business?

Yeah, Pablo, and I'll let John Christensen offer this, too. You know, the disruption in the earthquake market, the homeowner's market, I think it remains good for our business, whether it be the non-renewing policies that may have had an earthquake endorsement or standalone policies. companion policy attached to it. We get to compete on that, whether it be the CEA taking their deductibles up to 15% on anything over a million dollars of coverage A, or reducing the amount of coverage C, which is your personal property. Those are all good dynamics for us. And I don't think we've reached a point where there's a precipice that we've gone beyond. I think this is just... a bit of kind of a slow burn change in the California market that we are going to be benefiting from.

Dan, I'd add with the disruption that we've seen to date in that homeowner's market in California, it has not translated into anything unusual with our residential equip book. Our book has been very predictable. And our partnerships remain very strong in the state of California. So we have not seen anything that would indicate a disruption to a very predictable and profitable line of business for us.

Okay. And even with the homeowners pricing going up double digits, it seems like from what you're saying, there's still appetite for earthquake insurance as a rider to the basic homeowners product. Is that fair?

That's fair. Yeah. I mean, again... Our buyers tend to be mass affluent that have a lot of equity value in their home, so they're protecting an asset. And we have not seen people reduce coverage. We offer multiple deductible options that hasn't deviated where they move their deductible up to manage the expense. So we look at that, but if you look at just, A, the continued growth, 20% in residential quake, but also the increasing take-up in E&S, which, frankly, an E&S, whereas EQ policy, costs more on a per-dollar basis or per-dollar of insurance basis than the admitted side, I think that's a reflection of the appetite.

Okay. Thank you.

Thank you. We reach the end of our question-and-answer session. I'd like to turn the floor back over to Matt Armstrong for any further or closing comments.

Thank you very much, operator, and thanks to all who joined this morning. We appreciate your participation, certainly your questions, and as well, most of all, your continued support. As always, I want to thank the great team here at Palomar for their diligent work and all that we accomplished this quarter and all the work that was done to further expand the franchise in the new specialty segments and further extend the Palomar 2X strategic initiative. You know, listen, we are growing where we want to. We are hitting our ROE targets and our earnings targets, and we're raising guidance. We'll look to continue to do this. But I think, you know, what we have in front of us is really exciting, and we are going to continue to build an industry-leading franchise. So thanks very much, and speak to you next quarter.

Thank you. That does conclude today's teleconference. Let me disconnect your line at this time, and have a wonderful day. We thank you for your participation today.