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.