Palomar Holdings, Inc.

Good morning and welcome to the Palomar Holdings Inc. Fourth Quarter and Full Year 2024 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 and instructions to follow. 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, sir.

Thank you, Operator, and good morning, everyone. We appreciate your participation in our earnings call. With me here today is Mack Armstrong, our Chairman and Chief Executive Officer. Additionally, John Christensen, our President, is here to answer questions during the Q&A portion of the call. 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 February 20, 2025. 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 10-Q. followed 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 an isolation or 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. I'm eager and very pleased to discuss our outstanding fourth quarter and 2024 results. The across-the-board success of the quarter and full year is a testament to the hard work of our exceptional team. The Palomar team more than effectively executed the four strategic objectives that we outlined to start the year. Sustain our strong and profitable growth, manage dislocation and diversification, deliver predictable earnings, and scale our organization. As a result, we delivered 23% gross rate and premium growth, 39% when excluding runoff lines of business, 48% adjusted net income growth, inclusive of $8 million in catastrophe losses, and an adjusted return on equity of 23% in the fourth quarter. Importantly, Q4 2024 is the ninth straight quarter that we have beaten expectations. Our strong execution is also seen in our full year 2024 results. which included record gross written premium and adjusted net income. Gross written premium growth of 35 percent, 43 percent on the same store basis, adjusted net income growth of 43 percent, and adjusted ROE of 22 percent, even when saddled with the short-term drag of the capital raised in August of this year. As it relates to our capital, our stockholders' equity increased 55 percent year over year, 30 percent when excluding the equity issuance. From an operational perspective, the accomplishments in 2024 were several and meaningful. highlighted by our acquisition of the surety company, First Indemnity of America, or FIA, which closed at the start of 2025, and our upgrade to A, excellent, by A.M. Best. But I'm most excited by the significant additions made to the Palomar team. 2024 saw us recruit respected industry professionals, including but not limited to a chief operating officer, chief people officer, chief claims officer, a head of crop, and a head of E&S category. These achievements enabled us to reach our Palomar 2X target of doubling 2021 adjusted underwriting income in three years, the shorter end of our intermediate timeframe. 2024 was a banner year for Palomar. At this point, I would like to touch on the devastating Los Angeles wildfires. I personally like to pass along my sympathies to all those impacted, including our employees, training partners, families, and friends. This has been a historic catastrophe for our region and state, and we're focused on doing our part to help our customers and communities through this challenging time. As a reminder, we do not write homeowner's insurance in California as we confine our residential property exposure in the state to monoline earthquake and flood policies. Similarly, the majority of our commercial property exposure in California is a commercial earthquake or difference in condition policy that does not cover wildfire. We do have builder's risk and builder's owner package products that have exposure to fire losses. Fortunately, our losses from the Eaton and Palisades fires are very modest and within the scope of our 2025 guidance in ordinary course attritional losses. We have indirect exposure through our residential earthquake franchise, and slightly less than 1% of our residential earthquake book is in the Eaton and Palisades burn zones. We are working closely with our insurers and producers to quickly cancel and refund those policies that have been impacted by the fires and unfortunately no longer need our coverage. Our focus is to help our insurers in their time of need. Due to the recency of the event, it's hard to forecast what the medium and long-term market impact will be. That said, it is amplifying the dislocation and challenges in the California homeowners market as well as heightening the awareness of natural disasters in our state. We've seen a modest uptick in residential earthquake new business to start the year and suspect the dislocation in the homeowners market will lead to further attrition out of the California Earthquake Authority as companies call back their exposure to California. This could prove a tailwind for our residential earthquake business. As it pertains to reinsurance, it is also hard to handicap the market impact as the losses seeded to the reinsurance market are likely to be from a concentrated group of seedings. Wildfires may slow the pace of rate decreases at Palomar and the broader market experienced on January 1st. That said, recent activity in the catastrophe bond market suggests that this event has not diminished investors' appetite for single-parallel exposure like earthquake. As long as this market dynamic continues, it would likely prove advantageous to Palomar. I will touch more upon our reinsurance pricing expectations toward the end of my remarks. Turning to the fourth quarter performance of our five product categories, I will start with our earthquake franchise. Exiting 2024 as the third largest rider of earthquake insurance in North America, we are a category leader. In the quarter, our core earthquake franchise grew gross written premiums 20%. Our balanced approach of riding both residential and commercial earthquake insurance allows us to play through market cycles and optimize capital allocation in soft or hard markets. Specifically, this strategy enables us to preserve our overall margin in a climate of rate softening in the commercial earthquake market. For example, our residential earthquake product features a 10% inflation guard, offering a strong cushion against inflation and a consistent rate increase as policies are renewed annually. Whereas in the quarter, our commercial earthquakes products experienced an average rate decrease of approximately 5%. This dynamic is likely to persist throughout the year, but the California wildfires could reduce the pace of rate decrease. That said, as mentioned in our previous calls, the portfolio profitability, theoretical loss, and aggregation metrics for the earthquake franchise are strong as at any point in our history, a reflection of this balanced book approach. As we look to 2025, the prospects of our earthquake franchise remain strong. and we are confident the earthquake premiums will grow in the mid to high teens for the full year. Our Inland Marine and other property category, which consists of seven distinct property products, grew 36% year over year. Over the course of 2024, we are investing in town and geographic expansions selectively while simultaneously reducing exposure to the more volatile classes of business in this category. Strong premium growth contributors during the quarter were our builders risk, excess national property, and Hawaii hurricane lines of business. Overall, this category delivered exceptional results from a nutritional loss perspective. The low loss ratio was a function of a multi-year effort of significant rate increases and underwriting changes that combined with moderate weather activity hold aside Hurricane Milton. The loss ratio was not negatively impacted by softening commercial property rates. Commercial property pricing is showing a moderate downward trend like that we are seeing in commercial earthquake. Importantly, we remain steadfast in holding firm on key terms and conditions as rate declines at a low single-digit clip. Like our earthquake products, the Inland Marine and other property portfolio is balanced by a mix of residential and commercial lines. The rate increases we are getting from our Hawaiian hurricane and residential flood products are helping offset the rate softening in the commercial property market. Our casualty segment saw another period of significant growth, with premium increasing 112% year over year. Strong performers in the casualty group included contractors GL, real estate E&O, miscellaneous professional liability, and environmental liability. The quarter also saw a nice contribution from our new E&S casualty team, headed by David Sapia. The group was able to take advantage of a hardening market in segments like primary and excess construction liability insurance. Casualty now represents 15% of our total portfolio, and we remain focused on conservative underwriting within targeted niche markets. Our approach includes prudent risk management tactics, such as shorter tail liability focus, modest line sizes, avoidance of high severity exposures, and conservative reinsurance. At the end of the quarter, our Casualty Book's average gross limit was 2.4 million, and our average net limit was 1.1 million. The Casualty Book's loss ratio remained in line with our conservative loss spec, and reserves continue to grow. Notably, over 80% of our casualty reserves are IB&R, meaningfully higher than the industry average, which one would expect for a nascent franchise like ours. In terms of pricing and rate adequacy, we are seeing strong rate increases and excess of loss costs across the casualty book. Environmental liability rates increased by 8%, E&S casualty and excess liability rates climbed 7% to 12%, and contractors' G.O. accounts with auto coverage star rates increased just below 20% for the quarter. Our casualty franchise is well positioned for profitable growth in 2025. Turning to our fronting business, this was the first full quarter where we experienced the complete effect of our separation from Omaha National as the fronting group's premium declined 33%. We are pleased with the growth of our existing partners and the prospects of our newer relationships. We continue to bet opportunities and have a healthy pipeline of potential partnerships. Fourth quarter was the first quarter which Benson Latham was leading the charge for Palomar Crops. During the quarter, talented professionals in marketing and claims joined the crop team, bolstering the efforts made over 2024 to build the foundation for a much larger business. Our fast-growing Palomar crop franchise delivered $15.7 million in premiums in the seasonally low fourth quarter and $116 million in premiums for our first full year in the business. Importantly, the underwriting results were as strong as the top-line growth, with an estimated underwriting gain on MPCI or multi-parallel crop insurance of approximately 20%. These results affirm our risk selection approach and moreover our intention to increase our risk participation over time. To that end, we finalized our 2025 reinsurance treaty, putting in place quota share and stop-loss programs. We will retain 30% of the subject matter premium going forward as compared to 5% on the expired treaty. I have every confidence that we are building an industry-leading crop business at Palomar. and continue to believe Palomar Crop will eclipse $500 million in premium in the intermediate future. We aim to be among the top 10 crop premium riders in the U.S. by the end of 2025, with projections exceeding $200 million in premium for the year ahead. Lastly, we closed on our acquisition of FIA at the start of 2025. FIA's results will be included in the casualty product group for the immediate future. Surety is an attractive market segment that, like crop insurance, is not correlated to the P&C cycle, and one that we believe can be an important growth vector for Palomar over the longer term. While FIA's contributions will be modest in 2025, we believe surety will be a meaningful market segment over time. Quickly turning to reinsurance, we are active on January 1st across the portfolio with successful placements in our earthquake crop, which I already discussed, and casualty groups. First off, we renewed our commercial earthquake quota share at about $155 million of incremental excessive loss limit to support the growth of the earthquake book, until the main excess of loss renewal on June 1st. These treaties were priced at risk-adjusted decreases of approximately 15%. On the casualty front, we renewed two treaties at either expiring or improved economics. We also put in place two new treaties for our casualty group. They were both well-received with strong support from Blue Chip reinsurers who already support Palomar and other lines of business. Despite the industry's losses from the wildfires, we remain cautiously optimistic on the prospects of our 6-1 renewal as we have seen leading indicators such as recent cap bond issuances and secondary market pricing that suggest strong appetite from investors for single-parallel exposures like earthquake. Looking ahead to 2025, we have four strategic initiatives. First, integrate and operate. We must monetize the investments that we have made throughout 2024. Second, we will build new market leaders deliberately. Our crop and casualty lines have strong leadership in the capital support necessary to become market-leading franchises. but we will not overextend our appetite and risk management approach in the short term. Execute deliberately in 2025 to have an entrenched franchise in 2029. Third, we must remember what we like and more importantly, what we don't like. This is a natural migration from the grow where we want mantra. We'll stick to our conservative and well-defined appetite in the market and focus on the profitable growth the product portfolio affords us. Fourth, continue to generate consistent earnings and with the addition of new talent, find new sources of earnings growth while preserving a healthy reserve base. As we execute our strategic initiatives, I'm confident in our ability to build on 2024 success and maintain steady growth and returns. While last year's performance was exceptional, it's only the beginning. Our heritage products, alongside newer offerings like Crop Casualty and Surety, provide strong visibility for long-term growth and above-market returns. We are well-positioned to execute our Palomar 2x strategy in 2025. Our full year 2025 adjusted net income guidance is a range of $180 million to $192 million, including the catload that Chris will discuss in more detail. The range assumes our core 6-1 excess of loss reinsurance treaty renews at a price of flat to down 5% from the expiring 2024 treaty. As the market is still digesting the impact of the wildfires on the reinsurance market, we are taking what we believe is a conservative approach, certainly when compared to what we saw January 1st. The midpoint of our guidance implies an adjusted ROE of 23% and puts us in a position to double the adjusted underwriting income of the 2022 Palomar 2X cohort in three years. With that, I'll turn the call over to Chris to discuss our financial results in more detail.