Mac Armstrong : But Mark, I think to your question around broadly, we feel great about top line growth for the company. We have not given guidance on premium growth historically, but I will say that we feel that we can certainly have strong growth that’s in excess of 20-plus percent for sure, and think that crop is going to be a nice contributor. As I mentioned, previously, we thought we saw ourselves to doing high double digits of millions of premium. Now we’re saying that we can do over $100 million. So I think that’s a good indicator. But we don’t want to be overly prescriptive on premium growth. We do want to be very prescriptive on bottom line net income growth because I think that’s what all of our investors and certainly us as investors and shareholders in the business are more focused on, it’s the ROE in the bottom line growth.
Operator: Our next question is from Andrew Andersen with Jefferies.
Andrew Andersen : Maybe going back to the NPE to GPE ratio, Chris, you had mentioned you think in ’24, it would be a little bit lower. I was hoping you could just unpack this a bit more for me because I suppose ’24, you’re bearing the full cost of the ’23 XOL program. So perhaps a benefit that we would see at mid-year ’24, renewals wouldn’t really come up until 2025. And then we would see the ratio increase again. Is that the right way to think about it?
Chris Uchida : No. So what I would describe is that, let’s say, 2023 had 7 months of that full cost. And so for the first 5 months of 2023, it was at a lower rate. And then if you remember, we had about a 30% increase at our 6/1 renewal. So that full weight we saw for 7 months in ’23, you will continue to see that for 5 months in 2024. And then as Mac mentioned in our guidance, we have — in our assumption, we are assuming a low to single-digit type increase in our reinsurance. So you’ll have 5 months at the current rate and then, let’s call it, less than 5% type increase at 6/1 of 2024. So a little bit up, right? And so when you look at think about that 2024 will just have a much or not much, but it’ll have a higher overall reinsurance load in 2023, had the first 5 months at a lower reinsurance price.
And so with all of that when you look at the cycles, right, we buy our reinsurance or excess of loss reinsurance for growth, right? And so at 6/1 of this year, will have a slight or we expect to have a slight increase, plus we will buy for the growth that we expect throughout 2024 and into 2025. And so those factors together kind of create that stair-step function when you look at the net earned premium, right? The net earned premium in Q4 was 33.9%. It was up from Q3 of 31.6%. So I expect Q1 of 2024 that 33.9%, I expect it to move up a little bit. I expect there to be that same little bit of benefit into Q2, but then you’ll get one month of that new reinsurance. And so then in Q3, with the full reinsurance with a little bit of price increase, also buying for growth.
I expect that ratio to then come back down a little bit. It was kind of that same stair step, a much more, I guess, muted stair step that you probably saw in 2023, but still that little bit of stair for that function. So let’s say, it’s 34% plus in Q2, in Q1 I would expect you to go back down to something that you saw similar to Q1 — Q3 of 2023, Q3 was 31.6%. If it’s somewhere around there, that’s probably the right way to think about it because it’s going to start smoothing out as things start to mature and the mix starts to mature a little bit in our overall portfolio.
Mac Armstrong : But Andrew — yes. And one thing I would add, Chris describes it very well. It does somewhat hinge on XOL. And we like to think that we’re being conservative and assuming that there is going to be a slight rate increase in XOL that renews at 6/1. What we saw at the start of the year is encouraging, but it’s on a very small sample set. It’s — when you add up the quota share in the excess of loss that we renewed at 1/1. It constitutes about 10%, maybe a little bit more of the total limit that we buy. It was down. But I don’t want to let 10% inform the totality. So if it mirrors what we saw at 1/1, then it’s the inverse of what Chris described.
Chris Uchida : Yes. And to your point that we’ll say we’re expecting a little bit of increase that if it goes the other way, that margin, let’s call it, expansion, it starts happening in same thing in Q3, end of Q2 and fully in Q3.
Andrew Andersen : And maybe going back to cat losses here and recognizing the improvement over the years and the derisking of the book. Year-to-date, $3.5 million of cat losses included in the guidance, but you’re also kind of talking about a $4 million AAL, which I suppose, isn’t exactly the same as like a cat loss ratio, but can you kind of help us square the 2 in the context of guidance and cat losses here?
Mac Armstrong : So Andrew, couple of things. The $3.5 million losses related to floods in California, the atmospheric river El Nino, what you saw kind of on the front page news in San Diego and other parts of the state. The $4 million we are referring to is tied to our continental hurricane. So that is our continental hurricane average annual loss. The flood losses is a separate peril, and it’s something that we budget for. So we budget — so when Chris refers to his point — 2 to 3 points in our loss ratio for mini cat that includes floods. This is just an elevated amount that’s cross the threshold that we are disclosing.
Chris Uchida : Yes. And maybe I’ll add on to that a little bit for just the overall loss ratio, right? When you look at it from a guidance standpoint, we said, our loss ratio for the year should be about 21% to 25%, and that includes the $3.5 million of flooding loss that’s going to be in the first quarter. So that first quarter loss ratio will be a little bit higher. From a quarter standpoint, that’s 3 to 4 points of loss ratio for the year. It’s probably less than 1 point of overall loss ratio. But when we think about our loss ratio in that 21% to 25% loss ratio, target or expectation, we believe and we feel that we do have a cat load in there. That cat load is made up of mini cats, which is going to be severe convective storms.
It’s going to be normal flooding. It’s going to be tropical storms. We believe net of that 21% to 25%, there are 2 to 3 points in there that is related to catastrophes. That’s what we would say, other companies bucket as catastrophes, we could bucket it as catastrophes, but it’s something that’s just part of our planned loss ratio. What it does not include is a large major hurricane or earthquake impacting our portfolio. But we believe similar to prior years, the cat load is in there. We call it mini cats because they’re usually smaller for us because of the way we use reinsurance, because of the way we underwrite and do all different sorts of things, but we believe that we have a 2 to 3 point cat load in our guidance for next year.
Operator: [Operator Instructions] Our next question is from Meyer Shields with KBW.
Meyer Shields : Mac I don’t want to misinterpret it, but it sounded like you were a little cautious on fronting appetite for 2024. I mean, I understand that there’s the crop issue because it will be broken out. But am I misreading what you’re thinking about the growth potential there?
Mac Armstrong : I think with fronting, we do take this very much more of a rifle shot approach. And so, we want to go deep with existing partners that have high credit quality that we feel terrific about the collateral with that we can orchestrate the reinsurance and we can, frankly, acutely manage from an underwriting and claims handling and compliance standpoint. So what that means is we kind of elephant hunt to some degree. So we think we can grow fronting this year, but it’s not one that’s going to grow 63% like it did in ’23. It’s going to index the growth rate of the overall operation. So I think that’s what I would say. It’s not to say that we don’t have a pipeline. It’s not to say that we are not in discussions with a range of partners but our bar is high.
And I think the other thing, it helps when it’s 1 of 5 product categories. So we can be selective. It’s a nice fee generator, but we also have crop that we think will do over $100 million this year. We also have quake that we feel great about, high teens, 20% growth. And then we have a casualty franchise that’s really coming into its own. So it’s a great line of business. It’s not the totality of what we do, which allows us to be selective.
Meyer Shields : With regard to the crop, obviously, as an approved carrier, you have the ability to buy reinsurance from the government reinsurance plan. Is that — does that responsibility rests with Palomar or with the companies that you’ll be sharing the premiums with?
Mac Armstrong : Meyer this is Jon. Christianson and I can take that one. So that is you’re referring to the SRA reinsurance treaty with the FCIC that is a benefit to Palomar. So we buy reinsurance through that government program, but then also we have supporting private market reinsurance that completes the totality of that 95% risk transfer that we have in place for our reinsurance. So that is benefit of Palomar with regard to the risk transfer.
Jon Christianson: And I think Meyer, as we’ve said, 1/1/25, the complexion of our participation will be different, and therefore, the reinsurance structure will be different as well, but we’ve got time to put that in place and educate you guys on that.
Meyer Shields : I just want to understand where the dominoes lie? Final question, this is just with regard to the guidance. You talked about conservatively anticipating higher property cat rates online, I guess, for reinsurance costs. At June, does we guidance anticipate a meaningful change in the attachment point? I apologize if I missed that before.
Jon Christianson: No, it’s assuming the same attachment.
Mac Armstrong: And I would expand on that just a little bit when you think about our overall book and quota shares and things like that. Our guidance and estimates are basically static from a risk participation status. Obviously, we’ve mentioned crop that 5% is in there. But when we think about our overall portfolio, in loss ratio, acquisition expenses, all these things and that we kind of guide to in net earned premium, those all assume, let’s call it, static participation or underwriting to 2023 or end of 2023.
Operator: Our final question is from Pablo Singzon with JPMorgan.
Pablo Singzon : First question, when thinking about the growth in underwriting income that’s implied in your guidance for ’24, would it be fair to assume that the improvement there will be driven by net earned premium growth seems like you’re implying some deterioration in the combined ratio, which is consistent with what you’ve said in the past, given you’re changing the mix? So therefore, would it be fair to assume that the uptick that will be basically driven by net earned premium growth?
Mac Armstrong : We do expect our net earned premium to continue to grow. We’ve talked about it that reinsurance increase that we saw at 6/1 this year was about 30% or $13 million a quarter. So now, let’s say that we’ve got that fully in our results for Q3 and Q4, you saw that growth show up in the Q3, Q4 results. I would expect those dollars to continue to grow into Q1 and Q2, right? And we’re not expecting the same type of rate increase. So I would expect the growth in the top line to better translate to the growth in net earned premium throughout the year because of that factor. So overall, we feel very good about it. We try to project that and share with everyone what we expected to happen during 2023. And we think we did a good job of that, but we are expecting to see net earned premium continue to grow throughout 2024 even with a potential slight increase at 6/1 of this year.
Pablo Singzon : And then, Chris, I guess as a follow-up. The loss expectation you gave for ’24, I think 21% to 25%. If you do the math, that sort of implies a wider range than the $110 million to $115 million you’re giving for 2024. So I was wondering how you sort of get from that wider loss ratio range to a tighter range on income? Just if you could provide more context on how to bridge those 2 things?
Chris Uchida: Yes. No, it’s a wider range. Part of that is strategic just to make sure that we give those ranges out there for people because one thing, while I view that range as a good range for the year. I think some people like to apply that to every single quarter. And so on a quarterly basis, our loss ratio could — I would expect to be probably in between those numbers, right? But for the year, I would expect something closer to the middle of that range, let’s say, right? But because some people interpret that differently, I would like to give a little bit of a wider range there, right? But that is to your point, even on an after-tax basis that is probably wider than the $5 million adjusted net income range. But overall, that’s why we do it that way because different people interpreted different ways.
And if for some reason, it was a little higher or a little lower, it doesn’t mean it’s not going to be close to that at the mid — fourth quarter, it’s not going to be close to that to the midpoint when you get there for the full year. That’s kind of the philosophy there. But you’re absolutely right. That is from a dollar standpoint, probably a little wider range than what we give with the guidance.
Pablo Singzon : And then last one for me, just a smaller question. So investment income has clearly been at the event for Palomar like for all the other insurers. But — and just given your run rate in the fourth quarter, right, I think you pointed 7, you can just multiply that you can reach the high 20s and 24 easily. Could you just give a sense of your current book yield and the new money yields you’re investing at?
