Good morning, and welcome to the Palomar Holdings, Inc. Third Quarter 2021 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 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 2021 earnings call. With me here today is Mac Armstrong, our Chairman, Chief Executive Officer and Founder. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11:59 p.m. Eastern Time on November 11, 2021. 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 10-Q filed with the Securities and Exchange Commission. We do not undertake any duty to update these 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. Today, I'll speak to our third quarter results as well as our strategic initiatives and efforts to drive profitable growth for the remainder of 2021 and beyond. From there, I'll turn the call back to Chris to review our financial results in more detail. We are pleased with the sustained premium growth in the numerous strategic initiatives accomplished during the third quarter. Highlights of the quarter include strong written premium growth for yet another quarter with gross written premiums increasing by 48%. Growth across the enterprise was fueled by strong performance among our core products, continued traction of new products and partnerships and entering into new lines of business and markets. Notable premium growth occurred in our residential and commercial earthquake flood in the marine and Hawaiian Hurricane products. We also saw continued success with our nascent E&S company, Palomar Excess and Surplus Insurance Company, PESIC. PESIC grew its gross written premium 362% year-over-year and 22% sequentially from the second quarter. Second, we further expanded our product offering. Specifically, we launched an E&S residential flood product in a handful of states to complement our admitted offering. And in September, we announced our entrance in the fronting sector of the U.S. insurance market. PLMR-FRONT offers many advantages to Palomar, including access points into attractive lines of business, limited incremental investment and new sources of fee income. It also enables us to quickly enter new markets as a nonrisk-bearing insurance entity with the flexibility to participate in the risk over time. Third, we maintain our commitment to the long-term growth prospects of Palomar through incremental investments in technology and more importantly, talent. We successfully recruited experienced professionals across the enterprise, including subject matter experts in new and adjacent casualty markets and dynamic additions to our…

Thank you, Mac. Please note that during my portion, when referring to any per share figure, I'm referring to per diluted common share as 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 the MIM periods where we incur a net loss. We have adjusted the calculations accordingly. For the third quarter of 2021, our net income was $246,000 or $0.01 per share compared to a net loss of $15.7 million or $0.62 per share for the same quarter of 2020. Our adjusted net income was $1.7 million or $0.07 per share compared to an adjusted net loss of $15.2 million or $0.60 per share for the same quarter of 2020. Gross written premiums for the third quarter were $152.3 million, representing an increase of 47.9% compared to the prior year's third quarter. As Mac indicated, this growth was driven by a combination of strong performance by our core products, entering into new markets and by the execution of new partnerships across multiple lines of business. Ceded written premiums for the third quarter were $58.1 million, representing an increase of 39.7% compared to the prior year's third quarter. The increase was primarily due to increased catastrophe excess of loss reinsurance expenses related to the exposure growth and the increased quota share extensions due to the growth in volume of written premiums subject to quota shares. Seed written premiums as a percentage of gross written premiums decreased to 38.1% for the three months ended September 30, 2021, from 40.4% for the three months ended September 30, 2020. This decrease was primarily due to lower excess of loss expense as a percentage of gross written premiums. Net earned premiums for the third quarter were $64.7 million,…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.

Good morning, thanks for the call, I was hoping you could talk a little bit more about the new fronting business and maybe a little bit about sort of what the extent and limits of what you'd be interested in fronting are and maybe some of the risk management that's going to go behind it to make sure that what's fronts being fronted is what you want to be funding that kind of thing.

Paul, it's Mac. Thanks for the question. We are excited about our entrance into the fronting market. I think it's worth pointing out that we actually historically have served as a front. We did so in our specialty homeowners segments as well as in flood. But ultimately, what we are going to the market, it really affords us the opportunity to generate fee income on a nonrisk-bearing fashion, leverage existing infrastructure, enter new markets where we can potentially study the markets, learn more about them and determine if we want to take a participation in the future and then ultimately develop an expertise. So where we stand right now, we have two deals that have been announced. One is we are fronting on behalf of an unrated insurance company. In others, we are fronting on behalf of a cyber MGA. Both have been announced earlier this month – or in October. In both those instances, we are 100% or we are 100% reinsured and fully collateralized with the unearned premiums. So we're collateralizing the unearned premium. We want to take a conservative entry into this market. We potentially would be willing to take some risk on an occasional basis, especially for line that may be more property-focused where we can leverage our reinsurance tower as well as our underwriting acumen and do the appropriate counterparty credit analysis. But I think as we go into the market, the majority of what you'll see from us will be pure fronts where we are not taking a risk participation and where we are collateralizing the UEP. And that's what we've done for these first two deals. But we're excited about it and think there's great promise here.

That's great. Is there any limits on the kinds of products that you would front? Or is just whatever...

Yes. I mean I think we want to be domestic focused. I think there are certain lines of business that we are less inclined front right now. We've kind of come out and said that workers' compensation is something – because of the longer tail on the collateral requirements, that's something that will probably a little less interested in. I think heavy cat business is something that we're probably – unless it's something that's really up our alley is something that we're going to shy away from. But if we can get comfortable with the collateral underwrite the partner, get the appropriate reinsurance, I think it does broaden up our market on.

And then separately my question, on the attritional loss ratio, you mentioned sort of what it was if you excluded the runoff businesses. Do you think that's a fair run rate for the future? Or is there some adjustments we should think about prospectively from that base?

Paul, this is Chris. Great speaking with you again. I can handle the loss ratio question. Yes, as you outlined it well, when we think about the attritional loss ratio for Q3, it was about 17%. We think about $2.4 million that came from lines of business that we have exited. So we do think that, that is a better marker for how the quarter performed. What you did see this quarter is we did have a lot of growth in a lot of lines of business that do have attritional losses associated with them. So we have taken conservative positions with some of those newer lines. We continue to use reinsurance and underwriting techniques to make sure that those losses are lower. But because lines are growing at a healthy clip. We do expect them to contribute to the loss ratio. And so we have said it would move up based on the current book of business. Right now, we probably expect that loss ratio to come in between 14% and 16%. Over time, we do expect that to still continue to tick up because we are expecting growth from those lines of business. But it's also nice to remember that we do have a strong anchor to our book of business or to our loss ratio with our earthquake in Hawaii wind lines that are very binary. We're never going to be completely, let's combined ratio, our loss ratio focus. We want to make sure that we are investing in very profitable lines of business, what we do think we have with or lines that do have attritional losses, so we will contribute to invest in those, but these are profitable lines that you add to our overall ROE and bottom line profitability. So these are lines that we like to get into. But we do think Obviously, this does enforce our decision to kind of get out of the attritional or the admitted All Risk book of business and kind of this shows why we weren't giving the requisite return on it. So we want to make sure that we showed that with and without, so to speak.

Thank you for your insights. Appreciate it.

Thanks, Paul.

Our next question comes from the line of Jeff Schmitt with William Blair. Please proceed with your question.

Hi, good morning everyone. The residential weight book continues to grow really nicely over 20% where that growth been just from a geographic perspective, has it been inside of California or outside of? And then maybe could you discuss how much of a benefit you may be seeing? I know AIG or may be pulling back in quake. The large players still pulling back in the California homeowners market. I'm just trying to gauge how sustainable you think this sort of 20% growth is?

Yes, Jeff, this is Mac. Great question. We obviously are pleased with the continued success and sustained growth we're seeing in residential earthquake. It grew nearly 24%, and we are optimistic that it can sustain closer to a 20% growth rate for indefinite period of time. We obviously are growing nicely in California. We are also growing in the Pacific Northwest and in other states. So it's not just limited to California. It's Washington. It's actually states like Utah, Missouri and as well, where we can leverage partnerships like ones with travelers, for instance, that are really focusing on outside of California quake opportunities. But California is the predominance of what we do. And the dislocation in the homeowners market is a major contributor and I think it's one that has allowed us to not only grow the premium and the policy count, but it's allowed us to grow our distribution footprint. So residential quake total production plan is up, I think, 19% – excuse me, it's up 23% year-over-year. So that portends for future growth. You mentioned AIG pulling out that had – we have benefited from that. I think it's actually where we benefited there probably more in our E&S residential quake business because it's high value and high value is more tailored for the E&S market. So long story – short story is we think there's great growth ahead of us in the residential quake market driven by those factors. We also are going to continue to monetize our partnerships and we've made concerted efforts to do so through what we're calling an inside sales team that's really focusing on driving new producers, new production activity as well as appointing producers that are associated with some of our carrier partners. And then there are potentially some regulatory catalysts that we could benefit from as well, something that we are watching really more on a prospective basis, and it's something that really wouldn't impact us until 2022 or beyond.

Okay. Great. And then the commercial All Risk premium the drop for the quarter? And I may have missed it if you addressed that. But I guess I thought you were sort of transitioning that book to being more on an E&S basis. But could you maybe address that drop there and what you kind of expect over the next few quarters?

Yes. So we are running off the admitted all risk. And that basically, there was no premium written there in the quarter. So the admitted business will be all of that basically at the end of December. So all of the all risk business that we wrote in the quarter was E&S. So in the third quarter, we wrote roughly seven – I think it was roughly $7 million of premium, and that was tied to just all E&S business.

And just for a rate you think about where we were last year, if you look at the number of about $12.5 million, almost all of it was made up of the admitted all risk. I'd say there was $1.1 million in E&S company. So that gives you due to the growth rate of the $1.1 million to the $6.8 million, you're looking at a north of 500% growth. So that's kind of bogey that's out there, and obviously, that affects the overall growth as well. We would have been in the 60% – 66% range of growth if you take that book out of the equation.

I think one thing I'd add, Jeff, you may have heard it. But on the new what we are seeing in the E&S all risk was a 20% rate increase on average. And frankly, it's something that we expect will accelerate into the fourth quarter as the market absorbs losses from Ida.

Got it. Okay, very helpful. Thank you.

And our next question comes from the line of David Motemaden with Evercore ISI. Please proceed with your question.

Hi, thanks. Just a question on just the catastrophe losses this quarter. And I guess I just wanted to clarify, would you have had a full retention loss if we take out the impact from the runoff of the discontinued lines.

Dave, this is Mac. We would not have. As I pointed out, if you annualize the recurring cat loss for the quarter, it was about four points on the annualized premium. And that would have been losses from Nicholas and Ida. And that does not obviously include the PG&E loss, the shock loss there. But so no, it would have been retained. And Ida, on a stand-alone basis would have been about halfway up our retention, a little bit more than halfway of our retention.

Okay. That's great. That's good to hear. And then, I guess, maybe – and Chris, I just wanted to confirm I understood this right. Just on the attritional loss ratio. So should we be thinking about like a 14% to 15% baseline for this year, off of which you would expect to increase a point or two a year just as the mix shifts to lines with more attritional losses?

Yes, I think that's a good way to describe it, right? I think we've talked about it this year as our mix has changed and our book has grown that it has been ticking up. I would have expected it to be, let's call it, on the lower side of the teams at the beginning of the year. I think the growth we're seeing from lines like Inland Marine, from lines like Flood and the builders all those lines, some of the newer lines, we are pushing that up a little bit. So I think the 14% to 16% range is kind of what I would expect based on the current book on an annual basis. So that could be one point higher, it could be one point lower. But I would say my expectation is going to be in that range and then like you described. I would expect that if we continue to see this growth, especially in the newer lines, then it will start to keep ticking up, I would expect one that potentially two points a quarter. But again, we are continuing to use underwriting techniques and reinsurance to make sure that this doesn't swing volatility, and it's not going to just jump. It's not going to go from, let's call it, 15% to 30%. This is going to go up incrementally slowly on a quarterly basis.

Yes, Dave, if I would to just add a couple of things. and I'll reiterate a point that Chris made at the asset the call. I think we talked about it last quarter, 57% of our book right now has a 0% attritional loss ratio at the Hawaiian Hurricane and obviously, most prominently the earthquake. Secondly, I'll just give an example. Our builders risk book grew 350% year-over-year and Inland Marine group 350%. And that has a target loss ratio of in the 30s. In the quarter, it was around 15%. So it performed very well at 15% loss ratio and a 35% loss ratio. It has a very good margin and a very good return. So to Chris' point, it's accretive to the ROE. It's accretive to the ROI. So we feel good about how we are managing that. And then the last thing that I would add is as we enter into new segments, especially in the casualty business, we are very conservative in our risk participation. Our average net line is going to be around $1 million per casualty business with the max line potentially of $5 million. So we are going to be seeding off close to 80% in the – on the high end, and in certain cases, it is closer to 50%. So you can manage the volatility, so to speak, as we go in into these new lines of business, especially people like Eric and Ty joining us, we want to give them the tools they need to execute on their business plans, but we're also going to do what we've done historically in use attritional reinsurance strategies, most notably quota share to prevent major disruption or a book getting over it is out of the gates.

Got it. That's helpful. And I guess the cat load theoretically would be coming down as well as you have more of the casualty lines. So that's also, I guess, something to consider. I guess just lastly, on the other line of business when you break out by line of business, the gross premiums written. That had another very strong quarter of growth. I'm wondering how much of that was driven by the excess liability line? And just given what happened with PG&E this quarter, definitely feels like a one-off, but are there any actions that you're thinking about taking in terms of reducing the limit you guys are putting out there or using more reinsurance to sort of prevent that from happening again in the future?

Yes. A very good question, a fair question. So in that other line is going to be mostly all of our casualty business at this point. So we – as I just mentioned, our net line on casualty business is going to be on the high end, $1 million. So that in its own right, a shot loss there will not be a impactful as the loss from the PG&E account. I think also when you look at the type of risk the PG&E accounts, which is a high attaching high rate online. I think I pointed out, 75% rate online. There's really only one other risk that we have that's somewhat like that. It's a $2.5 million limit. It also has a high rate online, but it's in a different part of the country. It's a different exposure. So long story short, yes, I think what you'll see is our net exposure will come down even though the PG&E or the true net exposure was around $2.2 million. We would probably – if we were to renew account like that, line will probably be about half what it was.

Got it. That's helpful. Thank you.

And our next question comes from the line of Tracy Benguigui with Barclays. Please proceed with your question.

Thank you. I just wanted to just get a better frame of reference when you previously came out with your full year guidance of $64 million to $69 million. That did include at the time, I think, the Texas winter storms. And then now we just had results and you came out with the fourth quarter guidance. And I guess it would imply that you would be below that range. And I'm just wondering if the original guidance did not include catastrophe losses? Or how should I be thinking about bridging that gap?

Tracy, it's Chris. I can try and bridge that gap for you. So when you look at what the guidance we gave in the second quarter, we kept a called the $64 million to $69 million range. That did include the activity the cat activity in the first part of the year. So that was included in there. when you bridge it compared to where we are now, we did have $17.5 million of additional cat losses this quarter. So that is called the lion's share of it. The losses were slightly elevated, not where I'd say, materially elevated. But I think that is – the cats are the biggest contributor this quarter when you take that $17.5 million tax effect that gets down to $14 million, $15 million, and that's kind of the big bridge between where we are now. And if you added the $17 million to $18.5 million on top of our year-to-date number. That's the, call it, the bridge between taking that, let's call it, $64 million down to the $51 million, $52 million range. Did that answer the question? Or is that...

It does. I'm just wondering why maybe we should be thinking about cat load.

Yes. I mean, that's a fair question, Tracy, I think what I would tell you is we don't have not factored in a cat load. What I would direct you to is just with the experience that we just came out of it kind of on a steady-state basis. The losses from Ida and Nicholas equated to four points on an annualized or premium basis. So that might be something directionally you could look at. But our approach has been not to try to ratably spread a cat losses across the year.

Okay. And my next question, and this may be super basic. But I guess I was a little bit surprised how long your exit from admitted all risk and your specialty home in Louisiana would take to make its way as we saw elevated catastrophe experience this quarter. I mean, Mac, I think you said at our conference that you've reduced your exposure in your commercial all risk segment by 80% at least at this point in time. Yes. So I guess I'm just wondering why the lag once you decide at exit a market, why would we still feel a little bit longer?

Yes. Tracy, I wish it was as fast as you and I both hope or could see it. Unfortunately, you have to basically run off every policy. So if you make the decision to exit on, let's just pick a 10, 31, 2020 all of those policies in force wind down over the course of the year. So when we spoke at your conference, we were down to less than 180 policies in force. And it just so happened that the storm came where we had 17% of the book still left. So it's not as simple as saying we're out of a market. It is as simple as saying we're out of the market, we're not going to write new business, but you do have to honor policies in force and provide coverage for them until they lapse.

Okay. So where – maybe just my last question, where we are right now in terms of any of those markets that you've exited?

We will be out by 12/31. I think we are in Louisiana. We're probably the furthest through because out of the first state. I think Texas, we will be the last one. So by December, I think September 1, our total insured value there will be a couple of hundred million, and the policies would be in the, call it, $60 million to $70 million in that state, but they should all come off by the end of that month.

Very helpful.

Our next question comes from the line of Mark Hughes with Truist. Please proceed with your question.

Yeah. Thank you. Mac, I don't know whether you touched on this earlier in the call, but the pricing dynamic you're seeing in the excess risk you made it pretty clear that PG&E was an unusual situation. But what are you seeing more broadly in terms of pricing and competition for those excess risks?

Yes. I mean I think, Mark, it remains a pretty hard market in that excess liability space. We are actually talking to our professional liability team yesterday that recently joined in a broader case team they are building out their filings and appointing producers and starting to get their first submissions in. And – the rates are materially up. For us, it's hard to say where they were compared to last year because we were not in the business last year. But what we're hearing is that in the excess space, the rates are up 40% prior year-over-year, there are certain classes that you can't get coverage for, especially in some of the professional lines. So we feel like our timing there is good, but it's also a circumstance where we want to be pretty judicious in how we go into that market, and that's why we're solving for kind of a net line of $1 million on an account. But overarchingly, I think we believe in whether it's excess property or excess liability, there is almost in some ways kind of a reinvigoration of the hard market, and that gives us confidence that we're going to maintain pretty good rate integrity through 2022.

And when you say reinvigoration, are you talking now versus last quarter, six months ago?

Yes, now versus last quarter. I'll give you an example. I think E&S, All Risk, we were 20% up in Q3. I think now you're looking at 25% up, if not more.

Understood. Thank you very much.

Thanks Mark.

Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question.

Thanks. If I can take a step back sort of big picture, we've always defined the cat retention, cat net retention in the context of, I guess, shareholders' equity does the diversification of line of business change that at all?

Meyer, I don't think it does. I mean, I hope that the diversification in the other lines of business allows us to bring down the cat load across the totality of the operation and drive some scale. We expect those diversifying lines, especially like PLMR-FRONT to provide less riskier if not a risk-free margin that will help, but I still feel like we feel we want to maintain that retention inside of 3% of surplus and well inside of a quarter of earnings.

Okay. Perfect. That's helpful. On the fronting business, I don't know if this is an answerable question, but what does that look like in an inevitable soft market?

In a soft market – it depends on who you're running for. I think we are funding right now for MGA. I think we're fronting and then for an unrated insurance companies, I think in a soft market you're still going to need access to a licensed vehicle. So I don't know – it may mean that margins get tighter for reinsurers remaining that margins get tighter for the MGAs. But there is some cost or carrying cost associated with us taking tail risk of taking regulatory and licensing risk. So I think our margins will hold.

Okay. Perfect. And I was just hoping for an update in terms of California? Because I know that they're relatively recently were basically restricting the homeowners company's ability to nonrenew policies. And I just wanted to get basically the current fed.

Yes. So I think California had put in place, I guess, it's probably the third geographic moratorium where certain homeowners companies are not able to – excuse me, admitted homeowners companies are prohibited from nonrenewing in those markets. That is driven purely by wildfire exposure while far lack of appetite from the homeowners market. But that doesn't mean that they're not going to be renewing at prices that might be higher or there are still other areas that they're going to come out of because they're trying to reduce their exposure. So it still creates dislocation. And I think in many ways, it actually heightens dislocation because leads to a circumstance where homeowners carriers to grow further and further concerned about doing business in the state when they are precluded from nonrenewing businesses taking is unprofitable.

Okay, perfect. Thank you very much.

Our next question comes from the line of Pablo Singzon with JPMorgan. Please proceed with your question.

Hey, thanks. So there was news about a month ago about the California earth lake authority setting up an in-house to be insured to essentially mitigate the rising prices and having to raise premium rates and customers? Is Palomar exposed to a similar dynamic of having to raise prices to absorb higher insurance costs? And I guess bottom line, from your perspective, is what's happening with the and opportunity or threat?

Yes, Pablo, I'm glad you asked that question. I think what is happening is the CA is undoubtedly an opportunity for us. So the CA has gone on record specifying that they potentially based on sustainable strain on claims paying capacity because of increasing reinsurance costs. We are not in that circumstance. We buy about $1 billion. Sorry, for the background noise. that was $1.8 billion of excess of loss limit for our earthquake, CA buys about six times back. So we have clearly ample capacity to support our growth there. I think most importantly, and the CA again has said that they're worried about is claim paying capacity. And furthermore, they have said that their rates may double over the next five years unless they can solve for how much limit they have on their books. And so there's also been talk of them potentially shedding business. So we think it's an opportunity. The CA governing body has been getting together by monthly basis or quarterly basis to review a proposed plan that's been put forth by the management of the CA. All-in-all, it lends itself well to dislocation, not only in the California homeowners market, but specifically in the earthquake market, and we are primed to capitalize on that. So we're watching it closely. We are doing what we can from a marketing standpoint to hopefully position us well when there is some inevitable change that comes out of the CEA, but I think that's more of a 2022 dynamic that comes to play.

All right. And then my second question is, I was wondering if you talk about your private flood exposure in California, and I leave it you how to cut whether by geography or maybe property type. I'm just trying to get – and I think California is our biggest private flood state. I just trying to get a sense of your potential exposure to the floods in the northern part of the state is at October, and serve type of events that you price for and contemplate in your models?

Sure, Pablo. Yes, in fact, California is our largest state for our flood product. And the model that we put in place in California was very similar to what we do in earthquake and that we created a pricing grid that basically prices every location uniquely in the state of California. And so therefore, we are able to price competitively against the NFIP. There were heavy rains. We have seen claims, but nothing out of the ordinary. And in fact, even in our attritional losses in the third quarter, we had some measure of flood at cat claims we had losses from Ida in the state of Pennsylvania, for instance. The flood program performed very well for us. The inception-to-date loss ratio is less than 20%, and we feel very good about its prospects. In light of the work that we're doing from building out – extending our production footprint, building out partnerships, but also the potential regulatory reform is tied to NFIP's risk rating 2.0, which is basically going to be repricing five million accounts.

Yes. And then the last question for me is could you talk about to what extent earthquake pricing is correlated not with sort just a higher P&C pricing environment?

Yes, Pablo, that's a very good question. I would say earthquake pricing certainly is impacted by catastrophe losses on a global and national basis. So if reinsurance cost goes up, ultimately, earthquake pricing will go up in the third quarter. Our rates were up 9%. That is slightly below where it was the prior two quarters. But it's still steady increases, and it allows us to potentially improve our margins some. So it is correlated to cat losses on a global basis. It's probably a little bit more of an indirect corollary than wind. And I think, again, a prime example of that is our E&S win was up 20% in the third quarter, quake was up 9%.

Got it. Thank you. Operator [Operator Instructions] Our next question comes from the line of Adam Klauber with William Blair. Please proceed with your question.

Thanks. Hi guys, just one or two questions. On expenses, underwriting expense for the year running up almost 50%, which – sorry, other underwriting expense, it makes sense because you've been building a platform, hiring teams, getting new products up and running. As we think about 2022, do you think that the rate of growth in underwriting expenses will come down compared to 2021?

Adam, it's Chris. I'll try and address that question. Yes, I think you outlined it well. I would expect it to call it, flatten a little bit as well this quarter. I think we did talk about some new hires that we had on. So those are going to, call it, add to the expense. We are going to continue to invest. But we have seen, let's call it, the rate of other underwriting expenses compared to gross earned premium continued to decrease as we talked about. – earlier this year. We did expect, call it, the first half of this year to kind of be up to a little bit flat. That has started to come down. It was 9.4% this quarter, Q2 was 11.1%. So it is moving in the right direction with some of the investments we continue to make in the casualty space, the E&S business. I would expect it to be a little bit flatter in Q4 and maybe in Q1, but overall, it's going to scale over the long term. It's never – the dollars are always going to increase in the near future just because we are continuing to invest. I do not expect it to be at the same rate that we're growing the top line or earned premium. So when you're looking at those things, it would be at a lower rate, but it's still going to be something we invest in because we want to make sure we're building our organization and our business to continue to sustain that growth and make sure that we have all the right pieces in place.

Right. So if we look at your gross expense ratio this year with – obviously, there are some moving pieces, but it looks like it's coming in around 31.5%. As the other underwriting expenses slowed down, is it possible that we'll see some improvement in that gross expense ratio more in 2022?

Yes, I think you can definitely expect to see more of it. That's where I would expect the most to come in. I think the other place is even the acquisition expense is a lot steadier, right, harder to maneuver as we go into the fronting that can actually have an influence on the acquisition expense side of it. So there is the potential for some, call it, reduction on that side as well. But if I was to pick it, I would expect more of it to come from the other underwriting expenses. We do have still strong growth in other lines of business that do have higher acquisition expense, but I do expect the fronting over the next, call it, one year or two to help the acquisition expense ratio as that business grows.

And that is my next question. On the fronting, the two programs you brought in to date, are those more like the tens of millions of range potentially? Or is that – could they be bigger as we think about whether 2022, 2023?

Yes, Adam, this is Mac. A fair question. I mean I think what we're – if I had to say what we're targeting for we'd like to see in $22 million, $100 million of premium from that. And I think if we do that, then it will be a nice fee income stream, kind of a nice risk-free income stream and those two are good anchors, so to speak, for that goal. We don't want fronting to become in 2022, a $1 billion line that is driven by one large account that we could lose the next year. So we're going to – we're going to be deliberate on how we go into it, and I think we've got two very good initial partners and a healthy pipeline.

And if I remember correctly, and I could be off here, but I always thought front fees were set in that mid and a little more single-digit range. Is that around...

Yes, I think, is a good rule of thumb.

Yes. Yes. Okay. Okay. And one last question. On the $12.5 million retention. When did that come up? Is that? Is that midyear or is that year-end?

6-1.

6-1. Okay. Okay. Great, thank you, guys.

Thanks Adam.

And we have reached the end of the question-and-answer session. I'll now turn the call over to Mr. Armstrong for closing remarks.

Well, thanks, operator, and thanks for everyone on the call this morning. As always, we appreciate your participation, your thoughtful questions and most importantly, your support. As I mentioned in my prepared remarks, we are pleased with all that we accomplished in the third quarter. And I think especially pleased when we look at it from a lens of 2022 and beyond. We exit the quarter in a better position than when it commenced. We continue to have a very positive outlook across the breadth of our business. And we feel that we are in good shape for the rest of this year and again, 2022 and beyond. So we look forward to sharing our results with you the end of Q4 as well as updates that may avail themselves over the days between then and now. So enjoy the rest of your day, and we'll speak to you soon. Take care.

And this concludes today’s conference. You may disconnect your line at this time. Thank you for your participation.