Good morning and welcome to Palomar Holdings, Inc. Third Quarter 2022 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. [Operator Instructions] As a reminder, this conference 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 2022 earnings call. With me here today is Mac 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 11:59 p.m. Eastern Time on November 10, 2022. 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 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 will turn the call over to Mac.

Thank you, Chris and good morning everyone. I am very proud of our third quarter results as they are further testament to our commitment to profitable growth and our execution of Palomar 2X, our intermediate term strategic plan of doubling our adjusted underwriting income while keeping a 20% adjusted return on equity. We grew the gross written premium of the business 66%, highlighted by sustained earthquake growth and incremental progress on newer lines of business such as Inland Marine and Casualty. We made incremental traction in our nascent PLMR-FRONT and Excess property franchises amongst others. We added new talent throughout the organization in the underwriting, actuarial and technology departments, perhaps most significant, even with the full retention loss from Hurricane Ian, a major catastrophe that severely impacted our entire industry, we generated an adjusted combined ratio of approximately 90% as well as an adjusted ROE of 10% when adding back realized and unrealized gains and losses from our investment portfolio. We further validated the resilience in our model as adjusted net income grew over 328% year-over-year, again with the full event retention loss. Taken together, our continued strong momentum through the third quarter provides a clear line of sight to doubling our adjusted underwriting income in an intermediate fashion and at a pace that has accelerated from where the concept was first introduced in June of this year. Turning to our financial results and strategic priorities in more detail, during the quarter, we made strong progress executing on all four components of our 2022 strategic plan. Our first priority is focused on generating strong and profitable premium growth, which we accomplished once again this quarter having increased gross written premium 66% to $253.1 million. Our earthquake business grew 19%, led by strength in our residential earthquake product, which continues to…

Thank you, Mac. Please note that during my portion, when referring to any per share figure, I am 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 them in periods when we incur a net loss. We have adjusted the calculations accordingly. For the third quarter of 2022, our net income was $4.3 million or $0.17 per share compared to net income of $0.2 million or $0.01 per share for the same quarter in 2021. Our adjusted net income was $7.4 million or $0.29 per share compared to adjusted net income of $1.7 million or $0.07 per share for the same quarter of 2021. Our adjusted net income, excluding net realized and unrealized losses was $9.2 million or $0.36 per share compared to $2 million or $0.08 per share last year. Gross written premiums for the third quarter were $253.1 million, an increase of 66.2% compared to the prior year’s third quarter. Our consistent strong growth was driven by a combination of favorable rate acceleration and increases in volume across our products. Ceded written premiums for the third quarter were $161.9 million, representing an increase of 178.8% compared to the prior year’s third quarter. This increase was primarily due to quarter share reinsurance driven by the growth of our fronting business, lines of business subject to attritional losses and additional excess of loss reinsurance to facilitate growth and the impact from Hurricane Ian. Ceded written premiums as a percentage of gross written premiums increased to 64% for the 3 months ended September 30, 2022, from 38.1% for the 3 months ended September 30, 2021. As anticipated, our fronting business was the primary catalyst of this increase, slightly…

Thank you. [Operator Instructions] Our first question today is from Mark Hughes of Truist. Please proceed with your question.

Yes. Thank you. Good morning. Good afternoon. Chris, the Specialty Homeowners business, you wrote $14 million in 2Q and zero in 3Q. What impact did that have on earned.

Yes. So Mark, that’s a great question. When you think about it from a gross earned standpoint, obviously, the impact was minimal, right? Let’s talk about the Specialty Homeowners book just a little bit. There is two pieces of that. There is the Texas portion that we have put into a full fronting model effective six of this year. There is the non-Texas Specialty Homeowners that is in runoff. Obviously, we did not write any more business in Q3. The Texas business is now in the fronting model already is our funding model, so it’s generating consistent fee income. But that move obviously has moved the written premium out of the Specialty Homeowners line, and we’ve now included it in the fronting line. From a net earned standpoint, obviously, there is an impact, there was some of that impact we felt in Q2, but there was only 1 month of that impact. The third quarter is the first full quarter where you see the full impact of that net earned, especially for the Texas Specialty Homeowners book being moved to the printing model. When you think about that from a headwind standpoint, that’s probably $3 million to $4 million of ceded earned premium that has now moved out of the net earned premium because that is in the fronting model. Obviously, we do receive a little bit of benefit of that in the losses, but also you see that in the acquisition expense. But when you’re thinking about from the top line, the revenue line or the net earned premium, yes, there is a little headwind from that, but that’s as expected, moving that and also, obviously, to get that fee income.

Thanks for that. I think your guidance for the non-cat loss ratio for the full year was 20% to 21%. How do you see the trajectory of that as we think about the emergence or development of the 2.0, what is – what should we think about next year specifically?

No, it’s a good question. Obviously, the loss ratio for the quarter was higher than we would like to see it. Some of that is due to the strong growth of the lines of business are key to Palomar 2X, whether it be Inland marine or casualty bills grew faster than we expected, definitely faster than we expected when we presented Palomar 2X at Investor Day. So we’re happy about that, and that was taken into the thesis when we’ve said all along that the loss ratio was going to continue to tick up because of the growth in some of these lines and the overall change in the mix of business. It’s also relevant when we talk about the lines of business that we’re running off. Those lines of business obviously contributed a little bit more than we would have liked this quarter, and those lines will mostly be run off in the first half of next year, but let’s call it mostly fully run off by the end of next year. So there is still some of that going to be running through there. We still expect from a mix standpoint that the loss ratio will continue to tick up. But when you think about it a little bit longer-term or intermediate term and you think about it in 2024 or 2025, when you think about the Palomar 2X bottle and what we presented, also assuming quota shares that are the same mix of business is the same as we presented. We expect that loss ratio to continue to go down from where it was. So yes, it could go up to 23%, 24% in the more near-term. But I do expect over the more intermediate term of, let’s call it, 2 to 3 years that, that loss ratio will continue to tick down as the mix of business improves – some of those lines of business are fully run off and we get a little more consistent earnings and predictable earnings from some of the casualty clients, but also some of the lines subject to attritional quota share. So overall, I expect it to improve, but there is going to be a little bit of an increase and then a decrease, let’s call it, hopefully, we will see that starting to come up near the end of next year but early in 2024.

Mark, this is Mac. What I would add is that the lines, whether it’s Casualty or Inland Marine did outpace the growth. And that’s a positive thing for us. But like Chris said, that means that you pull forward a little bit the timing on the attritional loss ratio ticking up. So net-net, we are accelerating the pace of Palomar 2X because of the performance of both fee generative business and PLMR-FRONT and those lines that are expected to grow at a quicker rate than historical binary lines like Hawaii and earthquake. So that is a positive in the sense that I think that it will allow us to get to the inflection point where the loss ratio does start to tick down at a quicker pace than initially forecast. So that is something that I’m actually encouraged by.

Mac, you say proposed changes that the California Earthquake Authority has not yet been a catalyst to the quake business. Can you elaborate on that? Why not and when if they are going to be a catalyst.

Yes. Sure, Mark. And that’s a good question as well. I think ultimately, this California Earthquake Authority has not come to a conclusive decision on the majority of the changes that they are wrestling with. They have another governing body meeting in December. And the topics on the table include a reduction in coverages, especially the non-structure limits. There is also a discussion of them potentially going back to the traditional mini policy. So the changes in coverage there continues to be a little bit of a kicking of the can down the line. It creates agita and it allows us to market against us, but it doesn’t drive something conclusive whether it be from the participating insurers that are members of the CEA or some of our distribution partners that still have business that they send off there, especially something that’s a more full coverage policy. Secondly, as it relates to the reduction in claims paying capacity, they have stated that they are buying less reinsurance. It’s to the tune of $1 billion to $1.3 billion. That’s just going to come up as it renews. And so that’s a dynamic that we actually look opportunistically upon and there might be a limit that can be redeployed to our program that allows us to grow efficiently from a reinsurance standpoint and support the growth in the premium base. And frankly, it will allow reinsurers to get a participation in a more attractive and a better returning book of business. So what I would say is the coverages, it’s fluid. I would expect something will shake out over the course of ‘23. The reinsurance and claims paying capacity, which is a catalyst for the participating insurers as well as us as a buyer of reinsurance, that will take course over the course of the year as their program renews and they have got a lot of different treaty dates.

Appreciate it. Thank you.

The next question is from David Motemaden of Evercore ISI. Please proceed with your question.

Hi, thanks. Good afternoon or good morning for you, guys. Just a question on how we should think about the reinsurance costs? I know you guys renew a lot of your – well, I think the aggregate renews on 4.1 and the rest of the program are news on 6.1 next year. Obviously, hearing about the dislocation, I think you guys had a 9% increase last year in your reinsurance costs. So I guess I’m wondering, it’s a two-part question. What are you guys expecting for your reinsurance cost increase this year just given everything that’s happened in the market? And second part, do you think you’ll be able to increase your pricing on a consolidated basis considering the residential earthquake book as well, will you be able to increase your price by enough to offset the cost of reinsurance?

Dave, yes, this is Mac. That’s a good question, and it’s something that we are very focused on in taking stock of this reinsurance market. We’ve actually been in Bermuda, and we get down to remitting get to lending kind of on an off-cycle basis just to catch up and give people a holistic view of all the Palomar is doing. And it’s afforded us the chance to get a sense of this market. I mean it is a dislocated market and there is pullback from reinsurers or retrenching of their property cat appetite. I think it’s important, though, for us to reiterate a few kind of key themes. One is the property cat perils that are in the crosshairs for the majority of rate increase is going to be Southeast Wind, which obviously, we have some exposure to, but I’ll come back to that because it’s a very decreasing book of business. And then those that have secondary payrolls think about tornado hail, deracho [ph] or Midwest wind and then have delivered kind of unexpected losses. So for us, and even if you look at Ian, that was not an unexpected loss, but as it relates to us, we feel that we’re in a very solid position. We have meaningfully reduced our SCS and cardinal hurricane exposure. It’s more than 60% since 2020. We actually, just with the runoff of this book that we have in place that we put into place at the start of this year, there is another 20% reduction in our PML. And so as we think about what comes up for renewal at 6.1, it’s really going to be a single peril or single uncorrelated peril renewal. And if you talk to reinsurers, that’s what they are focused on from a property cat standpoint.…

Got it. Thanks. I appreciate that answer. And maybe just a follow-up there, I mean, are you hearing from reinsurer, we’ve been hearing just a broader retrenchment away from property lines, which I don’t know if that includes earthquake or not. Are you seeing just less capacity just full stop across property perils, just on the reinsurance side?

We’re not hearing full stop. So again, we don’t have anything renewing at 1/1, but obviously, we’re talking to reinsurers back probably 30 reinsurers over the last month or so of a marketing trip that was actually established before Ian. But nonetheless, no, I mean I think it’s a matter of what their cost of capital is and what they are targeting. I think every reinsurer is looking as earthquake as, a, a bit of a safe haven. It’s not climate change impacted. It’s uncorrelated from their peak zone. So, Southeastern wind is a little bit of a different story. And so that’s why we feel good about the actions that we’ve taken over the last 2 years and that we will have probably when it’s all said and done, less than $200 million of Southeastern wind PML that we’re buying limit for, which is less than 10% of our total program. So when you can bundle southeastern wind with earthquake and then the other thing, too, is as we’ve grown and diversified, we can bring more casualty opportunities to reinsure. So there is more that we can trade with from our broad relationship standpoint, we feel that we are uniquely positioned in that regard. And the other thing I’d add is, Dave, we have built up a very significant book with our reinsurers. They made money with us, a lot of money with us. So I think that accounts for something, too.

Got it. Thanks. And then I guess just on the attritional loss ratio. I guess now we’re thinking 23%, 24%, I think, you were originally taking about a 21% to 22%, if I recall, for next year. Is that really, is that all driven by mix where you’re having just a greater portion of your net earned premiums that are just coming from these other lines, which I think you guys had outlined have a 57% attritional loss ratio, and it’s just purely mixed or is that 57% loss ratio that you guys laid out in the Palomar 2X? Has that changed at all?

That’s good question. Obviously, that has not changed, our view it is talked about it, our view on the lines of business that are fundamental to Palomar 2X into marine, casualty and the like, those loss picks haven’t changed. Those lines performed as expected this quarter. So we’re very happy with that. But the written premium and the earned premium associated with it have accelerated. And so from where we were at in June, we are in a different spot than it has accelerated. So I brought some of that loss ratio, call it, forward a little bit. And so when we look at it, and we think about 2023, yes, that does push the loss ratio up. But the one thing I’d also say is that we’ve always had this runoff in our expectations. And so we knew that, that part of the mix was in there when we’ve talked about this ticking up. If we can fast forward and get this out of our book, I still expect the loss ratio in total, same thing, all those caveats this with the same quota share, say mix to be below 20%. And so if we can do things faster and get that mix of the right spot by the end of 2023, maybe that happens faster, maybe something – one of those lines decelerates a little bit and other line goes faster, and so maybe it stays a little higher, a little bit longer, but that’s a little bit harder to predict. But overall, this mix is – or this new business that we’re writing is performing as expected it’s what we like to see. We’re very happy with it. We’re very happy with the growth trajectory. And I think when you look at it on a long-term basis and when it’s call it the mix is a little more mature, we still expect that loss ratio to be below 20%. But there is still going to be some increases in a little more of a short-term. So the one thing I would say is I don’t want people to front-run the comment where we say that $5.3 million or 29% of the loss ratio for the quarter is from these lines of business. These lines aren’t necessarily gone in Q4. They are going to take a little bit of time, but most of it – the majority of it will be gone by the first half of next year.

Got it. Thanks. And is there like – because you guys obviously disclosed on the gross basis, gross written basis, the mix. Back of the envelope, I’m calculating like roughly 40% of your mix will be from these, I guess, attritional loss lines. Is that the right like level of the mix to think about? And is that sort of a stable level or would you – I guess it sounds like you would think it would stay at a 40% mix and it’s sort of going to be tapped out there?

Yes. I think are you doing that ex-fronting. I think if you are thinking about ex-fronting and we go in with, let’s call it, comparing to earthquake in Hawaii kind of the binary line. And yes, I think 40% is probably the right mix there. We have said for a while, excluding fronting that at some point in time, there is probably going to be a 50-50 mix between earthquake and other lines, I would say, in that commentary, that Hawaii is probably in there a little bit as well. But no, I think if those lines are, let’s call it, 40% to 50% of the non-fronting mix, and I think that’s a good mix for us. But obviously, everything still has to continue to grow, which we are watching as well and making sure that we are fundamentally strong on earthquake growth will continue and is a key fundamental to how we are operating the business. And earthquake has seen good growth as we sit here today.

Great. Thank you.

The next question is from Pablo Singzon of JPMorgan. Please proceed with your question.

Hi. Good afternoon. The first question I had is, could you speak to the slowdown in gross premium growth or binary alliance in the quarter? I think based on my math, you grew about 33% in the first half. And in the third quarter, your grading percent. It seems like from your comments, you expect growth to accelerate once disruption from the CA begins to play out. Also, can you comment on any impact you are seeing from each riders pulling out of California, I think all states announced stop filing new business?

Hey Pablo, this is Mac. Yes, it’s a good question and happy you brought it up. The growth did slow down sequentially from the second quarter to the third quarter for Earthquake and Hawaiian Hurricane lines. I would point out that the third quarter is our largest and so it’s a tougher comp. But what I would tell you is that as we sit here today, the growth year-over-year in the early part of the fourth quarter has accelerated. Some of that’s a function of the residential side, E&S opportunities that we are seeing and the ability to get rate there. Some of that is some partnerships that are getting more and more traction. On the commercial side, it’s rate and dislocation or better said capacity pullback. So, while it was – earthquake did grow just under 20% in the third quarter, we expect that to sustain, if not grow faster for the remainder of the year. On Hawaii, we were waiting in the third quarter. We were not actively looking to grow our exposure there. We were waiting on the approval of a rate increase and an inflation guard. So, we did get both those approved in August. And you typically are quoting 45 days, if not 60 days out ahead. So, what we are seeing there is, again, a reacceleration of growth in those – in that binary segment. So, we feel very good about the growth prospects for residential earthquake and then even Hawaii. Hawaii, we are not going to be growing exposure, we are going to be growing more just from a pure rate. But I would expect a sustained level of growth in those lines that will be a nice anchor going forward.

Got it. And then just a follow-up on the reinsurance discussion, how much of your residential risk book is admitted versus E&S? And how fast do you think you can shift your mix there? I guess the context of the question is that recognizing all these pricing levers you have, at the end of the day, your biggest exposure is still California earthquake, right, which is mostly admitted and a subject that regulator that’s not granting any pricing pieces?

Yes. No, I mean we do have an inflation guard, right. So, that’s ticking up 8% a year on the admitted side. But the E&S book is around 10% right now plus or minus. And I think probably closer to 8% right now. But nonetheless, we do have the ability to increase that channel, in particular, as we look at high-value thresholds and which eligible for the traditional admitted versus the E&S from a high-value standpoint. We can look at certain producer channels. We can also look at geographic concentrations to manage that. So, the admitted side does not afford the latitude. We can use the E&S company. The inflation guard gives us a decent cushion as well. The inflation guard is frankly keeping up just with the risk-adjusted increase on the 6.1 renewal. So, the rest of it will be subsidized by the commercial.

Got it. And then just switching to the results of this quarter, maybe for Chris, how much earned premiums were associated with the runoff book in the third quarter? I am just trying to get a sense of the AOI loss ratio ex those losses. And I guess can you talk about the drivers of claims here? I think the main reason for your decision to exit certain lines and to switch it to cap risk, but it seems like attritional factors drove the losses this quarter?

Yes. No, that’s a fair statement, right. Obviously, if you look at this quarter, I mean some of these lines, mostly the lines don’t have a ton of cat. They do have a little bit of cat in there. So, some of that was felt. But no, the attritional losses were the reason in that call it – if they were cat, we look at the cat payback. But the attritional loss was the main reason we made the decision to exit these lines. When you look back in Q2, obviously, we had these lines and they were performing better, but there is some reading of the tea leaves, and we thought that this may be in there. And so this definitely affirms our decision to exit those lines. These lines in total, obviously, we haven’t given out the breakout of the earned premium, but in total, it’s probably good to think about these lines, even with this loss ratio operating in the 90% to 95% combined range. So, that’s probably a good way to think about it. But no, they drove some of the results this quarter. It’s something that we thought could happen and really did drive the reasoning behind we wanted to exit these lines. And so that’s what we started doing earlier this year. And that’s why the majority of it will be out by the middle of next year. So, we are happy with that decision. And we would just wish like some other people that it was out sooner. But it doesn’t take away from the good results we are having on the other lines of business and the growth that we are seeing in the binary lines, the growth that we are seeing in the lines are key to the Palomar 2X and the fee income that we are seeing on fronting as well. So, we feel good about all those things also.

Are these lines non-tax specialty owners, or are they something else?

There is specialty homeowners. There is also an assumed reinsurance relationship, which is, it’s a homeowner/renters product. And then there is one commercial property program that we are, again, restructuring running off.

Okay. And then last for me, just given your cat experience this year, do you think the $6 million average annual loss estimate you offered before for cat still stands? And I guess, just given what happened, you talk about your appetite providing risk in Florida, given that you weren’t in that market in any meaningful way a couple of years ago. Thanks.

Sure. So, I think there is a couple of things in there. The $6 million is the average annual loss and was not an average storm. This was, I don’t know if it’s a one in 40-year or one in 50-year or one in 30-year event. But so that’s – so it’s going to – an event like that will over-index the average annual loss. That all said, as I mentioned earlier, we still have line of sight on an incremental 20%-plus reduction to our exposure in continental hurricane, which will push down that AAL and also the runoff, which is a function of the runoff of that continental hurricane exposure, plus then one of the things that a hard market affords you is the ability to look at your book and drive further optimization. So, we have rate targets. We have the ability to contract our line sizes. We have the ability to look at occupancy eligibility and age of construction. So, all of those will also help the AAL our ability to – our retentions, whatever it might be. So, the AAL will actually come down if you roll forward in next year’s wind season through previously identified initiatives and then ongoing initiatives that we have right now on managing our wind exposure and taking advantage of rate and the like, we will push it down further. And then again, just to reiterate, and that was not an average event. That was a cat 4, cat 5 that hit Southwestern Florida, I think we feel very good about our losses only being 3% on a pretax basis of our surplus.

Fair enough. Thanks Mac.

The next question is from Jen Lee [ph] of KBW. Please proceed with your question.

This is Jen Lee on for Meyer Shields. Thank you for taking my questions. My first question is on inflation. So, is there any kind of changes on the current inflation costs, are you comfortable with the current level?

Yes. So, on the inflation guards, we did increase them from 5% to 8% on our admitted residential book, so residential earthquake and emitted Hawaiian hurricane. I think we continue to look at not just the inflation guards, but the underlying insurance to value and the ITV for all of our portfolio. So, we use that to look at when a policy is submitted for new business or renewal to make sure that the estimate on the replacement cost does factor in a true sense of inflation right now. We also have the ability to leverage our builders risk business, which has what’s called auditable policies that you can see once a project is completed, what was the ultimate cost and how did that compare to the original estimate. And so if that was 10% or 12% higher, not only is the premium adjusted, but we can use that on a regional basis to inform what we think the replacement cost should be across all of our portfolio on a state-by-state basis. So, right now, we think it’s adequate. That doesn’t mean that we won’t potentially bump them up. And hopefully, as the Fed gets inflation under control, there will start to be a cushion that would be below the 8%.

Got it. Thank you. And my second question is on the fronting premiums. Fronting premiums for this quarter continue to be strong. So, is there any updated thoughts for 2020 – this year and going forward in 2023?

Yes. So, you are right. Fronting was strong this quarter, and it has exceeded our expectations this year, and I think that gives us great visibility on a nice fee income stream into 2023. We did take up the range from $180 million to $200 million this quarter from $160 million on the high end that we gave at the end of Q2. So, that gives us good momentum into ‘23. We have not given a target for ‘23. What I will say is that we have a nice pipeline of prospects for the fronting business. The existing clients are performing well. We have been able to bring incremental capacity to support their growth. through our reinsurance relationships. We have been able to help them execute on a host of ways. So, that gives us a very nice eviction on the fronting opportunity in ‘23 and beyond.

Got it. Thank you for the color.

Thank you.

The next question is from Tracy Benguigui of Barclays. Please proceed with your question.

Thank you. As you have mentioned that you exhausted $12.5 million catastrophe retention and you are also paying a reinsurance reinstatement premium. Can you highlight what the reinsurance recoveries were your gross losses around trying to get at is I am just trying to figure out how far in your program, you might have had some losses and then just tagging back to that discussion with reinsurance capacity, if you had a view of how those reinsurers would feel about renewing with you since they have had some losses.

Yes. Hey Tracy, this is Mac. That’s a good question. So, just as a reminder, we do have prepaid reinstatements. So, we have a $12.5 million retention loss from this event. And then whatever is impacted in those lower layers of our reinsurance program are reinstated and so come back online. Now, we have not disclosed our gross right now as of yet. We are seeing claims come in. What I will tell you is this is immaterially up our program. Now, that being said, for those reinsurers that are in our first layer of the program, and if it’s in the first layer and ticks up into the second, we want to be mindful of their losses, and there will need to be payback there. But this is well within the first two layers of our reinsurance program and hopefully really just closer to the first layer.

Okay. No, that’s definitely helpful. And I totally get your commentary earlier that some of the perils that you are in might be attracted to some reinsurers. But just thinking like a stress scenario like where in the danger zone could you be in terms of raising retention, coinsurance, maybe reducing top layers, I mean how do you think about if you had a stretch what would be the minimum you could think about in terms of reinsurance protection.

Hey Tracy, we are looking at the market closely. And I think we look at our retention because that is, frankly, where there will be losses into that first layer because of Ian. And so will we have to take our retention up $3 million, $5 million, we will see how that goes. Maybe we will do it vertically through a co-participation in that first layer. We obviously don’t want to get to a point where we are trading dollars. So, the rate online is 100%. That doesn’t make a whole lot of sense for us. I think there is a couple of themes that I want to impress upon you, though, as you think about stress scenarios. Again, I made the point around earthquake being a nice diversifier. I will make the point again that we have a substantial bank built with those reinsurers, so we have made them money. But the one thing that you are hearing from reinsurers is they want to see retentions go up. They also are moving up programs. And so for us, as you get above I will forecast it, $175 million of limit, you go into really only binary exposures or single payroll exposures. And that’s where property reinsurers are looking to go. They want to go to a single peril, so if they take a loss from an earthquake, that’s what they are in business for. It’s not a circumstance where they are taking a loss in the layer that they thought was only Earthquake exposed and then there was a winter storm that hit it. So, what you are seeing is reinsurers moving up in the mid working levels of programs and there is actually a scenario. I mean this is my roasted view that we are going to have excess demand in the middle of our program because it will have an attractive rate online, and it will be single peril. So, I think that’s the dynamic that will play itself out, whether it’s excess demand or what the price is, it will be manageable for us. But I do think that it’s not a circumstance where we have Midwestern to hail exposure, Florida exposure all the way through our program, so we are scratching and cling for a limit. We are actually going to be bringing something to them that’s involved with the property reinsurance market. I think the other thing that I need to reiterate is we have a $2.1 billion program, $675 million of that is in cat bonds that is multiyear. So, they are not renewing right now. So, they are locked-in in 2024 or 2025. So, I think that’s also like you think about those stress scenarios. We don’t have the totality of the program renewing the majority of the program is single peril, and the strong majority of the program doesn’t have any secondary peril exposure.

Thank you.

We have a follow-up question from Mark Hughes of Truist. Please proceed with your question.

Yes. Chris, what would you say is a good ratio we should be thinking about in terms of earned premium relative to written, I think this quarter was a little lower because of the new reinsurance and new quota share. When we think about Q4 or maybe and go forward a few quarters, what should that ratio look like?

Yes. I think the best way to think about it is it’s going to continue to decrease, right. And I think as we transition some of our business over to fee-based business like fronting or even some of the newer clients that have attritional exposure where we use a heavy amount of quota share to protect our risk and to help deliver more consistent earnings that the net earned premium is going – the net earned premium ratio is going to continue to go down. So, at the end of this quarter, it was, let’s call 42%, sorry 48% for the full year. I think I have said all along that I expected it to be below 50% for the full year. That trend is happening, right. And so could that full year number be 45%, 46% or potentially even lower maybe, but I think that trend when you think out to ‘23 is going to continue. Fronting has been strong. We expect that trend to continue. Mac obviously didn’t really take up the range on where we performed there. The growth in the lines of business, key to Palomar 2X, casualty, Inland Marine have been strong. Those have quota shares with them. That’s going to increase. And you can actually see that even on the net written side, right, we did see a significant portion of our written premium this quarter to reinsure. Some of that, obviously, is XOL, Mac talked about. We did have some cost increases there. Also, if you will remember, XOL, the first quarter that you have a full quarter of excess of loss is your heaviest quarter as the percentage goes because you are paying the same rate for the next 12 months, even though we are planning on growing our book and we buy to be able to facilitate that growth. So, XOL is a little bit higher. But the quota shares is going to drive the largest amount of that differential into future quarters when you think about the net earned. So, I expect it to continue to decrease on the other side of that, the fees side of that. I expect the acquisition expense, especially as a percentage of gross earned to continue to decrease as well. And you saw that trend continue Q2 to Q3 of this year. So, it’s down to 14.6%. That trend is what we expected as well. So, it’s still going in the right direction. And so I think that’s what I continue to expect with net earn. I am not going to give out a specific target for next year at this stage. But no, I do expect it to keep going down. And I think there is going to be more consistent fee income from that, but also just strong performance in those lines of business is what you are seeing and what you are seeing go through our net earned premium ratio right now.

Thank you for that. Appreciate it.

You’re welcome.

There are no additional questions at this time. I would like to turn the call back to Mac Armstrong for closing remarks. End of Q&A:

Great. Thanks operator and thanks to all who were able to join. We appreciate your participation questions and your support. I would also be remiss if I didn’t thank all of our team at Palomar for their dedication to the business and as well as all of our customers and partners for what they do and they are critical to our success. To conclude, we do think that this quarter really was a demonstration of the meaningful strides we are making on our path to Palomar 2X. We have reached record growth in gross written premium. We monetize and continue to monetize our capital investments made over last year and the early part of this year, and we really did demonstrate the increasing resilience in our business model. Overall, we have line of sight in our ability to execute Palomar 2X, and we look forward to delivering considerable value to our shareholders as we do indeed achieve those milestones. So, thank you very much. Enjoy the rest of your day. And we will talk to you next quarter.

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