Good morning, and welcome to the Palomar Holdings, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me here today is Mac Armstrong, our Chairman and Chief Executive Officer. Additionally, Jon Christianson, our President, is here to answer questions during the Q&A portion of the call. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11:59 p.m. Eastern Time on November 14, 2025. Before we begin, let me remind everyone this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our quarterly report on Form 10-Q 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 to 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. Today, I'm pleased to walk through our exceptional third quarter results. It was another outstanding quarter for Palomar, highlighted by record gross written premium, record adjusted net income, the 12th consecutive earnings beat and our fourth adjusted net income guidance increase in calendar 2025. These results underscore the strength of our distinct franchise and the effectiveness of our disciplined underwriting, diversified portfolio and consistent execution. We've intentionally constructed a portfolio of specialty products designed to perform through all parts of the insurance market cycle. Our portfolio consists of a unique mix of admitted and E&S residential and commercial property and casualty risk that provide balance and earnings consistency. Additionally, our newer businesses like crop and surety are scaling nicely and enhance the diversification of the book given their lack of correlation to the broader P&C market. Even when -- with the increasing balance of our book, we are not standing still. The Palomar team remains not only entrepreneurial, but also steadfastly committed to profitable growth. We continue to strengthen our franchise, entering select specialty markets that offer compelling risk-adjusted returns. As part of this effort, last week, we announced the acquisition of the Gray Casualty and Surety Company, a leading surety carrier with a strong national presence and an exceptional management team. This transaction meaningfully enhances Palomar's surety platform, bolstering our market position and complementing our existing operations. The acquisition immediately adds scale and provides access to attractive markets such as Texas, Florida and California. Gray only enhances the sustained execution of our Palomar 2X initiative of doubling adjusted net income over a 3- to 5-year time frame. We're thrilled to welcome the Gray team to Palomar. Returning to the third quarter, we delivered another quarter of strong financial results, highlighted by 44% gross…

Thank you, Mac. Please note that during my portion, 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 them in periods when we incur a net loss. For the third quarter of 2025, our adjusted net income grew 70% to $55.2 million or $2.01 per share compared to adjusted net income of $32.4 million or $1.23 per share for the same quarter of 2024. Our third quarter adjusted underwriting income was $56.7 million compared to $31 million for the same quarter last year. Our adjusted combined ratio was 74.8% for the third quarter of 2025 as compared to 77.1% for the year ago third quarter. For the third quarter of 2025, our annualized adjusted return on equity was 25.6% compared to 21% for the same period last year. As Mac discussed, our third quarter results continue to demonstrate our ability to achieve our Palomar 2X objectives of doubling adjusted net income within an intermediate time frame of 3 to 5 years while maintaining an ROE above 20%. Gross written premiums for the third quarter were $597.2 million, an increase of 44% compared to the prior year's third quarter or 56% growth when excluding runoff business. Looking at the fourth quarter, this headwind is now fully behind us. Gross earned premiums for the third quarter were $518.8 million compared to $395.9 million in last year's third quarter and sequentially to $408.8 million in the second quarter of 2025. Year-over-year growth is driven by the overall performance of all lines of business, while sequential growth is significantly influenced by the crop earning pattern. Net earned premiums for the third quarter were $225.1…

[Operator Instructions] And your first question comes from Paul Newsome with Piper Sandler.

I was hoping you could talk a little bit more about the market opportunity in Surety and maybe a little bit more specifically about exactly who you may or may not be competing with and it is an ordinarily pretty broad class of the business.

Sure, Paul. Thanks for the question. We are really excited to bring Gray Surety into the organization. They are a very nice complement to what we have in New Jersey, which is Palomar Surety, the company known as First Indemnity of America. It's really writing contract Surety, kind of mid to small limit bonds. On average, you're talking about bonds that are less than $2 million. The combination of the two affords us greater regional expense. As I said in my prepared remarks, Gray Surety is very strong in kind of high-growth Sunbelt regions, Texas, Florida, California. FIA is the Northeast. Bringing them together gives us over $100 million of kind of in-force bonds and premium and writing say, nationwide presence, but really strong in like 15 markets. I think the opportunity for us is to take this from approximately a top 30 Surety on a combined basis to a top 20 in the not-so-distant future. And that's going to be driven by a few things. One, continuing to extend our reach. The Gray team has a terrific market entry model that's replicable where they understand what it takes from an underwriting investment and a system investment standpoint to enter into a market, the premium that must be generated to cover the cost and generate the requisite margin. So we will do a lot of that. I think there's an opportunity to cross-sell distribution between the two entities in FIA and Gray Surety. And then thirdly, our balance sheet will afford us more to do. Putting us together, I am going to have an entity that's approaching book value in excess of $1 billion. And moreover, our intention is to have Palomar Specialty T-listed, which will give them the ability to write larger bonds and participate in larger T-listed bonds. Right now, the combined entity can do around a $12 million T-list -- has a $12 million T-listing approximately. So I think the combination of going deeper in existing markets, expanding into new markets, writing some larger limit business and a cross-selling distribution will allow us to get to that top 20 status. But again, the footprint that we have, just once they come together, gives us a meaningful position in the market and really strong expertise helping us build a franchise that we think can be an even bigger leader.

And then for my second question, maybe you could talk as well about the potential future of the Crop business. Obviously, this year has the effect of the acquisition. I don't think of crop as being a growth business in general, but it's also fairly competitive. I don't know if that's a business that can grow a lot organically, prospectively and maybe it can. If you can just direct us into where that may go as well.

Yes. So well, I think, first off, I want to applaud our team, Benson Latham and [ Jon Scheets, ] Jay Rushing and others for what they've done this year. This is our second full year of operation, but the first full year of where we've had that leadership team as well as AAP inside our four walls. So they are executing very well. And I think the strength of their execution has been, a, leveraging their historical experience and relationships in the market. I mean these are professionals that have been in the crop space for decades. And then secondly, there's been their ability to attract talent. I highlighted on the call some new additions that we brought in, in the Oklahoma and Kansas market that's going to extend not only our geographic reach, but also our product offering and allowing us to write more kind of off-season winter wheat-type business, stuff that's written more in the fourth and first quarters of the year. But overarchingly, Paul, we do think we're going to continue to growing crop. We've said that we plan on getting this to $0.5 billion of premium in the next several years, next couple of years. And then the ultimate goal is to get this to a $1 billion of premium. And the way we're going to do it is really on service and technology. And so we're making the investments right now to get to $0.5 billion and to get to $1 billion, and particularly on the technology side, while attracting best-in-class talent. So this is going to be a growth driver for us for the next few years, and we are very confident in our ability to execute.

Your next question comes from Andrew Andersen with Jefferies.

Just on the net income guidance, I didn't hear anything about cat. Is there anything embedded within that?

Yes. No. So we obviously had about $1.9 million of cats in the quarter. From our viewpoint, we do include mini cats in our loss ratio expectations of -- now we've kind of updated to be a little more favorable around 30% for the year. In our view, that includes everything that we would expect to happen for the year. Knock on wood, there are no major cats at the end of the year or in this quarter.

Okay, and -- sorry, go ahead.

Just on the commercial quick, yes, I think it was down 20% in 2Q in terms of rate, down 18% this quarter. Do you think we're kind of past the peak deceleration of rate where maybe it will still be soft minus 10%, minus 5%, but it's not going to get much worse from here? Or how are you kind of thinking about the next 12 months?

Yes, Andrew, it's a good question. And I do think we have seen a deceleration but we are not hanging our hats on a reversal. So I would say that you're going to continue to see a softening. But what I would like to point out is if you just look at the expense of our earthquake book, residential quake now is 61% of the book at the end of the third quarter. The area where we're seeing the most pressure from a rate standpoint is about 1/4 of the book and frankly, is around 8% of our book in totality. So we think we are very well hedged against softening rate on the primary side in commercial quake by the softening P&C -- or excuse me, property cat reinsurance market plus the inherent leverage that we have in residential quake. So yes, I think, you're going to continue to see large account pressure, probably not to the degree that you saw in the second and third quarter, but we're not going to make a call that it's going to recede. But we will make the call that the health of our residential earthquake book and the softening property cat reinsurance market is going to allow us to grow book top gross written premium in '26 as well as have scale from a net earned premium perspective on the earthquake book prospectively.

Your next question comes from Mark Hughes with Truist Securities.

Chris, did I hear you properly the ratio of net -- yes, net to gross should continue to increase. It should step up in the fourth quarter and then step up further in the first half of next year. Is that correct?

Yes, that's the correct way to think about it. We think of the third quarter as our low point for the net earned premium ratio. A couple of factors now, obviously, before and currently, it still has a lot of impact from the XOL and this being the first full quarter of any new XOL placement, even though there was rate savings on that, we still buy for growth. So the dollar spend on that does increase to support that growth. And then now this year and a little bit last year, but obviously, with the growth in crop this year and still ceding 70% of that, we expect the net earned premium ratio to be at the low point in the third quarter of every year and then going up incrementally from there all the way until, call it, Q3 of next year.

Yes. I appreciate that. The impact from the Omaha National in 3Q, did you give that specifically? You mentioned that 4Q should show the underlying trend in fronting. And I'm just sort of curious what that underlying trend looks like at this point?

Yes. No. So the third quarter, I want to say it was about $30 million last year in our written premium. And so at this stage, that, call it, headwind has been pushed aside or beaten, I guess, is the right phrase for that, yes.

Yes, run its course.

Yes. You pushed the headwind. Mac, you had mentioned a pipeline of quake relationships. Was that -- is there something -- some new developments there? Or is that just ongoing course of business?

Yes, Mark, and I'll let, Jon Christianson, chime in, too. It's -- I would say it's ongoing course of business. We have over 20 carrier partnerships for earthquake, where we are their dedicated partner to providing earthquake, whether it's to satisfy mandatory obligations or to bundle it with other products. And sometimes they come over lumpy, sometimes they are a bit of a hunting license and they grow. And so we have seen good execution and good conversion from partnerships over the course of '25, but we also do have a pipeline. But Jon, feel free to chime in.

Yes. No, I agree with all that. And I'd add that we're always searching for new strategic opportunities. And what we're finding now is that because we have been known as a strong strategic partner for earthquake, we're also taking inbounds, inquiries from others that are looking to better address the earthquake exposure that they may have or add value to their customers by adding earthquake. As Mac mentioned, some of the more higher profile household name type of partnerships that have come on over the last few years, they don't all come on at once in certain cases. And so as time has gone on and we've been working together for a longer period, we have seen increased traction with a number of large partners, and that's paid off so far this year.

Yes. And so sometimes, it can be in a relationship where we are working with them in all states, but California and then California has opened up to us or it's vice versa. We're the California partner and then all of a sudden, they think about us handling Pacific Northwestern, New Madrid. So Jon and his team do an excellent job of chasing down these partnerships and then executing and implementing them. So we feel that '26 should provide one or two other new deals.

[Operator Instructions] Your next question comes from Meyer Shields with KBW.

Chris, I can push a little more on the guidance. I'm trying to get a sense as the expectations for the underlying loss ratio, excluding reserve development and excluding the major catastrophe losses so far this year. Is there any -- can you help us think about that?

Yes. So I think from our standpoint, when you look at the book of business and the maturity and the lines of business that are growing, whether it be Crop, Casualty, Inland Marine and Other Property are growing at a very strong rate, not to say that Earthquake growth is still very good, but those lines that are growing at a higher rate do have attritional losses with them. So overall, Earthquake still has a nice 0% loss ratio, but these other lines that are growing at a higher rate do have attritional losses with them. So I expect the loss ratio to continue to move up. I think the one thing that we were saying at the end of last quarter is that we expected our loss ratio to be about, call it, low 30s for the year. I think now based on some of the favorable results that we've seen so far, we expect that to kind of be around 30%. So that could be plus or minus 1 or 2 points on either side of that. But overall, we feel a little bit more favorable about where we did before. But overall, nothing has really changed that we still expect it to move up. It's still moving up in line with those attritional results. But there's been no, call it, underlying unfavorability in any of the results. It's kind of just a natural change in our book of business and portfolio and diversification that is having that loss ratio move up a little bit. But again, like I said before, it's not jumping. It didn't jump from 10 points like anyone was thinking before. But overall, we felt that it was going to just move up incrementally and it's kind of doing exactly what we expected.

Okay. That is very helpful. Can you talk a little bit more about the healthcare liability, I guess, book that you're writing? The specific question is whether there's like sexual abuse and molestation exclusions, but more broadly, what you're looking for?

Yes, Meyer. So we launched that [ 71. ] We hired a gentleman named Frank Castro, 30-year-plus underwriter, spent time at RLI, access -- and actually have worked as a risk manager for a large hospital system too. So great experience, launched [ 71 ] with a nice reinsurance program. It's like we've done with other casualty. It's a walk before we run. Our gross limits are about $5 million. Net limit is going to be inside of $2 million. His book, what we're targeting is about 60% hospital liability, 25% managed care E&O and then 15% kind of Allied Health. And his timing is good as it pertains to hospital liability because you are seeing the SME or sexual molestation liability exclusions more frequently or sublimited. And as I mentioned on the call, again, the timing is good in the sense that there is meaningful rate to be grabbed here. So this is another example to walk before you run, but it's led -- and it's also another example of a great underwriter overseeing a market that's a bit dislocated.

Okay. Yes. The timing certainly makes a lot of sense. And one last question, if I can. How should we think about the stickiness of flood policies that you're writing while the federal program is shut down?

Yes. Happy to take that, Meyer. This is Jon Christianson. So I think what we found historically, both pre-shutdown and what we're seeing now is strong stickiness of policy renewals. And I think more importantly, in the last couple of months, we've seen a greater interest in new business and greater confidence in the private market delivering relative to the uncertainty around the NFIP. So strong product, a great partner, strong distribution. And I think as every day passes, there's greater validation and credibility in how the private market can deliver a better product than what has traditionally been in the market.

Your next question comes from Pablo Singzon with JPMorgan.

The question of loss ratio deterioration versus accelerating premium growth always comes up for you, right, because of your changing mix and that's before thinking about things like reinsurance retentions and ceding commissions and the like, right? But just given your Palomar 2X aspiration to double earnings in 3 to 5 years, would it be fair to simplify the discussion here and assume that you're also planning for a similar growth trajectory in your net underwriting income, right? So I don't know, something like 20% to 30% growth a year in the medium term. Is that a fair way to think about your portfolio in a very simple way?

It is, Pablo. Yes, and thanks for bringing that up. I mean I think we feel that Chris has talked about it, that we have levers to pull from retentions and that's going to potentially amplify net earned premium growth over net premium growth and similarly on the investment side. But to answer your question simplistically, yes, I think that is an accurate way to categorize it.

Okay. And then second question also, I guess, on growth, Mac. So clearly, good growth you're experiencing right now. I'd be curious to hear at what point do you think you'll have to reload, whether it's with respect to new hires or even M&A as you did with Gray in order to sustain the current pace as opposed to sort of like past hires ramping up and growing in adjacent lines or sort of like low-hanging fruit that what you have now can achieve versus incremental hires or stretching for M&A.

Yes. I mean I think, obviously, Gray was unique in that it was an acquisition. We've been really an organic growth story up until the last year or so. But I think Gray afforded us the ability to really kind of supercharge our entry into the Surety market and give us the scale that we wanted. We said our goal was to get to $100 million, bringing Gray in fold allows us to do it a lot quicker. But I think having Gray, and that's going to give us another organic growth vector, and that's because they can enter into new markets. And so Pablo, I think we're going to continue to grow organically by investing in talent, expanding geographic reach, entering into adjacencies. And then we'll be opportunistic if there is some inorganic growth driver that allows us to bring in an expertise or a competence that we don't think we can build in-house as effectively. So I don't want to say that we're going to -- well, I definitely want to say that we're not going to stop hiring talent that complements what we're doing or can help enhance our growth trajectory because we will continue to do that. But I do want to say that we -- all of our lines of business, earthquake included have growth vectors. Some lines of business have headwinds in them, commercial property. But if you really peel it back, commercial property is less than 9% of our book. So when you look at crop, casualty, now the Surety franchise, the builders' risk franchise, residential quake, there are growth vectors across the board. So 44% growth is very strong, and that's not going to be ad infinitum, but we remain very confident in our ability to achieve the Palomar 2X goals. And so that's going to have to come from gross written premium to some degree and then the net earned premium, which you highlighted earlier. So we just think that we are well positioned and -- to attain Palomar 2X and also just to grow organically.

There are no further questions at this time. So I will turn the call over to Mac Armstrong for closing remarks.

Thanks, operator, and thank you all for joining the call today. I'm very proud of our third quarter results. They demonstrate the strength of our business and the diversity of our unique specialty insurance portfolio. It's a balanced book of E&S and admitted residential, commercial property and casualty products. That's being supplemented now by the newer lines of business like crop and Surety that are uncorrelated to the P&C market cycle. So we think we are very poised to deliver consistent growth, and we're confident in our plan to do so. And the third quarter only gives us more conviction of what we have in front of us. So I'll conclude this with welcoming our new teammates at Gray Surety. And as always, I want to thank our employees for their commitment to Palomar. Thanks again. Enjoy the rest of your day.

Thank you. All parties may now disconnect.