Good morning, and welcome to Palomar Holdings, Inc. Fourth Quarter and Full Year 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 February 19, 2026. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our quarterly report on Form 10-Q 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'll turn the call over to Mac.

Thank you, Chris, and good morning, everyone. I'm excited to review our strong fourth quarter and full year results. In 2025, we delivered record levels of gross written premium and adjusted net income as well as strong, broad-based profitable growth. For the full year, Palomar grew gross written premium 32%, increased adjusted net income by 62% and achieved an adjusted return on equity of 26%. We also meaningfully exceeded our initial full year adjusted net income guidance of $180 million to $192 million, finishing the year at $216 million. We beat earnings every quarter of the year, resulting in 4 upward revisions to our outlook as performance continued to strengthen and exceed expectations. At the start of 2025, we outlined 4 strategic imperatives: integrate and operate, build new market leaders deliberately, remember what we like and don't like, and generate consistent earnings, and I'm proud to report that we executed across all 4 efforts in all 4 quarters. We scaled our newer verticals in Casualty and Crop while maintaining underwriting discipline. We purposely built a balanced book of both admitted and E&S in residential and commercial property and Casualty products to ensure consistent results in any market cycle. We added outstanding talent across all our departments, including underwriting, investment, claims, data, and actuarial, growing our team to over 500 exceptional professionals. Finally, we successfully integrated 2 specialty franchises, First Indemnity of America and Advanced AgProtection, and at the end of January, announced the closing of our third acquisition, Gray Casualty & Surety now Palomar Casualty & Surety. The myriad achievements of 2025 enabled us to reach our Palomar 2X target of doubling adjusted net income for both the 2022 and 2023 cohorts, a significant and impressive milestone that underscores the strength of our execution. We exit 2025 with a national…

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 them in periods when we incur a net loss. For the fourth quarter of 2025, our adjusted net income was $61.1 million or $2.24 per share compared to adjusted net income of $41.3 million or $1.52 per share for the same quarter of 2024, representing adjusted net income growth of 48%. Our fourth quarter adjusted underwriting income was $62.3 million, an increase of 52% as compared to $41 million for the same quarter last year. Our adjusted combined ratio was 73.4% for the fourth quarter compared to 71.7% last year. For the fourth quarter of 2025, our annualized adjusted return on equity was approximately 26.9% compared to 23.1% for the same period last year. Our fourth quarter results continue to validate our ability to sustain profitable growth while maintaining returns well above our Palomar 2X target of 20%. Gross written premiums for the fourth quarter were $492.6 million, an increase of 32% compared to the prior year's fourth quarter. Net earned premiums for the fourth quarter were $233.5 million, an increase of 61% compared to the prior year's fourth quarter. For the fourth quarter of 2025, as expected, our ratio of net earned premiums as a percentage of gross earned premiums increased to 48.2% compared to 39% in the fourth quarter of 2024 and compared sequentially to 43.4% in the third quarter of 2025. Losses and loss adjustment expenses for the fourth quarter were $70.9 million, comprised of $72.9 million of attritional losses, including $0.7 million of favorable development and $2.1…

[Operator Instructions] Our first question comes from the line of Pablo Singzon with JPMorgan.

First question, just on the higher retention on Crop. Would you be able to size how much that will contribute to earnings next year versus what you earned in '25?

Yes. No, I think Crop is a great example of the diversification of our business and the use of the capital as we start retaining more. We've talked about it before that Crop is a lower margin business than some of our others, but also very stable, so providing a very consistent earnings base. Generally speaking, it's going to have a combined ratio in the low 90s, so say 92%. So for every, call it, $100 million and 10 points that we keep, that's adding another $8 million let's say, of pretax income to the bottom line.

Got it. And then my second question, the 10% reduction in reinsurance costs you're assuming, is that on a risk-adjusted basis or is that absolute dollars you're talking about?

That's on a risk-adjusted basis, Pablo. Yes, so that's just assuming that the -- if you have like-for-like exposure it would be down 10%. So we -- when we think about the forecast, we are assuming growth in quake this year. We said there's modest growth for Earthquake and there's also would be some exposure expansion, which would lead to us buying more limit.

Our next question comes from the line of David Motemaden with Evercore ISI.

Mac, in your prepared remarks, you had talked a bit about a few new hires that you've made here in the fourth quarter as well. I know you guys made a few more even before that. I'm specifically interested on the underwriting side and the underwriting teams that you're adding. Is there any rule of thumb to think about how much growth you guys are expecting those teams to contribute in 2026 and 2027 if we think about just gross premiums written?

Yes, Dave, thanks for the question. It's a good one. Let me start by saying you're absolutely right, we've added some really strong talent to our organization over the course of 2025. And as we sit here in '26, we continue to recruit and add really strong underwriters. And it's across both the casualty and the property franchise. When we gave our guidance, there is certainly an assumption around production from those various new hires. But it really depends on the market that they're going into. A strong addition to our Builders Risk franchise in Boston, like that opens up several million dollars or a few more million dollars of potential production there versus someone like [ Matt Deans ], who joins us on the construction engineering side, where it's a much larger TAM and much larger exposures. But I think overarchingly, the most important point to mention is for all of these new hires, we are not expecting them to burn their way into a market or overextend themselves. We want to walk before we run, and that's something that we've done for -- since we started the business. And what that means is when they go into a market, whether as a property underwriter or a casualty underwriter, they're going to have a comprehensive and robust reinsurance solutions supporting them. And then they are also going to have modest gross and net line sizes that they are deploying while we build traction. The other thing is there's a lot of infrastructure that needs to be built out. So we don't want to open up the proverbial floodgate to not be able to service and underwrite the business effectively. So it's also very moderate in terms of distribution. I'll just close with as an aside, like for instance, we did write an interesting construction engineering risk, one of Matt's first. The gross line was $76 million, our net was $4 million on it. And that's because of the strong reinsurance relationships we have, we are able to -- we were able to use an existing facility and then we're also able to buy facultative reinsurance. And I think that fact that you have that type of strong reinsurance support both facultative and treaty, is a reflection of the quality of the underwriters and their experience.

Got it. Great. That's encouraging. I guess just another one on the earthquake growth. Is there any way you can just help us think through? It sounds like commercial was down just in terms of gross premiums written. Residential was growing. Could you just break that out how much the residential book grew in the fourth quarter and how you're thinking about that within the modest growth that you outlined in 2026?

Yes, Dave. So what I would offer you is as I mentioned that the residential quake is approaching about 60% of the book. It's got strong policy retention and it's writing good new business. So I think residential quake is you're looking at what we hope would be high single digits to double digits growth. And then the commercial is going to be obviously continue to see some pressure, especially in more large commercial business, where rates were down 15%. And I think I would say from a rate deceleration standpoint, the rate decreases, we expect them to hover at this level for certainly the next several quarters. So I think that's what I would offer you is residential quake is going to grow and should offset the deceleration in the commercial. And then most of all, and most importantly, is we should see margin expansion. The fact is that property cat pricing should allow us to really scale the residential quake and then absorb the softening on the primary rates in the commercial side.

Got it. Yes. And it sounds like the -- I guess, the XOL pricing at down 10% is actually not as good as you guys were able to get on some of the stuff that you renewed here recently. But maybe just one more, if I could, for Chris. So I heard you on the loss ratio being in the mid- to upper 30s. I'm sort of looking at that versus the 31% accident year loss ratio, excluding cats in 2025. So it feels like that's getting a little bit worse than I think the old rule of thumb, which was 2 to 4 points deterioration a year. So I'm wondering if you could just unpack that a little bit. What -- is it mix? Is it higher picks? That would be helpful if you could just unpack that a little bit.

Yes. I think the simplest answer is going to be that it's no change in our picks. I think we've said this a lot of times that we are going to continue to reserve conservatively upfront, react to bad news quickly and do good news slowly and deliberately. That has proven true throughout this year where we're able to have some favorable development. If you go back, call it, this time last year, we were expecting a low 30s loss ratio for this year. I think this year was probably a little bit better than we expected. Crop contributed to that. Crop was a little bit favorable to where we expected. So maybe our loss ratio was a little bit better. But overall, when I think about that 2 to 4 points, I feel like this is right in line with that expectation, let's say we were call it, 31, 32, we're at 4 points, we're at 36, right? The other thing you got to think about is that we are expecting some still really strong growth from Crop. The other assumption we're changing there is we're going to be taking 50% of that book versus 30% this year. So that, while adding profit to the bottom line does move the ratios a little bit. We've talked about it a lot. I just talked about it a little bit. That Crop does operate at a higher combined and a higher loss ratio. Mac said, it was better than 80%, but even an 80% loss ratio, that is higher than 31 or 32 So if you're taking, call it, 20 points more of that, if you're at 30 and taking 20% more or about 66% more of the losses plus higher growth, it's going to influence the loss ratio. But overall, when you think about it, and the reason we're not saying that our combined ratio is going to jump at the same rate, is we do expect to see some scale or leverage in the operating expenses. And so when we talk about right now, our low 70s combined ratio for the year and kind of getting into the mid-70s for 2026, I think that is taking all those factors into account. Yes, the loss ratio is going to go up as expected and as we've talked about, you're going to see some savings potentially on the expense side. But overall, we're going to be mid-70s combined ratio with a growing diverse book of business that's delivering consistent profitability to the marketplace. That's something we've talked about for the last 2 or 3 years, continuing to do, and that's what we plan on doing. So overall, we feel like we're in a good spot. Loss ratio is doing exactly what we expected. And overall, the book is performing very well.

And Dave, if I could just come back to the one point you made on the reinsurance. Yes, 10% is the assumption. It is a little bit less -- a lower risk-adjusted decrease than what we saw in the first quarter, but that's for the midpoint of the guidance. So there's certainly an opportunity to outperform that 10% down, but I think that's the right level for us to assume at 6/1.

Our next question comes from the line of Matt Carletti with Citizens.

Mac, I appreciate your comments on kind of the Casualty book that was really helpful. Can you maybe just kind of zoom out and as we look at the book today, maybe year-end '25, broad strokes, like how much of the book is in kind of excess and primary GL? How much is kind of professional lines exposures? Whatever the big buckets are that you got to think of, could you help us with that? And then secondarily, how much of that is directly written by Palomar? And is any of it done through some sort of program or delegated authority arrangement?

Yes, Matt, thanks for the question and excited to talk about the Casualty franchise because it really is performing well and been a nice success story. So just the predominance of the book is going to be what we call E&S Casualty, which would be GL, kind of niche segment GL. And then there is some professional lines. But again, the majority of it is going to be excess and primary general liability. We are not writing wheels business for the majority of cases, we do have a small amount of wheels business that's in our contractors -- primary contractors GL. But on the whole, it's going to be niche categories of GL and then professional liability that's going to be more E&O or health care liability, which is a new example, and that's one that we got into earlier this year. I think it's important to just talk about overarchingly on the Casualty side, we remain very disciplined, whether that's in our reserving, 80% as I said, of the IBNR -- or excuse me, of the total reserve is IBNR. We have several lines of business in the excess liability, where it's 100% of the reserve is IBNR. Casualty is only 16.4% of -- excuse me, our Casualty reserves only 16.4% of our surplus. Our limits are very conservative. Our average net limit is $1 million. Our largest net line would be $2.3 million. And our largest line of business, as I pointed out, which is our E&S casualty is $700,000 on a net basis. I think the other fact that's worth highlighting here is just the underwriting approach. And it's going to be really focusing on writing if it's excess, it buffer layers. So we're avoiding social inflation. So if we get a pop, like it's not a…

Our next question comes from the line of Andrew Andersen with Jefferies.

Just on the reinsurance update, the quake that you mentioned that was renewed, was that commercial quake? And did you purchase any incremental limit this year?

Andrew, yes, good questions. So the quota share that renewed was for Commercial Earthquake. We did have a Commercial Earthquake quota share renew. And then we bought incremental limit that's for all of the quake book. But it was a very modest amount. Most of the incremental limit will be procured at 6/1. So -- and then we had one existing layer that renewed at 1/1. And again, those were all down in the 15% range.

Got you. And maybe bigger picture here, as the cycle and some of the lines softens and it doesn't seem like there's any constraint on capital here. But how would you kind of rank capital deployment opportunities across organic, increased retention, share repurchases and opportunistic tuck-in deals, which you have some history of doing?

Yes. I think overarchingly, opportunistic is the right term. Today, share buybacks looks pretty compelling as we scratch our heads inside our conference room. But nonetheless, we still want to grow organically. And we think we have multiple growth vectors to grow the book organically and we also think we have the capital base to do so. We certainly, as the balance sheet has grown, it does afford us the opportunity to take -- increase our retentions like we're doing in Crop, it's certainly something we can look at on cat retentions. Probably more specifically for earthquake cat retentions as that approaches at 6/1. And for our property business, our Inland Marine and Other Property business has performed really well. So I think our desire is to potentially put out larger lines in selected classes like both admitted and E&S Builders Risk and excess national property. So I think it's a combination, really, ultimately, opportunistic M&A. We're proud that we bought 3 great businesses over the last 15 months. But that's really will be more opportunistic. I think you should be thinking about is our organic growth, leveraging the scale of the organization, the balance sheet to potentially take more of our own cooking. And then also think about opportunistic capital management through selective buybacks and repurchases.

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

On the commercial quake, you said you expect competitive pressure to continue through 2026. How does it look sequentially, this down 15? Is it continuing to decline sequentially? Or has it stabilized at a low level and then you just got some tough comps?

Yes, Mark, this is Mac. That's a good question. I think we're still -- we started to see commercial quake pricing really soft in the second quarter of '25. So we think we're still a couple of quarters to go there. And then hopefully, the comps lead to a deceleration. I think the other thing too is one dynamic where you have the all-risk players, potentially retaining more of the quake, they'll start to -- as they get through a 12-, 15-month period of that, they'll start to get to a point where they'll be managing capacity and overall limits in aggregates. So I think that will help stabilize it some. But our view, and when we talk about this year having modest growth in earthquake is that pressure will persist in '26 and certainly the first half of '26 in a more pronounced fashion on commercial quake.

And then on the Crop, your retention moving up to 50%. If things go as planned, does that continue to move up? Or is 50% as high as it gets?

Well, I think we will -- it's a good lever to have to be able to pull. If you talk to Benson Latham, who's been in the Crop business for a very long time, he would tell you the way to make money in Crop is to retain more of it, and you will make more money over the long term doing that. And so that's something that we do see as, again, a potential lever. The one thing that we want to be mindful of is just capital allocation. And while Crop is not a capital -- overly capital-intensive line, the growth we're having is pretty strong. As I said, we're targeting over 30% growth. So the combination of growth and an increase in retention could start to put a little more pressure on how much capital we have allocated. So that's something that we'll watch. But that's really once we get beyond that $0.5 billion threshold mark. So I think in the interim, we can continue to increase our retention and grow the book, and then we'll take stock at what is the right risk transfer structure from there.

[Operator Instructions] Our next question comes from the line of Paul Newsome with Piper Sandler.

I was hoping you could maybe expand upon a question I'm getting from investors, which is sort of inevitably as the business mix moves away from earthquake as well as takes increasing retention, do you inevitably end up with returns on equity that are less given that you essentially have less reinsurance leverage? Or is the model so such that you have some more balance in that regard. Just -- and I'm not really talking about 2026. I mean just as you think out longer term, is that what we should be thinking about in terms of how the business delivers returns?

Paul, this is Mac. I'll offer my views. We continue -- I think I'll start with saying we continue to believe that Palomar 2X is achievable for the intermediate future. And we will have -- based on the guidance we're giving, we will double our adjusted net income from '24 in 2 years while maintaining an ROE that is above 20%. And so we think that is sustainable, maybe not doubling it every 2 years but certainly maintain an ROE that's over 20%. And that is with the changing complexion of the book. You have to remember, we still have earthquake is our largest or top 2 largest line. We're now adding Surety, which has very attractive margins as well. That's a sub-80 combined ratio book. This is not a circumstance where we're all of a sudden going to become a 12% ROE business and a 95% combined. Until we say otherwise, we're going to be generating an ROE that's in excess of 20%, and we're going to be growing our bottom line at a very attractive rate. And I think the guidance that we gave this year is illustrative of that. And I think the investments that we're making in the business afford us the ability to sustain those parameters.

A couple of things I'd add to that just for a clarification, right? Remember, as we diversify and as the portfolio grows, we are able to leverage our capital base a little more efficiently versus earthquake is very capital-intensive. So as we get to diversify the base and use our capital a little more efficiently, that helps the ROE. The thing we don't talk about a lot, but when you talk about thinking out years is also our investment leverage. We have a very low investment leverage. As our retention increases and our portfolio diversifies, investment leverage will also come into play, and we'll be able to use that as part of our earnings growth as well.

Yes, just to echo what Chris is saying, if you just look at -- I mean, I think that's important to point out, too, just to sample these margins like our net reserves as a percentage of surplus is under 30% and our investment leverage is 1.43% compare those to industry averages, you should feel like there's a fair bit of operating leverage in the model.

That's great. Second question, just on the Fronting business. Is the thought that without additional Fronting operations, essentially will see sort of stability out of that unit prospectively? Because I think we're at the point -- I think where we've lapped the one Fronting arrangement that went away. Is that kind of the baseline thinking there?

Yes, Paul, I think our thinking is just Fronting is not a strategic focus for us. And the premium has declined as you've pointed out. And as a result, it's really just not a meaningful reflection of the operating results of the business and the organizational focus. I think the other thing that's just worth pointing out is the Fronting market has evolved to where it's really not a risk-free fee generative business. These -- most Fronting deals that we see are participatory fronts. And so if they are going to require us to take 20% of risk, it's not a circumstance where we can -- we're comfortable. So we'd rather support a handful of Fronting relationships that we have and focus our capital and resources on programs, but also just most importantly, internal efforts. So yes, I mean, I think it's just the evolution of the Fronting market, combined with our strategic focus has led us to this decision to just collapse it into the appropriate product categories.

Makes sense to me. As you know, I agree with you.

Yes. I think you've told me once picking up nickels in front of a steamroller. So, yes.

It wasn't a lot of fun.

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

Mac, one quick question on the guidance, and I apologize if I missed this, but what are the cat excess of loss attachment points that are embedded in the 2026 guide?

Yes, Meyer. Good question. And we didn't offer it, but we will. I assume the retentions remain at the same levels as expiring. So a wind retention in around $12 million, and earthquake, just several million dollars above that.

Okay. All right. That's a good place to start from. With regard to the engineering, does that require new distribution relationships, both in general and with regard to data centers?

Well, it can leverage -- it does both. So it can leverage existing distribution relationships but also it does bring new ones to bear. And that's why we hired Matt. Matt actually was at Willis Towers Watson before he joined us and has a long-standing history of writing with kind of the traditional alphabet houses here. But then there will also be a lot of wholesale produced business, which is kind of our bread and butter for commercial property. So it's a combination of the two.

Meyer, this is Jon. One of the things to think about with regard to distribution with what Matt brings on in the engineered space is up until he came on board in the fourth quarter, we were kind of in all corners of that builders risk market from small single-family homes all the way through commercial property with the exception of engineered risk. And so now this -- as we think about our -- the way that we face our distribution, we really come with a full solution across that Inland Marine department to be able to service all kind of major components of builders' risk in the U.S. market.

Okay. That's very helpful. And then one last question. I just wanted to get a sense of current and maybe planned retentions on the Casualty quota share.

So the Casualty quota shares, we renewed that and kept our retentions flat year-over-year. And that's a 1/1. So that's kind of locked in for the next 12 months. And we can write up to a $10 million limit within that treaty. The average net though, is going to be typically -- our average gross limit is going to be $3 million and the average net will be less than $1 million.

Thank you. And we have reached the end of the question-and-answer session. I'd like to turn the floor back over to Mac Armstrong for closing remarks.

Thank you, operator, and thank you, everyone. I appreciate your time and support of Palomar. As I close the earnings call, I want to thank our incredible team here at Palomar. Your execution and work in 2025 was exemplary. As evidenced by the strong guidance for 2026, we feel great about our prospects, and we look forward to sharing our success with our investors in 2026 and beyond. Have a great day. We'll speak to you soon.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. .