Good morning, and good morning, everyone. Welcome to the William Blair Conference. Starting off, we have Palomar, a great way to start. In case you don't know me, sorry, Adam Klauber, I run our insurance and insurtech on the research side. And I've covered Palomar since they become public, and I've known Mac for a good, good number of years. It's a great company. I'll just say two words about it, and then Mac obviously will fill you in and keep up in what's going on at Palomar. But, you know, the way I think about Palomar is that in the last really 8-10 years, we've seen a lot of companies and a lot of money go towards upgrading technology in around insurance.
And you've had, you know, just a couple companies that I think are the successful, what I'll call the successful data models, where they've invested a lot of money up front, built new analytics, new software systems, core systems, and wrapped it around a really good product and good management team. And Palomar is really one of those few that there's a lot... maybe could be good, maybe not. Palomar has actually proven through the years now, not, not a young company anymore, that, you know, that model can and does work, and more importantly, you can actually have a really, really differentiated business compared to the traditional model. So with that context, Mac, thanks. Thanks for joining us.
Terrific. Thanks, Adam. So kicking off the conference can only get better from here. So as Adam said, we are a specialty insurer. Is the clicker working, sir? It doesn't appear to be. You wanna drive? Okay, so if you want to turn to the next slide, that would be great. So as Adam said, we are a specialty insurer that focuses on the use of data analytics and traditional underwriting acumen to create kind of best-in-class specialty products, focusing on niche markets where we've identified some measure of dislocation or opportunity to innovate. Our first market in which we applied this task was the earthquake space, and earthquake is our largest line of business. It's been kind of the bellwether line of business for us and where we write both commercial and residential business.
As I said, we focus on both commercial and residential accounts, and as such, we developed what we call kind of an open architecture distribution model that allows us to develop an underwriting box and take risk as we see it, and fits our appetite, regardless if it comes from a retail broker or a wholesaler or program administrator or another insurance company, for that matter. We write both, as an admitted, and an E&S insurer, writing at this point now in all 50 states. We are an AM Best-rated company with an A-minus rating. At the end of the first quarter, we eclipsed a new size category. We're now Financial Size Category X , which should allow us to access new distribution channels and, frankly, open up new lines of business for us, and particularly in the casualty arena.
One of our key differentiators is not just the data analytics, but how we use data analytics to inform risk transfer and the use of reinsurance, and we use reinsurance to really balance the book and minimize earnings volatility. You can see on the right, we have had a good run of both profitable growth, growing the top line in excess of 30% over the last several years and growing the bottom line commensurately. We exited the first quarter on an LTM basis with approximately $1.3 billion of premium and over $100 million of net income. Additionally, we have what we feel are best-in-class margins and an ROE that's in excess of 20%, which is a goal that we've stated with our Palomar 2X strategic framework.
So if you turn to the next slide, I will spend a moment just describing Palomar 2X. So Palomar 2X is a philosophy, an operating philosophy, that we introduced to the market in June of 2022. And really, what we're trying to do is looking at our existing product suite to determine the potential to double the underwriting income in kind of an intermediate timeframe, 3, 4, 5-year timeframe, while again maintaining an adjusted ROE in excess of 20%. And the core franchise or really the premise behind Palomar 2X is doing this in an organic fashion. All of our growth since we started the company 10 years has come organically. We've done 2 small acquisitions that have contributed less than $15 million of premium to the in-force book.
So it's been a story premise around organic growth, anchored by our earthquake franchise and then supported by now non... I guess, well, attritional loss-bearing business that don't have a cat profile similar to that of earthquake. We've made a concerted effort to limit our catastrophe exposure beyond earthquake, whether that be through reduction of exposure for continental hurricane or transition of our business model, in the case of Hawaii, to one that's more fee generative through the incorporation and creation of a reciprocal insurer. What we are trying to do is go into new markets with a formula of bringing a experienced underwriter that's either we will recruit-...
or have in-house, and marrying that with a data analytics platform to develop an underwriting framework that allows us to be more granular in our risk selection and also more conservative in how we take on that exposure. Sometimes that exposure can be more fee generative, and that could be either whether it be through delegated underwriting, in the case of the reciprocal, where we're the attorney-in-fact manager, or it can come from, quota share reinsurance, where we're paid an override on the business that we originate. We're continuing to invest in people and process. As I highlighted, we have brought on terrific underwriting expertise to join us, and that ranges from, leadership in general casualty to environmental liability, to builders risk, and now new additions in the crop space.
And so as we look at Palomar 2X, you know, we are well on our way. With the guidance that we put out in the market, we will have achieved our goal based on 2021 results inside of three years. And so if we look at 2024, we want to maintain this Palomar 2X strategic framework, sustain strong, profitable growth. We want to take advantage of the dislocation in the market, and we're seeing it in several segments, as well as continue to diversify the book, and hopefully, in doing so, we will deliver predictable earnings. So turning to the next slide. Thank you. This just gives you a snapshot of our book of business. We now divide the book into five kind of key specialty categories.
All of them are in different stages of their maturation cycle, but all are growing nicely. The earthquake segment remains our key franchise. We are considered an expert leader in the sector. We're now the second-largest writer in California after the California Earthquake Authority and the third-largest writer in the United States. I think it's important to point out that we write both commercial and residential business, as I mentioned earlier. The important thing about that is that it allows us to play through market cycles. The residential business is an admitted line, and so you have kind of an automatic price renewal that allows you to scale the business nicely in a softening reinsurance market environment. And then the commercial market segment allows you to adjust rates accordingly to market conditions.
In this case, we've been able to take rates up meaningfully over the last few years and continue to do so right now. The inland marine and other properties, probably the segment of the business that best typifies our approach to consistent earnings, and this Palomar 2X framework that's trying to generate a 20% ROE and double the book in an intermediate time frame. And really, what I mean by that is this is the segment of the book where we're growing, where we want to. We are investing in certain segments and de-emphasizing others. So a good example of that is continental hurricane-exposed business, mostly commercial, to some degree, residential. We have meaningfully contracted that line of business. At its apex, we had what's called probable maximum loss for a 250-year event.
So think a major hurricane, a hurricane that we have not seen in our lifetime hitting. We had over $650 million of theoretical loss in that circumstance. That is now down to $100 million, so we've meaningfully contracted that book. At the same time, we have made considerable investments in the builders risk book and excess national property. These are lines of business that do not have exposure to or have much less exposure to hurricane losses. Their primary loss is going to come from a large fire or structure fire. And so I want to emphasize, this is the segment where we're growing, where we want to and continue to make investments where appropriate or scale back where appropriate. And the, the last prime example of that is what we've done in the state of Hawaii.
So we write hurricane exposure in Hawaii. If we cover a home for damage incurred only from a hurricane. So we're only on risk when there is a named hurricane watch or warning in place on any of the islands in, of Hawaii. But what we've done is we've now set up a reciprocal insurer, where the actual losses will be paid by that company that we do not own. We manage it, and so we get paid an override for the placement of risk and the administration of the risk. But if there are actually losses incurred, they'll be borne by the policyholders of this reciprocal insurer.
So again, I want to spend a second just emphasizing, this is the line of business or the category, excuse me, where we are growing, where we want to, continuing to reduce volatility and continue to invest where we can see strong risk-adjusted returns. The third segment is Casualty. So Casualty is a line of business that we entered into really in 2022. What we've done is brought on subject matter experts that have a long-standing track record and distribution history in the marketplace and brought to them technology, data analytics, and tools to help them execute a business plan in niche segments. So that could be real estate agency errors and omissions, it could be environmental liability, it could be contractors' liability or excess liability. In all cases, we are taking kind of a walk before you run approach.
Our maximum line size on a gross basis is $5 million. On a net basis, it's around 40% of that, so a max net line of $2 million. So what that affords us is the ability to, if there is a one-time shock loss, it's not going to be disruptive to our earnings results. Additionally, we are using heavily heavy quota share reinsurance that pays us a small override, so provides a nice fee income stream in addition to the underwriting income that we generate from casualty....
I think the other thing to emphasize is because we've been in this line of business really since 2022, we are not weighed down by legacy results and what you're seeing from other casualty insurers that are taking adverse development or reserve charges or building up the reserve base for underwriting years that predate certainly our entrance into the market, but really 2015-2019. So very excited about the prospects for what we can do in casualty, but it's not one where we're going to overleverage. We're going to be very deliberate in how we enter that market. That deliberate approach is also what we're doing in fronting. Now, fronting is a segment of business that's really more fee generative.
We will work with reinsurers, non-rated insurance companies, and certain MGAs that need our balance sheet or our licensing to enter into a market segment where they have domain expertise, but don't, again, have the requisite insurance licensing to participate in that market as a true insurer. So we get paid an override for the provision of our licensing, and it typically ranges from 5%-7%. What we've done in the fronting market, and it's been one where we've taken a very more of a rifle shot approach. We have around 10 clients or so that we work with that will pay us a fee, and in turn, they will access the market. And our primary focus here is really on collateral and counterparty management.
And so by having this rifle shot approach, we have a very keen sense of what our counterparty is taking on from a risk standpoint, a very keen sense of the reinsurance that's supporting that line of business, as well as the ability to insert ourselves in the claims handling and underwriting process where as need be. This was our slowest grower in the third quarter or first quarter, excuse me. We do expect it to be a bit of a laggard this year, but we do have a nice, robust pipeline that should allow us to grow, you know, again, deliberate and controlled fashion over the course of 2024 and into 2025. Crop is the next line of business. This is our newest segment, albeit though our management team actually dates back, their career started in the crop space.
So, this is an interesting market that it's somewhat similar to what we see in earthquake as well as flood, where you're benefiting from a government-sponsored entity that's either your competitor or in this case, providing a reinsurance backstop. So like earthquake, flood, property, you can use data analytics to cherry-pick your risk and then assign how much your risk participation to what's going to be assigned to your balance sheet or to in this case the US Department of Agriculture and the through the RMA. And so we are now one of 13, soon to be 12, approved insurance providers recognized by the federal government. It's a large market and therefore a large opportunity for us. We initially thought we would do close to $100 million in premium in 2024.
We now think it'll be closer to $150 million, $125 million-$150 million this year. And, importantly, in this year, it'll be more fee generative. We're really acting more as a front for reinsurers. That will transition starting in 2025 to, one where we're taking risk and generating fees. So turning to the next slide. Thank you. This just gives you kind of an overview of our operation, and I think it's important to point out, you know, as a, you know, a best-in-class specialty insurer that has industry-leading margins, a combined ratio in the low- to mid-70s, you have to be sound operationally and additionally, too, on the underwriting and the risk transfer side. So a few things that I would like to highlight here. First and foremost, data analytics.
It's pervasive throughout the organization. We're using data analytics to underwrite risk, at the individual risk level. We're also using it to manage the portfolio, and then additionally, to using it for risk transfer purposes. We continue to build out our actuarial team. You know, our actuarial team, has proven to be not just a great resource for us from a pricing standpoint, but now they're becoming more strategic from a data utilization standpoint and with great symbiosis with our underwriters to target classes of business within a product category, focusing on segments that could use more rate or where we can lean in with our current rate and our current rate and pricing paradigm.
And it's also kind of a nice blend between underwriting, data analytics, and frankly, technology, because more often than not, our actuarial team will be using data to help us pre-underwrite products into a system. So technology is something that we've also used to differentiate ourselves. That can entail, in many instances, where we have a point-of-sale system that allows you to bind a policy in five or six clicks, like in residential earthquake or flood, because all of the underwriting is preprogrammed into a system. We also use technology to bridge into other insurance carriers who view us as a product specialist and want to have access to our flood, our earthquake, or our hurricane products, in the case of Hawaii, but they want to bundle it with their personal lines product suite.
So we partner with over 20 different insurance carriers, more often than not, through the use of technology, through an integration and an API into their point-of-sale system. And that's just one example of kind of our, again, this omni-channel or open architecture distribution model that we use to aggregate business. So again, we're working with retail brokers, we're working with wholesale brokers, we'll work with selective program administrators, and then we'll work with other insurance companies. If a risk fits our appetite, we are agnostic in terms of how it comes into or comes onto the book. And then on the investment side, I think all of our investors know that we are an underwriting organization, first and foremost.
You know, we are very proud of the fact that if you do a DuPont analysis on our book, about 80%, if not more, of the income is generated from underwriting income and profits, as opposed to investment income. But investments do continue to provide a nice tailwind for income growth for us, as it's a conservative portfolio with less than 4 years of duration, that is, now investing at new yields closer to 5.5-6%, versus a trailing return of about 4.2%. But on the whole, you know, as the book matures, we have modest investment leverage, about 1.4 times. We do think there's a chance for us to continue to evolve the portfolio, but not take on disproportionate risk relative to what we're doing on the underwriting side. And then reinsurance.
And if you don't mind turning to the next slide, I'll spend a second on reinsurance. You know, if you were to say what's a differentiator for Palomar beyond data analytics, I think it would be our reinsurance acumen. We are using reinsurance and risk transfer to really afford us predictable earnings and reduce volatility. We have a reinsurance strategy that incorporates traditional excess of loss, traditional per risk coverage, quota share, and insurance-linked securities. We've issued over $800 million. We have currently over $800 million of catastrophe bonds in place to support our excess of loss program. And so what we're really trying to do is a few things. One, obviously manage losses from a severe event, as well as confine our exposure from shock losses.
So think like a house fire or a single indemnity loss on a casualty risk. And then really position us for post-event demand in the case of excess of loss, or excuse me, earthquake and the utility of our excess of loss program. So spending a second on the excess of loss program, we just completed our June first renewal. June first is when the predominance of our reinsurance expenses incurred, and it was a favorable result for us. We were able to reduce our retention. So when we talk about our retention, think about an earthquake or a hurricane. We took down our hurricane retention from $17.5 million to $15.5 million. So if there was a large storm that hit a state like Florida or Texas, we would incur the first $15.5 million.
The next $100 million would go to reinsurers. In the case of an earthquake, we incur the first $20 million, the next $3.05 billion would go to reinsurers. What we are doing is we are buying reinsurance above the 250-year probable maximum loss, ensuring that there's a cushion to not only endure that event, but also support our growth. And so with the most recent 6/1 placement, I talked about, we took our wind retention down to $15.5 million. We also maintained the earthquake retention well inside, tried and true goalposts of ours of less than a quarter of earnings and less than 5% of surplus. In this case, now, the earthquake retention is about 2.5% of surplus and about a month and a half of earnings.
But we also bought $400 million of incremental limit to support our growth in the quake space. So the punchline was, in the circumstance of the excess of loss, which is about $230 million of annual expense, that is far and away our largest expense, it was down 4% year-over-year. And so when you look at what that means, again, it's off a $230 million base. We thought we were going to be up 5%, it ended up being down 4, so about a 9-point swing. It's around $16-$17 million after tax of savings. And so if you turn to the next slide, this just kind of gives you a sense of the financials as we think about Q1, and more importantly, full year guidance.
You can see in the first quarter, we had nice, strong top-line growth, 47%. That translated nicely into 36% bottom line growth. And again, we also had an ROE well above our 20% benchmark. It afforded us the ability to up our guidance. We actually started the year at $110 million-$115 million of net income guidance. At the end of Q1, we took it up to $113 million-$118 million, and now as we sit here today, we're at $122 million-$128 million. That does factor in seven months of savings from the reinsurance. Again, it's a twelve-month treaty year, so it incepts at June 1, 2024, and runs through May 31, 2025.
So on an annualized basis, as I said, about an after-tax, it's closer to $17 million. I think it's important to point out that we do reflect some measure of catastrophe loss in our guidance. So we had $3.4 million of loss in the first quarter from floods in California. We also give guidance of on our loss ratio of 21%-25%. That includes severe convective storm activity, call it 2-3 points of severe convective storm activity, which could include, in some cases, a tropical storm or certainly a tornado hail event, which we've seen in states like Texas and certain parts of the Midwest throughout this year. So as we sit here today, we feel very good about the business.
We have made a concerted effort to grow where we want to, reduce segments that offer volatility, but more importantly, have made considerable investments in growth vectors that will continue to drive the bottom line, as well as certainly top line, but generate those consistent results in a meaningful fashion. So very pleased with where we are. Happy to answer questions or spend some time with you, Adam.
I'll start then. When the building blocks for a couple years, you don't give specific 50, 20. What are the three? I mean, how much of that will likely, how much of, I guess, unit this, how much from business profits
Just, how do you think about it other than the exact number?
Yeah, no, it's, it's, I mean, it's a great question. You know, we, we're constantly looking at this Palomar 2X model to see how we're trending. And it really does vary product by product. So a line like earthquake, it's gonna go from a combination of rate as well as unit and exposure growth. And it's, you know, we grew earthquake around just under 20% in the first quarter. It was probably a mixed 50/50 between rate and unit growth. We have some partnerships that are coming online, one with Cincinnati Financial that came online this quarter, and a few more that should come online later this year. That will help drive the unit growth in quake.
Casualty, a lot of greenfield growth opportunity for us because we have underwriters that have been with us less than 15 months that have long-standing distribution relationships. We're building out their systems that's gonna allow them to take on more producers, so we're gonna continue to appoint producers, as well as, you know, take rate where we can. That property in the marine and other property segment, we're adding a lot of underwriters on a regional basis that will allow us to, you know, obviously try to get some measure of risk-adjusted rate increase, but also open up new distribution and frankly, greenfield. Crops, the last example, that's, you know, green shoots, greenfield, pick your, pick your term. We think we can build that into a $500 million business in, in, you know, in the next few years.
And that's going to come through distribution relationships and broadening of our footprint there from both the geographic and going deeper with certain market participants in that segment. And I think just one thing I'd add on crop is we did make a strategic investment in a distribution partner, a group called Advanced AgProtection. The principals of that firm have been in the market for over four years, with long-standing distribution relationships with the introducing brokers and frankly, the farmers themselves. So we think that will be a nice long-term catalyst for growth for us. And again, I think we can be building into a $500 million business.
Good.
Yeah, it's, it's a good question. It's really product specific. So, you know, the property market had been as hard as certainly I'd seen in my fifteen plus years in this business. It's slowed down from the rate increases. It's not 50% rate increases, but it's still 10% rate increases you're seeing there. I think overarchingly, what I would say in the P&C market is there's rate integrity. You know, there's maybe one line, public company, D&O, where you're seeing large rate decreases, but even that, that's starting to see some discipline. Across the board, people are maintaining their pricing discipline. It may not be high teens increases, but you're still trying to see rate increases to keep pace with loss cost inflation. And as certain lines have seen some adverse development, there's a bit of a catch-up coming on.
So what's driving that more than anything is the reinsurance market. Reinsurers are leaning in in certain pockets where they see the ability to maintain good risk-adjusted returns, but they're also maintaining discipline on things like their attachment and the underlying unit level economics or margin that they're trying to get. So while we saw a 4% decrease in our pricing of our reinsurance program, that was driven mostly by the higher-end layers of the program, where it's more remote loss chance for loss. The low end was still up, and it was still a price increase. And frankly, there's less availability in that low end if you think about, you know, losses from a 3- to 5-year event timeframe, as opposed to losses from a 10- to 100-year timeframe. So overarchingly, there's rate integrity in the market right now.
Great.
Okay.
Yeah, sorry. Yeah. Yeah. Yeah. So I think fronting, you know, it's, it's a way to generate fee income. It's also a way to learn about markets. So we have the ability to transition our participation over time. So we have certain lines where we're fronting for property business, and there is an opportunity for us to get smarter on the market and potentially take risk or choose not to and just make it fee generative. So it is a great way for R&D and determine if it's a new market segment to enter into or just say, "No, we'll be fee generative." And I think that's the biggest lesson learned, like, you being selective in your partners, not overextending yourself and being, you know, steadfast in managing the counterparty risk, because you can get surprised in fronting.
You know, it's risk-free in theory, until the risk comes back onto your balance sheet because someone didn't have the requisite reinsurance or they missed something in their underwriting.
Great. Thank you, Mac.
Thanks, Adam. Appreciate it. Thank you.