Good morning, welcome to the Palomar Holdings, Inc. fourth quarter and full year 2020 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference line will be opened up for questions with instructions to follow at that time. If at any point you require operator assistance, please press star zero on your telephone keypad. 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. Good morning, everyone. We appreciate your participation in our fourth quarter and full year 2020 earnings call. With me here today is Mac Armstrong, our Chairman, Chief Executive Officer, and Founder. As a reminder, a telephonic replay of this call will be available on the investor relations section of our website through 11:59 P.M. Eastern Time on March fourth, 2021. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans, and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements, including but not limited to risks and uncertainties relating to the COVID-19 pandemic.
Such risks and other factors are set forth in our annual report on Form 10-K that will be 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. Good morning, everyone. Today, I will speak to our fourth quarter results at a high level and then discuss our initiatives to expand our business and drive profitable growth before turning the call back to Chris to discuss our financial results in more detail. During the fourth quarter, we executed upon several notable initiatives that further position Palomar for consistent earnings growth in the years ahead. First, we grew gross written premium 31%, including growth across existing and new product lines, expanding our position as a specialty insurance leader. Second, our newly launched E&S carrier, which we refer to as PESIC, accelerated its traction in the fourth quarter. Our efforts with PESIC represent a logical extension of our business and enable us to address a large and attractive market opportunity.
Third, we consummated several new partnerships during the quarter, most notably a residential earthquake partnership with The Travelers Companies, Inc. Partnerships like these continue to be a meaningful source of growth for Palomar, as well as an important validation of the value that we provide to the market. Fourth, we acquired the renewal rights to GeoVera's book of Hawaiian residential hurricane business. This transaction allowed us to solidify our position in an attractive market where we already provide our producers and carrier partners a differentiated product, technology platform, and financial stability. Fifth, we continued to refine our underwriting strategy and implement measures that emphasize risk-adjusted return, catastrophic payback, and earnings predictability. As such, we made the decision to exit commercial all-risk on an admitted basis, specialty homeowners in Louisiana, and put into place a host of other underwriting changes.
We are committed to the continuous improvement of Palomar across all dimensions of the business and believe that the underwriting changes made during the fourth quarter reflect this commitment. Finally, we continue to emphasize the protection of our balance sheet and our earnings base. To that effect, subsequent to year-end, we secured $25 million of aggregate excess of loss reinsurance limit, the aggregate cover, to put a floor on our ROE combined ratio and earnings base, ultimately minimizing the impact of losses from multiple severe catastrophe events. Turning to our results in more detail, we delivered gross written premium growth of 31% in the fourth quarter and approximately 41% for the full year. Our full-year growth consisted of an 87% increase in our non-earthquake offerings, growth of 52% for our commercial earthquake business, and 14% growth on a same-store basis for our residential earthquake business.
We continue to expand our product portfolio, launching four new products and PESIC in 2020, and are encouraged by the traction these newer products have quickly established. For example, our inland marine division grew premium by over 500% year-over-year, albeit off a small base. Our commercial lines premium grew 95% year-over-year, a function of new distribution sources, expanded geographic footprint, incremental product traction, and most importantly, sustained pricing increases. Our fourth quarter commercial policy average rate increase on renewal was 16% versus 14% in the third quarter, demonstrating sustained rate integrity in the commercial property market. Our book experienced premium retention rates of 84% during the fourth quarter, a rather strong result when factoring the amount of non-renewals of all-risk and specialty homeowners policies in this quarter, and 87% for the full year 2020.
Premium retention for our residential earthquake and Hawaii hurricane lines of business remain the strongest across our portfolio, both in excess of 92%. We believe these results are a testament to the unique value our products offer insureds and distribution partners. As we think about our evolution in 2020 and what is to come in the years ahead, PESIC is a key pillar of our progress. This natural extension of our business truly enables us to extend the breadth and reach of our product suite. PESIC provides us the flexibility to enter new programs, enter new market segments in an expedient fashion, and in some cases, permits us to enter lines of business or geographies we were previously precluded from as an admitted insurer. PESIC also gives us the opportunity to participate in national property layered and shared business for commercial earthquake, commercial all-risk, and inland marine business.
PESIC's 128% sequential growth in the fourth quarter demonstrates its potential. Strategic partnerships continue to be a key growth driver for Palomar. Over the course of 2020, we executed new partnerships in our earthquake, flood, and commercial lines of property business on behalf of both Palomar Specialty Insurance Company and PESIC. These relationships enable us to enter new lines of business, as well as deepen our standing as the go-to residential earthquake partner for major national insurance carriers. Subsequent to quarter end, we joined forces with Travelers to provide residential earthquake products to their agency partners in Missouri, Indiana, and Utah. This partnership began in earnest last month and is emblematic of our strategy. We are pleased with the initial reception that our products have received by the Travelers clients and producers, and look forward to extending the relationship into additional geographies as the years progress.
Although these relationships take time to develop, we believe the investments will serve the company well as we provide valuable technology-enabled solutions to other insurance carriers. I'd also like to briefly touch on our newly launched real estate errors and omissions program. This is a class of business where our team has longstanding experience and distribution relationships. We believe it is a strong addition to the Palomar product suite and heralds our careful and targeted expansion into casualty business. We are pleased with the progress this admitted offering has produced over the past few months. As previously mentioned, our country experienced a historic string of severe weather events during the second half of this year, which resulted in a meaningful impact on our financial results. As always, our immediate reaction was to ensure that our policyholders and business partners received the support they deserve.
Once this was complete, our focus turned to utilizing the lessons that we've learned to improve our financial results and our business overall. We rigorously examined our product performance and underwriting guidelines and evaluated the available returns in specific market segments and geographies. As such, we opted to exit admitted commercial all-risk in totality and specialty homeowners in Louisiana. These collective actions reduced our gross losses from the historically active 2021 season by 70%. With the launch of PESIC, we shifted our approach to writing layered and shared all-risk accounts on an E&S basis, materially altering our exposure and participation on an individual risk and aggregate portfolio basis. As it pertains to our reinsurance program, in October, we announced the procurement of a backup coverage for our $20 million excess to $10 million layer. The layer will remain in place until June 1st, 2021.
As it relates to previously mentioned $25 million aggregate cover placed earlier this year, it ends up April first and has an attachment point of $30 million, providing coverage for qualifying events within our per-occurrence retention. This coverage applies across all perils, including earthquakes, hurricanes, convective storms, and floods above a qualifying event level of $2 million in ultimate gross loss, recovering on a first-dollar basis once above the threshold. Simplistically speaking, the aggregate kicks in after three full retentions or after the accumulation of losses from a multitude of $2 million ultimate gross loss events. The actions taken demonstrate our commitment and focus on remaining agile, preserving our ability to invest in our core markets, and most importantly, to achieve the requisite payback from a catastrophe fund at Palomar, our shareholders, and our reinsurance partners. 2020 was a trying year, yet one of accomplishments.
We grew rapidly and maintained our profitability. More importantly, we got better as a company. Hard lessons learned over the second half of the year and the swift actions of our team to adapt, learn, and improve during the pandemic embolden the numerous paths for growth that lay ahead. I'd like to spend a few minutes on our team who are at the core of everything we do and what fuels us forward. To this extent, we had several notable additions to our world-class leadership team, including Angela Grant, who joined us in November as our Chief Legal Officer, the promotion of Michelle Johnson to Chief Talent and Diversity Officer, and the addition of Mark Rose as Chief Technology Officer. At Palomar, our most vital strength is our talent, which we continually invest in while also promoting diversity and inclusion in the workplace.
I would also highlight the launch of our inaugural sustainability and citizenship report, which we plan on releasing annually. The report represents our commitment to exceeding traditional environmental, social responsibility, and governance standards as we strive to build a workplace grounded in ethical behavior, compassion, and equality. I'm proud of the strides that we've made toward creating economic opportunities and promoting social justice. Turning our attention to 2021 and the future prospects for Palomar, I would like to start by addressing the severe weather activity throughout the country this past week, and in particular, winter storm Uri in Texas, where Palomar has had a considerable market presence. First off, I want to tell our policyholders in Texas that our thoughts are with them. We stand ready to support them. We're here to help them rebound.
Secondly, I want to remind our stakeholders that Palomar protects its Texas business, residential and commercial alike, with not only catastrophe excess of loss coverage that responds should our gross loss exceed $10 million, but also with underlying quota share reinsurance where there is first-dollar participation that helps manage attritional loss. Unlike the hurricane losses that impacted us in Q3 and Q4 of 2020, both commercial and residential quota shares will respond to this event on a ground-up basis within our retention, and as such, we do not expect to incur material losses from this storm. We believe we are well positioned to further support continued profitable growth. Palomar's ability to innovate, adapt to market conditions, and to maintain our profitability through strong risk management are differentiators that will enable us to capitalize on new and existing market opportunities.
We are investing to support this growth. We are confident we will continue to scale our business while diversifying our product mix. We are excited with the prospects for the year ahead, as well as our ability to deliver attractive results for all of the company stakeholders. For the full year 2021, we believe that our adjusted net income will be between $62 million and $67 million. Additionally, we believe that with our aggregate cover in place, we have established a floor of approximately 10% for adjusted return on equity, 80% for adjusted combined ratio, and $39 million for adjusted net income for the year. With that, I will turn the call over to Chris to discuss our results in more detail.
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. We have adjusted the calculations accordingly. For the fourth quarter of 2020, our net loss was $1.8 million, or $0.07 per share, compared to net income of $10.9 million or $0.45 per share for the same quarter in 2019. For the full year of 2020, our net income was $6.3 million, or $0.24 per share, compared to net income of $10.6 million or $0.49 per share in 2019. Gross written premiums for the fourth quarter were $96.1 million, representing an increase of 31% compared to the prior year's fourth quarter.
For 2020, our gross written premiums were $354.4 million, growth of 40.6% compared to $252 million in 2019. As Mac indicated, this growth was driven by a combination of new products, accelerated rate increases, expansion of our E&S footprint, and extension of our distribution networks. Ceded written premiums for the fourth quarter were $53.8 million, representing an increase of 82.3% compared to the prior year's fourth quarter. The increase was primarily due to increase in reinsurance expense commensurate with our growth. During the fourth quarter, the company also incurred additional reinsurance expense associated with the losses sustained in the third and fourth quarter of the year while maintaining the company's $10 million retention. In the fourth quarter, we fully utilized the original reinsurance layer, providing $20 million of coverage in excess of $10 million.
The exhaustion of that layer resulted in an expense acceleration of $4.1 million of the remaining costs that would have normally been recognized in 2021. This layer was fully utilized, including a reinstatement due to historic weather activity in the second half of 2020. Additionally, at the beginning of the fourth quarter, we placed a backup layer to provide equivalent coverage through June 1st of 2021 if the original layer was impaired. This backup layer cost $6 million, $2.2 million of ceded written premium in the fourth quarter. A portion of the backup layer was utilized during the fourth quarter, resulting in a reinstatement premium of $759,000. The full layer remains in place for windstorms, earthquakes, and other events such as Winter Storm Uri through its expiration.
As Mac mentioned, evident in our recent announcement, our risk transfer model remains a critical component to our strategy as we seek to pair sustained top-line growth with conservative levels of reinsurance protection. The aggregate cover we recently placed effective April 1st of this year is emblematic of this strategy. As a reminder, our CAT excess of loss program provides coverage once a loss exceeds our current retention of $10 million. Our retained losses from qualifying events will contribute to the new aggregate cover that kicks in at $30 million. Net earned premiums for the fourth quarter were $38.9 million, an increase of 25.6% compared to the prior year's fourth quarter due to the growth and earning of higher gross written premiums, offset by the growth and earning of higher ceded written premiums that include the additional and accelerated reinsurance expense described earlier.
Net earned premiums for 2020 were $155.1 million, an increase of 54.7% compared to 2019. For the fourth quarter of 2020, net earned premiums as a percentage of gross earned premiums were 45.2%, compared to 52.6% in the fourth quarter of 2019. The decrease was significantly due to the reinsurance acceleration charge and backup layer expense and reinstatement premium incurred in the fourth quarter of 2020. For 2020, net earned premiums as a percentage of gross earned premiums were 51.4%, compared to 50% in 2019. We believe the ratio of net earned premiums to gross earned premiums is a better metric for assessing our business versus the ratio of net written premiums to gross written premiums. As we stated last quarter, we expected the net earned premium ratio to decrease in the fourth quarter with the placement of the backup layer.
This was further decreased by the reinsurance expense acceleration and the reinstatement premium. We continue to expect this ratio to be around 52%-54% on an annual basis, lower at the beginning of a new reinsurance placement and higher at the end with our expected growth in earned premium. The expected net earned premium ratio contemplates the new aggregate cover that provides increased protection and improved earnings visibility if we face multiple catastrophic events similar to what we saw in 2020. Commission and other income was approximately $803,000 for the three months ended December 31, 2020, $654,000 for the same period in 2019. Commission and other income in 2020 was $3.3 million and $2.7 million in 2019. Losses and loss adjustment expenses, or LAE, incurred for the fourth quarter were $17.2 million, including $14.5 million of catastrophe losses and $2.7 million of non-catastrophe attritional losses.
We define catastrophe losses as certain losses resulting from events involving multiple claims and policyholders, including earthquakes, hurricanes, floods, convective storms, terrorist acts, or other aggregate events. The definition captures the catastrophe losses from the third and fourth quarter and hurricanes Harvey and Florence from previous periods. The loss ratio for the quarter was 44.2%, comprised of a catastrophe loss ratio of 37.2% and an attritional loss ratio of 7%, compared to a loss ratio of 7.1%, comprised entirely of attritional losses during the same period last year. Our 2020 loss ratio was 41.3%, comprised of a catastrophe loss ratio of 32.9% and an attritional loss ratio of 8.4%, compared to 5.6% in 2019, comprised entirely of attritional losses. The increase in the attritional loss ratio between the two years is in line with our expectations.
Our expense ratio for the fourth quarter of 2020 was 68.6%, compared to 56% in the fourth quarter of 2019. The increased expense ratio was driven by additional reinsurance placements with increased ceded premiums and continued investments in PESIC. The ratio of other underwriting expenses, excluding adjustments to gross earned premiums for the fourth quarter of 2020, was 10%, compared to 10.5% for the fourth quarter of 2019. This ratio was 10.2% for the full year of 2020, compared to 11.6% for 2019. Our combined ratio for the fourth quarter was 112.8% and compares to a combined ratio of 63.1% for the prior year's fourth quarter. Excluding the catastrophe losses in the quarter, our adjusted combined ratio was 73.8% for the fourth quarter compared to 60.7% in the fourth quarter of 2019. The increase is primarily from higher expense ratio, as previously discussed, and in line with our expectations.
We believe that this ratio is a better measure of our results for comparison purposes and offers a better sense of our business on a steady-state basis. Our adjusted combined ratio, excluding catastrophe losses for 2020, was 67.5%, compared to 63.3% in 2019. Net investment income in the fourth quarter was $2.3 million, an increase of 29% compared to the prior year's fourth quarter. The increase was largely due to a higher average balance of investments held during the three months ended December 31st, 2020, due primarily to cash generated from operations as well as proceeds from the company's January and June 2020 stock offerings. We maintain a conservative investment strategy as our funds are generally invested in high-quality securities, including government agency securities, asset and mortgage-backed securities, and municipal corporate bonds with an average credit quality of A2/A.
Our fixed income investment portfolio book yield during the fourth quarter was 2.3%, compared to 2.9% for the fourth quarter of 2019. The weighted average duration of our fixed maturity investment portfolio, including cash equivalents, was 3.96 years at quarter end. Cash and invested assets totaled $456.1 million at quarter end as compared to $272.8 million at December 31st, 2019. For the fourth quarter, we recognized realized and unrealized gains on investment in the consolidated statement of income of $245,000 compared to a $1.2 million gain in the prior year's fourth quarter. Our effective tax rate during the fourth quarter was 23.1% compared to 24.5% in the prior year's fourth quarter. The 2020 fourth quarter, the company's income tax rate differed from the statutory rate due to the tax impact of the permanent component of employee stock option exercises.
Excluding any unforeseen events, we anticipate that our tax rate will settle around the 21% mark for the 2021 year. Our stockholders' equity was $363.7 million at December 31st, 2020, compared to $218.6 million at December 31st, 2019. For the fourth quarter of 2020, annualized return on equity was a negative 2% compared to 20.4% during the fourth quarter of 2019. Similarly, our annualized adjusted return on equity during the fourth quarter was negative 1.4% compared to 21.5% during the fourth quarter of 2019. Our adjusted return on equity for 2020 was 3% compared to 24.1% for 2019. As Mac indicated, looking ahead to 2021, we expect to generate adjusted net income between $62 to $67 million. This adjusted net income guidance considers the impact of Winter Storm Uri in Texas. As of December 31st, 2020, we had 26,245,339 diluted shares outstanding as calculated using the treasury stock method.
We do not anticipate a material increase to this number during the year ahead. With that, I'd like to ask the operator to open up the line for any questions. Operator?
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for your question. Our first question has come from the line of Matt Carletti with JMP. Please proceed with your question.
Hey, thanks. Good morning. Just a couple questions. Mac, maybe start with one centered on growth. Appreciate your comments about seven new partnerships being signed in the quarter. Really my question is, could you help us kind of gauge your excitement or optimism for the growth path going forward? Specifically, what's the potential for those new partnerships? How should we think about the timing and the ramp of those? Really with kind of the bottom line question of, as you look at 2020 and what was a very strong 40% or so growth rate and premium growth rate, do you feel that's sustainable? Do you feel that's something that can be built upon? Is the model maturing a bit and there'll still be strong growth, but maybe we shouldn't think about those numbers?
Yeah, Matt, good to hear from you, and thanks for the question. Definitely want to address this, because I think it's important to say that we feel very good about our growth prospects into 2021 and beyond. When you look at our growth over the course of 2020, it was strong, with the addition of new products, the new carrier, and new partnerships which you've touched upon, we do believe that a growth rate that we're not going to provide premium guidance per se, we do think that a growth rate that we achieved in 2020 is sustainable. We think that that is directionally very achievable.
I wouldn't mind just giving this a little more color on the fourth quarter top-line growth, because ultimately, when we went through the exercises and the underwriting changes that we put into place in the fourth quarter, we focused on profitability. As a result, we made changes that would've slowed the growth in certain lines of business. Clearly, commercial all-risk, exiting that business in the middle of the quarter on an admitted basis and pivoting to the E&S layered and shared focus, exiting Specialty H omeowners in Louisiana, you could argue that sacrificed seven points of growth from just what our average new business was in a month, it also took away the potential losses of 70% of our losses that we incurred from the wind season of 2020.
We also looked at certain of our lines, like commercial earthquake, to make sure we were getting the same targeted return. Even with earthquake, where you have a circumstance where you see no attritional loss, you do have underlying target metrics. There were certain accounts that we opted to walk away from that weren't going to achieve our targeted returns. If you compartmentalize that was probably around seven points of growth within commercial earthquake. Then just one little nuance on commercial earthquake is that there is around $1.2 million of premium that's tied to national property in the E&S book that is earthquake premium that could've been reconstituted and would've pushed up the earthquake growth rate to closer to commercial quake closer to 23%. The only thing I would highlight, too, is on residential earthquake, our same-store growth was 15%.
Our largest product, Value Select, was north of 20% in the fourth quarter. It's a long-winded way of saying, when you look at just the underlying trends in earthquake, plus factor in the growth from the E&S company, new partnerships that we have in builders risk, certainly for national property, some of our new casualty lines, the real estate agents E&O, the new earthquake partnerships with someone like a Travelers, our flood partnership with Torrent, also the Hawaiian hurricane renewal rights deal, which didn't kick in till the first quarter because there is a lag from the timing of the deal to when you actually deliver the renewal notice. There are multiple growth drivers that gives us very good confidence about sustaining growth equivalent to that of 2020 for the full year in 2021.
The only other, the last point I'd make is, we're two months into the year, and we're seeing very good growth, earthquake, Hawaii, you name the line.
Great. That's very helpful. Thank you. Just one other question. Kind of more of a underwriting approach question, particularly as we think about some of the newer partnerships that have been announced. I'm thinking of things that have a little larger limits to them, like the excess liability partnership or the builders risk partnership. Can you just give us a little inside baseball on how you approach those sorts of partnerships where maybe there's, in some of those, there's a little more tail involved, there's a little larger limits involved. I'm sure reinsurance is probably part of the answer, as well as just old-fashioned underwriting. Any color you could give there would be great. Thank you.
Yeah, absolutely. Well, first off, we want to underwrite it on a net line basis. We're looking at what is the unit level profitability irrespective of reinsurance, because if you do it that way, you have the ability to supplement your risk and your underwriting appetite with reinsurance. Those lines that you touched upon, the newer partnerships in builders risk, the new partnership that we've done in the casualty arena, those have quota share reinsurance supporting them. Typically, we would only end up being 20%-25% of the risk, much like we've done with all of our attritional loss lines, and that's why we have the confidence that we do around the results in Texas. We have underlying quota shares working side by side with us.
Those new partnerships, we're going to wade into those markets, have a very disciplined underwriting appetite, have incremental reinsurance supporting us, and doing it in a market that is conducive to naming your terms and conditions. It is still a very favorable market from a pricing and terms and conditions standpoint.
Great. Thank you for the color and best of luck in 2021.
Thanks, Matt.
Thank you. Our next question comes from the line of David Motemaden with Evercore ISI. Please proceed with your question.
Hi. Thanks. Good morning. I had a question, Mac, just a bit more on the growth during the quarter, and specifically the residential earthquake growth, where it slowed a bit. I think I caught that you had said 14%-15% same-store growth in residential earthquake. You guys have historically had very good retention in this line. I guess I'm just wondering maybe if you could touch on new business trends, and was that just running a little bit light in 4Q that seems like it might be temporary based on the comments that you just made, but wondering if you could just expand a bit on the residential earthquake growth of about 6% year-over-year in the quarter.
Yeah, absolutely, Dave. Again, what I would say is that the same-store growth was 15%, Our largest product, Value Select, grew 20% in the quarter. There's really two specific things that influenced or impacted the growth, it wasn't new business, it was actually some of our assumed reinsurance partnerships. We had one partnership with a carrier that exited the line in Utah that we stopped doing business with that actually in the fourth quarter gave us a little bit of a one-time unit unearned premium bump. That was roughly a four-point kind of aberration in the fourth quarter of 2019. The other thing was we had one other assumed reinsurance relationship with a homeowners rider in California that has materially changed its appetite due to wildfire.
We have supported them on the earthquake side, they're still a very good partner, but they have changed the size of the risk they want. They're non-renewing policies because of the wildfire exposure in the state of California. What I look to again is our core products, Value Select, Heritage, Flexpoint, those grew 20-plus%. You had two legacy partnerships, for lack of a better term, that have been kind of wound down. One was wound down, one has come back some considerably. Again, as I said, if you look at the start of this year, new business is strong. We feel very good about sustaining the growth rate that you saw, 15-plus% in 2020 on the residential earthquake side in 2021.
Great. Thanks. That's really helpful. Maybe a quick follow-up on that. Great to hear about the partnerships, adding seven in the quarter, and great to hear about the Travelers partnership in Missouri, Indiana, and Utah. I guess I'm just wondering if you have any line of sight into expanding that relationship to include some other states like California, Washington, Oregon. I guess, is that an ongoing conversation that you guys are having?
Those are ongoing conversations. I think what we're focused on right now is executing in those first three states, getting our systems well integrated with their agents, getting our marketing team to train their marketing reps as well as their producers on the product themselves. Yeah, we entered into this arrangement with the hopes of expanding it well beyond those three states. I hope to report that there is expansion over the course of 2021, we're going to walk before we run and get it right, because this is an important deal for us.
Got it. That makes sense. Thanks. I guess, just shifting over to reinsurance, it was great to see the aggregate that you guys put in place earlier this month. I'm wondering if you could maybe just touch on other parts of the program and just on the reinsurance renewals at one-one, what sort of rate increases you guys experienced, and then also maybe just give your outlook on how you expect the reinsurance rates to progress over 2021, especially now it sounds like the specialty home facility is clearly working as you guys had intended. I believe that renews at six one. Just wondering, I guess, as well, specifically on the specialty home facility, how you're thinking about the renewal on that.
Sure. What I would tell you, Dave, is we did not have any reinsurance renewing at one-one. The majority of the program renews at six-one. We did go out and place the aggregate earlier this year, and it's up to four-one, and we did it in January, as you know. We had a good experience. We have some great reinsurers supporting us. It was priced in line with our expectations. As it relates to six one, the broader CAT program renews. We are in the market now. We have a terrific panel of reinsurers that the strong majority of which will not have incurred losses. I think we feel good about the placement. The guidance that we've put in place reflects some rate increase, it's a digestible rate increase when looking at the primary market and what we can get there.
On the specialty homeowners facility, I think first and foremost, what it starts with is we need to do a very good job of servicing our policyholders. One, to make sure that they're not disrupted in their homes, they are back in their homes with full utility. Two, that we're responsive and also not putting ourselves in a position where there's leakage from a claims handling expense, or just overall malaise in servicing the business. If we do a good job of that, we feel that we will be able to successfully renew the specialty homeowners facility at six one. Up until this month, that program had done very well, and it has done very well historically. We've got a great group of reinsurers supporting us. We think we'll be able to get it placed. We're very confident in that.
We take around 22.5% of the risk there. We might be able to dial that up or down some. I think what it first comes down to is just being very transparent with our reinsurers, being very responsive to our policyholders, and getting these claims serviced and closed as quick as possible.
Okay, great. Thanks. That makes sense.
Thank you. Our next question has come from the line of Mark Hughes with Truist. Please proceed with your question.
Thank you. I know you said that Texas is not material, but in thinking about your guidance, the $62-$67, I do wonder whether there might be a million or two that you assumed from the winter storms in that guidance. I think you said it was inclusive of Texas. Is Texas zero, or is it perhaps a couple of million?
Mark, this is Mac, and it's a fair question. I mean, we'll have some loss. It's going to be on the lower end. It'll be within that range. If I had to handicap right now, it'll be within that range that you specified, That's why we feel that it's immaterial. It's still too early to tell. The guidance that we put out there reflects the losses from Texas. That's all we can say because it is early stages, certainly in terms of adjudication. The volume of claims is dissipating some, but we're still seeing them. Until we get our true hands around that, the range of the net is kind of what you outlined.
The one thing I'd add around that guidance as well is that, we talked about it on the call and mentioned earlier this year, is that also includes the new cost of the aggregate, which is new to our program but will definitely help create more visibility and consistency of earnings. Also, as Mac mentioned in his prepared remarks, create more of a floor for what our adjusted net income will be for 2021. I think that'll just help prepare, but there is additional cost associated with that included in that guidance that we are providing.
Mac, you gave some numbers talking about that floor specifically. I think the 10% ROE, 80% adjusted combined ratio. Did I hear that properly? I think you provided a third metric that I did not get.
Yeah. Yes. The numbers were approximately a 10% the floor. This is, again, the floor.
Yeah.
10% ROE, an 80% adjusted combined ratio and adjusted net income of $39 million. For what it's worth, based on the underwriting changes that we've made, if 2020 were to repeat itself again with the same type of storm, same location, the range that we would have, the floor wouldn't be $39, it would be closer to $41, $46. The full utilization of the aggregate would be a $39 million adjusted net income.
Understood. Then PESIC, I think you mentioned 128% sequential growth. You might have given the 3Q number last quarter. What was that contribution in the fourth quarter?
It was-
From a written standpoint
in terms of the gross written premium? Yeah, sure.
Yeah.
Let me give you the exact number. It was in and around $21 million.
What do you think about the ramp on that? Obviously, 128% sequential. Where is that going? Yeah. What kind of ramp should we anticipate on that, roughly?
I think long-term, we think that the premium in PESIC could be equivalent to what we have in the admitted company. We have internal targets. We're not going to guide to them this year. The new partnerships that we've announced In builders risk, in excess liability, those are E&S. There's great momentum with what we're doing with Amwins as well as in the national property as well as in commercial quake. There's a lot of things in the hopper. We feel very good about the long-term prospects. I don't know if we're going to grow sequentially 130% a quarter, but we're going to grow pretty nicely in the E&S company. Thank you.
Thank you. Our next question comes from the line of Jeff Schmitt with William Blair. Please proceed with your questions.
Hi. Good morning. The commercial all risk book that you exited, I think in the past you said that was about a $9 million book, but it cost you sort of seven points of overall growth in the quarter, I believe, which implies maybe it was a bit larger. I guess, what was the size of that book, and will that come out fairly evenly this year as policies not renew?
Yeah. Hey, Jeff, it's Mac. I think it was 9% of total premium, not $9 million. What I would tell you is sequentially, that book of business declined from, call it, $12.5 million or so in the third quarter. It declined probably by about 50% on a sequential basis. It's going to wind down ratably over the course of the year. It's going to be offset by growth on national property in the E&S company. It'll probably end up being looking slightly flat to down modestly as categorized as commercial all risk, but it will be all E&S versus the admitted. We're kind of rolling off close to 8%-10% a month, and the limit comes down commensurately as well.
I think a good indicator of that is if you just look in the fourth quarter, and we disclosed this, how much of our Texas premium declined sequentially. That was a function of the commercial all risk being wound down in that state, the admitted commercial all risk being wound down in the state. The only thing that I would add is just if you look at the business that we're bringing on the layered and shared national property business, the metrics are considerably better. Not necessarily from a pure rate perspective, but from a pure premium perspective. The AAL to premium and some of the other metrics that we track, it's considerably better. It's close to 38% better from a theoretical or underlying profitability standpoint.
It will help with our margins, it will reduce our cost of reinsurance, and it will enhance our spread of risk.
Got it. Okay. Yeah, that's great color. Looking at the other line in premium, it's actually ramping faster than flood, almost as fast as builders risk. Is that all the real estate E&O product, or I thought that was newer, I guess. What is in that, what are the growth prospects of that?
Yeah. There's a few things in there. There's real estate E&O. There are some new E&S assumed reinsurance relationships. We are starting to write kind of non-property assumed quota share reinsurance with a team that's longstanding market experts. That's another component to it. That could be for a line like mostly casualty . The other right now is going to be really more of our casualty business. We've gotten a good start in ramping that up.
Is that casualty in terms of like with a property, like a commercial property, kind of a commercial package product?
Yeah, some of it could be package, some of it could be just a pure liability product. Some of it could be like the real estate agency E&O, it's a professional line.
Got it. Okay. Thanks for the answers.
Thank you. Our next question comes from the line of Tracy Benguigui with Barclays. Please proceed with your question.
Thank you. Just want to circle back to Uri. There are a lot of estimates that seem to be pretty varied, and the largest vendor catastrophe modeling firms haven't provided their view yet. I'm just wondering, as you're thinking about your outlook for the year, it seems to be in a tight range, how you think about the industry loss size of this event? If you could also just walk us through the mechanics of your reinsurance, because I realize it's not linear. Maybe I could follow up on that question.
What I would tell you, Tracy, we can follow up on it, I think we've talked about since we've been public, that we use four attritional loss lines like Texas Homeowners or our specialty homeowners facility. We use quota share reinsurance, we're taking 22.5% of the risk with recoveries on a first dollar basis. We have quota shares in place for the specialty homeowners business. We have them in place for the all-risk business, as well as builders risk and in the marine. We have three separate quota shares in place to support us from an attritional loss standpoint. Those are inside of our retention. Once the aggregate loss is above $10 million, that's when it's triggered by our CAT program. We have the ability to recover from multiple vehicles.
Our quota shares for the three individual lines, plus our CAT program. As it relates to the size of the event, it's too early to call, but for us, the fact that we have those four reinsurance programs working to our benefit, it gives us very good confidence that the losses are going to be immaterial. I mean, Chris, I don't know if you'd offer anything else, but I think that's really the sum and substance of it, and we can give you a full Tracy outline of breakdown of how all of these-
Yeah, I guess-
quotas work.
Yeah. I guess you've previously mentioned the 22.5 for specialty homeowners, but if you could walk us through what your retention is for commercial property, and also if your estimates take a view that you will blow through your occurrence tower.
We will not blow through our occurrence tower. We will not have $600 million+ of loss from Uri. It will be nowhere near that. It could go into the first layer of our reinsurance program. It's still early to tell. As I said earlier, the claims have dissipated, or the pace of claims tendering has dissipated considerably over the last few days. It's a manageable, identifiable number. Our all risk, on average, we're taking about 20% of the attritional loss. Same thing on the Builders R isk. It's 22.5 on the specialty homeowners.
Appreciate you laying that all out. I guess there was a lot of discussion on growth. Maybe on the flip side, you had mentioned, I guess, reiterated, not new news on some businesses that you have exited. I'm wondering if there's any other areas where you're not meeting your risk-adjusted returns on capital that may look less attractive right now that you're revisiting.
Right now, beyond the commercial all risk and the specialty homeowners in Louisiana, we look at it on a state-by-state and an account-by-account basis. That's the beauty of having an E&S company or having the ability to modify rates, even on the admitted side. No, there's no line of business. There could be zip codes, there could be certain classes that we're going to take rate on, but that's just good underwriting. There's nothing, no broad brush.
Thank you.
Thank you. Our next question comes from the line of Meyer Shields with KBW. Please proceed with your questions.
Great. Thanks. First, I think, Mac, you mentioned seven new deals. Should we think of those outside of Travelers as being the typical earthquake hotspots?
Yes. That's fair, Meyer. Yeah. It's going to mirror where we have filings in place, existing presence, and distribution, that's right.
Okay. Those are all those up and running as of January 1?
They are Yes. In varying degrees. Some of them are in pilot phases, some of them are in training phases in a single state. There's a lot more to come, in terms of penetration, training, and adoption.
Okay, that's helpful. In fact, I was hoping you could just go through the reinsurance program associated with the growth in Florida, just because it's been a tricky state in the past.
Sure. The reinsurance, we have a separate tower, it's a North Atlantic hurricane tower that covers us for the Florida exposure. Some of the Florida exposure that we brought on was part of motor truck cargo. Some of it is the assumed reinsurance that doesn't have CAT exposure. The new Florida business that we brought on that's tied to our layered and shared property, there is a standalone facility that we have that attaches at $10 million. At some point, the broader CAT program, it will mirror to the benefit of the broader CAT program. Our PMLs in Florida right now are very modest.
Okay. I'm assuming it wasn't accidental, but I was wondering whether you've given any thought to disclosing how Palomar looks at AAL.
In terms of how we look at our average annual loss?
Yeah.
We look at-
we should build it.
Well, I think the average annual loss that we build, AAL, our reinsurance program is priced as a multiple of the AAL, same way we price our premium. I think if you're trying to figure out what a CAT load is, I think our best offering to you is we have put the aggregate in place that puts a floor. If there are three retentions, after three retentions, it goes into the aggregate. A lot would have to happen. We saw it happen in 2020, but 2020's going to look very different in 2021 just because of our underwriting appetite. The CAT load If it's one event, I don't know how you want to do that, Meyer. I think when we look at AAL, we use it to look at the underlying pricing and how we pay for our reinsurance.
The lower the AAL, the cheaper our reinsurance is, the higher our net earned premium is.
No, I understand. I know it is not a question you can answer. That is something for the models.
Yeah.
Thank you. Our next question has come from the line of Paul Newsome with Piper Sandler. Please proceed with your question.
Thank you, and good morning. I was hoping you could talk a little bit about the outlook for the attritional layer in the loss ratio. Obviously, you have a business mix change happening with the new E&S business, which I assume would have higher attritional losses, but there has been a lot of changes in both reinsurance and pricing. Should we continue to expect, I guess, a gradual increase in the attritional loss ratio, or how should we think about that and how that may be changing in the last three to six months?
Yeah, no, I can handle that one, Mac, but I think you described it well. I think there is really no change in the philosophy that we have been giving really over the last year, that we do expect the attritional loss ratio to continue to tick up. As you can see, for the full year of 2020, it did not jump. It went from 5.6 for 2019 to about 8% for 2020, or excuse me, 8.5% for 2020. Some of that is also a little inflated just because of the amount of additional reinsurance expense that we had to take in the fourth quarter, that pushed the loss ratio up slightly. These are all in line with our expectations through the year that it was going to go up. Obviously, we are still expanding some of those lines, especially homeowners line is still growing.
As Mac mentioned, we are rotating out of our admitted all risk, but going into another all risk or a layered and shared all risk program. I will say that the attritional loss profile of that book is a little bit better than our historic book, our historic admitted book. We do expect to see some improvement there. There are lines expanding, such as inland marine, all risk, the layered and shared all risk, especially homeowners, that will still have attritional losses. We expect it still to tick up. Like I've said before, it's not turning into 20% overnight. This is going to be 8.5% moving up to maybe 9% next quarter or things of that nature. As you know, loss ratios aren't perfect. They are a little bit seasonal, so there is going to be some bumps and valleys in that.
On an annual basis, we don't expect it to jump to 20% or anything like that, maybe a point or two each quarter or over an annual period.
Great.
I think just what I would add, Paul, is if you looked at the fourth quarter, it was 7%. It was flat year-over-year. Again, to Chris's point, it's very gradual.
That's great. Then on the reinsurance side, use of quota share, are there any products where you are either expanding or contracting the use of quota share that might affect net to gross respectively over the next year or two?
Not in a material fashion. Our participation in our flood product has ticked up modestly over the last few years. No, it's not like we're going to start to take 100% of that book. We're still ceding out 60% of it.
Yeah. Like I said, obviously, when we talked about it on the call or on the prepared remarks on the call, I indicated that our net earned premiums should remain around that 52%-54% mark. That includes our thoughts on our participation in the quota shares, the increased expense of the Agg, and then also, obviously, any reinsurance that we place at the June 1 renewal.
Great. Thank you very much.
Thanks, Paul.
Thank you. Our next question has come from the line of Adam Klauber with William Blair. Please proceed with your question.
Hi. Couple questions. On the expense ratio, quarter-over-quarter obviously jumped up, went from, sorry, year-over-year, 54 to almost 57. How much of that is the reinsurance?
Yeah, there's a significant amount of that that is being driven by reinsurance. When you think about how that ratio is calculated, it probably, let's call it about a 12% hit to those ratios. When I look at the expense ratio, it was 56 last quarter, on adjusted basis, 53.6 or 54, and it's now adjusted as about 66.7. If you were to back out some of those reinsurance charges for the year, that gets you below 60. The reinsurance charges I'm talking about is the expense acceleration of $4.1 million and then the reinstatement of the backup layer, about $760,000.
You take those out of your net earned or add those back into your net earn, that lowers the ratio to be within our expectations for the year or for the quarter, where we did talk about the fact that as we changed the quota shares back in Q2, we increase our participation and then also change the structure where we had a lower ceding commission. That also helped drive up the improved net earned premium. The expense ratio definitely is inflated. I'd call it about seven and a half to eight points, it gets inflated purely from the acceleration and additional reinsurance in the quarter.
Okay. That's helpful. This is more directional than exact, but in 2019, the expense ratio is 57%, 2020 up to 59%, but again, had a lot more reinsurance expense. As we think about 2021, again, you got the aggregate coming in, you got some of the additional insurance costs. Are we looking at that sort of higher level, not asking for an exact, but 59% or with the additional reinsurance could be going up from what we saw in 2020?
Yeah, no, I think it should. I think one thing we've talked about is the investment we're making in PESIC. I think over the last couple quarters, we've said that the expenses or the ratios will probably flatten out in a little bit over Q4 and then into Q1 of this year. I think it's going to stay at that level, let's call it for maybe a quarter or two, but then we do expect, let's call it by the end of or probably the second half of 2021 that we will start seeing that scale come back into the model as some of those investments take hold. I think Mac talked about we're continuing to investment in people. We talked about Angela Grant and other folks that have joined the team.
We're continuing to invest there and then also on some of the other things that will help PESIC grow. That scale, we do expect to continue to be in there, and I think you can even see it when you look at the other underwriting expenses on a gross basis, compared to gross earned. If you look at the other underwriting expenses with the adjustments included, last year it was 10.5%, and this year it was 10%. There is still improvement in those layers or in those ratios when you look at it on a gross basis, which is generally how we look at it internally, because it takes out the noise that any type of reinsurance expense is going to put into those ratios.
Okay. Thanks. Going back to some of the premium growth, again, the commercial all risk will be a bit of a drag. It sounds like more in the first half. How big is the Louisiana homeowners that you're running off? Also on the commercial earthquake, sounded like you did some re-underwriting in the fourth quarter. Is there any of that going forward, or is that probably more of a just a fourth quarter type hit?
Adam, this is Mac. Good questions. First on the Louisiana homeowners, it's very modest. It's ±$1.5 million. That will not have much of an impact, if any. On the commercial quake, I would say it was specific to the fourth quarter. As I said, we're seeing very good growth to start the year, what I would add is we're seeing very good growth to start the year with our target metrics being hit. We're getting rate increases, we're improving terms and conditions. We feel very good about commercial earthquake growth at this point.
Sorry, similar question on residential. I think you said one of your partners is not doing a lot in California. I think one other thing depressed that somewhat growth in the fourth quarter. Will we see some of that carry over in the first half, or is that more of a fourth quarter issue?
That was a fourth quarter issue. One was a one-time unearned premium bump that we received. Those can happen as we bring on new partnerships, but that was a partnership that was dissolved fairly quickly after a short-term arrangement. The other one is kind of run itself over the course of 2020. They've stabilized what they want in California homeowners.
Okay. More of an overall on the E&S and PESIC side. Again, still very new, two quarters in. You're building up some partnerships there. Is the momentum in that property market still building as much as we saw three, six months ago? Or is there any, I guess, pointing out or flattening of that momentum?
We're still continuing to see rate increases. We feel good about that for the remainder of the year. In the fourth quarter, our average rate increase was around 16%. I don't know if I want to say that for the rest of the year, we'll average a 16% rate increase, we will get rate. It's rate on top of rate at this point, which is a good thing. I think we feel very good about the rate environment and it being sustained certainly in a positive fashion through the rest of this year and probably into the early part of next year too.
How about the level of opportunities coming the door? You had over 100% sequential growth. Do you see any change in that environment anytime soon?
We're seeing a lot of different new partnerships, new markets to enter. We have to be somewhat mindful of bandwidth and how we allocate our time and resources and making sure that these new arrangements can hit our target returns. Yeah, there's no shortage of opportunities out there in this market.
Great. Thanks a lot.
Thank you. There are no further questions at this time. I would like to turn the call back over to Mac Armstrong for any closing comments.
Great. Thanks, operator, and thank you to all for your time this morning. This concludes Palomar's fourth quarter earnings call. We appreciate your participation, the questions, and certainly your support. We believe 2020 was a significant year in our company's short history. We launched a new E&S platform. We grew in both new and existing lines. We added terrific talent to our team. Most importantly, we adapted swiftly to market conditions and challenges. Looking ahead, we really are excited about the opportunity ahead of us in 2021. We think we will showcase our efforts and our growth initiatives in a very good fashion, and moreover, provide strong, consistent earnings over the course of 2021. With that, I hope everyone remains safe and healthy. Thanks so much, and we'll speak to you after the first quarter. Have a great day.
Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.