Good morning. How are you guys doing?
Good.
Thanks for joining us. We're going to go ahead and get started. I'd just like to welcome everyone to Palomar's 2025 Investor Day. We're thrilled to have this opportunity to share our vision and progress with you. I'd like to extend a warm welcome to our shareholders and analysts. Your continued support and engagement are invaluable to us, and we're excited to have you here today. I'm Angela Grant, Palomar's Chief Legal Officer and Corporate Secretary, and I joined the company in November of 2020, right in the middle of COVID, including relocation. This is my commitment to Palomar. I provide strategic advice and counsel to Palomar's executive officers and directors while also working to minimize the company's legal risk and exposures in a forward-thinking, proactive manner.
I've worked for both large and small insurance companies, including GEICO when it was still a government-employees insurance company, Kemper, Esurance as part of the Allstate brand, as well as HIPPO. I have to say, by far, Palomar has been the best decision of my career. I've been in the insurance industry for 35 years. I know it's surprising, isn't it? Palomar is a best-in-class company because we exhibit a true spirit of collaboration, precision, and execution in every aspect of our business and throughout all levels of our organization. I did say I was an attorney, so we're going to go to this slide. Just take a moment, if you don't mind, to review our disclaimer, which confirms this presentation contains forward-looking statements about Palomar, as well as financial measures which are not prepared in accordance with generally accepted accounting principles or GAAP.
A description of these non-GAAP financial measures and reconciliations can be found in the presentation appendix in the back. Now to the good stuff. Our leadership team. Today, you will meet our amazing team. We have lots of new faces since our last Investor Day in 2022, and you will learn more about our business. Over the next few hours, we will take you through the key milestones we have achieved, the strategic priorities driving our business, and how we are positioning Palomar for continued long-term profitable growth. We have made significant strides in delivering on our promises and creating value for our shareholders. Our agenda is packed with meaningful information from our executive leadership team. We will have dedicated time for Q&A, as well as time to connect with you over lunch. Please do not hesitate to ask questions and share your insights. Thank you again for being here.
We're excited to share a story with you and demonstrate why we're confident in the future of Palomar. Now I'll turn it over to Mac Armstrong, our CEO, to get us started. Thank you.
All right. Good morning, everyone. Thank you, Angela, and thank you to all for attending our second Investor Day. I'm Mac Armstrong, Chairman and CEO. I founded the business in 2013, which we officially launched in 2014 with Jon Christianson and several others that are in attendance today. It's terrific to have so many members of our original team part of the organization still as we are now an 11-year-old company. As Angela said, today is a wonderful occasion to share the Palomar story and detail how the business has evolved and how we have emerged as a market leader in the specialty insurance sector. Moreover, I want to spend some time with you telling you how we're going to continue to elevate our strong franchise over these next several years.
Turning to page six, it's been an amazing 11 years, over half of which has actually been as a public company. If I had to succinctly characterize the Palomar journey over this last decade plus, it would be characterized by profitable growth and evolution, evolving from a single market focus when we launched of an earthquake insurer to a specialty property insurer, now to a distinct specialty portfolio of products that, frankly, is one of one. We are assembling an excellent book of business with strong margins contributing to our profitable growth and our consistent earnings. We've learned a lot over this last decade plus. We've absorbed some body blows, and those missteps have provided our greatest lessons. I am really proud to say the business is in excellent stead today.
Simply put, we're building a market leader in the specialty insurance segment, and our focus today is to show you how we're going to do that, how we're going to continue to build and profitably grow and execute. I'm pretty confident at the close of the session today, you'll walk away with a strong confidence as well in what we're doing and our overall strategic direction. Before we go into the gory details, I think it makes sense to just provide a quick level set of where we are and where we currently sit. As you know, Palomar is a data-driven specialty insurer that's marrying data analytics with traditional underwriting acumen, and then buttressing our products with a sophisticated reinsurance solution to access markets that we think are in need of innovation or are dislocated and certainly can generate compelling risk-adjusted returns.
On the heels of our upgrade in July, we are an A-rated AM Best company with financial size category 10 status, having grown our surplus 55% over the course of 2024, and with size 11 well within our sights. We have a portfolio of five specialty product categories: earthquake, which we are now the third largest writer of in the business. If you ask Jon Christianson, he may say second because he does not believe low-hazard earthquake counts. Any way you slice it, we are a market leader in the earthquake space and certainly the second largest in California. We write inland marine and other property. That is our second largest category. That consists of seven distinct specialty property products, such as Builders Risk and Flood and Hawaiian Hurricane.
We have a fronting category, which provides us an ability to generate fee income as well as do R&D on potential new markets of opportunity for us. We have a niche-oriented casualty franchise that we're excited to talk to you about today and a high-potential and high-growth crop business. Our portfolio consists of both commercial and residential risk, as well as both an E&S and admitted franchise. What we like to have is balance in our book. When you look across, whether it's the inland marine and other property lines or an earthquake, we like having a combination of residential and commercial business to allow us to play through market cycles. Similarly, we like having certain segments of our business with the emergence of our new surety franchise, as well as crop that can play through the P&C market broadly or be uncorrelated to the P&C market broadly.
We have an open architecture distribution model. What that really means is it's product-specific. We've talked about that since we've gone public. If we develop an underwriting appetite, we're somewhat agnostic in terms of how we accumulate the risk within the portfolio. Our commercial business is going to skew more towards wholesale. Our residential business is going to be retail-driven. We also have unique distribution partnerships, whether they be with other insurance companies or specialty MGAs that can allow us to access market segments that might be harder for us to do on a direct basis. Again, we are agnostic on how the business comes to us as long as it fits our underwriting parameters and we can optimize the risk transfer within the reinsurance mechanism that we have in place. That reinsurance mechanism really allows us to be dogmatic in our focus on consistent earnings.
We are sophisticated, we're innovative, and we are robust in how we put together risk transfer strategies, and I'm excited for you to hear more about that from Jon Knutzen later this morning. Lastly, and you'll see more of it today, have an exceptional and experienced management team. We continue to add terrific talent to the organization, and you will hear from several of them. What you're going to find is all of our people have a combination of experience, expertise, and an entrepreneurial gene that's going to allow us to execute our long-term strategy over the next several years. Turning to the next slide, as I said earlier, we are acutely focused on consistent results in managing the volatility in both our portfolio and our earnings base.
We've made considerable efforts to reduce the volatility in our business, most notably learning from our experience in the 2020 and 2021 hurricane seasons to generate not just profitable growth, but consistent profitable growth. Consistency is a word you're going to hear a lot today, and we're going to beat that dead horse. You can see since 2021, both the top and the bottom line have grown over two and a half times. I think the greatest testament to this execution has been that we've beat our earnings nine quarters in a row, and we've beaten raise guidance seven times since our last investment day. That's a timeframe that included a generationally hard property cat reinsurance market. I think you should look no further than 2024 as a testament to our results. It was a year in which we beat all four quarters.
We raised guidance three times and finished the year at $134 million of net adjusted net income after initially guiding the street to $110-$115. We're pleased that the stock responded to the performance, but we think it's well justified based on the consistency of our results. Palomar's portfolio has allowed us to really generate and demonstrate that we have a strong business model, a business model that's capable of generating industry-leading margins. Getting to critical mass in earthquake has allowed us many economic advantages. It's a highly profitable line once you do get to scale, and that's even after spending copious amounts on reinsurance. It provides a terrific anchor to our earnings base. It doesn't weigh down or inflate our reserves, but rather it grows our surplus rapidly. Furthermore, it allows us to conservatively enter new markets with comprehensive reinsurance and modest and gross net line sizes.
You're going to hear a lot about that today. This combination of conservatism and earthquake growth and overall portfolio growth has led to strong returns on a relative basis. You can see that our combined ratios beat the industry on average of 26 points over the last four or five years, four and a half years. ROE is north of our Palomar 2X 20% target and also meaningfully above the industry average. I think it's also important to point out, Chris and I like to make this point regularly, that 2022's results with the 22+% ROE were weighed down by our August 24th equity issuance of approximately $115 million, which we don't expect to be fully deployed until the end of 2025. The stat that I'm most proud of, far and away, is our employee productivity.
At year-end, our 252 employees generated about $527,000 of net income per head. That's nearly five times what our proxy peer group generates. I don't know what can be a greater testament to our model, but I think one thing I can say is it certainly reflects that we have a terrific and exceptional team. Turning to slide nine, I want to spend a moment on Palomar 2X, our strategic framework. We introduced this at our Investor Day of 2021, or excuse me, June of 2022, and it set the goal of doubling our adjusted underwriting income in an intermediate timeframe while maintaining an ROE over 20%. Chris Uchida likes to call Palomar 2X, and I think he aptly does, philosophy, as it doesn't have a finite objective. It's an ongoing goal that resets its target every year.
Core tenets of this philosophy include organic growth, anchoring the business with earthquake. We would like earthquake to be our largest line for as long as possible, building the rest of the portfolio with lower volatility lines from both an earnings and a cyclicality standpoint, entering into adjacent markets via a replicable process where we can leverage some combination of people, process, technology, and infrastructure, as well as relationships, whether that be distribution or reinsurance, and then buttressing those lines with a comprehensive and sophisticated reinsurance strategy, and then supporting all of these lines of business with organizational investments that will drive long-term operating leverage and scale. I'm pleased to report that our inaugural benchmark, which was set for 2021's calendar year adjusted underwriting income, achieved its Palomar 2X goal at the end of 2024. That intermediate timeframe in this instance was three years.
Importantly, Palomar 2X does not allow us to rest on our laurels. We are now looking at how and when we will achieve the objective for 2022 and 2023. Our focus on those cohorts, and frankly, 2024, has resulted in considerable investments in the organization that will create long-term recurring avenues for profitable growth. Chris will provide more color on the financial elements of Palomar 2X in his section. As I mentioned, Palomar 2X was a central component at our last Investor Day, and it set a true north for us, creating a corporate mantra and mindset. Beyond Palomar 2X, though, a lot has happened since our last Investor Day, and I am excited to offer a quick snapshot of the accomplishments since June of 2022. From a financial standpoint, the execution has been solid, and forgive the term, consistent.
Our adjusted net income grew at a compound annual growth rate of 37%. Our book value grew from just under $400 million at the end of 2021 to approximately $730 million at the end of 2024, and that is exclusive of $56 million of stock buybacks. Importantly, we have achieved our 20% adjusted ROE targets. Ultimately, we have achieved the first crack at Palomar 2X and demonstrated that we can do so with consistent earnings, something that we stridently seek. Beyond the stellar financial results since the last Investor Day, there have been a myriad of achievements and investments across the organization that we are extremely proud of and hopefully will provide a source of excitement and encouragement about what we can do long-term for our investor and analyst base.
I've already mentioned our AM Best upgrade and that we've achieved a market-leading position in earthquake with room to grow, might I add. Those are two terrific feathers in the proverbial cap, and we're very proud of those. Again, I'm most excited about all the investments we've made, in particular in talent and leadership. These investments are long-term in their nature and their long-term commitments to profitable growth and consistent earnings, and ultimately the sustained achievability of Palomar 2X. In the case of our FIA acquisition, First Indemnity of America, it opens up a new specialty market and an opportunity to build a national presence in the economically attractive surety market. We're also pleased to announce that today we are acquiring our strategic partner, Crop MGA Advanced Ag Protection.
This will only enhance our burgeoning and thriving crop franchise as we incorporate AAP's talent, technology, and service organization into Palomar. Kyle Morgan, Benson Latham, and Jon Christianson will discuss the acquisition, which we expect to close on April 1st in more detail, but we're thrilled to welcome the AAP team into the Palomar family. We've made great progress in building a well-defined entry in the casualty market. We've done so with the conservative risk appetite. We've done so by identifying pockets of the casualty market that are dislocated and niche-oriented, and we've done so with exceptional talent leading us. As I said earlier, one other big factor that's contributed to our success has just been our continued and steadfast focus on reducing the volatility in the earnings base, most notably our exposure to major losses from North American hurricanes.
We've reduced our 250-year wind PML, probable maximum loss, from $650 million at its apex to approximately $80 million, with the majority of that written by Robert Beyerle's Builders Risk Team, which, as an aside, has considerably under-indexed model losses from actual events over a five-year period. Just for instance, Hurricane Ida, which was the first storm that we had a Builders Risk franchise of scale, was expected to generate a model loss of close to $3 million. It came in less than $1 million. That's played itself out with Ian, with Milton, with Ida, name your storm. The complexion of the continental hurricane book is decidedly different than what it was four or five years ago. Furthermore, we've transformed our Hawaiian hurricane business model into one that is a fee generator with the creation of the Laulima Exchange.
All of the business that we wrote on our Palomar Specialty Insurance Company paper in Hawaii for residential hurricane has moved over to the reciprocal. In doing so, we have taken the tail risk out of the balance sheet of the group and limited our exposure from the balance sheet standpoint to the surplus note that we use to capitalize the vehicle. Our greatest investments since June of 2022 have been our people. You can see the names of the photos and the pedigrees that they possess, but these are best-in-class professionals that have joined us over the last three years, and you'll hear from many of them today. All of them are experts in their fields with outstanding reputations, and all of them are enriching our culture. I'm really excited for you to meet them. Grill them, ask questions. I think you'll be impressed.
What does all of the investments made really translate into for Palomar 2X in 2025? I think the answer is simple as we're going to keep doing what we have been doing, but we also are going to continue to be a fast-growing dynamic business and evolve. As such, so much the organization, so much our strategy. Our charge for 2025 is simple. First, we're going to integrate and operate. We must monetize the investments made throughout 2023 and 2024. We need to incorporate FIA and now AAP into Palomar. They will help make us better if we truly integrate them into the fabric of our company. We must also let our leaders, excuse me, like Rudy Hervé, James Long, and Althea Garvey build their organizations, whether it's technology, operations, or claims, to help us scale long-term. Secondly, we will build new market leaders deliberately.
Our crop and casualty lines, as you'll see today, have strong leadership, and they have the capital support necessary to become market-leading franchises. We are not going to overextend our appetite and risk management approach in the short term. We are going to execute deliberately in 2025 to have an insurance franchise in 2029. I sleep well at night knowing that we have experts like Benson and David building these businesses. I also like the fact that we are ceding 70% of our crop book to best-in-class reinsurers to help manage the volatility. I also like the fact that our average casualty net line is less than $1.5 million. I like the fact that our net reserves are approximately 0.2 times our surplus. Not two times our surplus, 0.2 times our surplus. We will grow these lines, but we will not overextend ourselves, and in doing so, we will avoid negative surprises.
Third, and somewhat of an extension of this strategy, is remember what we like and, more importantly, what we do not like. This is a natural migration of last year's mantra of grow where we want. We will continue to maintain our conservative and well-defined appetite in the market, most notably in the property market, and focus on the profitable growth that that product portfolio affords us. We will avoid surprises and volatility from wind and SCS as we further pull back our exposure there. We will focus on core property earthquake markets like earthquake that provide consistent results and not feel the need to chase premium growth in areas like California homeowners.
As dislocated and disrupted as that market may be, we are better suited to be a partner to homeowners companies in California on the earthquake side or even the flood side than we are to be a competitor to the 25 partners we have in the state. Fourthly, we're going to continue, you guessed it, to generate consistent earnings. With the addition of new talent, we can find new sources of earnings growth while preserving a very healthy reserve base. Our surplus and reserves will grow our investment leverage to allow us to increase the investment returns organically and, in turn, bolster our results. We are an underwriting company, but we can continue to see growth from the investment portfolio.
Additionally, we can recognize that further investments in claims, as well as actuarial departments, will drive consistency in the results and afford us the better ability to increase our risk participation over time in a deliberate fashion. Before I hand it over to the rest of the team, I want to lead the witness a bit and offer a few key themes that I think you should listen for and hopefully hear over the course of the day. One, or first and foremost, we are building a specialty market leader in the insurance basis with a truly distinct product portfolio. I said it earlier. I'll say it again. Our portfolio now is becoming a one-of-one. You'll hear today that Palomar X, and you'll see, is now a proven strategy that is embedded throughout the organization.
You'll see multiple competitive advantages come to the forefront over the course of the day from our risk transfer to our underwriting to talent at all levels of the company. There is conservatism in all facets of the portfolio because of our underwriting and our risk management. We have an exceptional team that knows how to identify new markets and how to execute in those new markets, and they prove in their ability to build market leaders in our core markets. Lastly, you guessed it. You're going to hear a lot about our commitment to consistent earnings. With that, I'm pleased to hand it over to our President and a fellow member of the founding leadership team, Mr. Jon Christianson. JC, the floor is yours.
All right. Thanks, Mac. As introduced, I'm Jon Christianson and the President here at Palomar.
I joined Mac during the second half of 2013 and was a member of the original team when we launched the company in February of 2014. I've held various leadership roles at Palomar over the years, starting out as the original Chief Operating Officer, served some time as the Chief Underwriting Officer. During that time, I've been intimately involved with the development of Palomar's analytics, technology, reinsurance strategy, regulatory and rating agency efforts, underwriting, and product development. We've been fortunate to recruit great talent over the years, as Mac mentioned. So many of them are here with us today, and we've gained tremendous depth and expertise in many of the areas that I've been associated with during my time since Palomar's inception. Prior to Palomar, I worked in the reinsurance industry where I focused on the structuring and placing of reinsurance treaties.
In addition to that broking, I focused on catastrophe modeling for natural perils such as earthquake, hurricane, severe convective storm, among others, and provided various technical solutions to our crop insurance clients. In 2018, Palomar's last full year as a private company, we recorded $155 million in annual premium, two-thirds of which came from earthquake insurance. Today, our top line has grown nearly tenfold. We have solidified our position as the largest earthquake writer in the United States outside of the state government-run California Earthquake Authority and the commercial engineering specialist FM Global. When Mac referred to the low-hazard earthquake, that was who he was referring to. Impressively, even though we're a top earthquake writer today, our business has scaled and evolved through prescriptive diversification. Now, two-thirds of our portfolio consists of lines beyond earthquake insurance. This transformation didn't happen by chance.
It was a result of disciplined execution, strategic vision, and a commitment to building a uniquely diverse specialty platform. As we move forward, we will continue to expand and refine our diversified portfolio, optimizing both our capital and our ability to drive profitable growth. As our original specialty line, it is only appropriate that as we go through our portfolio of specialty products, that we start with earthquake, as we want to talk about that in greater detail. At Palomar, we talk a lot about earthquakes. It's our foundation, our expertise, and our identity. In California, the biggest domestic earthquake market, Palomar is the largest non-governmental writer of earthquake insurance, and our reach stretches throughout the United States, wherever there is meaningful demand. We are one of a few pure-play earthquake providers that serve both the residential and commercial markets, offering solutions tailored to homeowners and businesses.
Earthquake insurance is predominantly a named peril policy, meaning that it covers property damage caused specifically by seismic shaking. For example, if an earthquake leads to a gas line break that causes a fire at a residential property, the resulting damage would fall under the fire insurance policy, not the earthquake insurance policy. Unlike fire or wind insurance, earthquake insurance is rarely required by residential lenders and almost never mandated by commercial lenders. That means for most of our customers, this is a voluntary purchase. Despite this, Palomar has solidified its position as the undeniable leader in the U.S. earthquake insurance market, and we continue to grow our franchise at a meaningful clip. We provide earthquake products on both an admitted and a non-admitted, or E&S, basis, ensuring flexibility in how we meet our customers' needs.
Within our residential product suite, most of the policies are written on an admitted basis, which is conforming with the traditional market. Palomar's admitted earthquake residential filings in the states in which we're licensed are differentiated from traditional filings, however. We've developed innovative filings, both on the rate and form side, to incentivize new buyers to enter this historically low take-up market while creating durability in our filed pricing model to sustain through market cycles. The take-up rate for earthquake insurance in California is only 10-15%, and each additional point of consumer take-up represents approximately $125 million of new potential premium.
While residential earthquake remains a predominantly admitted market, over 30% of Palomar's organic new business premium in California has been written on an E&S basis over the past 12 months, offering even greater flexibility in pinpoint pricing, utilizing the latest catastrophe modeling and risk transfer analytics. On the commercial side of the house, the strong majority of the business is written through our E&S company, where pricing, terms, and conditions better serve the complexities of the large commercial earthquake customers. We do serve small commercial earthquake customers, and that would be HOAs and strip malls and things of small office buildings. We can use our admitted paper with rate filings that have broad ranges to serve that customer set, allowing us to offer admitted paper to customers who assign a higher value to an admitted product over non-admitted. Our distribution channels are equally diverse.
We work with agents, wholesale brokers, MGAs, and strategic partners, including other insurance companies. Within the strategic partner channel of our distribution model, we have partnered with over 40 companies, including we have formal relationships with four of the top five national homeowners writers. Some of these relationships date back to the first year of Palomar's existence, but many are still in the early innings of development with the opportunity to continue digging deeper roots and growing together. These partnerships can be deployed as integrated APIs into the partner company system, mandatory offers to satisfy the statutory obligation in California, or white-label solutions leveraging infrastructure already built by our partners. Regardless of how we partner, this channel is a highlight of how Palomar is uniquely differentiated within the market. We do not just develop novel products.
We provide reliable capacity and stability to our partners through every market cycle, whether that's hard, soft, or destabilized. Our expertise goes beyond product design. We are the most sophisticated purchaser of earthquake reinsurance in the world. The global reinsurance market and investors in InsuranceLink Securities recognize the value of our carefully curated earthquake portfolio. This was made evident at the peak of the hard market when we successfully expanded our reinsurance tower by over $500,000,000, ensuring our ability to support the continued profitable growth throughout 2023, throughout 2024, and into 2025. At Palomar, we are committed to innovation, resilience, and leadership in earthquake insurance. We don't just talk about earthquakes. We deliver solutions that provide real value, real protection, and real peace of mind. Since our IPO, total reported market premiums for earthquake insurance have doubled.
That's a remarkable shift in demand, reflecting both the growing awareness of earthquake risk and the need for reducing the insurance gap in the U.S. economy. Even more impressive, in that same period, Palomar's market share has quadrupled. This isn't just a story about industry growth. It's a story about Palomar's leadership and market influence. While other carriers may offer earthquake insurance as a small part of their business, we have built our company around it. That difference shows up in the way that we serve the market. To understand our position, let's consider the competition. Among the top 10 earthquake insurance writers in the United States, you'll find major names: FM Global, Berkshire Hathaway, State Farm, Chubb, Sampo, among others. These are large, entrenched companies, each with broad portfolios that span many geographies and lines of business. Here's the key difference for these carriers.
Earthquake insurance is an afterthought. It's a product that they may offer, but it is far from a strategic focus. For Palomar, earthquake insurance is our focus. Our specialization gives us a distinct advantage. We are constantly refining our products, pricing models, and distribution strategies to serve this market more effectively than any of our competitors. While they treat earthquake insurance as a secondary business, we are innovating, adapting, and leading. Of course, in any discussion about earthquake insurance, we must acknowledge the role of the California Earthquake Authority, or the CEA. The CEA plays an important role in the California insurance market, but it is crucial to recognize a fundamental distinction. The CEA is a gatherer of risk, not an underwriter of the business. What does this mean? Unlike private insurers, the CEA does not operate with the same risk selection, pricing, or underwriting expertise.
Instead, it pools risk together on a broad scale, operating within a structure that does not prioritize efficiency or flexibility. Recently, we've seen the CEA pull back its offerings, a shift driven by the challenge of balancing political motivations with an expense structure that works against scale. As a result, Palomar has stepped in to fill certain desirable gaps left by the CEA's retrenchment, offering solutions that meet the needs of homeowners at a Palomar-defined price. Our growth isn't just about gaining market share. It's about bringing new buyers into the historically underserved market. The reality is that earthquake insurance has long been viewed as an optional, complex, and often misunderstood product. Palomar has changed that equation. We have designed attractive residential products with granular pricing and flexible coverage options, making earthquake insurance more accessible than ever before.
Rather than forcing customers into a rigid, one-size-fits-all product, we have created solutions that empower them to tailor their coverage to their specific needs. That approach has made a real impact. By offering products that align with the customer needs and budgets, we have expanded the market, not just by taking share, but by attracting new policyholders that might not have otherwise considered earthquake insurance in the past. That is how we drive long-term sustainable growth. As we move forward, our mission remains clear to deliver innovative, data-driven solutions that expand access to this critical coverage, strengthen our market leadership, and ensure that more homeowners and businesses are protected for the peril of earthquake. When we talk about earthquake insurance at Palomar, we're not just discussing a single product. We're talking about a well-balanced, strategically structured portfolio that has proven its resilience across market cycles.
It's a product suite that we expect will deliver mid-teens growth in 2025. Our ability to navigate both soft and hard markets is a testament to our diversified approach across residential and commercial, admitted and E&S, inside and outside of California. One of the biggest challenges in the insurance industry is dealing with the natural fluctuations of market cycles. At Palomar, our balance is a strength. A few years ago, when the property reinsurance market hardened, many insurers faced significant challenges due to the rising risk transfer costs. Palomar took a different approach. We strategically leaned into our commercial E&S segment, which allowed us to defray the increased cost of risk transfer and grow our strong position. Now, as market pricing begins to normalize from historic highs, our residential earthquake franchise provides a natural counterbalance.
With its strong inflation guards well above current inflation, we are able to bolster our earthquake premiums while maintaining pricing discipline in the commercial E&S segment. This flexibility is what keeps us ahead. We are adjusting to market dynamics while sustaining profitability. Through Palomar's tenure in the earthquake insurance market, we've seen soft markets and we've seen hard markets. Today, we sit atop of a book that is exhibiting gross and net profitability metrics near all-time highs. That's not by chance. It's the result of strategic decision-making, deep market expertise, and discipline execution. In the residential market, consistency is key. We continue to strengthen distribution and carrier relationships, achieving premium retention ratios in the low 90% while maintaining a strong flow of new business across both our admitted and E&S products. This segment remains a critical driver of long-term growth, and we are well-positioned to capture additional opportunities.
The market has faced some headwinds from a high interest rate environment, inflation, slow real estate transaction market, and a lack of price shopping in California's homeowners sector. For Palomar, larger tailwinds for profitable growth are numerous. We see tailwinds for the residential earthquake segment and the CEA's retrenchment, which has created opportunities for us to expand market share to customers who have a history and familiarity with buying earthquake insurance. Recent natural catastrophes, which have underscored the importance of closing coverage gaps. Severe dislocation in the California homeowners market, pushing more consumers away from CEA-participating insurers, and increased consumer acceptance of price-flexible E&S policies, further opening the door to innovative offerings from Palomar. These dynamics reinforce our confidence in the residential earthquake market. We are not just withstanding market changes. We are capitalizing on them.
While the residential and small commercial earthquake markets remain very stable, the large commercial earthquake segment, particularly the large layered and shared market, is more sensitive to market cycles. Global carriers that dabble in E&S can enter and exit at will and deploy their capacity. While the commercial layered and shared rates are starting to retreat from their peaks, our balanced portfolio products insulate our strong profitability metrics. More importantly, Palomar's brand is fundamentally different than opportunistic capacity that enters the market. Our expertise, reputation, and underwriting discipline set us apart. At Palomar, we've built a resilient, forward-looking earthquake insurance business that is designed to adapt, thrive, and lead regardless of market conditions. Whether in residential or commercial, admitted or E&S, inside or outside California, our approach has been deliberate, disciplined, and dynamic. With that, I'm going to turn it over to our Chief Underwriting Officer, Robert Beyerle.
Morning, everyone. I thought about making a joke about the NCAA tournament, so I'm going to go ahead and do it. My team isn't in the tournament, so I'm not in a great hurry, unlike maybe some of you here, but I'll try to keep my points brief. My name is Robert Beyerle, and I serve as the Chief Underwriting Officer here at Palomar. I joined the company in January 2019 after spending 16 years at Great American Insurance Company. Upon joining Palomar, I led the company's expansion into the inland marine vertical, which has played a key role in the Palomar 2X growth story. In the spring of 2022, shortly before our last investor day, I stepped into my current role as Chief Underwriting Officer. Before we begin, I want to take a moment to thank you guys for being here today.
We're all excited about seeing you and engaging in really healthy Q&A, so we look forward to that part of the message. Our inland marine and other property pillar plays a critical role in our long-term profitable growth strategy. In 2024, this segment contributed $334 million in gross written premium, driven by seven lines of business that have grown at an impressive and profitable 20% annual rate since 2021. This sustained momentum is a testament to the strength of our strategy, the depth of our underwriting talent, and the strong partnerships we built with our distribution network. Our inland marine business consists of three products, all which serve the broader construction and transportation industries, sectors that are fundamental to U.S.
Economic growth: Builders' risk, providing coverage for construction projects in the build phase, motor truck cargo, protecting goods in transit, a vital offering in the transportation industry, contractors' equipment, covering the machinery and tools essential to the construction industry. On the property side, our portfolio includes a non-catastrophic-focused commercial excess property book designed to provide stable and predictable returns, a residential flood coverage, offering critical protection in the ever-evolving flood insurance market, Hawaii hurricane coverage, meeting a specialized need in a historically underserved region, and commercial all-risk policies, providing protection on a syndicated basis for property exposures that are considered low risk for attritional losses. Beyond product diversity, our approach to risk management ensures long-term stability. We contain a controlled net line size, allowing us to carefully manage our exposures and maximize profitability. Our programs are supported by a long list of highly stable, world-class reinsurers.
Additionally, we've developed strategies, like Mac mentioned earlier, to reduce our U.S. continental wind exposure, helping us navigate market volatility and deliver consistent earnings year after year. Another key advantage is our ability to write both admitted and non-admitted business. This flexibility allows us to compete in a broader market, serve more diverse customer needs, and strengthen our relationships with our distribution partners. Our presence across both the commercial and the residential spaces further expands our reach, creating a large, sustainable pool of insureds. At the core of our strategy is the ability to deliver targeted, risk-adjusted returns that align with Palomar's long-term vision. By carefully selecting and pricing risks, we ensure that each product in our portfolio contributes to profitable, sustainable growth. This approach benefits not only our businesses, our partners, our investors, and our policyholders.
Palomar's inland marine and other property pillar operates in a market rich with opportunity. While these lines of business are well-established, they remain in the early stages of their life cycle, offering significant room for expansion. Top and bottom line growth will come from multiple areas of focus. Additionally, the industries we serve—construction, transportation, commercial real estate—are among the largest contributors to economic activity, ensuring sustained demand for our products. These sectors are constantly evolving, reinforcing the need for specialized risk solutions that we are uniquely positioned to provide. From a broader market perspective, the property sector, though always evolving, has reached a point of stabilization in both rates and capacity. After an extended period of market hardening, carriers are now more willing to deploy capital, fostering a more competitive environment.
We believe in this landscape, Palomar's strong brand reputation, deep underwriting relationships serve as a powerful advantage, allowing us to manage market cycles and effectively maintain a disciplined approach to growth. The reinsurance marketplace is also experiencing favorable conditions with improved terms and capacity. These improvements, combined with our long, deep-standing relationships with treaty partners, many of whom support lines of business across all of our five pillars, will provide Palomar with the flexibility to structure programs that create value for all stakeholders. A group of us just recently returned from meetings in London and Zurich with our treaty partners ahead of our 5/1 inland marine reinsurance renewal. During these discussions, we provided a market overview. We shared the results of our success, outlined our key areas of focus for this year and beyond. Across the board, we received continued support from our reinsurers.
Their commitment to Palomar is steadfast, and it will continue to be. We have a shared enthusiasm for profitable growth and strengthening our relationships moving forward. Given the diversity of our business, our portfolio composition varies across risk profiles, rate change, and geography. We remain disciplined in our approach, ensuring that we will price risk appropriately while taking advantage of opportunities when market conditions are most favorable. As we navigate the market, staying true to our underwriting strategy is critical. Knowing what we like and what we do not is a strategic imperative. This disciplined approach to risk selection will help us drive profitable growth and maintain a stable portfolio. While we already maintain nationwide exposure, there remain underserved regions where we see meaningful growth potential. Expanding into these areas will diversify our portfolio and strengthen our competitive position.
The flexibility of operating in both an admitted and non-admitted company further enhances our ability to scale efficiently across multiple markets. One of our strengths, like Mac mentioned earlier, is our people. It's our deep underwriting expertise. Within this particular pillar, our veteran underwriters average over 20 years of industry experience. We believe this provides Palomar with a critical advantage in risk assessment, pricing discipline, and market insight. Our key distribution relationships are just as strong as our underwriting expertise. We believe this creates a powerful advantage for our company to drive sustainable growth and market success. Beyond our team, we're actively investing in top talent across the country to further enhance our capabilities. Recognizing the importance of developing the next generation of underwriters, we've also embedded early career talent within our operations to ensure they gain valuable exposure from our veteran leadership.
As Mac mentioned earlier, we've made great—the slide from the last investor day of 2022, all the talent we brought into the organization is just truly exciting. You'll meet a lot today. It is important for us on the underwriting side to partner with these leaders in operations and tech to help build the infrastructure necessary to support our continued expansion. It's an exciting time to be at Palomar. Additionally, as our portfolio matures, we'll continue to increase our net retention. For instance, since 2019, we've consistently increased our net retention on our builders' risk line year after year, a strategy that has increased our net income and enhances long-term value creation. At Palomar, we're always evaluating where we can keep more net in our business.
Now I'd like to highlight three lines of business within our inland marine and other property pillar: Builders' risk, excess property, and Hawaii hurricane. While these lines of business are well-established, each presents a strong growth opportunity that aligns with our profitable growth and discipline expansion. Builders' risk has been a core strength for Palomar, continuing to perform at a high level, we believe, with scalability. It's a proven business supported by top-tier underwriting expertise and long-standing industry relationships. The opportunity for Palomar remains significant as the construction industry represents a substantial market with a strong and ongoing need for insurance coverage. A large segment of our writings is in the single-family and multi-family U.S. residential construction market. This past January, residential spending exceeded $930 billion on a seasonally adjusted annual rate. The overall annual U.S. construction spend is over $2.1 trillion.
As our capacity and our surplus increase, we can expand beyond primarily residential risks and participate in more commercial and light infrastructure-type projects. Geographic expansion is another key growth lever, allowing us to diversify risk and access new distribution channels, ultimately, which will strengthen our portfolio. We have Builders' risk exposure nationwide. We see significant growth opportunities in the Midwest, in the South Central, the Northeast, and the Pacific Northwest. This line also benefits from both admitted and non-admitted offerings, again, which provides access to much broader market opportunities. Our flexibility and approach to underwriting enables us to ensure, for example, a single-family home in Austin, Texas, to a distribution warehouse in Southern California, or participate on a panel for a large high-rise office building here in Midtown Manhattan.
Excess national property is another area we have strategically developed a well-structured portfolio guided by disciplined risk selection and a strong attachment point strategy. Our approach leverages comprehensive facultative reinsurance to mitigate volatility while ensuring sustainable portfolio performance. A prime example of our conservative underwriting approach is a recent insured that owns multiple shopping centers, all built with concrete and non-combustible construction materials. The total insured value across all locations is $50 million, geographically spread to reduce concentration risk, with this largest single location at $20 million. Based on reasonable risk assumptions, the largest probable maximum loss, or PML, is estimated at $6 million. Our attachment point is 10, nearly double that PML. A core principle of our strategy is maintaining minimal catastrophic exposure, ensuring portfolio stability and consistent performance.
When we do consider wind-prone catastrophic areas, we focus on new construction that adheres to modern building codes and attachment points that exceed the 500-year modeled wind event. This disciplined approach allows us to capture targeted growth opportunities while maintaining a resilient and well-balanced portfolio. As this portfolio matures, we'll continue to increase our net retention, capturing more profitable business and driving long-term growth and net income growth. Lastly, Hawaii hurricane has been a standout success for Palomar. We're now recognized as the second largest standalone residential hurricane provider in the market. A key differentiator is our fee-based model through the Laulima Exchange, which is designed to limit earnings volatility and create a more stable revenue stream. With Laulima, like Mac mentioned earlier, our net exposure is limited to the surplus note.
Importantly, our growth in this space has been driven by double-digit rate increases rather than aggressive exposure expansion. This enables us to maintain a balanced and sustainable portfolio. Each of these lines of business plays a critical role in our broader strategy. We leverage market expertise. We manage controlled exposure and pursue growth where conditions are most favorable. As we continue to scale, our focus remains on delivering profitable, sustainable results that support both underwriting excellence and long-term financial performance. I will invite Jon back up to the podium to provide an update on our fronting business.
All right. Thanks, Robert. All right. When I wrap up with fronting, I'll turn it back to Robert, and we'll get into the specialty casualty segment. In the insurance industry, the term fronting is well understood. It is a defined cohort of companies that specialize in the practice. While Palomar does engage in fronting relationships, I think it is worth pointing out that while we can act as a front, we are not a front company in the conventional sense. Unlike traditional fronting companies that build their business models around the practice, fronting is a strategic complement to our broader specialty platform and not central to our business model. We maintain fewer than 10 fronting relationships, a much more selective approach than those whose businesses revolve around the practice of fronting.
All but one of those partnerships that we have involve a single carrier or balance sheet counterparty, meaning our relationships are direct and focused rather than fragmented across multiple parties. The one exception, a syndicated reinsurance arrangement with a specialist MGA, is a long-standing relationship that we have successfully supported for several years. For most of our fronting partnerships, the driving factor is simple. Carriers or balance sheet counterparties seek licensed and/or rated paper to enhance their existing operational strategies. Palomar provides that capacity and that capability in a way that aligns with our disciplined approach to risk. One of the hallmarks of our fronting strategy is our conservative approach to risk retention. Currently, in every fronting relationship, Palomar retains less than 10% of risk. In most cases, we fully cede the risk, a true 100% fronting structure.
While risk is minimal, we build value through the generation of fee income, providing a steady revenue stream that contributes to our consistent earnings. Further, our fronting franchise offers insights into potential new lines of business for us, allowing us to explore areas that may be outside of our current infrastructure or expertise, akin to research and development. This means that fronting is not just a transactional activity for Palomar. It is a calculated, strategic component of our broader growth and learning framework. Because of our narrow scope and rigorous counterparty credit requirements, this segment of our business has experienced and will continue to experience both growth and contraction over the years. A recent example of contraction occurred in the third quarter of 2024 when Omaha National, a workers' compensation insurance company, received regulatory approval to write on its own paper in the state of California.
This was a natural transition, and as a result, Palomar no longer provides fronting services to that insurance carrier. However, this fluidity is expected. We enter fronting relationships where they make sense and allow them to evolve and, in some cases, expire over time. Our selective, disciplined approach ensures that fronting remains a strategic asset rather than a dependency. Our fronting relationships are deliberate, carefully managed, and designed to complement our long-term strategy. Our thoughtful approach demonstrates the value that we assign to risk-adjusted returns for our shareholders. As we continue to navigate this evolving landscape, our focus remains on maintaining high-quality partnerships, generating value through fee income, and leveraging our fronting experience to explore future opportunities for Palomar. Over the past several years, we've witnessed a significant influx of new players into the fronting market.
With more fronting companies available, MGAs and reinsurers now have more options than ever before, creating an increasingly competitive environment. As a result, the market has begun to experience some softening with pricing pressure and shifting dynamics. One of the key developments in the evolving landscape is the growing trend of fronting companies retaining risk in order to secure the necessary reinsurance support. This shift has entered a new phase or a new phrase into the insurance industry lexicon, participatory fronts. Traditionally, fronting companies operated with a full risk transfer model, ceding 100% of their exposure to their reinsurance partners. In today's market, we are seeing more fronting carriers take on a share of the risk themselves to remain competitive and attract reinsurance capacity. That risk that they take on is located not just in the tail, but also in retention.
This represents a fundamental shift in how fronting is structured and approached. In light of these changing market conditions, Palomar will remain focused on carefully selecting partnerships that align with our discipline strategy. Rather than chasing premium volume, we will remain focused on fronting relationships that offer an opportunity for R&D or are solving for a specific licensing or rating challenge where our expertise and structure provide true value. This selective approach ensures that fronting remains a complementary, well-managed part of our business rather than a reactive pursuit of market trends. As the fronting landscape continues to evolve, Palomar will remain adaptable, strategic, and intentional in how we approach these opportunities. On fronting, I'll pass it back to Robert and David for discussion on casualty.
We're really excited about our casualty business. Hopefully, a lot of questions come from the group today on that. It's a key driver of our growth and our diversification. Before we talk about its highlights and direction, we have to talk about our folks. Our casualty leadership and team and underwriting talent are among the best in the industry, with an average of over 24 years in experience. Having built and successfully led, excuse me, having built and successfully led casualty operations, they are focused on establishing long-term sustainable growth, long-term sustainable businesses within Palomar. Their deep expertise and understanding of market cycles allows us to stay disciplined and strategic, ensuring profitable control of growth even as conditions shift. Palomar launched its first casualty product in 2020, residential real estate errors and omissions.
Since then, we've onboarded industry-leading program partnerships and developed internally underwritten specialty products aligned with our stable earnings goals and risk-adjusted return targets. Palomar's casualty franchise has grown at a 72% annual rate since 2021, reflecting strong market opportunity for our products. From the beginning, our strategy has been built on niche markets where we can leverage deep underwriting expertise to write profitable, scalable, sustainable business. A prime example is residential real estate errors and omissions, which we initially launched as a California-only footprint. Since then, we've expanded to 41 states with our eyes set on 45 by the end of 2025. This line of business, along with our professional liability offerings, are claims-made exposure, which reduces the reporting lag risk to our reserves. Another key niche within our portfolio is primary casualty. Here, our focus is on small, limit, low-frequency, and low-severity trade contractors.
This line is an example of targeting sectors that do not require a large limit outlay. They exhibit low-severity exposure and limited frequency. Many of our casualty products complement our inland marine and other property lines, allowing us to offer broader solutions to insureds while strengthening relationships with our key distribution partners. Our primary casualty, our E&S casualty, and our environmental products all serve the U.S. construction market, where distribution partners work across multiple lines. This creates cross-selling opportunities for our underwriters and overall deeper market engagement. Unlike broader casualty books that face ongoing legacy issues, our portfolio is insulated from pre-2020 accident-year adverse market development, allowing us to grow from a clean slate with a modern and disciplined approach. A significant advantage of our casualty strategy is our ability to operate in both the admitted and the non-admitted marketplace.
The admitted offering is in very specific markets where it's needed to compete. Our E&S offering gives us significant flexibility to adapt to changing market conditions. The majority of Palomar Casualty's franchise is in our non-admitted company. We're committed to disciplined growth, maintaining modest gross and net lines to ensure portfolio stability and manage volatility. Our risk selection strategy prioritizes prudent underwriting standards to mitigate exposure to social inflation, which is a key challenge in today's casualty market. Additionally, we have implemented conservative reserving practices across our entire portfolio, ensuring long-term profitability and financial stability. This approach allows us to scale responsibly, maintaining a strong balance sheet while continuing to grow a footprint in the casualty space. Palomar's specialty casualty business has a strong foundation with top-tier talent, disciplined risk selection, and a focused market strategy.
As we continue to expand, our approach remains the same: profitable, controlled growth that enhances our overall portfolio while protecting our long-term earnings stability. The U.S. casualty market continues to evolve. It presents challenges and opportunities. We see significant potential within our defined risk appetite, which offers attractive pricing and strong prospects for profitable growth. Social inflation remains a key concern, driving adverse development and longer tail exposures across the industry. Outsized large loss activity has further pressured the market, reinforcing the importance of sound underwriting discipline and careful risk selection. Reinsurance capacity is available for well-structured and well-priced portfolios. Achieving support requires expertise and deep market relationships, areas where our team excels. A prime example of this was the successful placement of our quota share reinsurance treaty for our new E&S casualty division at 11.
This placement, led by David Sapia, our Head of E&S Casualty, alongside the very strong casualty expertise within our seated re-team and Palomar's reputation of introducing new and profitable products to the market, all played a pivotal role in securing this placement. It was a great success for our team. Although we're still in the early stages of our casualty build, our strategic imperative remains the same. Remember what we like and what we don't. It still applies here. Our experienced leadership knows what works and what doesn't. We'll stay true to our risk appetite with disciplined underwriting. We're committed to sustainable, well-priced growth. We're actively monetizing our casualty lines of business and exploring adjacent markets that fit our risk tolerance and our expertise. Our ability to identify and capitalize on the right opportunities has always been a key driver of Palomar's success.
A core principle of our long-term profitability, like Mac said, we're going to say it over and over, conservative reserving philosophy. You'll hear it from Ethan here shortly. We remain committed to upholding that. As our casualty business expands, we're also focused on achieving operational scale by leveraging technology, optimizing claims management. We aim to improve efficiency and overall performance. You'll hear from Rudy today. You'll hear from Althea today. We're excited about their story and joining Palomar to help us scale in the right way. Another cornerstone of our strategy is enforcing firm terms and conditions. In today's market, ensuring rate adequacy, appropriate attachment points, and well-structured policies is crucial for managing risk and driving sustained profitability. Additionally, we'll continue to selectively increase net retentions where it makes sense, allowing us to capture more profitable business.
Lastly, we are integrating FIA, Palomar's recent surety acquisition, to expand our footprint and strengthen our market position, all while maintaining our commitment to underwriting integrity. Kyle will speak about that later in our strategy around surety. We're excited about the opportunities ahead and remain confident in our strategy and our team to execute. With that, I'm excited to bring David Sapia to the podium to talk about his E&S casualty plan.
Good morning. My name is David Sapia, and I am pleased to be the new E&S casualty lead for Palomar Insurance. I started with Palomar in September 2024, and I've been charged with responsibility over the E&S primary and excess, admitted primary and excess, professional liability, and environmental verticals. I bring to Palomar 34 years of line and management experience in the admitted, non-admitted, and reinsurance spaces, with an emphasis on E&S non-admitted casualty. Prior to Palomar, I had a similar position at casualty lead at HDI Insurance for three years, where I opened up E&S primary casualty, cyber, life sciences, primary auto liability, workers' compensation, and environmental.
Prior to HDI, I was an excess underwriter casualty division at Access Insurance for 10 years, Guy Carpenter as a managing director level facultative reinsurance broker for general casualty, professional liability for 10 years, going back even further, 10 years in the admitted market for carriers like The Hartford, Royal Sun Alliance, and Reliance National. With this diverse background, I've seen all sides of the casualty practice. I watched and observed as everyone from senior executives to field underwriters make decisions on how to best deploy capacity in challenging and constantly changing market conditions. Some of these decisions were brilliant in terms of their strategy, while other decisions not so much.
What I've ascertained from these observations over the years is that the market is as fluid as it is challenging, and hard decisions regarding all aspects of our portfolio can and must be made in a real-time situation to positively influence the result. Having just launched in 2020, I got lucky and inherited a casualty platform at Palomar with limited to no legacy issues. Not having to clean up a predecessor's mistakes, let me tell you, is exhilarating. I've been down that road before. It's not much fun. Timing is everything, and Palomar is optimally positioned to enter the E&S casualty market while the legacy carriers continue to deal with the soft market mistakes made during the post-2007 financial crisis through the 2020 to 2023 COVID pandemic.
The current casualty state of the post-COVID era has presented Palomar with the opportunity to benefit from sustained rate hardening while focusing on lower attaching excess, where competition is scarce, capacity is constricted, rates more adequate, if not outright redundant, and more robust reinsurance support is available. To back up this market hardening statement, I will offer two recent new business wins for Palomar's E&S unit. First one, this is an account I wrote many years ago at a previous carrier as a recreational resort located in Juneau, Alaska. The expiring $5 million premium with a large global admitted carrier was $42,755. Palomar bound the renewal at $191,500, or an exposure adjusted rate change of 448%, not a typo. Between treaty and fact, the Palomar net is $1.2 million or 24%. This is an interesting case.
We're seeing more and more of this in the casualty space, where back in the 2010s to the early 2020s, a lot of standard carriers stepped in and started taking business such as this into the standard market out of the E&S market. What's happening now is the results are reflecting that their decisions to buy this business for very cheap premiums is coming back to haunt them. This business is now coming back into the E&S sector, thus the massive rate increase we got in this account. It came back to me after 10 years of having it at a previous company. I was glad to see it come back. Second case is a grocery food distributor, a lead $3 million expiring with a large global admitted and non-admitted carrier at $427,500. Palomar bounded at $570,000 for an exposure adjusted rate change of 28%.
With FAC and treaty capacity considered, the Palomar net is $600,000 or 20%. These low net positions are by design, and they will serve Palomar well in the current market. More on that shortly. As I follow through to Rob's earlier comments regarding the E&S treaty, Palomar was able to secure a broad-scope quota share treaty for the E&S unit which accepted on January 1 of 2025. This highly successful placement clearly validates the Palomar approach to the non-admitted casualty market, as we ended up well over-subscribed as compared to our initial capacity request. What Palomar accomplished with this first-year treaty was truly impressive, given the panelists' general pullback from new capacity outlay that started to emerge in 2021 and beyond. Of note, being oversubscribed on a first-year casualty treaty is highly unusual. That never happens, not in today's market.
Kudos to the Palomar team, both CDRE, actuary, and underwriting for making this happen. Despite this initial oversubscription, Palomar decided to scale the proposed capacity back to 60% to leave room for supplemental facultative capacity on certain accounts while keeping the Palomar aggregate net line to a level acceptable to that of the Palomar senior management and to the reinsurer partners. In addition to the treaty, Palomar uses supplemental facultative in support of our treaty. We do this for two reasons. FAC offers multiple sets of eyes on the individual risk to ensure the Palomar underwriter's approach is in line with the market as respects terms, conditions, attachment, limited rate. It's a validating exercise. We do not use the reinsurers to price our business. We price our business. They validate what we're doing. Nearly every single account we've got to date has facultative support on it.
The use of FAC in conjunction with the treaty has significantly reduced the Palomar net position in the portfolio aggregate, thus protecting Palomar and that of our treaty reinsurers from any outsized loss potential. Keeping that net low and keeping our rates adequate, if not redundant, is a cornerstone of what we're doing in casualty at Palomar these days. Of note, in this regard, underwriting is not rocket science. Let me rephrase that. It is not rocket science. It's much harder. Where math leaves off, common sense, intuitiveness, curiosity, and most importantly, experience takes over. In short, it is the underwriter's job to know what they don't know. That's why we hire experienced E&S operators. They know where to find that information. They will reach out and get it, whatever it takes.
Concurrent with that, we have a program or a compulsory program at Palomar that requires what's called a two-heading process. No underwriter is allowed to send a quote out before they run that account via another underwriter for their consultation and approval. This keeps it level. It keeps it real. It keeps stakes from being done. You put that two-headed process in addition to the facultative process, we have multiple sets of redundancy, almost like a fail-safe. It works very well. It's worked for me very well in previous companies. It's going to work here. I guarantee it. Take that to the bank. In my world, there's no downside to that much redundancy in the underwriting process. The three initial market offerings for the non-admitted casualty will be construction primary, construction excess, and non-construction excess.
Palomar's intro into the casualty marketplace will be framed as that of a generalist whose appetite is opportunistic in terms of rate, compressed limits, and low attaching programs. Our optics will be one of being one of the few go-to markets for the wholesale distribution plant, while the competition pulls back in favor of higher attaching capacity, where many carriers mistakenly believe they are safe from the effects of social inflation. They're not. In the construction space, we will target only commercial-grade, mid-market contractors with no wood frame residential exposure, contractors with industry-leading risk transfer and risk management protocols, and a stable, highly trained, and extensively experienced workforce. We will avoid known problems such as standalone excess automobile liability and construction defect-laden classes. Moreover, products with latent injury potential or insureds that represent reputational risks at Palomar will not be entertained.
The rise of social inflation, followed by nuclear, thermonuclear verdicts—we've all heard the phrases—in the introduction of third-party litigation funding have given rise to what is known as judicial hellholes throughout the country. Although we cannot avoid these judicial hellholes in their entirety, we will underwrite and charge for these venues as appropriate. We know where they are, and we know what they're capable of doing to a carrier's bottom line. There could be no long-term viable casualty program at Palomar without the addition of experienced and responsible E&S underwriters who understand the value of disciplined underwriting, collaborative, and transparent relationships, both internally and externally. We call these E&S operators in the casualty market. We've already been successful in bringing this talent to Palomar in the recruiting of others who's likely to go on.
Last night, as we were preparing to go to bed, I got a text from an underwriter I worked with years ago at Access. He reached out. "What are you doing? How are you doing? And how can I help?" The buzz on Palomar is out there, and we're getting some very interesting people checking in to see what potential role they could have with this organization. That means the world to me because recruiting in this market is very difficult. It's a very thin workforce. Carriers are out there buying talent, and just because someone costs a lot of money, it doesn't make them the right person for the job. The people who are reaching out are the operators. We'd love to see them come to Palomar. That, again, will go on.
Along with the right team, it is essential Palomar stick to the principles of portfolio steering. There is little disagreement amongst industry experts that the current E&S space for all casualty verticals is evolving very quickly. To be successful, we need to pivot quickly to change direction and address trends as they come, both good and bad, and as they emerge. Waiting until the end of the calendar year to retrospectively view portfolio mix is a grave mistake. We do not intend to make this mistake. We have the platform, the personnel, and the expertise to manage this process in real time. For my poor staff who had to endure me on a daily basis and my oversight, I like to use analogies to make salient points stick with them. Therefore, I feel it appropriate to close with one for you today.
As a licensed pilot with decades of flight experience, I view my role at Palomar as similar to that of flying my aircraft. If I ever find myself behind the yoke flying at 250 miles an hour at night and bad weather and being bored, I'm doing something dreadfully wrong. I'm missing something. Same with underwriting. It's all about the details. Pay attention to the details, and disaster will be averted. With that, I turn it over to Benson. Thank you.
Thank you, David. Thank all of you for being here. My name is Benson Latham. I came to Palomar in October with a little more than 30 years' experience in the crop insurance industry. I started in the mid-90s at a family crop operation that became ProAg. It's currently one of the 12 approved NPCI riders. That business was riding about $20 million of premium when I got there in the mid-90s. Seventeen years later, we sold that book to CUNA Mutual at a premium level of about $500 million. After that, I went to work at Validus in 2012 as a founder of their agriculture practice. We built a reinsurance business there of about $300 million, and we were amongst the top three or four crop reinsurance riders at that time. In 2017 at Validus, we purchased crop risk services from Arthur Daniels Midland, ADM.
That business at the time was about $475 million. We grew that to over a billion dollars. In the middle there, AIG purchased Validus, and then AIG sold the crop risk services business at a premium level over a billion dollars to Great American in 2023. I stayed there for about a year while we combined that to about a $2.5 billion company. I have seen kind of the alpha and the omega of the crop insurance business. Having grown one from scratch earlier in my career and then working for multiple public owners in recent years, I feel like I have got a good handle on the do's and don'ts of the crop insurance industry. I am looking forward to leading the creation of a stable and profitable book of crop and livestock business here at Palomar.
One of the attractions for Palomar in this space is that it complements our overall book and other lines that you've heard about here today by adding widely spread and lightly concentrated risk uncorrelated to earthquakes, windstorms, terrorism, etc. Additionally, the reinsurance agreement with the federal government limits downside quite a bit and provides for an efficient use of capital. We think the market is primed for a successful new entrance for a few reasons. There is a lack of differentiation amongst the top writers that agents in crop insurance are increasingly vocal about. We've managed to hire some of the highest quality professionals in the business to lead our operations and sales teams. Those people are attracted to Palomar for the same reasons that I am.
It's a committed and stable owner with a desire to build a crop insurer that is built on personal service to our agents and farmer customers. We're confident that a meaningful subset of the market will respond to that more personalized approach that puts farmers first. Additionally, Palomar, like in their other lines, is committed to being a technology leader in crop, and we will flex that muscle here in the near future. As the market becomes more familiar with the depth of our team that we have hired on the IT side, we will get lift amongst the agency force from an understanding that in the very near future, we will be a tech leader in this industry, meaning that the ease of doing business with Palomar will be industry-leading.
We'll also be nimble in our response to an ever-changing business landscape driven by our federal regulators, as well as a fast-moving production agriculture space. Agents will be able to process more business through Palomar technology than our competitors, allowing us to grow alongside them as partners. Private product discipline will be a key to Palomar's strategy on profitable growth. The bottom of the private product business in crop insurance was about five or six years ago. There are fewer instances of crop companies burning their way into the market than there used to be on the back of cheap private products. We do not intend to build our company on private products, but on the aforementioned technology and farmer-centric operation.
Lastly, as a new entrant, it's a big advantage for us to have almost no row crop premium in a couple of really problematic states for the industry. We have close to zero business in Nebraska, which has been the main driver of private product losses for a decade. We don't have any significant row crop business in Texas, where a multi-year drought has hurt results to the point that the rest of the market is either exiting or drastically lowering commissions, neither of which creates anything but bad feelings in the market. We do write some premium in Texas through a product called PRF, which is an indexed rainfall product requiring no loss adjustment and is primarily sold to ranchers. We have successfully managed the risk of that product through the fund selection process available to us through our reinsurance agreement with the federal government.
This new entrant advantage translates to us being able to focus on known books of business that are familiar to the professionals we brought on board. We can strategically write profitable business in areas and wait for loss-prone areas to course-correct and enter those geographies at the appropriate time. This strategy will allow us to maximize underwriting gain and obtain best-in-class private reinsurance economics. Using this mixture of the federal government backstop and private reinsurance allows us to manage the risk very effectively, limit shock losses in bad years as we increase and expand both the book and our risk participation in the years to come. I think I missed a slide there. Sorry about that. The map on the left shows Group 1 states in the blue and the rest of the states in the green.
As many of you know, the Group 1 states have historically produced the largest underwriting gains. In the last negotiated standard reinsurance agreement in 2011, the loss of gain sharing for the states in Group 1 was changed, slightly reducing the amount that a company can earn in the Group 1 states. Additionally, the XOL portion of the SRA offers a little less protection in the Group 1s. That said, we are varying degrees of bullish on all of those states, including Nebraska, where we would write NPCI business that doesn't come with an overabundance of poorly rated private products. Setting aside the differences in the Group 1 and 2 states, the green Group 2 states, especially the ones that border the Group 1s, are areas of focus, and we will actively market in them for 2025 and beyond.
Our thesis will be to focus on Illinois, the states that touch Illinois, and the states that touch those states. The chart on the right will give you some guidance around some of the unique premium writing and earning cadences in crop insurance. Our CEO, Chris Uchida, will speak more about those later in the presentation. As we sit here today, just ending Q1, I know there are some issues that are top of mind amongst those of us that follow agriculture. Tariffs are something that we've heard lots about. Tariffs will have a negligible effect on the 2025 planning season as inputs for most producers were purchased months ago. Should this issue drag into the fall, we could be looking at increased 2026 input costs at that point, but those would likely be reflected in the prices calculated next February.
We're also going to plant lots of corn here in the U.S. in 2025. Soybean planting at current prices is difficult to pencil. We anticipate about 95 million acres of corn to be planted this spring, up from 91 million last year. Those 4 million acres will come at the expense of soybeans, which were at about 86 million acres last year and should fall to around 82 million. Of the soybeans we do plant, we anticipate about 57% will be crushed onshore here in the U.S., which should blunt the effect of tariffs. With that, I will push this to Kyle Morgan.
Good morning. My name is Kyle Morgan. I serve as the Chief Strategy Officer of Palomar. I joined the team a little over seven years ago after a career as a private equity investor. During my time at Palomar, I have been involved in the research, development, and capitalization of many of the businesses that we're involved in today. As the previous speakers have demonstrated, we have thoughtfully built a portfolio of products that complement each other, and each contributes to the growth and profitability of Palomar. We have a thorough, repeatable process for identifying, evaluating, and entering new markets. We look for the presence of a few key criteria when identifying where to participate. Foremost, we look for markets that demonstrate attractive through-the-cycle profitability. Earthquake, inland marine, and crop are perfect examples.
These attractive economics are typically the byproduct of barriers to entry and of the requirement for specialized underwriting skill and distribution relationships. Sometimes experts in these areas can be recruited to join the Palomar team. At other times, obtaining this know-how requires the acquisition of an existing business. We are comfortable pursuing either path in order to achieve our objectives. Talent is the key ingredient. We want to find and recruit the specialized talent needed to succeed in a specific market segment. We also bring to bear our own talented existing team members and their expertise in risk transfer, technology, and other functional areas. Each market segment and product line has its own nuances, and we digest all of that information in a way that enables us to monitor the risk, assess unit economics, and allocate our own capital and resources to their highest and best use.
We're careful stewards of our capital and enter every new market with a conservative, bespoke reinsurance strategy. In fact, as others have mentioned earlier, the support of our reinsurance partners validates and reinforces the conviction that we have already built for each offering. Finally, and most importantly, in spite of the significant work and effort that we undertake to get to this point, we view the launch of new products not as the finish line, but rather just as the start. We're committed to continuous learning, adaptation, and ensuring that every incremental dollar of our capital is always invested wisely. As Benson articulated in his previous slides, the crop market is an area that we're very enthusiastic about and have built a meaningful presence in over a short period of time. The crop market is large, growing, and consistently profitable.
A couple of years ago, we successfully obtained status as one of only a dozen approved insurance providers, or AIPs, a necessary designation to participate in this market. A key ingredient for our early success has been our partnership with Advanced Ag Protection, an MGA comprised of longstanding crop industry veterans. We are an early investor in AAP, and we're excited to announce that we are acquiring the business in order to seamlessly integrate our crop operation and accelerate our expansion in this area. We expect this acquisition to close in the next couple of weeks. Another example is our entry into the surety market. This is an area we've admired and have been actively seeking to enter for some time. As the left-hand chart indicates, the margin profile for surety is significantly better than for the P&C industry overall.
Margins in this segment are very similar to Palomar's margin profile, a key reason we are attracted to surety. Underwriting, claims, and distribution expertise within surety are highly specialized and difficult to replicate. We are fortunate that we met and got to know the FIA team over the past couple of years. Pat Lynch has spent decades building a great business and a respected reputation in the contract and subdivision surety market in the Northeast. We closed the acquisition of FIA this past January, and we're excited to build a national surety footprint with the help of Pat and his team. As you can see from the results on this page, FIA already has the growth and profitability profile that fit well within Palomar. We believe there are initiatives that we can undertake to grow the business even further.
These include geographic expansion, utilizing our balance sheet to offer larger limits and retain more risk, and working to obtain a T-listing from the U.S. Treasury, a milestone that will enable the company to more directly address a significant portion of the surety market. In line with our strategic imperative that Mac articulated earlier today of deliberately building market leaders, our intention is to build a leadership position in surety on the order of $100 million in annual premium over time. We are focused on profitable, sustainable growth, consistent with the formula we have successfully employed in these and other lines over the past decade. Now, I'd like to invite Mac back up to the stage as we shift to Q&A.
Thanks, Kyle. Before we open up to Q&A, David, if there's more business that is a 450% rate increase in Juno, I'm happy to open an office up there.
I agree.
Yeah. No. No, but please, hopefully you've gotten a keen sense of the experts that we have on the team leading our products. Now is your chance to grill them because they can certainly go into a level of depth that Chris and I can't on these calls. Please don't be shy. Mayor.
Okay. I think I've gotten over my shyness. A couple of random questions all over the place. First, you mentioned avoiding some of the worst judicial hellholes. My understanding is that there's been some evolution where formerly good jurisdictions are going bad. I was hoping you could talk about how you avoid that deterioration when experience can point you in the wrong direction.
It's a very good question. You are correct. Some venues that were normally in the past considered favorable have gone the way of the dodo bird, unfortunately. Third-party litigation funding has a lot to do with that. A lot of the venues that are going south, unfortunately, also have to be some of the largest states where E&S premium is available, which is why I said earlier that we can't avoid them. We have to charge for them and pay attention to our rates, pay attention to our limits deployed and the limits in the aggregate.
You can't entirely avoid them if the deal that comes across our desk, in our opinion, once it's run through the radar and we have reinsurance support on it, if the rate is robust and we feel the class of business is somewhat protected from a thermonuclear or nuclear verdict, we'll jump on it. You won't see us putting up lead fives in these states. You'll see buffer layers, usually a one or two million buffer or 3X of 2. On average, across the U.S., on average, our average limit deployed is $3.6 million. In the large E&S states where judicial hellholes are an issue, that drops to about $2.1 million. We're going to watch our limits there.
That's on a gross basis.
That's correct.
Yeah. Completely unrelated question, but for Jon, I would think that low-hazard earthquake would be a great risk to target. It sounds like you're not interested in it if I inferred your.
Yeah.
If I interpreted your.
No, no, it is. No, I guess what Mac was referring to and what I kind of joked about was FM Global, which is, if you look at the S&L kind of statutory filings for the line of earthquake, is the second largest earthquake writer in the United States based on the year-end of 2023. A lot of the premium that they associate with the earthquake line is written across. They write large industrial facilities, and then they categorize a certain amount of that premium as earthquake. They may be writing all over the United States, really not for the purposes of writing earthquake, but it just has some ancillary earthquake premium. The sizes of accounts that are written in places like New York State, the Northeast, the Southeastern United States that has virtually no earthquake risk, get categorized as earthquake.
That was kind of the point.
Mayor, the punchline is Jon wants us to be number two, and if you take out CEA, number one. That is really what he's striving at, but yeah.
Yep. Exactly.
We will be there.
We do write a lot of lower-risk earthquake in the Midwest and throughout kind of any state that has earthquake demand, and we welcome that.
Paul?
Thanks. A couple of crop insurance questions. I still think I'm the only sell-side analyst that's ever bought a crop insurance policy. The first one, I didn't hear any financial announcements with the crop acquisition. Does this affect any of the financial stuff that we should be thinking about, guidance, or?
Yeah. I'll address that one. No, it's immaterial from a financial impact, and guidance won't be changed to reflect it. We think it will allow us to really execute the plan that we have in place for 2025, but more really for 2026 and 2027. No changes to the model.
Looking at the slide that shows the states as it rolls out, is it fair to say, as we look at this business, that we should be sort of thinking this on an annual basis given that you'll have essentially five states this year, and then you'll have X states the next? Should we also think of that in terms of how the production will sort of be created over time?
I'll let Benson and Jon chime in. What I would say is we're going to be focused on adding talent in those geographies, Illinois, the states that border Illinois, and those states that border those states. It is multi-pronged. We're not going to turn away business, but we're going to have investments in local market presence there. We've made a big push, and Benson's brought on an excellent team in Illinois as well as in the Dakotas. It will be a little bit of logical progression of how we can service it and then how we add talent. Anything you would add, Benson, there?
Yeah. No, I think Illinois, in my experience in the business, is kind of the most consistent state. It's where we've got contacts and experience with people that I think we can kind of have a base of growth. Out from there has been my experience as far as where we can do well. I'd not put any fences around anything. The business kind of exists in the middle of the country, and we'll opportunistically pursue whatever we can.
Just as one point of clarification, when we talk about kind of that area that we put up on the screen that was circled in red, that's really for row crops. There are other products like PRF and others that are on a more broad geographic basis. For MPCI that you think of, it's exactly what Benson outlined.
Pablo?
Thank you. First question. Can you talk about the economic sensitivity of your major end markets, whether it's construction, contractors, or maybe even the consumers who buy residential earthquake California? Just want to get a sense of what could potentially happen if we do encounter an economic soft patch.
Yeah. I'll speak to residential earthquake, but I think, Robert, you can speak to the construction exposed segments because you're seeing it in real time. Residential earthquake, as Jon mentioned, it's a voluntary purchase, and it's 10%-15% adoption. We've always talked about it with you, Pablo. It's a mass affluent buyer. The total limit on average is going to be close to $1.5 million, and the average premium is going to be a couple thousand dollars, $2,400 or so. They are very mindful of protecting the equity of their home. We've seen the beginning of this year, whether it's rising cost of homeowners insurance or dislocation caused by non-renewals in the homeowners market, we have not seen any disruption in our policy retention. That's with a 10% inflation guard.
Furthermore, I think what I would say is the disruption in the homeowners market, whether it be rising costs or carriers pulling back, that's an opportunity for us, whether that's because they are CEA member companies that are reducing their exposure and therefore reducing the number of policies that are within the CEA or attached to a CEA homeowners policy, a member policy, or it's a new interest that needs a partner. With residential earthquake changes in the construction market, the rising cost of carrying home, we have not seen any impact there.
The only other thing that I would add is if there are rate decreases, rate cuts, and the cost of a mortgage comes down, I think that'll be beneficial for us because candidly, I think Jon and I would both say that's been a bit of a headwind for us, slower transaction activities, whether it's first-time buyers or someone that is looking to sell or find a new home. I think on the commercial side, maybe Jon and Robert, chime in.
You're just talking about kind of the market conditions. And with regard to, just to clarify the question, future building opportunities and expenses.
Yeah. I think it's really around commercial construction, cost of construction, slowdown in activity, or whatever it may be.
Yeah. I'll just add a couple of points. The permits are from a single-family and multi-family down compared to 2022, but you're still significantly higher than you were at all-time highs when it was 2019, 2018, 2017. There is still significant demand, a lot of construction activity. From our perspective at Palomar, we still have a green field of opportunity. Our admitted book is in 50 states, we're across half of them on a non-admitted basis. We have exposure across the United States in every state, except for maybe Alaska, so we should probably pair up with David. There is still a green field of growth opportunity for us. Demand is still strong.
Maybe talk a little bit about kind of the impact of rising costs of construction materials and how that plays into a builder's risk policy.
Yeah. From an increase in value, if tariffs come through and lumber prices go up considerably, one thought, the builders are buying in a lot of times in real time, right? If they're going to build a home in January, they're accessing that lumber not too far before that moment. If the values do go up, the contractor absorbs that, they'll pass it on to who the ultimate owner is. We capture rate against construction value. If that value goes up 10%, 20%, 25% because of the tariff on that segment of the build, we're capturing premium for that exposure.
Yeah. Yeah, exactly. Kind of the point is that there's not, with a fixed property policy, you could have a misalignment of the value charged at the policy's inception versus the value that you're on risk for during the policy period. With builder's risk, you're capturing that full value upfront just given the nature of the policy.
A good portion of those policies are auditable as well,
Right?
You capture the value.
You capture the value then too.
I would say our business is quite diversified. Going back to the example of a single-family house and then a large participation on something in Midtown Manhattan, folks that are building high-end custom homes, they're not as concerned if the lumber price goes up slightly. They still want to build that custom home. One of our larger segments of our book is in that space.
I think that's an overarching theme that we'd want to leave with you today is it's the balance in the book. There's the residential component, which funny enough is where we're seeing very strong rate increases, whether it's flood, where we actually got a 14% rate increase approved in California, whether it's Hawaii and hurricane where our new money is going in over 25%, or residential earthquake where you're seeing a 10% inflation guard against 2.5-3% inflation. We have small commercial risk, whether it's the admitted builders risk or small commercial earthquake where you're not seeing the rate pressure that you are in large layered and shared E&S accounts. The balance in the book has been something that Jon said earlier appropriately has been curated since we formed the company.
I think that's going to help us play through market cycle on the property side.
Thank you for the comprehensive answer. If I may sneak in just a second one, I'd be curious to hear if you could give a sense of the breakdown of the underwriting income by line of business, right? Earthquake is about a third of the book by gross premiums, right? I suspect its contribution to underwriting income is higher than that because it's the most mature line. The others where you're retaining less, I suspect the contribution is lower than what the premiums would imply. I suppose what I'm getting at is I was hoping to get a sense of how much uplift you could potentially get as you start retaining more risk, right? I think that is ultimately where you want to be. Any way you can sort of frame that dynamic. Thank you.
Pablo, you're stealing Chris's thunder a little bit. He's got a slide on that later. Is that okay if he addresses that and then we talk about it later on? Because you're absolutely right. There are levers, but Chris, we could be mad if I say anything more. Any other questions on the product side? Terrific. I hope you got a sense that we have added some tremendous expertise in bolstering what was already a very strong underwriting and product team. Feel free to ask more questions over the course of the day or at lunch. Thanks to the five of you. Now I'll hand it over. I believe we will go and do operations. Actually, excuse me. We're going to do a quick 15-minute break, I believe. It is 10:20. We'll come back at maybe 10:35 East Coast time. Thanks. Okay.
Now we're going to move into the operations section of the presentation. Like the product side, I am certain you'll be impressed with the leadership that we have presenting now. Up on the stage, we have Jon Knutzen, our Chief Risk Officer; Ethan Genteman, our Chief Actuary Officer; Rudy Hervé, our new COO; Althea Garvey, our new Chief Claims Officer; and Tim Carter, who's leading people and talent for us as Chief People Officer. Similar format, we're going to walk through some slides, starting with Jon Knutzen, and then we'll re-engage for Q&A following Chris's presentation. With that, I'll hand it over to Jon.
Thanks, Mac. Good morning. It's a pleasure to be here with you today. My name is Jon Knutzen, and I am Palomar's Chief Risk Officer. I joined the company in this role back in April of 2019.
Prior to that, I spent over 20 years working in various senior leadership roles encompassing both analytics and reinsurance broking, working for a few different reinsurance intermediaries, including Guy Carpenter and TigerRisk, now Howden Re. One of my responsibilities is managing the team that oversees the execution of Palomar's risk transfer strategy. Over the next 10 minutes or so, I'll provide you with an overview of, one, Palomar's approach to risk transfer, some of the risk transfer tools we use, and lastly, by using our property catastrophe excess of loss program as a case study, how we employ some of these tools in a coordinated fashion. Risk transfer is a central component to Palomar's overall business model and its 2X philosophy. A risk transfer strategy delivers on the same key drivers highlighted by others throughout this presentation, produce consistent earnings with minimal volatility, and deliver profitable growth.
This strategy is executed by a team of subject matter experts in risk transfer structuring and design. This team works hand in hand with executive leadership, underwriting, programs, actuarial, and analytics, along with our reinsurance broker partners to ensure that the company's risk transfer outcomes align with its goals and objectives. The risk transfer team is further supported by the teams and processes that will be covered throughout this operations review today. In managing volatility, we've established conservative risk tolerances that protect our capital and underwriting income from shock losses, whether from a large individual risk loss or from the severity of a single event such as an earthquake or a hurricane.
As an example, while our stated risk tolerance is to contain the impact of a single event loss to less than one quarter of earnings and less than 5% of stockholders' equity, our current per-occurrence retention, inclusive of co-participations, for earthquake at $20 million and for all other perils excluding earthquake at $15.5 million, equates on a pre-tax basis to only 2.7% and 2.1%, respectively, of our year-end 2024 group equity of $729 million. In addition, we secure sufficient reinsurance limit to conservatively cover cat losses in excess of our 1 in 250-year peak zone probable maximum loss. To evaluate and stress test the adequacy of our reinsurance program on a monthly basis, we conduct a variety of portfolio analytics utilizing multiple stochastic models such as catastrophe models, deterministic loss scenarios, and exposure profiling to quantify and assess the risk associated with our various lines of business.
In addition, prudent gross and net line size management is also a key element in managing volatility. Currently, our maximum net lines are $3.5 million for property and $3 million for casualty risks. Palomar's risk transfer program provides a significant amount of the requisite capital to support both its current writings along with any future growth, including any increased demand we may experience post-event. To achieve this, we have designed our risk transfer program to scale with exposure growth and evolve with the coverage needs of underwriting, specifically as the underwriting team uncovers new opportunities to write additional businesses or additional business at attractive risk-adjusted returns. Providing stability to the sources of this risk capital, we work with a diverse and well-capitalized panel of reinsurers. This panel has sufficient security and adequate capital and has demonstrated the readiness to support our growth across market cycles.
Lastly, as Palomar's own capital has increased and continues to increase, we will look to raise our retentions, where doing so is accretive to our risk-adjusted return on capital. As skilled buyers who understand the marketplace and reinsurers' appetite, we design programs that strike an appropriate balance between comprehensive protection and cost efficiency. Bolstering our approach toward this end, we employ quantitative and stochastic risk models that allow us to run simulations with multiple alternative reinsurance structure options and use these to evaluate the cost-benefit trade-offs associated with each option. These risk models are parameterized by the use of catastrophe models as well as actuarial models informed by Palomar's actual loss experience and industry loss data. Lastly, to generate competitive pricing tension, we access both traditional and non-traditional forms of risk capital, specifically insurance-linked securities.
Palomar makes use of a comprehensive and diverse set of risk transfer tools to meet the needs of its various lines of business. The tools fall into two basic categories: facultative and treaty. Facultative reinsurance applies to individual risks, and treaty reinsurance applies to a portfolio of risks. We utilize facultative reinsurance to augment limits provided by our treaty coverage or cover risks excluded from our treaty reinsurance. The vast majority of our ceded risk is transferred via treaty, of which we have two types. Quota share reinsurance provides first dollar pro-rata coverage for a portfolio of risk in exchange for ceding pro-rata premium less a ceding commission. We use quota share reinsurance to mitigate against outsized volatility from attritional losses as well as individual shock losses. Most of our lines with attritional loss exposure have quota share coverage.
The session percentage will vary depending on the subject business, and typically, the session percentage is set to align the net limit any one risk with our risk appetite. Quota share reinsurance also provides a source of fee income via an override in the ceding commission above our acquisition expenses. Excessive loss reinsurance provides coverage above a fixed dollar retention. Most of our property catastrophe reinsurance limit is purchased on an excessive loss basis. We also use excessive loss on a per-risk basis in a more limited way for subsets of our inland marine and other property. Catastrophe bonds provide us with a non-traditional source of capital for our catastrophe excessive loss reinsurance program. In general, as one moves from left to right across the various products on this slide, the risk transfer transaction becomes more complex, requiring more analytical sophistication in the design and decision-making around the reinsurance purchase.
However, through this process, there are efficiencies to be gained in the form of reduced ceded margin. As our newer lines of business mature and the credibility in our loss experience increases, we will likely look to reduce the use of quota share reinsurance to capture more underwriting profit and manage individual shock losses and support gross limit needs through expanded use of excess of loss at some point in the future. The slide also highlights which reinsurance products our various business segments employ. To illustrate how some of our business units currently utilize various aspects of our reinsurance programs, here are three examples. Our inland marine team leverages their reinsurance capacity to write and deploy larger gross limits, which enables our underwriters to drive better terms and pricing and take advantage of attractive market conditions.
Our niche casualty segment is one of our most diversified underwriting pillars, and the reinsurance purchase is bespoke to each portfolio. We use reinsurance as a feedback mechanism for our underwriters. For example, E&S casualty purchases facultative reinsurance as a second set of eyes on complex exposures. The continued support of our quota share reinsurance partners provides validation that our portfolio is in line with market expectations and addressing loss trends appropriately. For our crop business, in 2025, we shifted from more of a fronted model with a minimal risk participation to becoming a larger risk participant by taking a 30% retained share in order to capture more of the expected underwriting income. At the same time, we introduced a stop-loss excessive loss structure that mitigates our downside from an adverse crop season. This current risk transfer strategy is complementary to the growth plans that Benson outlined earlier.
Leveraging multiple forms of reinsurance enables us to build a more resilient risk transfer strategy that can respond to shifts in market conditions, including post-event. This is demonstrated by the approach we have taken in the design of our property catastrophe reinsurance program. The strategy combines the use of quota share, excessive loss, and catastrophe bonds into a comprehensive reinsurance program that has enabled us to build and maintain a leading market share in the U.S. market while conservatively managing our potential net retained loss should a reasonably severe earthquake or hurricane affect our portfolio. This program is supported by over 100 highly rated reinsurers or capital providers that fully collateralize their obligations. Our current property catastrophe reinsurance program is a reflection of some key evolutionary steps over the years. One of these steps was the introduction of catastrophe bonds in 2017.
Ever since, ILS capacity has contributed a meaningful share of our total catastrophe risk capital, with the exception of our June 1, 2020, treaty year. It currently provides $895 million, part of approximately $3.2 billion in total earthquake limit. In addition to the competitive pricing tension ILS capital brings, it also provides committed limit at fixed economics over a multi-year period. This was beneficial in helping us manage the hardening reinsurance market in our 2022 and 2023 renewals. Another step was our decision to reduce our exposure to Continental U.S. Hurricane and associated secondary perils beginning in Q4 of 2020. This multi-year process has been very well received by as it better aligns our reinsurance program with the low-frequency, high-severity, single-peril exposure preferred by our reinsurance partners. This is evidenced by the substantial increase in limit committed to our program over the last few years.
As mentioned with our Q4 earnings commentary, we did renew our California commercial earthquake quota share at January 1, 2025, along with adding $155 million of incremental earthquake excessive loss limit to support growth. These placements were priced with risk-adjusted decreases of approximately 15%. The majority of our catastrophe excessive loss limit will renew effective June 1, and we are in full swing with the renewal process. While we expect the impact of the recent fires in California to temper the softening market we saw at January 1, we remain confident in our ability to achieve our objectives with the upcoming renewal and as reflected in our 2025 plan. With that, I will now turn the presentation over to Ethan Genteman, Palomar's Chief Actuarial Officer, to walk you through Palomar's actuarial strategy and reserving philosophy.
Thanks, Jen. Hi, and good morning. I'm Ethan Genteman, Chief Actuary at Palomar. I joined the company in 2019, bringing experience from P&C carrier Intact Insurance and reinsurance broker Tiger Risk, now Howden Re. I lead our reserving and pricing functions, focusing on quantitative modeling to complement the strong business acumen across Palomar. Today, I'll discuss Palomar's reserving methodology, how it supports our strong financial position, and creates a pricing feedback loop that ensures strong, sustainable margins. I'll also cover our business mix and strategic use of reinsurance, providing insight into our reserve evolution over the past five years. A key theme I want to highlight is that we prioritize disciplined growth in all of our lines of business. Palomar's reserving methodology is quantitative, conservative, and collaborative. This is a disciplined approach that ensures long-term stability and financial strength. First, our methodology is quantitative.
We leverage actuarial-standard stochastic models to provide unbiased, data-driven reserve estimates. Our models incorporate loss trends, mix of business, and external factors to ensure reserves are both robust and responsive. We also analyze loss types separately, accounting for seasonality, demand surges, and other economic factors. For example, severe convective storms in Texas drive higher Q2 losses compared to Q1, a trend we integrate into our reserving models. Second, our approach is conservative. We initialize expected loss ratios at prudent levels, often above historical performance, to provide a cushion against emerging loss trends. For example, in our E&S all-risk segment, despite experiencing over 50% in rate increases, we have not lowered our expected loss ratios, ensuring built-in redundancy and risk mitigation. Additionally, we are swift to react to adverse developments while remaining cautious with favorable trends, reducing the likelihood of premature reserve releases. Finally, our process is collaborative.
We work closely with claims professionals, underwriters, and senior management to integrate real-world insights into our reserving models. This ensures that our assumptions reflect not just historical data, but also forward-looking business intelligence. The result is a reserving strategy that is not only data-driven, but also aligned with our broader business objectives. Having established our reserving methodology, let's now examine how it reflects in our actual reserve composition over time. Over the past five years, Palomar's reserve composition has evolved. At year-end 2020, our reserve balance was 100% in the marine and other property. On the heels of our E&S company launch, we strategically diversified into new business lines, leading to the emergence of fronting and casualty reserves in 2021. By 2023, each of these grew to approximately 20% of our gross unpaid liabilities.
Today, at year-end 2024, our $503 million gross reserve balance is 6% crop, 25% casualty, 44% fronting, and 25% inland marine and other property. On a net basis, our reserves are $155 million, which shows that our reinsurance strategy plays a big part in our reserve composition. Up until this year, our fronting and crop segments have retained little to no risk, shifting the net reserve weight to other lines. Not only does this shape our composition, it also plays a crucial role in scaling back our retained reserves to a prudent level. At year-end 2024, our net composition is roughly a 50/50 split between casualty and inland marine and other property. This intentional diversification and scaling align with our core strategy of growing in targeted markets while maintaining a risk-mitigated approach. A well-balanced reserve composition is critical to financial strength.
While our net reserves are now 50% casualty, this is by design and a result of our carefully structured portfolio mix. To illustrate, consider our earthquake franchise, which accounts for 34% of written premium. Earthquake is a binary risk, and because they occur infrequently, the segment does not contribute significantly to reserves, yet it adds substantial net income, strengthening our financial position without a proportional increase in reserves. Over the past three years, our net reserve balance relative to surplus has remained steady at approximately 20%. This is a testament to our disciplined portfolio construction and targeted growth strategy. Four years ago, when we started our casualty franchise, this metric was 11%, demonstrating measured, deliberate expansion. At our financial size, our relative reserve balance is small, positioning us favorably relative to the broader P&C industry.
Even in a stress test scenario of a 20% adverse casualty reserve development, our surplus impact would be limited to just 2%. This balance between disciplined growth and conservative reserving is central to our approach. Our casualty reserves remain relatively small, and we remain quick to react to adverse developments while deliberately cautious with favorable trends. To date, we have released little to no reserves in our casualty segment, despite limited claim activity. Over the past four years, our net IBNR as a percentage of unpaid reserves has grown from 41% to 74%. Put another way, we now hold three times more in IBNR than in case reserves, simply because we have maintained a disciplined, cautious reserving philosophy. Compared to industry metrics, this places us in a strong reserves position.
While the data and models might suggest future reserve releases are possible, our focus remains on long-term stability, not short-term gains. Maintaining reserve adequacy while scaling our business requires both discipline and agility. Our commitment to stability extends beyond models. It is reinforced by cross-functional collaboration. While our actuarial approach is deeply quantitative, it is strengthened by real-world insights from underwriters, executives, and claims professionals. A seamless feedback loop between reserving and pricing is essential as we adapt to market trends in real time. Given the pace at which we bring new products to market, maintaining this alignment requires robust operations and cutting-edge technology. To discuss how we execute on our reserving and pricing strategy at scale, leveraging technology, automation, and operational excellence, I'm pleased to introduce our Chief Operating Officer, Rudy Hervé.
Thank you, Ethan. I'll start with a little personal story. It's a full-circle moment for me. My first job out of college was as an equity research analyst in London. It's true. Back then, the smart kids would have the technical industries, so technology, banking, and insurance. I was covering food and drinks. Well done, you guys. Must be nice. I joined Palomar in July of last year as Chief Operating Officer. I'm honored to lead the technology and operations team in charge of empowering Palomar 2X. I have 15 years of experience in the insurance industry. Started at QB North America as part of the strategy team. My first big assignment was to take ownership of the turnaround and sale of several MGA assets. Later, I was heading the operations for the specialty insurance unit.
During that time, we launched seven new teams, 30 new products, and grew premium from $200 million to about $1 billion. I think that specific experience is probably what got me an interview with Mac. After that, I joined SCOR for four and a half years, first as CEO of the North America insurance business and later head of operations for insurance, which included a large MGA portfolio, large shared and layered portfolio in the Lloyds syndicate. Most recently, I was appointed to head the operations of SCOR for the entire P&C business, so reinsurance, claims, actuarial, in addition to insurance. Pleasure to be here. I would mention that we also have our Chief Technology Officer, James Long over here, and our AVP of operations, Jake Armstrong over there.
I would be very disappointed if you don't somehow harass them at some point and ask them a lot of questions. Our challenges at Palomar are very similar on the tech and ops front as you would find in any other company. What sets us apart is the need for speed. To enable Palomar 2X, we constantly need to be able to launch new products, onboard new MGAs, do that at speed. How do we do that? First, there's a strong core of insurance systems. Brand names that you would recognize are Environment for Application Development is Pega. Our billing platform is Majesco. Our general ledger is Sage. It's not an environment in which you're battling with dozens of systems and trying to figure out how to consolidate all of this. We had the luxury of starting with a core, and we tried to maintain that core.
Two, we have proven playbooks in how to launch products and how to onboard MGAs. The best example I can give you is with my friend David, who joined us in September last year. By October, he was able to book his first policies on the casualty system. By no means does it mean that his platform is completely done, but we like to have a very agile development mode and keep building incrementally until all the functionality is all done. There is a very strong bias for execution and deployment. Three, for everything that we cannot readily give you a system for, we have the ability to throw bodies at it through outsourcing agreements. For data entry and the writing support, tech development, testing, we have long-standing business processing outsourcing agreements in place.
Beyond our core insurance systems, our secret sauce, what we like to maintain as our secret sauce is threefold. First one would be for anything that touches our producing partners. PASS is a very important system for us. It's the Palomar automated submission systems. It's a very slick portal by which we distribute all our quake, flood, and wind products. It's connected to 6,000 agents currently. We were processing 130,000 policies on it last year. It's very slick. It's completely integrated with our producing partner systems. They just enter basically an address. It feeds our pricing model. They can quote, by the way, if the policy is within the appetite that we set, they can bind. It's automatic, and it feeds the information directly to the backend system. We run periodically surveys to check how we're doing compared to competitions. We get high scores.
The last time we ran that survey was in February, and we got a net promoter score of 55. The financial services industry average is around 35. The scores we got for the functionality of the systems was 4.4, 4.5, which was also going up from when we ran that same survey a couple of years before. We like to stay on top of our customer experience. Certainly, we're getting good grades now. Second part of our differentiation would be pricing. We like to think that we have the best flood rating in the state of California. We have 23 million rating territories. The granularity at which we can rate flood in California is down to the parcel level in high-density areas, so 30 meters by 30 meters. We're constantly evolving this.
We're involved with Princeton University Research and a few startups in the space trying to get even more granular at the square meter level. Obviously, there's going to be some limitations to the granularity at which we will be able to file in the admitted space. Certainly, for non-admitted pricing or risk selection or even just talking to reinsurance and be able to present our portfolio, continuing that effort is important. The third piece, the third element for our secret sauce would be really around the data. Half of our technology team is in data and analytics.
Whether we're talking data engineers and people worried about infrastructure or the analytics that support the rest of our business, because risk transfer, as Jon articulated, is such a big component of our strategy, we invest a lot in terms of being able to properly assess performance and exposures. We've built proprietary tools on the data side and also leveraged a lot of brand names for data cleansing and analytics. Finally, as I mentioned, we had the luxury of starting Palomar not so long ago. The technology stack is very modern. It's all cloud-based. Obviously, since 2023, there's been a big acceleration in the space that is driven by AI. The way we use AI, and first, I want to make the point, we're not competing with AI technologies.
I would love to have the hundred millions of R&D spend that AI companies in Silicon Valley have, but Chris has not given me that yet. We are not competing with those companies, but we are really trying to constantly assess what they are doing and how they can help us. Two examples. Number one, again, on the quake side, we are involved with a company founded by two PhDs, Stanford PhDs in structural engineering. The goal of our project right now is to continue to understand the vulnerability to quake events of the building that we insure. Nobody is more excited about this project than Jon Christianson. The way the pilot would run, for instance, is we give them a big sample of our data and the buildings that we insure. They tell us what they think, the variables compared to ours, and then we look at the discrepancies.
That would be the first thing that we try to do is, do you really know your building better? The second one would be, okay, are there new variables that you guys can bring to the fore that we haven't considered? It turns out now with AI, there's five, six, seven new key metrics on any building that we didn't know. I don't know yet if this is something we can use in pricing or in risk selection, but it's really something that we're always trying to assess to make us smarter. Another way we include AI, obviously, is through automation. I've been working on trying to automate data ingestion.
Since my QB days, obviously at SCOR, at Palomar, I can say the very first example of complete automation with strong data accuracy that I've seen is with a product line that was launched at Palomar two years ago. We were able to cut the end-to-end lifecycle of a policy by 80% in the last couple of months. Something really strong that then we can potentially deploy to other lines of business. Obviously, a lot of very interesting work happening now with AI, and it's going to continue at pace because that's the path on our way. We view ourselves as an insurance company that's empowered by technology. You'll find us very comfortable adopting new, adopting startups, working with startups, constantly running pilots, assessing new tech. We have the benefit of being based in California.
Obviously, our connections to the insurtech scene are very robust and are further enhanced by the relationships that either Palomar employees and certainly our board members bring to us. Getting that balance right between build versus buy and adopting new tech is really key parts of our technology and ops philosophy. What can you look forward to in 2025? Obviously, developing the tools to launch QUAP integration journey, that's job one. We're going to continue to work on our systems. I mentioned automation that's now available to one line of business, so we're going to try and extend that to others. We have big foundational initiatives. If you've worked with data before, you know you're never done.
We continue that journey, building a large mirror lake for the entire Palomar organization and specific work, as I mentioned, in the area of pricing for earthquake, flood, but also obviously QUAP and casualty. I want to leave you with three parting thoughts because what we really after, if you look at Palomar now and the size that we are and the technology that we have, we're completely fine. What Mac has asked us to do is to build the ecosystem, the infrastructure to build a much larger company. We have Palomar 2X in mind. We're really trying to build the technology that will support an organization that could be much larger than where we are now. That's number one.
Number two is, and Chris will touch base on this as well, technology is really in support of the risk selection and pricing for sure, but the expense ratio, right? How can we continue to build scale in a business and make sure that as we grow revenue, we grow operational expenses more slowly? The third part, I insisted on this, but I'll say it again. We would like you to think of us as fast adopters of new tech. When we have good connections in industry, and if you'd be ever excited or interested in talking about what we see in the insurtech business, we'd be always happy to have a conversation around that. With that, I look forward to engaging with many of you later on. I would like to introduce our Chief Claims Officer, Althea Garvey.
Is it still morning?
It's still morning? Yeah. Yeah. Yeah. Good morning, everyone. My name is Althea Garvey. I made that joke because this is a full circle moment for me. I grew up in New York City, but now I live out in Los Angeles. I'm like, oh, what time is it? It's Palomar time, right? Again, my name is Althea Garvey. I joined Palomar in October of 2024 as Chief Claims Officer. With 30 years of experience in the insurance industry, my background combines my legal expertise. I've worked as a trial attorney, as in insurance defense, and as a plaintiff's counsel. I have extensive claims experience up through management. I've been everything from an adjuster to a claims executive. I started my legal career here in New York City as a public servant.
I was an Assistant District Attorney for the Bronx DA's office for six years. Yes, I tried homicides. Before joining Palomar, I held key positions at US F&G Insurance Company. I spent 15 years at AIG, and I worked as a Chief Claims Officer at Lifecare Insurance Company, which is a third-party administrator, for eight years. I like to say that I bring a 360-degree perspective to claims management. Supporting Palomar's claims team is Eileen Fay, who is our Vice President of Casualty Claims. She's also an attorney. Eileen has over 20 years' experience in the insurance industry. Before joining Palomar, she held leadership positions at Chubb and W.R. Berkley. Additionally, we have Teresa Urban, who serves as our Vice President of Property. She too has more than 30 years of experience and has held leadership positions at Kemper, GEICO, and National General Insurance.
Today, I will share how our holistic TPA oversight framework strengthens claims handling, optimizes actuarial underwriting and reinsurance functions, and ultimately enhances profitability and market competitiveness. At Palomar, claims management isn't just a function. It's a strategic asset. Our ability to handle claims efficiently, cost-effectively, and with precision directly impacts our bottom line. A key component of this strategy is our disciplined approach to utilizing and managing our third-party administrators. You may hear me use the term TPAs and our program partners. For example, we cover a number of other lines, but we cover catastrophic events. We strategically leverage our TPAs for such as time as this specialized events. We work with partners who have catastrophe-focused expertise. Our TPAs specialize in handling high severity, high-volume claims from earthquakes, hurricanes, and floods.
Our TPA network also allows us to expand capacity instantly in catastrophic events while keeping year-round costs low. In other words, instead of us maintaining a large, full in-house team year-round, we pay for claim handling capacity only when it's needed, thereby reducing our overhead. TPAs also help us meet state, federal, and reinsurance regulations. Having a network of diversified TPAs is only part of the story. Managing them successfully to align with Palomar's business is the rest of the story. Our oversight model is structured around three key pillars to ensure that TPAs operate as an extension of Palomar's high standards. The first pillar is strong governance and oversight. Some of the things that we do in-house, we have a dedicated in-house TPA oversight team that monitors performance and compliance. We do monthly claim reviews. We have random claim reviews.
That's just some of the things that we do. The second pillar, continuous quality assurance and compliance audits. Quarterly audits are scheduled. We do SOC reviews. We do loss control management reviews and regulatory compliance alignment with NIAC and state laws. This is in addition to the internal auditing and monitoring that our third-party administrator vendors do within their own businesses as well. Our third pillar is data-driven performance monitoring, which helps all of our internal business partners. Real-time claim analytics helps us refine loss development estimates and loss ratio management. For example, in our actuarial department, where we've heard from Ethan previously, our third-party administrators provide real-time claims data, which allows our actuaries to refine loss reserves. Claim analytics also helps our actuaries forecast claim trends and cat event impacts, which leads to better predictive modeling.
Accurate claim handling also prevents reserve underfunding or excessive allocations. Similarly, we see the results in data analytics and TPA oversight enhancing our underwriting department. Data analytics enhance risk selection and pricing. Our TPA provide insights that allow our underwriters to price policies more accurately, particularly around the cats, which you've heard some of the successful numbers provided previously. Accurate claim outcomes also help us maintain loss ratios within target ranges. Our underwriters use claims trend data to fine-tune underwriting guidelines and minimize high-risk exposures. The same type of result spills over into our reinsurance department, again with the data analytics married with the TPA oversight, which results in stronger treaty negotiations and compliance. For example, TPAs provide detailed loss documentation for the reinsurers, which ensures proper reimbursement. Equally, accurate claims handling reduces reinsurer concerns, thereby lowering reinsurance costs. We will have better risk transfer pricing.
As I mentioned earlier, before we cover a lot of catastrophes, right? After major hurricanes, for example, some claims take over a year or longer to get fully settled due to the scale of damages and the complexity of the loss. Working collaboratively with our TPAs and our oversight, we can see out on our numbers between 2020 and 2024, there was a report of approximately, well, over 6,800 catastrophe claims. Through active management and oversight, at the end of December 31, 2024, we were able to close over 90% of that pending. Similarly, if we look at 2020, we've had approximately 1,500 cat claims that have been reported. Through oversight and working with TPA and bringing those numbers in, we were able to close approximately 60%. Between 2020 and 2024, we were able to take our reserves down by 74%.
That is actively engaging with our third-party partners. We endeavor to do more, right? What is on the horizon for us in 2025? We are making an investment in full in-house claims handling capabilities. We are continuing with our TPA assessments and benchmarking. We also continue with our advancements in technology and data initiatives. In closing, at Palomar, we do not just pay claims. We manage them as a strategic advantage. That is my Jamaican accent coming out, right? We manage them as a strategic advantage. Our disciplined TPA oversight is to ensure that every claim is handled with precision, every reserve is set accurately, and every underwriting decision is data-driven. This holistic approach enhances profitability, strengthens operational resilience, and drives long-term value. By aligning claims, actuarial underwriting, and reinsurance function, Palomar continues to differentiate itself in the insurance industry. Thank you.
I would like to introduce you to Tim Carter, our incomparable Chief People Officer.
Good morning, everyone. It's not lost on us that we're throwing a lot of information at you. We are very appreciative of your time, your focus. Good news is we have some great information. We're very proud of our story. You got two presenters left. Thank you for hanging in there. As Althea mentioned, I'm Tim Carter. I'm the Chief People Officer here. Started with several of my peers back in June of 2024. I have about 25 years of human capital management, executive leadership experience across varied industries. Prior to Palomar, however, I spent over a decade at LPL Financial. I was an executive leader there running talent acquisition, learning and development, total rewards, and community relations.
I share a little bit of my resume to highlight some of the complementary, some of the equivalencies between what I saw at LPL Financial and what we're seeing here at Palomar. During my time at LPL Financial, we tripled our workforce. Also grew market cap from $4 billion to $24 billion. I make those distinctions because no promises on that growth here at Palomar. To be prepared for that growth, we need to build the right people systems. Maybe more importantly, we need to be very, very expert at identifying the talent that's needed not only to help grow, but ultimately to serve our stakeholders. We're very excited about that property, that opportunity, excuse me. Our ability to execute Palomar's strategic imperatives rests on the focus, skill, motivation, and alignment of our talent.
We believe that our people are at their best because we make talent decisions with our mission, vision, and values at the forefront of the opportunities we pursue and the problems that we solve. Before I share a little bit about the 2025 people priorities, I'd like to highlight some of the key 2024 people metrics that are emblematic to Palomar's overall success. We ended the year at 252, 253, excuse me, employees. Today, we're at 310. The delta there is because at January 1, with the acquisition of FIA, that was a large part of that growth. We continue to grow also in the areas of claims management, as discussed by my peer, Althea. We also focused on several lines. I'll get into a little bit more detail. We doubled our workforce over a three-year period.
We are prepared to continue to make those growths should we decide to. We are very intentional and strategic in our growth. Last year, we experienced a headcount growth rate around 30%. We will leverage our improved people processes and infrastructure to facilitate growth this year. One key takeaway that we would like to emphasize, and that was mentioned in Mac's earlier comments, is that we invest in growing our headcount pragmatically and with a discipline toward growing the bottom line, as indicated by our peer-leading adjusted net income per employee metric. Our talent acquisition efforts focused on filling senior leadership roles, building out our new crop line of business, reinforcing our casualty line, and supporting functions in technology, operations, and claims management. Along with attracting the very best talent, we were able to retain a productive and expert workforce as measured by our employee turnover rate of 9%.
We will continue to manage attrition by offering competitive compensation, a little bit of alliteration there, healthy and vibrant work environment, respect for all employees, and opportunities for advancement, as evidenced by the one out of four employees who were elevated last year through promotion. Because of nurturing a culture where employees are valued and trusted, have a sense of pride in the work that we all do, and are loyal to those we serve, we are proud to report consistent top employee engagement scores of 87%, two years running, by the way, which is top quartile within the larger banking, financial services, insurance sector. One contributor to our high engagement score and retention of great talent is our approach to how we reward and recognize our people.
Unlike many of our peers, we annually award each employee a long-term incentive grant in the form of restricted stock, which is above and beyond the employee stock purchase program we also offer. We believe this further emphasizes the importance of company ownership as a key to motivating and inspiring exceptional employee work, which leads to greater service to our stakeholders and ultimately heightens our delivery of corporate objectives. Focusing on 2025, our people priorities are quite simple. We're going to focus on how we work. We're going to focus on how we grow. We're going to focus on how we win. We are making intentional investments on reinforcing our integrate and operate strategic imperative with specialized talent and by creating predictable, scalable, and sustainable people solutions that drive the right behaviors leading to heightened consistent results.
Examples of this work are in talent acquisition, where we continue to hire for our crop, surety, casualty, reinsurance, and actuarial teams. In our people systems, we're modernizing how we align individual and teamwork to enterprise goals through a unified accountability construct or more modern performance management system. We are developing employees through learning programs to deliver on the scale and complexity of our five product categories. These learning programs are specifically designed to develop internal talent into value-based underwriters and program leaders. Developing our pipeline of high-performing employees, particularly in production roles, starts with our early and career talent programs such as internships, rotational programs, and intentional career pathing. By the way, we are seeing proven success out of our internship program. It's a two-summer program, by the way, which is resulting in about a 40% and growing conversion rate.
Of those who are converted to full-time employees, we're seeing well over 90% are staying here, which is fantastic because we are building that skill set, that capability set for not just today, but to hopefully in perpetuity to lead into the opportunities and problems that await for us. Also, what is another benefit of having this very focused, energetic, young, highly, highly desirous of learning is they are expert ambassadors for us. We are starting to see some real gains and some notoriety within the different campuses on our product offering and, more importantly, the culture that we have. We think we're pretty special if you haven't figured that out by yet.
Finally, our third people priority is building great people leaders that are not just technical experts, but equally understand the necessity to employ effective leadership skills to supercharge our growth through tried-and-true general manager and leadership practices. We want leaders, and we are building leaders, and we have hired leaders and continue to develop leaders who are critical thinkers, who use logic-based decision-making to inform our problem-solving, who work with a sense of purpose and agility that are solving real problems, not living in theory or philosophical realm. That takes some work, and that takes some very intentional designs on how we make sure that all of our leaders that come here understand that part of Palomar culture. As you have heard from my peers, you will hear from me, our talent will propel us to do great work and achieve industry-leading results.
The leadership assembled here is committed to enriching our talent by making purposeful investments that lead to greater scalability, predictability, and sustainability for how we work, how we grow and win, and ultimately how we serve where we work and the communities we live in. With this, I'm looking forward to questions later, and I'd like to introduce Chris Uchida, our Chief Financial Officer.
Thanks, Tim. My name is Chris Uchida. I'd like to thank Alex and Lindsay for all their hard work putting all these materials together. This, by far, is the best-looking slide that we have in this deck. If you guys want me to stay here for a little while, feel free. I think if you guys got handouts, you can take that home with you and keep that as a souvenir of this day. This does say CFO on there. I don't know if you guys heard the correction from Benson earlier. CEO is what I like to go. Mac, Angela, I need to talk to you a little bit later. It'll be quick and painless, I promise. No, Chief Financial Officer is what I am today. We'll stick with that for a little while. Hopefully, we can talk about changes.
We said we weren't going to do anything material here. So no big 8K after this is coming out. CFO is where we're going to stick for today. During my presentation, really three things I want to be able to get through. I want to talk about Palomar 2X. Even though the NCAA tournament starts in about 30 minutes, we're not going to talk about the three-ball. We're going to stay at Palomar 2X. I want to talk about 2025 guidance. I also want to talk about the stability of our model and how we think about the model internally and how we build that. First, I want to revisit what we presented at the Investor Day a couple of years ago or in the summer of 2022. It's nice to be here in person. If you guys remember last time, I was infected with COVID.
I was just a big head on the screen like that last picture. Palomar 2X is a translatable financial objective that we believe provides a great operating philosophy for our investors and our teammates. We believe that every single team member contributes to the goals related to Palomar 2X. We believe this is going to be great for all of our shareholders. It is also very important we remember that every single teammate is also a shareholder of Palomar, something we're very proud of. When you look at Palomar 2X, the core principles remain unchanged. We plan on doubling. We plan on doubling our capital base. We plan on doubling premium. Ultimately, we plan on doubling the bottom line. What we have done is, excuse me, all of that really starts with underwriting and goes through operations and the investment portfolio.
We thought it was simplified and straightened out the metrics a little bit. We're just going to point to doubling adjusted net income. That is the item that we provide guidance on. That is what we think the street really holds us to. We felt it was a more simplified metric to just point towards adjusted net income and focus that. I think that's the bottom-line goal that everyone here is striving to achieve. When we look at Palomar 2X, as we leave here today, the goal for Palomar 2X is to double adjusted net income in an intermediate timeframe of three to five years while maintaining an ROE of greater than 20%. Like I said, no real fundamental changes. We're still planning on doubling. We just feel like we'd make that metric a little bit tighter, get everyone on the same page.
It ties up with the guidance. We feel like that fits our model a little bit better. The one thing we have not talked about yet is that with this goal, we still have some levers in our quiver when we think about reinsurance. We are very conservative when we think about the reinsurance portfolio and how we use it. Right now, when you look at it, we have started to take a little bit more under our balance sheet. We will continue to do that more over time. If you look at that crop business, we were about 5% participant last year. In 2025, we were going to be about a 30% participant. Quota shares are not the only lever that we have in our model. We can also adjust our excessive loss.
We can adjust the structure, the retention, terms, and conditions to make it a little more favorable for us as we continue to grow and add more to adjusted net income. We can also adjust quota shares, like I talked about. We can also adjust the line size, like Mac likes to think about. As we grow, we can start writing larger lines. We still have those relationships, but instead of writing a $1 million line, maybe we'll write a $1.5 million line. These things will change and evolve over time, but allow us to leverage our capital base more as we continue to grow. I'd be remiss if I didn't look back at where we were at the last investor day and think about what we presented before.
If you remember, at the last investor day, what we presented to the group was really a model or an illustrative of where we thought we'd go or what we wanted to double. It was a model of adjusted underwriting income, excluding CATS, excluding overhead. We thought this was a high watermark with very conservative assumptions in it that did not take any benefit for scale into the model. First, we want to present that and just really show how we did. The goal or milestone, as you will, because as Mac pointed out, I like to think about this as an operating philosophy. These are not set targets where we hit the target and everyone goes home, right? Everyone knows it's what have you done for me lately. That's how we think about it. We want to keep growing this.
The goal off of that day was $220 million. You compare that to our most comparable metric, we beat that by 17%. That's pretty good, right? That was just an illustrative. We want to show you some real numbers. The most comparable metric is adjusted underwriting income, X overhead, X CAT. We beat that by 22%. Another good metric, just straight adjusted underwriting income. Include everything else in there. We beat that by 20%. Compare that to the new metric, adjusted net income. Yep, we're ahead of that by 27%. Look at ROE. ROE, 22%, 10% ahead of our goal. It is also important to remember that 10% ahead also includes the capital we raised over the summer. It's a little bit of drag. As we pointed out, that capital is not expected to be fully deployed until the end of 2025.
We're still getting a nice return on that capital before it's fully deployed. We've done some things to help deploy that. One of those things we announced today, apparently we're doing another acquisition, a little small acquisition. That'll help deploy some of the capital. We also did the surety acquisition a little earlier. That will also help deploy that capital. We're in the process of deploying. We are going to continue to leverage that capital to grow the bottom line, which ultimately grows our balance sheet and overall results and hopefully raises the share price. Looking at guidance for 2025, we put out a range of $180-$192 million of adjusted net income. That implies at the midpoint, 39% growth and an ROE above 20%. Additionally, it includes CAT losses of $8-$12 million in our model.
We felt that since we are pointing towards adjusted net income, we want to put everything in there. We want to make sure that we're all thinking about the same way, that we're all aligned. Additionally, that CAT target or that CAT loss assumption of $8-$12 million also includes all the significant underwriting changes that we've made in our portfolio over the last few years. It gives us confidence in putting out that metric, but it also only represents about three to four times our average adjusted annual loss that we expect to have in our portfolio. It has come down significantly over the last few years. Again, three to four times. We feel very comfortable with that number and that metric, and we think that we do have a very strong ability to achieve that.
Looking to the bottom part of this chart, what you will see is we kind of put the metrics or the goals, milestones that we need to achieve off of 2022, 2023, and 2024. What you will notice is that the midpoint of that guidance of $186 million, we are ahead of the 2022 number. So we will achieve, or we expect to hopefully achieve, the 2022 goal, Palomar 2X goal within three years. The other thing that you will notice, anyone that does math on a daily basis, we're right on the heels of 2023. We do have the ability to punch it. I'll say it's in our range. We've got a puncher's chance at hitting that objective in two years. I'm not changing the goal. I'm just pointing out that we may hit that in two years. Our goal is still three to five years.
The next piece of this will be obviously 2024. We want to think about the things that we need to do to kind of hit that goal of $267 million. That is our objective. Two things I would add to the slide. I talked about reinsurance a little bit earlier. That is still a lever that we have available to us to kind of pull as we start moving forward. When you think about just quota shares, not the other pieces, excessive loss limits, just quota shares in our 2024 numbers, we had about $50-$65 million of underwriting profit that has been ceded off to the reinsurers. Over time, that will come back onto our balance sheet, or come onto our balance sheet, not back onto our balance sheet. We've never had it on our balance sheet in the past. That book will grow.
That number will grow. It's not like we're going to just take this away from reinsurers. Reinsurers are a key partner of ours. Over time, our capital grows. We will continue to utilize that in our portfolio and in our results. Again, that doesn't include excessive loss opportunities. It doesn't include line size opportunities. It also doesn't include the investment portfolio opportunity by keeping that cash on our balance sheet. It's important to think about all of those levers as we continue to grow as an organization and we continue to leverage our portfolio. A lot of these lines that are growing at a faster rate, whether it be crop, casualty, inland marine, are much more attritional in nature and do not have the shock associated with them like our CAT business does.
We can leverage that capital for a longer period of time as we can grow. That'll be great for the investment portfolio. The other thing Mac talked about it, Ethan talked about it. When you think about our reinsurance, or excuse me, our net reserves, is the fact that we are still net reserves are a very small portion of our overall balance sheet. When you look at our capital base, net reserves only represent about 31% of our overall capital base. That's a very small percentage. Excuse me. 21% of our net capital base. Where I'm going next, 31% of our net reserves are from our gross number. We are only on our balance sheet retaining 31% of our overall gross reserves. That has been great leverage of reinsurance, and it shows in our historic results.
The one thing we do not talk about is that let's say there was some adverse development in our results. We would only have to take 31%. Yes, it has been great for historic results, but it also protects the future. How we can show consistent earnings in the future is that even if there was some adverse development, only about 31% of it would affect our P&L. We feel very comfortable with the consistency that it drives and the reinsurance structure that we have put in place. I was hoping to have a chalkboard for this so I can point and draw and do some stuff, but technology today does not allow that type of thing to be done. Now into the modeling sections, right? What we will say is at Palomar, now it is crop season. We do have some seasonality in our model.
It's going to show up. We've tried to highlight where it's going to show up on here. I'm going to spend a lot of time on it. Anyone can feel free to follow up with me later and talk about this. We're trying to be as transparent as possible about how we think about this. I talk about it a lot and how we model. We model off of gross earned premium. That top line that you see there is our gross earned premium line. On a sequential quarterly basis, it used to be very consistent. It grows on a quarter-over-quarter basis. Before Q3 of 2024, I would still expect that to happen. When you look at this on an annual basis, our gross earned premium is going to grow. We plan on growing. We're growing the top line. Gross earned premium is going to grow.
The first metric that you get to when you think about this is going to be reinsurance. That reinsurance cost, ceded reinsurance, drives our net earned premium ratio. In 2024, on an annual basis, we ceded off, or our net earned premium ratio was about 36.5%, meaning we ceded off about 63.5% of our business to the reinsurers through excessive loss and through quota shares. That is why we draw that line right there. That is the first and most expensive piece of what we spend our money on is reinsurance. We show it there. We model off of it, off a gross earned premium, and you can see this trend there. Historically, going back to Q3 of 2023, that low point has been driven by excessive loss. We still buy excessive loss. There's still going to be a driver of that.
As our book has diversified over the years, it has really started to be driven by the quota share business. You can see that with crop, right? In 2024, we ceded off 95% of that book. That drove the low point in Q3 of 2024 a little bit more. That trend is going to continue, right? You're going to still see a dip in Q3, but kind of like Q3 of 2023 on, it's going to go up. You're going to see a steady increase in that trend over time. For the year in 2024, it's about 36.5% based on our participation changes with crop, where we're taking 30%. I expect that overall line to move up to where it's a little bit closer to 40% for the year, right?
It's going to move up, but it's still going to have this trend where it dips in the third quarter. I expect to see that same type of trend that you see there, where it actually, you look at that gross earned premium, it's going to spike a little bit or have a little bit of a mountain in the third quarter with that strong dip of net earned premium in the third quarter as well. You can actually also see on there that the third quarter for gross earned, or excuse me, the fourth quarter for gross earned premium is actually lower than the third quarter. We're talking about crop growing. Crop's going to be $200 million this year. That dynamic's going to be there.
For people that model us, I want to make sure that you're looking at your gross earned premium and you kind of see that little bit of a mountain in there, right? The trend line, when you look at it and you map this out for four more quarters, is going to be upward. There is going to be a spike in that gross earned premium in the third quarter. There is going to be a dip in that net earned premium ratio in the third quarter. We want to make sure that is something that people think about and model. The third quarter is going to look different. The model itself, when you look at it, is going to be very stable on an annual basis. People that care about quarters, anyone in this room care about quarters, that is going to look different.
I want to make sure people think about it. I do not want people coming to me after third quarter results and being surprised. We are trying to be transparent. It is going to be there. I do not want to say I promise, Benson, $200 million. That needs to be delivered. We plan on doing that. That is going to be in the model. This slide kind of wants to show dollars and percentages. This slide is that net earned premium dollars. Again, strong, consistent growth. You can see back at Q1, Q2 of 2023, a little bit flatter. That is kind of as fronting was getting a little more mature. You can also see that dip in the net earned premium ratio going down. You also, we highlighted there Q3, 2023. If you guys remember, we had about a 30% increase in our excessive loss.
That's part of the reason there was a big dip in that third quarter. Again, strong net earned premium growth from there, right? Strong net earned premium ratio growth, strong net earned premium dollars growth. We expect that trend to continue. The one thing that I'll point out that the historic chart doesn't show is when you look at that net earned premium dollars, it's nice, consistent, sequential growth. Crop, $200 million. I expect net earned premium dollars to actually be higher in the third quarter. It's going to have that same type of mountain effect in the third quarter that gross earned premium does. Mathematically, it makes sense. You guys play with it, you'll see it. I would expect net earned premium to be higher in the third quarter and actually lower in the fourth quarter.
I want to see that same trend in those ratios when you look at it. That's kind of what we expect to see in the dollars. You still see that dip, but again, I think you looked at Benson's, sorry, pointing to these people, Benson's over there. When you look at that chart, right, we earn a significant portion of that premium in the third quarter. High dollars means high gross earned premium. Even though we're only keeping 30%, it's still going to result in high dollars from a net earned premium standpoint. Don't get me wrong, excessive loss still third quarter, but excessive loss is now the smaller component of what we see to reinsurers. Most of it we do now is quota shares with the fronting, crop, casualty and the marine.
That dip is still going to be there, and it's still going to go back up. Like I said, I expect kind of closer to 40% for the year, but still a dip in the third quarter. When you look at those ratios, that's really what I expect. Really, this model, the biggest changer in our model is really this net earned premium ratio. Like I said, 36.5% last year. It was 34.1% in 2023. I expect that on an annual basis to be around 40% for the year. Same pattern that you're seeing here. Kind of work on that pattern, work on that spike in dollars and net earned premium. I think you get there, but I think if there's any questions, I'm happy to talk about it. Next piece of the model, getting into the expenses.
Acquisition expense, even though that ratio on a gross earned premium basis kind of goes up and down, it's actually been pretty consistent on an annual basis. It was about 10.6% in 2023. It was about 10.7% in 2024. I would expect it to be right around there for the year in 2025. You're still going to have some stuff move around, right, on a gross earned premium basis. We've circled it. A lot of that premium is going to be there again in the third quarter. It's going to push that ratio down. Maybe it's a little bit higher in Q1, Q2, and Q4. Definitely lower in Q3. You're going to see that same type of trend. When you look at the dollars, the bars represent the dollars. We're going to expect to see the dollars continue to increase sequentially over time.
You should expect to see that in your model, right? There is some noise in these ratios, but the dollars, especially for acquisition expense, should show nice sequential growth. That is the one main thing I want to point out about the acquisition expense. That is how we think about it. That is what we think will happen with acquisition expense. Again, it will be pretty much flat for the year, but dollars will go up. Acquisition expense will dip in the third quarter. Other underwriting expenses, you are expecting to see the same trend. When you look at this, when you look at that ratio to gross earned premium on an annual basis, 2023, it looks pretty flat. That number was actually 6.8% for all of 2023. For all of 2024, it was actually 6.8% too. This is starting to show crop on a gross earned premium ratio basis right here.
That dip to 5.9, you're going to see that dip again in the third quarter of 2025. It's just the natural way. I expect this to probably be flat for the year. If it comes out 6.8% again for the year, that's what I expect. You guys know this. We're investing in our operations. We're investing in tech. We're investing in our teams, claims, all of these things. We're investing in. I expect that to be flat. Those bars, again, represent dollars. I expect it to continue to increase over time. There's a little noise, something going on in Q2 of 2024. I think we hired a bunch of people. We might have had some recruiting fees. I'm not going to blame anyone specifically, but there is a reason that Q2 of 2024 was a little bit higher.
Again, I expect the dollars to increase sequentially over time. When I look at Q1 of 2025, apparently we did an acquisition and hired some people. Q1 is going to have a little bit of an increase. I also heard about some other AI investment that we might be buying. Forty-one, so do not look at it for Q1 numbers, but Q2 of 2025, they will probably also increase in that or in that other underwriting expense. Again, strong sequential growth. We are investing in our teams. Net earned premium ratio expected to be flat, but a dip in that third quarter. Those are the key pieces of our model and how we really think about it. All right. Kind of trying to wrap all of it up into one spot. We tried to kind of show everything here. Still historic.
We did not kind of put this out in front of you, but we wanted to make sure we laid out these trends. The bars represent gross and net earned premium. Net earned premium obviously being the dark color at the bottom. We expect the gross and net earned premium to continue to increase. No shock there. We are a growing company. We are planning on growing our earned premium and written premium. The third quarter will show some noise. I expect a spike in that gross earned premium from a dollar standpoint for both the net and the gross. It is going to spike in the third quarter. What I expect is the fourth quarter to be lower.
Like overall, when you look at it over four quarters, it's going to be a nice trend, but I expect that spike to happen in the third quarter with a dip back down in the fourth quarter. If you look at it on a nice trend line, it's still going to show nice growth. Again, when you look at that gross and net earned premium ratio, I expect a dip in the third quarter. Overall, I expect that ratio again to be 40% for the year versus 36.5% last year. Again, it's going to show strong growth, but a dip in the third quarter because of all that crop premium that's going to be earned in that quarter. The next piece of this, we kind of same bars, so same gross and net earned premium, but we wanted to show the expenses.
You can look at acquisition expense kind of running across there. Again, we expect the acquisition expense from a dollar standpoint to continue to increase. I expect kind of to be around that 10.7% on an annualized basis, a dip in the third quarter. Similarly, adjusted underwriting expenses, we expect that to be flatter for a year. Again, 6.8%-ish for the year, but a dip in that third quarter. That is kind of what we expect on a gross earned premium calculation basis. Pretty straightforward. I know there is not a lot of moving pieces there. I think even though people complain, there is a lot of moving pieces within our overall model. I have tried to break it down as much as possible for you guys to kind of see what we expect to happen even with crop, earthquake, inland marine, casualty, fronting, all these things coming together.
This is kind of what we expect in our model, and we tried to help as much as possible. We believe that this model gets us to that midpoint on an adjusted net income basis of $186 million. The one thing I did not spend a lot of time talking about today is losses. We do spend a lot of time with the group talking about losses. Again, on a normal combined basis, we expect our loss ratio to be in the low 30%, up from where it was before. Crop participation is part of that. Again, you will see a spike that third quarter or that third quarter, that gross earned premium, our 30% participation in crop does not come on for free. Those losses will show up there. I expect something probably closer to 40% in that third quarter.
Doesn't change my view on the full year of about 31%-ish for that loss or 30-31%, low 30s for the year. I expect a spike in the fourth quarter from the crop business coming on. I want to make sure that people thought about it and think about pointing that out as they think about our model. Next, not going to spend a ton of time on the investment portfolio. I view it as a nice gravy on top of our overall income. It's a great, nice to have. I think we are still going to be very conservative in our portfolio. I think the one thing that we do look at is starting to potentially leverage it more, right? It always has served a very important role in our portfolio. It provides a nice ballast of all of our earnings.
The one thing that we look at as we get into more stable lines of business, whether it be crop, whether it be in the marine, whether it be casualty that do not have the shock associated with them, especially casualty that has a longer tail, we can start looking at leveraging our investment portfolio a little bit more than we have in the past. It is still going to be very conservative, but we think there is room for improvement. We have people on our team looking at it on a daily basis. It is something that we are going to look at more, especially as the base of our business is getting more and more solid. We still have to have that capital available to pay an earthquake, but it is not the preponderance of what we do anymore.
We can look at all of our specialty lines and leveraging our investment portfolio a little bit longer, a little bit more nuanced. We just want to show the slide, show where everything is, but again, very conservative, but it's something that we think that we can start doing a little bit more with over time. Last thing I'm going to leave you with, and there's not a slide on this. I didn't talk a lot about the AAP or the Advanced Ag acquisition. We did these slides and this before. We knew if we were going to be able to announce it or not. What I would say, don't change your models. Your models will still work. We expect for 2025, we expect the Advanced Ag acquisition to be neutral to overall results.
What I would tell you is that there will be some geographic changes on the P&L because of it, right? This is already a partner we're working with on a day-to-day basis. Best way to think about it is that acquisition expense will move to other underwriting expense. Basically, instead of paying an acquisition expense to a partner, we're basically going to have all that team on our books. Again, it'll be neutral for the year. If you model it just like I said, you'll be right. You'll probably get in Q2 and you might get acquisition and other underwriting expenses wrong, but your expense ratio will be right. I'm not going to spend a ton of time with it. Probably with Q2 results, we'll have made better numbers and we'll be able to give you a little more information at that time.
But right now, the model works just because I know people will ask me about Advanced Ag. The model still works. It's really just going to be a geographic change for 2025. We'll talk about how it levers and performs in 2026 and beyond later on in the year and maybe even in 2026. Overall, if you do that with your model, expect it to work. All right. With that, questions. I'll stay here. I'm going to monitor. All right. All questions go to Mac. Dave? Oh, thank you.
Hi, thanks. Dave Motemaden from Evercore ISI. Just one quick one. You spoke about the risk retention and increasing that. What is that today blended across your entire book? I know crop is 5 going to 30, but what is that today across the entire book and where is the target?
Where do you see that going to within the new Palomar 2X plan?
Yeah, I think the target very long term is we probably want to keep all of it on our balance sheet. If I told you we did that today, we don't have the capital to do it. We would need to go raise capital to do that today. It is not going to happen overnight. The other thing to think about is that these are strong reinsurance partners that we have relationships with on quota share and on excess of loss. We want to make sure that we treat them appropriately. We will telegraph this well to them. We will make sure that they understand what we are doing. I think when you think about it mathematically, overall, we still seed off.
When you take our whole portfolio, we still cede off the majority of our portfolio to reinsurers. Over time, we'll start decreasing it. Some of our lines we are taking more of, we'll be taking 60% of versus 40% of previously. Over time, we will continue to do it, but it's going to be very deliberate, right? We want to make sure we're building up a solid, profitable base of business that we will be able to leverage and do over time. It's not going to be, yes, you think about it, this is stroke of the pen type stuff technically that we can do, and we don't have to grow the book. We don't have to add people to do it. It's a nice thing that we can do, but we're going to be very deliberate. We're going to treat our reinsurance partners right.
They're a strong partner of ours, but it'll happen over time. We're not going to commit to a certain thing. Reinsurance markets change. We will look at it over time, but the goal is yes, to start doing it. It's not going to be, call it, 0% seeded at the end of the next three to five years. It's going to be slow and deliberate.
Yeah, Dave, if I could add, you have to remember there are annual reinsurance contracts in various lines or in various stages of development and evolution. A good example is flood. We've gone from initially taking 10%, now we take 50%. I agree with Chris. It evolves. I think the other thing, though, is if we collapse these quota shares at some point, we're not going to stop buying reinsurance on those programs.
We will have some type of stop loss or excess of loss. It is really going to be a circumstance where the risk transfer paradigm changes some, and it does afford us the ability to retain more of that risk and get all the levers that Chris is referring to, but we will still be mindful of risk transfer and insulate ourselves from shock loss. It will just be a different type of mechanic.
Got it. That is just the, I think, Chris, you had mentioned $50 million-$60 million of underwriting profit that you guys are ceding off right now. That is sort of what we are targeting here over time. Is that the right way to think about it?
That was the 2024 number. I mean, that was if we were unrolling, non-fronting, let us be clear on that.
If we unrolled or unwound some of those quota shares, that's what we're looking at. I expect it to grow, right? The lines that use quota share reinsurance are all going to be our fastest growers, right? Casualty, inland marine, crop, our fastest growing products. That's a bigger number in 2025, even bigger number in 2026, and so on. Target what you want, but yeah, it'll grow.
There would be some offsetting expense associated with that with excessive loss cost.
Got it. Thanks. Just on the outlook, the doubling over three to five years, just wondering what that considers from just a reinsurance pricing environment. I mean, you guys doubled it from the 2021 base, and that was in one of the most difficult reinsurance markets that we've seen, at least I've seen.
I guess, how should I think about that that's baked into the outlook and maybe just other high-level comments on what makes you get there within three years versus five years?
Yeah, I think it'd be good for Jon Knutzen to give some thoughts on what he's seen in the reinsurance market. I think our assumption for this year is that it's flat to down 5%. I think we are not making a call on a material softening in the out years to help us achieve that. As Chris pointed out, it's kind of a linear progression of top-line growth, operating leverage and scale, and net neutral reinsurance, excessive loss reinsurance margin.
With respect to kind of the near-term outlook, Mac and I were over in Europe a couple of weeks back. We are evaluating secondary market trades with respect to cat bonds.
We feel pretty good about the outlook that we've already provided, as I mentioned in my statements. I'd say kind of further out, as you think about that, take a look at how we responded to that harder market the last couple of years. Regardless of what the reinsurance market is, I think we've constructed a business model that allows us to allocate or focus on those segments of the market where we can get primary pricing increases if and when needed should reinsurance pricing change. No better demonstrated than how we navigated the harder market the last couple of years. Thank you.
I think one other lever is just in our cap retentions. I think there's the ability on the quake side certainly to explore taking that up some.
When you look at the lowest layer of the XOL, whether it's all payrolls or the quake only, it's a rate on line that's certainly higher than our ROE. As our balance sheet has grown, the capital place has grown 55%. We're not shifting our exposure disproportionate to some steadfast rules we've used around net retention relative to surplus or earnings.
I was hoping you could walk us through the reinsurance tower kind of one more time. I get questions about this on a regular basis. Maybe give us some examples that would help illustrate this because it kind of looks like there's essentially kind of three different types of risks, right? That earthquake, hurricane, and then other with slightly different retentions. One of the questions I've gotten repeatedly is sort of like how that cap bond actually works.
Is it sort of the first trigger and then it goes away? I know we've talked about this in the past, but I get enough questions about it. I think it's probably worth it to talk about it to the general public.
Yeah. As you're looking at the structure graph, if you read it more from left to right, that is the priority level, like the order of operations with respect to how it'll apply to the loss. A California earthquake loss is an example. First, flow through our California commercial earthquake quota share. Any recovery from that would reduce the subject loss to either of the next two towers. If the California earthquake loss was in excess of $325 million, it would also trigger recovery from the cat bond, reducing the subject loss to the core tower you see on the very right.
That's how all of that works.
I think simplistically, Paul, if there's an earthquake, our first $20 million will be retained by Palomar, say, for the 15% that we cede off to the quota share, and then the rest of the tower kicks in. If there is a hurricane, the retention is $15.5 million, both those numbers on a pre-tax basis, with protection up to $100 million. Hawaii hurricane, as we sit here today, it exhausted $850 million. As long as it's inside of what we're estimating to be over $3.5 billion at 6.1 for an earthquake, our loss is $20 million pre-tax.
If there's another non-earthquake or hurricane that limits up to the $100 million?
$100 million. Yeah. As a reminder, Jon and I both pointed out, our 250-year PML is $80 million. Yeah. Our 250-year, sorry, I was giving feedback.
Our 250-year wind PML is now $80 million. That's $100 million is well beyond the exceedance probability curves.
Presumably, over time, some of these changes could be the retention could go up over time as part of this.
For quake, for sure. We went public with a $15 million earthquake in a capital base that was a couple hundred million dollars. We've trebled that, if not quadrupled that, and we've moved up the retention to $5 million. That's logical. I think by nature of the fact earthquake is a binary exposure, it's not exposed to the frequency of severity events that you see in a hurricane. I think there's a scenario, though, as we continue to pull back our exposure on the wind side, that the all-other perils retention could come down.
It's just a matter of the cost and, yeah, it's really a matter of cost and expense and appetite.
Okay. Again, these are all over the place. I want to start with Ethan. Do the casualty pricing actuaries and reserving actuaries use the same assumptions, or is there more of a margin on the reserving side?
I guess I would probably say they generally start in the same position. As the reserving models start to gain experience, there's an implicit margin that gets built due to the bias towards reacting towards the adverse development swiftly, but not recognizing the favorable trends as fast. From an expected loss ratio standpoint, we do tend to have a little bit of a risk margin within our reserving models.
That would not necessarily be in the pricing discussions, but it really is dependent on line of business and really the conversations with our underwriters and other experts that understand the market at that level.
Okay. Thanks. Then, Chris, one of the points you made early on in the Palomar 2X, you talked about doubling premium. I do not know if I am reading too much into that, but is that on the same timeframe as doubling adjusted net income?
No.
Darn.
No. I mean, obviously, the one thing I would say to that, though, is obviously, at some point in time, we will need to double premium, right? I think we will. I am just pointing out that along with doubling adjusted net income, these things are all factors that are applying to that. We are going to have to double premium. That also means that the capital base will double.
Adjusted net income will probably double during those timeframes. Same investment income will probably double as part of that. Not necessarily on the same timeframe, but will need to double during that at some point in there. That could be longer. That could be shorter. The other thing I'd point out is that when you look at our adjusted net income and the way we use reinsurance and going back to Dave's question of that $50-$65 million of quota share type underwriting profit that we still have that we're seeding off to reinsurers, we do believe that we have the ability to grow our bottom line at a faster rate than the top line.
That's something we always make sure to point out to folks is that because we are such a heavy user of reinsurance, we still have that, call it tool, in our toolset that we can still use and lever appropriately and deliberately, but we do have that to lever. That also goes to, as Mac talked about, potentially even the retention on the earthquake side, right? It still sits relatively low. Usually, the guidepost that we give from a reinsurance standpoint or from a retention standpoint is we want to be within 5% of our capital. We want to be within a quarter of earnings. Last quarter's earnings was over $40 million, assuming we can grow that, then we are well within that. There is an opportunity there. Like Jon pointed out, we want to make sure that we understand what's going on in the reinsurance market.
We're going to look at all the factors and make sure that we're getting the appropriate risk-adjusted return on any type of shift that we make and make sure that we're appropriately using our capital in the right spot. Over time, everything will double. The only one we're committing to is adjusted net income in a three to five-year timespan.
Okay. One question for Jon, if I can. Is there any advantage to adjusting your renewal schedule so you don't get caught up in the groupthink that was such an issue a couple of years ago?
It's definitely something that we've explored. Of course, there are some years that it works in your favor too. It turns into more of a logistical problem once you get sort of stuck around a particular renewal. How do you move everything to a different date?
Something we're evaluating, but no immediate plans to make any change.
Any other questions? Paul?
A little bit outside the box. One criticism of companies like Palomar is the use of TPAs, which are generally considered not the most effective claims organizations. Is there thoughts or plans that certain lines of businesses might end up getting large enough that you'd actually start building your own claims operations?
Yes. Very good question. I think Althea teased it a little bit. We are continuing to invest in claims from both the people and processing systems with the designs for lines, most notably David's E&S Casualty, to take that in-house. We've hired a heckload of crop claims professionals as well, so that will be we won't do it for earthquake. We won't do it for Hawaii hurricane. It's a good question.
It's a lot of giggle progression, and you'll see the first steps towards that the second half of this year.
If it decides to open an office in Hawaii, I volunteer for that one.
Yeah. Yeah.
I can be hired too.
Yeah. I don't know if it's on, but it is worth pointing out, and it was said briefly, but from a cropper standpoint, those are, as of April, they will all be in-house. We will not use a TPA for the crop insurance business. Yeah.
Pablo.
As you've expanded the growth beyond earthquake and just increased the overall size of your writings, do you think you've gotten full credit from the reinsurers for where your portfolio is now, or do you think there's still scope on the margins to potentially get even better terms and conditions down the road?
Oh, yeah.
I mean, there's definitely potential improvement in the margins on the reinsurance side, hold aside the excessive loss. I mean, a lot of these quota shares are brand new. Trisha Panegaton, who runs Seeded Re on the casualty side, has done an exceptional job getting us up and running. Look no further, the traction we got with a brand new E&S Casualty quota share that she and David put in place at 11. As those books season and you build up a bank, there's definitely room for improvement in those economics. Yeah, we've by no means top ticked that.
Any other questions? David?
Just had a question just on the reserving side. I think you had mentioned it a little bit earlier, Ethan, just recognizing bad news first. It looks like there was some adverse development on other liability occurrence in 2024.
Not much, and I know it's a small part of the book. I think it's like, what, half other liability occurrence, half other liability claims made. Just wondering if you could talk a little bit about what was driving that adverse development there.
Yeah. I would say I think on paper, it's adverse development when you're looking at the figures. Just given the conservative approach to our modeling as our book is growing and new exposure periods come online, we are holding expected loss ratios flat, and we are holding our reserves flat. In the one in five or one in seven exposure periods that we do have a pop early on, we are reacting to that very quickly. We aren't giving the commensurate favorable experience on the other exposure periods that may be performing better than that expected loss ratio.
When you see kind of if you're looking at Schedule P or other publicly available numbers, it's a little bit of just the conservative modeling approach that sort of allows for the ebb and flow on the conservative approach. Does that answer your question, or was there some?
Yeah. No, that makes sense. Thanks.
Please. I'm going to ask the elementary question. That is, as you expand from your core business, the earthquake and some others, into the additional, sometimes adjacent, sometimes not so adjacent segments of the markets, what are the criteria before you select, saying, "Hey, I'm going to make a move here"? For example, let's say, what about the market size? What about your potential talent reserve? Maybe there is less competition, and maybe the pricing is hard. I'm just imagining from an outside.
If you can elaborate your thinking process of getting to these fields, and then how do you grow and thrive, that would be great. Thanks.
Yeah. It's a great question. I think Kyle Morgan touched upon it a little bit earlier. We have a team that's constantly assessing markets. One of the key criteria for anytime we see a market is that there's some measure of dislocation or need of innovation. That could be capacity scarcity. It could be hardening pricing, which obviously leads to the potential for us to generate compelling risk-adjusted returns. If that's identified, there has to be some component of existing infrastructure that we can leverage to go into that market that would provide us for speed to market and execution efficacy.
If there's not, then we better figure out how to find talent to go into that market. I think if you look at the first six, seven years of the business, it was premised around natural extensions into segments of the property market, earthquake into Hawaii hurricane. You could leverage reinsurance, similar distribution strategy, similar type of coverage, and then it's a binary risk. We moved into builders' risk and then excess natural property. Pretty sequential. I think if you've seen us evolve now, part of the reason for today is to show you that there were ways for us to enter into markets, but we needed to have talent. A lot of those people that have been on stage today are the examples of crop was a market that Jon Christianson and Knutzen had long-standing history in.
We have the ability to make an investment in a strategic partner, but we needed leadership, and we got that in Benson. I think that's what you'll see more and more now as we go into markets. It may not be as linear in the progression or as adjacent as we will be bringing in talent, or we might be buying talent in the case of what we did in Surety. Surety was a market that we had looked at for several years and thought about building, but by nature of the underwriting, the local market underwriting, and the local market claims handling, it was a much better buy than build. Yeah, it's a good question, and it's what we constantly are doing. Any other questions? All right.
Closing remarks.
You want me to handle those? Yeah. As a new CEO, should I be doing those?
You know something I do not. Chris was only willing to wax poetic about Mark's madness because his alma mater got blown out by 30 in the play-in game. Yeah, yeah. Same place your school is. At home. All right. Thanks, Chris, and thank you to all of the Palomar team for your terrific work today and also in the preparation for what I certainly feel was a really productive session. My remarks will be somewhat brief, but I am hoping they can put a little bit of a bow around our story. I hope these are themes that will have resonated today, if not been beaten, browbeaten into you. First off, that this Palomar 2X is indeed a philosophy that we live by and one that is going to sustain our operating strategy and, most importantly, our profitable growth.
We have several growth vectors, but those growth vectors are coupled by the levers that we can pull as the business matures, as our balance sheet grows, and our book seasons. We are going to remain conservative and deliberative. Maybe that is our new word, deliberative. How and when we pull them, it does not happen overnight. It does when we have conviction and scale. We are going to continue to invest across this organization. We are bringing in the best and the brightest. Angela and I were talking earlier, comparing it to 2022. We brought in some amazing people in this room, but you got to see them also in Southern California, in Minneapolis, in Amarillo, Texas, or Lubbock, Texas as well. These investments are going to allow us to scale and inform our underwriting strategies and overall risk transfer strategy.
Those two things, the conservative underwriting and the comprehensive risk transfer, are going to provide stable earnings and consistent results. It is what is really going to ultimately make us into a specialty market leader. That is our goal. I think Rudy said it earlier. I have tasked him to build an infrastructure for a much larger company. We want to be a much larger company. We are going to be a much larger company. We are not going to do it overnight, but we are going to get there. I cannot thank you enough for your time. We are excited to tell you the story. We are excited to answer more questions at lunch. Again, thank you for your time, your partnership, your investment in Palomar, and we will talk to you at the end of Q1.