Good morning, and welcome to the Palomar Holdings, Inc. third quarter 2019 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference line will be opened for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir.
Thank you, operator. Good morning, everyone. We appreciate your participation in our third quarter 2019 earnings call. With me here today is Mac Armstrong, our Chief Executive Officer and Founder. As a reminder, a telephonic replay of this call will be available on the investor relations section of our website through 11:59 P.M. Eastern Time on November 12, 2019. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans, and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements.
Such risks and other factors are set forth in our quarterly report on Form 10-Q that will be filed with the Securities and Exchange Commission today, November 5, 2019. We do not undertake any duty to update such forward-looking statements. During today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release. At this point, I'll turn the call over to Mac.
Thank you, Chris. Good morning, everyone. Our third quarter results demonstrate the successful execution of Palomar's strategy and focus on profitable growth. We continue to enhance our product portfolio and expand our geographic footprint into markets where we can deliver differentiated products that serve the needs of our customers and generate attractive underwriting income. This is best evidenced in the third quarter by our year-over-year gross written premium growth of 65.6% and our adjusted net income of $9.6 million and net income of $7.5 million. Our residential earthquake products, which comprise 53.9% of our gross written premium, generated 66.2% growth compared to the third quarter of last year. As discussed on our second quarter call, the Ridgecrest Earthquake in Southern California in July, a third quarter event, caused a surge in demand for our residential earthquake products, a phenomenon that is common after earthquake events.
In the third quarter, California residential earthquake new business policy count was 62.5% higher than the second quarter of 2019, and overall third quarter new residential earthquake policies increased 50.4% sequentially. Third quarter residential earthquake new business policies increased 87.6% over the prior year. This increase in demand is typically most pronounced the first few months after an event, also historically established a higher new normal level of production as we appoint additional agents. During the quarter, our commercial earthquake business grew 73% year-over-year. Our sustained growth in this business is due to a combination of a stronger rate environment with an average rate increase of 9.2% during the quarter, as well as expanding distribution on the heels of our achievement of an A.M. Best Financial Size Category VIII. Our wind-exposed business also demonstrated continued strong growth during the quarter, led by our commercial all-risk division.
The all-risk division grew its gross written premium 108.6% year-over-year and also saw existing policies renew with an average rate increase of 8.8%. The composite rate increase on all commercial policies, wind and earthquake alike, was 9% during the quarter. Growth in our wind products was also driven by the continued expansion of our distribution network across our wholesale, retail, and partner carrier channels, expansion into new states like North Carolina, where we recently introduced our specialty homeowners product. As a company, we remain focused on developing differentiated products to serve acute market needs, I'm pleased to report that the contribution from our newest product lines continues to grow. Our flood business grew 172% year-over-year, our recently introduced inland marine and assumed reinsurance products also grew rapidly during the quarter, albeit from a smaller base.
Overall, non-earthquake products represented 33.4% of our gross written premium during the quarter grew 62.1% year-over-year. These products serve markets that we believe are multiple times larger than the earthquake market, thus, we expect them to represent an increasing percentage of our overall business mix over time. Overall, we believe the unique value that we offer to insurers and producers is best demonstrated by our strong premium retention rates. Average monthly premium across all lines of business was 87% during the quarter, compared to 83% during the third quarter of 2018, was headlined by our commercial earthquake and all-risk products, which combined for premium retention of 91% in the quarter compared to 75% during the same prior year period.
Generally speaking, the third quarter historically involves the highest frequency of weather events that potentially impact our portfolio due to seasonal hurricane activity in both the Atlantic and Pacific Oceans. This quarter, the Atlantic was impacted by, among other events, Hurricane Barry and Hurricane Dorian, as well as Tropical Storm Imelda, while the Pacific was impacted by, among other events, Tropical Storm Flossie. While we will incur losses, it is important to point out that we focus on short-tail specialty property lines of business that we believe are insulated from unpredictable escalation of loss due to factors such as Assignment of Benefits and social inflation. In spite of the moderate seasonal losses from our wind portfolio and the Ridgecrest earthquake, we generated strong returns and increasing operating leverage during the quarter. For the third quarter, we delivered an adjusted combined ratio of 63.6% an adjusted ROE of 18.8%.
The 18.8% adjusted ROE is particularly noteworthy when factoring in our conservative net earned premium to surplus ratio of 0.53 times. We believe these results reflect the platform we have built and will enhance over time. Additionally, we continue to invest in technology and carrier partner integration, most notably in application program interfaces, APIs, that our partner carriers can use to directly access our system. This past quarter, we launched such an API with Liberty Mutual, who can now seamlessly offer Palomar earthquake, flood, and Hawaii wind products through its own point-of-sale system alongside its auto, homeowners, and personal line policies. We believe examples such as this are emblematic of our focus on utilizing technology to efficiently distribute our products and improve our operations.
As we look ahead, we will maintain our focus on technology and product innovation to address dislocation points in the market and create offerings to capitalize on them. With that, I would like to now turn the call over to Chris for a more detailed review of our financial results.
Thank you, Mac. During my portion, when referring to any per share figure, I am referring to the per fully diluted common share, unless otherwise specifically noted. For the third quarter of 2019, our net income was $7.5 million, or $0.31 per share, compared to net income of $1.6 million, or $0.09 per share for the same quarter in 2018. For the third quarter of 2019, our adjusted net income was $9.6 million or $0.40 per share, compared to net income of $2.7 million or $0.16 per share for the same quarter of 2018. Third quarter 2019 adjusted net income excludes expenses related to our company's IPO, the September secondary offering, one-time incentive cash bonuses, tax restructuring, stock-based compensation, and the tax impact of those expenses. The third quarter of 2018 adjustments exclude the expenses associated with the company's IPO, tax restructuring, and retirement of debt.
Gross written premiums for the third quarter were $66.2 million, representing an increase of 65.6% compared to the prior year's third quarter. As Mac indicated, this growth was driven by strong premium retention and new business across our product portfolio as well as by an improving price environment specifically for our commercial lines products, which saw an average rate increase of 9% during the quarter. Ceded written premiums for the third quarter were $28.1 million, representing an increase of 35.1% compared to the prior year's third quarter. Our risk transfer strategy remains a critical component to our business, especially as we demonstrate a sustained top-line growth. The increase was primarily driven by an increase in our excess of loss, or XOL reinsurance expense, commensurate with our growth and our quota share reinsurance.
We utilize quota share reinsurance to minimize the impact of attritional losses on our portfolio and to generate valuable fee income from ceding attractive risks to the reinsurance partners. This past quarter, we renewed our commercial all risk quota share agreements and completed the first full quarter under our specialty homeowners facility, both of which typify the successful application of our strategy. The increase in ceded written premiums was in part due to increased ceding to these quota share reinsurance partners. That said, while the total dollar amount of ceded premiums increased, ceded written premiums as a percentage of gross written premiums decreased to 42.4% for the three months ending September 30th, 2019 from 51.9% from the three months ending September 30th, 2018, due primarily to the increase in gross written premiums in our residential earthquake and commercial earthquake lines, which are not subject to quota share reinsurance agreements.
As we grow our business, we expect to incur additional excess of loss reinsurance expense as we maintain a conservative level of overall coverage. Due to the timing of our reinsurance placements and terms of the underlying contracts, there may be a lag between earned premium and reinsurance placements or expense. Over time, we expect the impact of these to smooth out and their trends to look the same. Our retention remains $5 million per earthquake or wind event, and we purchased over $1 billion of total reinsurance coverage for earthquake events. Net earned premiums for the third quarter were $27.7 million, an increase of 72.5% compared to the prior year's third quarter, due to the growth and earning of higher gross written premiums offset by the growth and earning of higher ceded written premiums.
Commission and other income was approximately $7 million for both the three months ending September 30th, 2019 and 2018. Losses and loss adjustment expenses, LAE, incurred in the third quarter were $2.4 million, a decrease of 54.6% compared to the prior year's third quarter. During both periods, losses were primarily attributable to our commercial all risk and specialty homeowners' lines of business, which both experienced seasonally high exposure to weather-related losses during the third quarter. While we did experience losses during the third quarter, the growth of our overall earned premium and the reduction in severity of weather-related loss events year-over-year translated into improvement in our loss ratio to 8.8% for the third quarter compared to 33.5% for the prior year's third quarter.
The third quarter results include $1.8 million of losses in LAE, including incurred but not reported, or IBNR, from the Ridgecrest earthquake and named storms Barry, Dorian, Maxie, and Imelda. Our expense ratio for the third quarter of 2019 was 64.6%, compared to 66.7% at the end of the third quarter of 2018. We believe our business will continue to scale over the long term. Our combined ratio for the third quarter was 73.4% and compares to a combined ratio of 100.2% for the prior year's third quarter. The adjusted combined ratio, which we believe is a better assessment of our efforts during the third quarter, was 63.6%, a decrease compared to the 94% in the prior year's third quarter. Net investment income for the third quarter was $1.7 million, an increase of 99.9% compared to the prior year's third quarter.
The increase was largely due to increased interest income generated by the proceeds from our IPO in April. We maintain a conservative investment strategy as our funds are generally invested in high-quality securities, including government agency securities, agency mortgage-backed securities, and municipal and corporate bonds with an average credit quality of double A. The weighted average duration of our fixed maturity investment portfolio, including cash equivalents, was 3.72 years at quarter end. Cash and invested assets totaled $263.2 million at quarter end as compared to $157.3 million at December 31st, 2018. For the third quarter, we recognized realized and unrealized gains on investments in the consolidated statement of income of $361,000, compared to $1.3 million in the prior year's third quarter. Our effective tax rate for the three months ended September 30th, 2019 was 21.1%, compared to 0.2% for the 2018 comparable quarter.
The increase in our effective tax rate is due to our restructuring in the early part of this year. All of our operations are now taxable in the U.S., whereas in prior periods, our Bermuda operations were not subject to U.S. taxes. Excluding any unforeseen events, we anticipate that our tax rate will settle around the 21% mark for the remainder of the 2019 year. Our stockholders' equity was $208.5 million at September 30th, 2019, compared to $96.3 million at December 31st, 2018. This increase was primarily due to the addition of IPO net proceeds, which will put downward pressure on a return on equity in the short term while providing capacity for continued growth over the long term. For the third quarter of 2018, annualized return on equity was 14.6%, compared to 6.9% during the third quarter in 2018.
Our annualized adjusted return on equity during the third quarter was 18.8%, compared to 12% during the third quarter of 2018. I would now like to turn the call back to Mac for concluding comments.
Thank you, Chris. To conclude, we are pleased with the results of the third quarter, especially the strong top-line performance of all of our products in the sustained increasing price environment for commercial specialty property lines. Despite the losses associated with the heightened weather activity in the third quarter, we were able to still generate a compelling adjusted ROE of 18.8%. We would like to thank all the investors, new and existing, that participated in our successful secondary offering in September. We appreciate your support and endorsement, and we will continue to execute our strategic plan on your behalf. I'd like to ask the operator to open up the line for any questions. Thank you. Operator?
Thank you. We will now be conducting a question- and- answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Mark Hughes with SunTrust. Please proceed with your question.
Thank you. Did I hear you properly, the losses from Ridgecrest and named storms was $1.8 million?
That is correct, Mark. You did hear us. That was $1.8 million, including IBNR from those events for the quarter.
Then you talked about the commercial retention being 91% this quarter versus 75% a year ago. Did I hear that properly? That's a pretty meaningful change. Any detail you can give on that?
Sure, Mark. This is Mac. You did hear it correctly. It's 91%. Again, that is premium retention. That reflects the improving rate environment that we're in right now. As I said on the call, the composite rate increase across all commercial lines was 9%. The combination of better policy retention, which is driven by the overall competitive environment in the market in combination with the improving rate environment, has allowed us to materially increase our retention.
The underwriting and other expenses were very good in the quarter. Were there any one-timers helping out there?
One time, I guess you're talking benefits in the quarter that drove that down? No, there was no one time benefits. Obviously, in the adjustments, we have listed the items that we take out of that to get a more, I'll call it, baseline quarterly expense ratio or a quarterly expense dollar amount. I think as long as you remove those, all one time expenses should be removed, and that's a good baseline for the quarter. I'd say probably a better Q3 and Q4 of this year are going to be a better reflection of our current run rate based on the size and operations that we have right now.
Just to echo what Chris is saying, I think we've tried to say that by the time we got to the third and certainly into the fourth quarter, we should be at pretty decent steady state, barring any major investments in new lines of business and things of that sort. We're hoping to really start to generate a decent operating leverage.
The ceded written premiums relative to gross written is 42% the last couple of quarters. Is that a reasonable way to look at it? Does that ratio hold steady or how much is that influenced by seasonality perhaps on the written premium?
I would definitely say that there is a little bit of seasonality in the written premium. Not necessarily, I'll call it, by season, but definitely by events that have been impacting our book this quarter and historically. If you look at Q3, the Ridgecrest event obviously happened early in the quarter. That helped with the overall growth for the quarter. When you think about the gross to net premium ratio, there is a little bit of seasonality, and I'll call it noise in that ratio, and that can be from two things. It can be from a significant portion of growth in a quarter, or it could also be from assumed deals.
If you think back to the first quarter of this year where we had an assumed deal come on the books with about $6 million of additional written premium at that point in time, that can make the written premium look a little bit lumpier compared to the ceding out on the excess of loss or on the quota share side. There's a couple things that we like to note and make sure that you guys are aware of. When we think about it, we think that the net to gross earned ceded premium and earned premium is a better way to look at our business because that has been smoothed out for any lumpiness for seasonality or for assumed deals that may come into our portfolio.
That number right now, you'll see it in the Form 10-Q, is hovering just below 50%, and we think that is probably a better indication of what the long-term run rate will be, but at least a current run rate based on our mix of business.
I do think, just to echo what Chris was saying, I do think what's driving it in the third quarter in a most pronounced fashion is just the composition of the mix of business. Earthquake actually over-indexed the growth rate for the quarter, and earthquake does not have a quota share component to it. It's all excess of loss, therefore, there's a lower ceded premium amount. As earthquake continues to grow at this rate, that could lower that ceded premium conversion, if you would. It is a function of mix, and in this quarter, we benefited from a very strong growth in the earthquake business.
Thank you.
Our next question comes from the line of David Motemaden with Evercore. Please proceed with your question.
Hi, thanks. Good morning. Just have a question. Just wanted to talk a bit about the continued penetration in some of the new distribution channels, in the commercial business. Was wondering if you could just break down maybe how much of the growth that we saw within commercial quake and commercial all risk is being driven by some of these new relationships, versus existing relationships, and how you expect that to proceed as we head into 2020.
Hey, David. It's Mac. I don't think we can break down how much was from existing distribution partners, how much was from new distribution partners, because a lot of times, our commercial business we generate through wholesale distribution. We would need to understand who the underlying potential retail originator is. We can't tell you if something came from, for instance, Amwins, if it came from a retailer that we were not cleared by the security committee versus one that we previously were. What I can say is it grew 73% in the quarter. It was a combination of us writing new distribution sources through all different channels, whether it is retail or other carrier partners.
The commercial earthquake and commercial all risks is just growing through a combination of broadening the distribution, opening up new distribution sources, having a bigger appetite on the heels of a larger balance sheet, and having access to new channels that we previously couldn't access because of our financial size category.
Got it. Thanks. Just to follow up on that, would you say we're still pretty early days in terms of access to those new channels? Do we have any more additional ones that could be brought online within the next few quarters?
Yeah, I would say that we are still very focused on broadening our distribution for all of our commercial products, but commercial earthquake and all risks specifically. There's a lot of runway for growth there. I think it's early stages, yes.
Okay, great. Then, just a question on the reinsurance purchasing and buying additional limit for earthquake, just given the growth that we've seen. Just wanted to get a sense for where are we and just how you're thinking about pricing for reinsurance at one-one renewals.
Yeah, Dave, good question. What I would say is, we say it every quarter, one of our guiding principles is keeping our reinsurance limit well above that 250-year PML and maintaining an adequate cushion above that. Because of the growth that we saw in the third quarter, in particular in residential earthquake, we will be buying more limit in short order to, again, maintain that buffer. Our expectation is that we will be in the market in the fourth quarter, then at one-one, we have $305 million of limit that's up for renewal. That is all loss-free business. Our expectation is the market's going to look pretty similar to six-one. We think loss-free business will be flat to maybe modestly up like it was at six-one. We think our portfolio remains very distinct in the sense that we are a great diversifier.
We are an excess of loss program that's dominated by earthquake, and its secondary peril is Hawaiian hurricanes. We are very appealing not only to the primary reinsurers, but even those in the retro market that are potentially pulling back their capacity. They like the fact that we are a way for them to access earthquake.
Great. Thanks for the answers.
Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question.
Great. Thanks so much. Two really quick modeling questions. First, was there any prior period reserve development in the quarter?
Yeah. We had favorable development in the quarter of about $200,000 from the prior year.
Okay, fantastic. Going forward, should we be modeling non-cash compensation at around the levels we've seen in the second and third quarter? Is that a recurring expense that will then be adjusted out?
You're talking about the stock comp?
Yeah
$400,000 per quarter? Yeah, no, I think that's the right current level. I think over time, obviously as we add resources to support the technology and the growth of the company, we will probably have additional options granted to those folks. The comp will probably tick up in relationship to the overall addition to those folks. I wouldn't expect a material movement over time.
Yeah.
This is the first full quarter for the stock compensation. I think that is a good marker for the near term.
Okay. Yeah. I just wanted to make sure that that should be included. Final question, when we look at other underwriting expenses, I appreciate your comments on the run rate going forward. Do you have any expectations or estimate about what the annual inflation is associated with that component, the inflation rate associated with that group of expenses?
We haven't provided any type of guidance on what we expect from that. I will say that, as we look at the business, we do think that there is going to be additional scale that occurs over time. With that, we are still going to continue in important parts of our business to make sure that the growth and the efficiency of the business continues. That's going to be technology. It's going to be some underwriting in relationship to the commercial lines and then also just some public company expenses that are required as we continue to grow. I wouldn't expect that line to grow at a rate similar to the top-line growth. I do expect the margin and the scale to continue over the long term.
We haven't provided any specific guidance on it's going to go up 5% or 10% in the next quarter or year.
Meyer, this is Mac, this might be a bit of overkill, but I think it's worth reiterating just that the composition of the book of business and the fact that it's roughly 65%-70% residential and personal lines business really does allow us to scale. If you think about it just on the heels of the third quarter with what we saw in residential earthquake, we not only saw the growth in 65% in that line of business, we also saw the number of agents that we have appointed increase by 12%. For us to do that, we don't need to add bodies. We can appoint them on a one-time basis, and then they are transacting within the system, so we can scale very nicely.
I do think it's worth pointing that out, that as Chris says, we will invest, it's going to be selective, and it's certainly nowhere near a circumstance where you have an investment that's a step function to keep up with the growth on the top line.
Completely understood. Thank you so much. That's very helpful.
Our next question comes from the line of Paul Newsome with Sandler O'Neill. Please proceed with your question.
Good morning. Thanks for the call. Any update on product roll-up and how that may change the mix prospectively?
Paul, what I would say is we are continuing to introduce new lines of business. We were pleased in the third quarter with the traction that we got in our recently launched inland marine division, as well as our assumed reinsurance divisions. The inland marine is right now, it's really focusing on builders risk, and we'll start to move into other lines like contractors equipment and installations. It's still early stages in the sense that what we're trying to get is get our rates approved, get producers appointed across basically a national geographical footprint. Right now, we're writing business in five states out of a target of 26. Long way to go. I think what you will see, though, is while the third quarter, we've said that we want to get to a 50-50 mix between other perils and earthquake.
The third quarter, ultimately, we didn't reduce earthquake as a percentage of the overall book. That's actually a good thing because of the growth. We are trying to continue to build around the earthquake and with the particular emphasis on these commercial lines. I think you'll see commercial business increase as a percentage. I think you'll see commercial products outside of earthquake increase as a percentage as well.
How should we think about the movements of the loss ratio or the expense ratio with that mix change?
Yeah. Paul, it's a good question. Chris has talked about it in the past that you would likely see the loss ratio tick up some. At the end of the day, right now, 72% of our business, if things go as we hope and we expect, it has a 0% loss ratio at the end of the quarter. That's earthquake, both commercial and residential, and wind hurricane. As we grow, even if it grows at 100% year-over-year, like in the circumstance of builders risk or flood or even all risk, it's not going to move it too materially. It's going to be pretty subtle on how it goes up.
Just to add to that a little more, I guess, context around the loss ratio and the acquisition expense. Those lines that we're expanding into, obviously, do have an attritional loss component to it. That's usually the lines that we're going to look at using some sort of quota share to help minimize the volatility those losses will have on the book. That's going to help keep the loss ratio lower. We do expect, obviously, that it will tick up just naturally as it becomes a larger component of the book. The other nice thing about the quota shares, though, is it also helps with the acquisition expense. Those lines naturally have a lower acquisition expense than some of our other lines of business. Additionally, the acquisition expense will be offset by ceding commission anytime we have a quota share in place.
That will also help to minimize or lower the acquisition expense as those lines of business expand.
Great. Thank you very much.
Thanks, Paul.
As a reminder, it is star one to ask a question. Our next question comes from the line of Adam Klauber with William Blair. Please proceed with your question.
Thanks. Good morning, guys. Are you still seeing the demand surge carry into this quarter in California earthquake that you saw last quarter?
Hey, Adam. What I would say is what we have been looking at is the demand is persisting. It does dissipate, as we've talked about. It does come down immediately following the event. In the metrics that we try to track, that we think gives us an indication of this new normal of new business is the number of agents that we appoint, not just the number of policies that we write in a quarter. As I just said, we did increase our agent footprint by 12% on a sequential basis from Q2 to Q3 on the heels of the Ridgecrest earthquake. We think that's a great indicator because what that means is those agents can now offer earthquake alongside all of their homeowners' renewals when they come up. It opens up the market.
It kind of hopefully level sets the new business production for a period of time. Then when you combine that with a product that's got north of 90% premium retention, it offers a nice bit of visibility. We're optimistic that we can see this persist for the immediate future.
Great. Just following up on that, I'm not sure if you can answer this, the way I think about it, you sort of have 3 different types of distribution. You've got retail agents, you've got MGA wholesalers, then you've got partnerships with insurance companies. Can you rank them, even if it's just on a rough basis, which ones actually are producing the fastest level of growth?
I would say the fastest level of growth right now is probably going to be the MGA and wholesale, because if you look at just how certainly in aggregate, because if you look at the third quarter specifically, there was very strong growth in commercial all risk and commercial earthquake, that's wholesale and/or MGA-driven. Residential quake, it's kind of a combination of all the above. I would say MGA and wholesale is probably the fastest grower. In terms of potential, it's going to be a combination of probably wholesale and retail that drives the future growth.
Okay. That's helpful.
The carrier partners are harder. They're a great channel for us. They're just harder to predict. They're lumpier. We saw good traction from Liberty Mutual and Allstate, but they're still early in the third quarter. Those were both newly launched initiatives. Great promise, but it's from a sitting start.
Great. As we look at the commercial all risk and probably the commercial earthquake, are you benefiting, and it may be early, but are you benefiting to some extent from unbundling of the major carriers? In other words, in the past, maybe an AIG or a Zurich would throw in a flood or throw in the earthquake along with their property coverage. Today versus a year ago, they're probably less likely to just give away those coverages. Are you seeing an impact from that?
Adam, that's a great observation. We are, I would say we're probably not seeing it in as pronounced fashion as others. You have to remember, we're an A minus eight company. Those circumstances that you just outlined, where a large national carrier was bundling in the flood or throwing in the quake with an all-risk schedule, that's probably a national schedule that's $500 million of TIV or $200 million of TIV. We traffic more in the sub $50 million. Now we have a smattering of risk where we're going to be a $10 million part of 100 or $10 million part of 200. More often than not, we're going to be kind of a mid-market account.
That is a dynamic that is persisting in the market, and that's allowing us to see our rates go up by 9% in the quarter and see them accelerate from up 5% in the second quarter to up 9% in the third, and frankly, something that is dynamic that we don't see is going to change in the immediate future.
Okay. Thank you. That's very helpful.
Our next question is a follow-up question from the line of Mark Hughes with SunTrust. Please proceed with your question.
Thanks. Did you mention the average pricing on residential quake?
Hey, Mark, this is Mac. Are you referring to what's the average premium point, average premium for an account, or what the average rate increase is?
Yes, you got it. I'm sorry. It's the average rate increase is my question.
We have this inflation guard, which basically locks in an increase of approximately 5% on an annual basis.
Okay.
That's a good rule of thumb. That's going to renew up 5% year-over-year. That's also tied to the exposure increasing somewhat as well, but it's an annual 5% premium renewal increase.
Thank you.
There are no further questions in the queue. I'd like to hand the call back to Mac Armstrong for closing remarks.
Thank you very much, operator. That does conclude Palomar's third quarter earnings call. We thank you for your time, your questions, and moreover, your support. We remain focused on the execution of our strategic plan, and we look forward to speaking with you after the fourth quarter. All the best. Thanks very much.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, have a wonderful day.