Palomar Holdings Inc

NASDAQ:PLMR

Earnings Call Transcript 2020-Q1

[Operator]

Hello, and welcome to the Palomar Holdings, Inc. First Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir.

[T. Uchida, executive]

Thank you, operator, and good morning, everyone. We appreciate your participation in our first quarter 2020 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 May 13, 2020.

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 the management's future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements, including, but not limited to, risks and uncertainties related to the COVID-19 pandemic. Such risks and other factors are set forth in our quarterly report on Form 10-Q and will be filed with the Securities and Exchange Commission today, May 6, 2020. We do not undertake any duty to update such forward-looking statements.

Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release.

At this point, I'll turn the call over to Mac.

[D. Armstrong, executive]

Thank you, Chris, and good morning, everyone. Before I discuss our strong first quarter results, I want to take a moment to address the global COVID-19 pandemic, and how our team at Palomar has responded. First off, our thoughts continue to be with all those impacted by the disease. We also thank those working tirelessly to stem the impact of the pandemic. We hope that all participants with us today are safe and most importantly, healthy.

Our #1 priority is and remains the health and safety of our employees and all constituents within the Palomar network. It is important to point out that Palomar was founded and architected to manage catastrophe risk. As such, maintaining and executing a comprehensive business continuity plan has always been a key competence of our organization. As COVID-19 began to spread throughout the U.S. in early March, we quickly mobilized our employee base for remote work, leveraging existing business continuity plans and practices developed previously for natural catastrophes.

Since that time, nearly all of our employees have been working from home, say for a small group performing tasks that are essential in an office environment. Our remote workforce is operating seamlessly and productivity has not been compromised due to not only our cloud-based technology infrastructure, but also the professionalism of the Palomar team.

For our customers and partners, it is business as usual when it comes to our service standards and transactability. I would like to thank our employees who smoothly adapted to this environment during these extraordinary circumstances. But in reality, it is not business as usual for our insureds and society in general. As we address the challenges posed by the evolving COVID-19 pandemic, our company is focused on assisting policyholders with their individual needs. We have implemented an insurance premium grace period to accommodate late payments across all lines of business in all states where we operate. While the risks in our portfolio of specialty property insurance products have not seen a reduction in exposure or hazard, we continue to assess additional methods to help our policyholders and the communities in which they live.

Before I detail our first quarter results, I want to take a moment to briefly touch on the business interruption exposure of our commercial lines book and the coverage offered in these policies. Our All Risk and Commercial Earthquake difference in conditions policies, offer business interruption coverage for insureds for a loss in business income caused by physical damage to the structure from a covered peril. All of these policies are written on an admitted basis, and all of our All Risk policies have an ISO virus exclusion in addition to requiring physical damage to the property. Our DIC policies require physical damage to the structure caused by the covered perils, whether it be an earthquake or flood. We believe our policy language and coverages are expressly clear and that they exclude damage from a virus and require physical damage to the property.

That said, we are acknowledging, investigating, assessing and adjudicating each and every one of our BI claims and providing the policyholder requisite consideration. We recognize that public policymaking process is an extremely fluid one, and we continue to monitor developments at all levels of government on the matter of business interruption insurance.

Regardless, we have reinsurance coverage for these policies through our excess of loss and per risk programs. We currently do not see any other areas of potential loss from COVID-19 in our portfolio as we do not write lines of business like event cancellation, workers' compensation, surety, trade credit or casualty lines where the exposure is materially changing.

Separately, I want to spend a moment highlighting a specific event, the March 18 earthquake in Utah. First and foremost, the earthquake just outside of Salt Lake City was another example of Palomar swiftly assessing and responding to a natural disaster. It also substantiates how the exposure to the specialty property insurance market and the needs of our policyholders are in no way diminished during the pandemic. The earthquake had a magnitude of 5.7 and was the largest in the state since 1992. Immediately following the event, our team and claims partner worked quickly and diligently to contact policyholders in the area to ensure their safety, offer support and review our exposure, which included 586 total earthquake policies within a 10-mile radius of the epicenter. Fortunately, losses from the event will have a minimal impact on our earnings in the first quarter and beyond.

Turning to our results. The first quarter provided another successful demonstration of Palomar executing on a strategic plan to build a leader in the specialty property market. Our existing products continue to grow, taking share and driving adoption. We continue to invest in new segments like Inland Marine. Our geographic reach is expanding, and we accomplished all this while generating strong returns. We believe these efforts are best reflected by our growth and profitability during the quarter.

Overall, gross written premiums grew 32.3% compared to the prior year period. It is worth noting that the results from the first quarter of 2019 included the onetime assumption of $6.6 million in unearned premium in conjunction with the Residential Earthquake carrier partnership that commenced during that quarter. Excluding the impact of that new partnership last year, gross written premiums increased by 50.8% year-over-year, and our Residential Earthquake products grew 26.7%.

Major growth drivers in the first quarter were our Commercial Earthquake and Commercial All Risk lines, which grew gross written premiums by 66% and 65%, respectively, compared to the prior year period.

Commercial lines growth was a function of new distribution sources and geographies, further product traction and most importantly, sustained pricing increases. Our first quarter commercial policy composite rate increase on renewals was 12.7% versus 11.2% in the fourth quarter. During the quarter, our entire book experienced premium retention rates of 90% compared to 89% in the fourth quarter. Premium retention for our Residential Earthquake, our largest line of business, Commercial Earthquake and Hawaiian Hurricane products were in excess of 94%. We believe these results are a testament to the unique value we offer across the Palomar network.

Loss and loss adjusting expense, which Chris will detail shortly, totaled $1.9 million during the quarter, generating a 5.4% loss ratio. As a result, we achieved an adjusted combined ratio of 61.6% and an adjusted ROE of 20.6% during the quarter. I feel it is worth highlighting that we achieved that ROE in spite of a conservative net written premium to ending stockholders' equity ratio of 0.64x.

Our balance sheet remains very strong, bolstered by the $35.5 million capital infusion from our January following offering. We are debt-free. We do not hold exposure to the equity markets, and our investment portfolio consists mainly of highly liquid and high-quality fixed income securities. We continue to invest in our team as we seek to scale our capabilities and footprint in the market.

During the quarter, we made strategic hires in underwriting, technology and operations, and we are still hiring via a virtual recruiting process rather than in person. We also built out our senior leadership group with the hiring of Bill Bold as our Chief Strategy Officer and the promotion of Jon Christianson, the Chief Underwriting Officer and Chief Operating Officer, effective August 1. I would be remiss if I didn't take a moment to thank our current Chief Underwriting Officer, Andy Robinson, who will be leaving the company in August. Andy has been instrumental in our success since he helped launch Palomar in 2014. We're going to missing Andy dearly and wish him well as he transitions to spend more time with family and pursue other personal endeavors.

We are fortunate that our products are an important enduring need to consumers and businesses in a way that is generally independent of economic conditions. That said, we are by no means impervious to the impact of COVID-19 on our business in the insurance industry, in particular, it's matters regarding business interruption insurance.

While BI is a very modest contributor to our overall insurance limit, we are very focused on this evolving dynamic. In the interim, we will appropriately respond to the needs of our policyholders. During these extraordinary times, our team remains committed to long-term opportunity in front of us and to serving all our stakeholders.

With that, I will turn the call over to Chris to discuss our results in more detail.

[T. Uchida, executive]

Thank you, Mac. Please note that during my portion, when referring to any per share figure, I'm referring to per diluted common share as calculated using the treasury stock method.

For the first quarter of 2020, our net income was $11.8 million or $0.48 per share compared to a net loss of $14.4 million or a loss of $0.85 per share for the same quarter in 2019.

For the first quarter of 2020, our adjusted net income was $12.3 million or $0.50 per share compared to adjusted net income of $8.8 million or $0.52 per share for the same quarter of 2019.

First quarter 2020 and 2019 adjusted net income excludes expenses related to our stock offerings and stock-based compensation, including the tax impact of those expenses, these stock offerings have increased our shares outstanding by approximately 7.2 million shares or 42% during the past year.

Gross written premiums for the first quarter were $71.5 million, representing an increase of 32.3% compared to the prior year's first quarter.

As Mac indicated, last year's results included an inception of a Residential Earthquake partnership in which we assume $6.6 million of in-force premium. Excluding the impact of that 2019 premium assumption, the period-over-period increase was 50.8%. We saw robust new business, rate increases and strong premium retention with contributions across our product portfolio.

Ceded written premiums for the first quarter were $29.5 million, representing an increase of 13% compared to the prior year's first quarter. Our risk transfer strategy remains a critical component to our business, especially as we demonstrate sustained top line growth. The increase was primarily due to an increase in the reinsurance expense, commensurate with our growth.

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 a reinsurance placement or expense. But over time, we expect these impacts to smooth out and their trends look the same. As of January 1 of this year, we retained $5 million per earthquake or wind event, and we purchased $1.2 billion of total reinsurance coverage for a California earthquake event.

Net earned premiums for the first quarter were $34.8 million, an increase of 89.7% compared to the prior year's first quarter. Our results improved primarily due to the earning of increased gross written premiums offset by the earning of ceded written premiums under reinsurance agreements.

For the first quarter of 2020, net earned premiums as a percentage of gross earned premiums were 53.6% compared to 44.9% in the first quarter of 2019.

As previously discussed, we believe the ratio of net earned premiums to gross earned premiums is a better metric for assessing our business versus net written premiums to gross written premiums. With our current mix of business, we expect that ratio to be around 50% on an annual basis.

The commission and other income was approximately $738,000 for the 3 months ended March 31, 2020, and $586,000 for the same period in 2019, due primarily to an increase in policy-related fees associated with an increased volume of premiums written.

Losses and loss adjustment expenses, or LAE, incurred in the first quarter were $1.9 million compared to $316,000 in the prior year's first quarter. Our losses during the quarter were primarily made of attritional losses as well as modest losses, including IBNR, of approximately $192,000 from the March 18 Salt Lake City earthquake.

In addition, we booked approximately $316,000 of favorable prior year development.

Our loss ratio for the quarter was approximately 5.4% compared to 1.7% for the prior year's first quarter. Our loss ratio increased in the first quarter of 2020, primarily due to increased attritional losses in our Commercial All Risk and Specialty Homeowners lines. During the first quarter of 2019, we ceded all loss-related -- losses related to our Specialty Homeowners lines in the state of Texas.

Our expense ratio for the first quarter of 2020 was 58.2% compared to 192.1% in the same quarter of 2019. The combined ratio for the first quarter was 63.6% compared to a combined ratio of 193.8% for the prior year's first quarter.

During the first quarter of 2019, the IPO-related expenses and the $23 million stock compensation charge incurred as a result of our IPO, significantly impacted our expense and combined ratios.

Our adjusted combined ratio, which we believe is a better assessment of our efforts, was 61.6% during the first quarter compared to 66.7% in the prior year's first quarter. We believe our business will continue to scale over the long term.

Net investment income for the first quarter was $2 million, an increase of 112% compared to the prior year's first quarter. The increase was largely due to interest income generated by the $122.9 million of net proceeds received from the company's stock offerings and positive cash flows from operations. Funds are generally invested conservatively in high-quality securities including government agency, asset and mortgage-backed securities, municipal and corporate bonds with an average credit quality of A1/A+.

Our fixed income investment portfolio yield during the first quarter was 2.85% compared to 3.1% for the first quarter of 2019. The weighted average duration of our fixed maturity investment portfolio, including cash equivalents, was 3.81 years at the end of the quarter.

Cash in invested assets totaled $320.4 million at quarter end as compared to $159.6 million at March 31, 2019. For the first quarter, we recognized realized and unrealized gains on investments in the consolidated statement of income of $0.4 million compared to $2.4 million in the prior year's first quarter.

Our effective tax rate during the first quarter was 22.3% compared to a negative 1% for the prior year's first quarter. Our prior year tax rate was significantly impacted by the reversal of the valuation allowance on the company's federal deferred tax assets and add back related to the stock compensation charge recognized during the quarter.

Excluding any unforeseen events, we anticipate that our tax rate will settle in around the 21% mark for 2020. Our stockholders' equity was $260.8 million at March 31, 2020, compared to $101.9 million at March 31, 2019. For the first quarter of 2020, annualized return on equity was 19.7% compared to a negative 58.2% during the first quarter of 2019.

Similarly, our annualized adjusted return on equity during the first quarter was 20.6% compared to 35.7% during the first quarter of 2019. The year-over-year changes in our annualized return on equity and our annualized adjusted return on equity includes the impact from a sizable increase in the company's stockholders' equity as a result of $122.9 million of capital raised from multiple stock offerings.

While COVID-19 has a high degree of uncertainty to the society at large, we remain steadfast in our ability to execute and achieve adjusted net income between $50.5 million and $53 million for 2020, which equates to a growth rate of 33% to 40% year-over-year. It is worth emphasizing that these results assume there are no major losses from a natural catastrophe and/or those caused by business interruption legislation.

As of March 31, 2020, we had 24,778,608 diluted shares outstanding as calculated using the treasury stock method. We do not anticipate a material increase in this number during the year ahead.

With that, I'd like to ask the operator to open up the line for any questions. Operator?

[Operator]

[Operator Instructions] Our first question today is coming from Mark Hughes from SunTrust.

[Mark Hughes, analyst]

What sort of take rate have you seen on the offer of a grace period on your policies?

[D. Armstrong, executive]

Mark, it's Mac. It's -- what I would say is, we haven't really been able to track it. What I would tell you is retention in March and what we're kind of seeing as we sit here in April is consistent with maybe a modestly tick up. Most of our interaction is anecdotal and speaking to insurers that want to understand their payment plans, want to understand what the grace period entails. But it's too early really to synthesize what it entails. The only thing that I would add is most of our products have some flexible payment options, but they're not 12 pay. They tend to be 3 or 4 pay periods. So in many instances, a lot people prepaid.

[Mark Hughes, analyst]

So they might understand that the information you've gotten back any specifics at this point, it's fairly limited. Is that -- should we assume that...

[D. Armstrong, executive]

Yes. I mean, it's really -- the first full month of it being in the market would be April. So it's early to tell. I think it's going to be better told -- this sort of be better told in the second quarter.

[T. Uchida, executive]

I was just going to add one thing that it's something that we're watching closely. And we look at our cash collections, I think, of that nature on a daily basis. And we haven't seen a real significant change since a lot of those grace periods have been [Audio Gap]

[D. Armstrong, executive]

Yes. Actually, no change.

[Mark Hughes, analyst]

Very helpful. And then the -- Chris, the XOL purchase timing, your earned premium pretty healthy this quarter. And presumably above the longer-term norm, that 50% of written premium. Any detail you can provide about that? What was the benefit this quarter? And when would you anticipate that the XOL purchases might have kind of a step impact?

[T. Uchida, executive]

Yes. No, I think that was well said, Mark. When I look at it for Q1, there was obviously the January placement that you mentioned. The key driver for the favorable results on the ratio was really the growth in written premium. That growth was throughout the quarter, but it did start in early January. So we did receive a significant benefit in the earning of all -- or a significant portion of that growth during the quarter. So that definitely helped the Q1 results.

We haven't announced any of our reinsurance placements for the remainder of the year. I can say that we did not have any new excess of loss in the first quarter, else we would have disclosed that. But I think if you look at some of the information that we provided in prior years, then it can give you a good sense of what our reinsurance cycles usually are. But with that, like you said, over the long term, I would still expect that ratio to be around 50% for an annual basis for 2020.

[Mark Hughes, analyst]

And then, Mac, if you wouldn't mind just a little more on market conditions, both in California, as it pertains to turnover dislocation in the residential market that may be giving you opportunity to sell your policies and then also the commercial line more broadly, what you're seeing in the opportunities in Commercial Quake?

[D. Armstrong, executive]

Sure, Mark. In the Residential Quake, what I would say is there -- we grew on a same-store basis, for lack of a better term, 25 -- excuse me, 26.7%. And we continue to have strong new business in the first quarter. There remains the dislocation in the homeowners market. And so I think that's creating partnerships as well as new distribution arrangement opportunities. I think our distribution footprint across all of Palomar grew 6% in the first quarter. So we feel pretty good about the momentum that we continue to see there.

I think, candidly, with the shelter-in-place mandate, people are reminded of the importance of the structure and protecting the structure that is their home. So new business volumes are sustained even as we speak today.

On the commercial side, the dislocation in the commercial property market is -- was continued to be pronounced in the first quarter. I mentioned the 12.7% rate increase that we saw and how that picked up from 11.2% in the fourth quarter. Candidly, I think it's going to be more pronounced the latter half of this year. I think it's a function of COVID-19 and losses being taken in other lines of business and forcing people that are writing commercial property to retrench or cut back their limits that they're allocating. I think also, the reinsurance market is hardening, which will impact others and what they can write. And that's probably relevant for Commercial Earthquake, Commercial All Risk and our Inland Marine. So we actually believe that the dislocation is going to be more pronounced in the second quarter, in the second half of this year, which I think creates opportunities for us. We have a strong reinsurance program in place. We have ample capital that was bolstered in the first quarter. So I think the prospects for commercial business, at least on the underlying cost of a unit of exposure of insurance, is strong.

[Operator]

Our next question today is coming from Paul Newsome from Piper Sandler.

[Jon Paul Newsome, analyst]

Any possibility or early read on market demand impact because of the Utah earthquake? Obviously, it changed quite a bit after the California earthquake last year, but any thoughts there?

[D. Armstrong, executive]

Yes, Paul, it's Mac. Good to hear from you. What I would say is, it has followed the traditional -- rather it's followed how we've seen in other states where there is a big surge in demand following an earthquake. In Utah, our new business picked up considerably. Now I need to temper that with the fact that the average premium and the overall size of that market is very small in comparison to California.

So it's a catalyst, and it certainly helps from a spread of risk and a diversification standpoint because we're writing a lot more Utah earthquake business than we ever have, and it creates some awareness in California. So we think that will help with new business. It helped in March and will help in the second quarter some, but it will not be certainly as material as it was in the case of July when the earthquake was in Southern California.

[Jon Paul Newsome, analyst]

Is there anything that's happened in the last month or so here with the pandemic and other effects that would change how you think about risk and particularly with the All Risk policies, I would guess, thoughts about changes in terms of conditions, thoughts about limits. Anything that you would think about adjusting over time based upon what we've experienced of late?

[D. Armstrong, executive]

Paul, what I would say -- it's a very good question. What I would say is, we feel very, very confident in our approach and how we've underwritten our All Risk business by having the ISO virus exclusion in every single one of our policies, and that's a form that's been in the market since, I believe, 2007. So I would say that we are not going to deviate from the inclusion of that exclusion in all of our policies. I think we are going to continue to underwrite certain classes that maybe some people have pulled out from. If we know that they have a clear operating plans for when they are open and fully functional. A lot of like -- I'll give an example of hotels and motels, they are operational, and they are open, but they're not truly fully functional. So we -- as we underwrite those, we want to understand what is their true return to work and return to full capacity function. But I think we are going to continue to be adamant in the inclusion of virus exclusions and not putting ourselves in a position where there is a shadow of doubt in coverage or lack thereof.

[Operator]

Our next question is coming from Jeff Schmitt from William Blair.

[Jeffrey Schmitt, analyst]

I think you had said that growth of distribution was 6%. And is that basically the distribution partners? I just wonder if you can maybe provide some detail on the components, retail MGA carrier. And is that changing at all here with, I guess, the pandemic, is that affecting that?

[D. Armstrong, executive]

Yes, Jeff. So our total distribution footprint increased by 6% in the first quarter. That's across all lines of business. It was more -- Residential Earthquake was about 7%. Our Commercial All Risk, so it's probably more pronounced in commercial lines, Commercial All Risk, the total producers increased by 22%. And then Inland Marine, which obviously is coming from a much lower base, anecdotally increased 91%.

The mix of that is going to be more residential and wholesale. Commercial production is predominantly wholesale-driven, although the Inland Marine does have a combination of wholesale and retail. So what I would tell you is it's line specific, it's growing across the board, it's more pronounced in commercial business, and it's going to be more wholesale and retail. We have some terrific program administrator partners for our Residential Earthquake and specialty homeowners lines, and we're not really broadening that arrangement right now.

[Jeffrey Schmitt, analyst]

Okay. And then -- I mean, you may have touched on this, but I guess given the jump in unemployment here and I guess just given that a number of these products are kind of add-ons, I mean, they're kind of optional, are you seeing a big pullback in demand for some of those products?

[D. Armstrong, executive]

No, Jeff, what I would say is we are not -- as of this point, we affirmed our guidance in May, right? With April in our rearview and the trends in that, what we've seen there. We had strong retention in May -- or excuse me, in March, forgive me, for the quarter is 90%. I think it comes back to -- while you're correct, our largest line, Residential Earthquake is a voluntary product. You have to go back and look at the buyer. The buyer tends to be a mass affluent buyer. The average TIV across the board is close to $1 million. That's the total insured value, close to $1 million. They're probably a middle-aged buyer. So -- and they're sheltering in place right now. So they're seeing a consistent reminder of their asset in protecting that asset. And then when you feather in some pretty material events in the form of earthquakes and not just in Utah, but also even in Idaho and some small ones in California, I think awareness sustains retention too. So the long-winded way of saying, so far, we have not. Now I'd be foolish to think that may -- that couldn't change, it could change. But from what we're seeing right now, retention is holding strong.

[Operator]

Our next question is coming from David Motemaden from Evercore.

[David Motemaden, analyst]

I had a question for Mac and maybe Heath, just on the reinsurance renewals for 06/01 and sort of wondering what your preliminary views are on pricing for the part of your program that's renewing? And then I think you also have the Torrey Pines cat bond that's also going to renew or is renewing pretty soon here and sort of what your outlook is on the pricing, given all the noise that's been thrust into the marketplace from COVID?

[D. Armstrong, executive]

Dave, it's Mac. It's a great question. And first of all, I'm pleased to report that we have placed all of our reinsurance program as we sit here today. We will have a press release out in the next couple of weeks that goes into more detail. We are finalizing contract terms and conditions and signing final lines, but all the limit has been placed. So we're thrilled to report that.

What I would say is, the reinsurance market is hardening. As it relates to Palomar, it's hardening in a digestible fashion. And it's one that, frankly, while we'll see a risk-adjusted increase in the cost of reinsurance, it's somewhat kind of -- in many ways, it's catching up with what we've seen in the primary market. And I also believe that what it will lead to is further dislocation in the primary market. What -- that will allow us to recoup or sustain our margins, generally speaking.

So the market is changing. And I think one of the drivers of it was the second question that you asked was around the ILS market. And for us, we were anticipating going out in the ILS market. We pivoted pretty quickly when we saw illustrative pricing and some of the terms and conditions that were being put in the market in March. So we decided to not go down that path. And again, this will be described in more detail in a press release, but we've gone back to the traditional market. And we've got a great reinsurance panel that supported us. And we're -- again, we're pleased that it's wrapped up. And once the bow is on the program, so to speak, we'll have a press release out in the next week or 2.

[T. Uchida, executive]

Jeff, just for a little clarity around that also. I would like to add that when we looked at the guidance that we did provide, we were able to contemplate a lot of that reinsurance placement in some of our projections. So we have considered that in the -- I guess, the affirmation of those numbers that we provided.

[D. Armstrong, executive]

Yes, that's a good point, Chris. Thanks.

[David Motemaden, analyst]

Got it. And then I guess, just any thought around -- you obviously are now at $260 million of equity. Any thought around increasing the retention from $5 million to maybe something higher? And sort of just your thought process around that?

[D. Armstrong, executive]

Yes, Dave. Yes, that's a good question. And I think we talked in the prior earnings calls and kind of outlined what our guideposts are and that we will keep our retention inside of 5% of surplus and no more than a quarter of pretax earnings. And I think that's what you'll see when we announced it. The cost of those lower layers get pretty expensive, and frankly, the payback is very quick. So that will be flushed out. But I would say the retention is going to be ticking up, but it's going to be inside of those parameters that we've kind of deemed somewhat sacrosanct.

[Operator]

Our next question is coming from Meyer Shields from KBW.

[Meyer Shields, analyst]

I was hoping you could talk a little bit about the commercial customers' economic exposure sort of analogous to your comments earlier about your Residential Earthquake customers?

[D. Armstrong, executive]

Yes, Meyer, just with respect to our commercial business. And I think it's -- overarchingly, it's worth pointing out, obviously, we write specialty home -- or specialty business, specialty property business. Overarchingly, our book is very habitational in nature. And so if you look at the totality of our book, 82% of the gross written premium and about 89% of the locations that we write are habitational in nature. So they can be HOAs, single-family homes, institutional housing and things of that sort. So generally speaking, our book tends to be a pretty homogenous book of habitational exposure. The commercial lines writes a lot of that habitation in which they also write a fair bit of hotels and motels and builders -- well, Builder's Risk or Lessor's Risk, so think strip malls, not a lot of heavy manufacturing, not a lot of contingent business interruption. It -- for lack of better term, somewhat plain vanilla. If you look at what we're seeing kind of in the commercial market right now, I think a trend that's fairly consistent is, you are not seeing people looking to switch too often, and they are going to stay with their existing incumbent carrier even with a 12%, 13%, 14%, 15-plus percent rate increase because they just don't want to create a circumstance of uncertainty. And then furthermore, when there is a shift from one carrier to the next, it's going to be driven by this aforementioned dislocation in the market that we feel is going to become more pronounced in the latter half of this year. And so you're able to bring that on at pretty attractive terms and conditions, whether it's the underlying, A, other premium metrics or the unit cost of insurance or with terms and conditions. So the commercial market for what we write is fairly predictable, it's fairly consistent in the returns and the underlying metrics that we're achieving and in the rate that we're able to glean. So hopefully, that answers your question.

[Meyer Shields, analyst]

It does. That was very helpful. I was wondering if you could contextualize the 6% distribution footprint growth, maybe where it was over the course of 2019.

[D. Armstrong, executive]

Yes. Over the course of 2019, Meyer, it grew probably around 10% to 12%. From the third quarter to the fourth quarter, it was pretty consistent. It was around 8%, 9% growth, I think, went from 5,400 to 5,800 agents actively producing with us. And I think it probably accelerated more in the first half of the year.

[Operator]

Our next question today is coming from Matt Carletti from JMP Securities.

[Matthew Carletti, analyst]

Most of my questions have been answered. I just had one for you. As you think about the landscape ahead, I wanted to ask you what new opportunities do you see. Are there -- do you see opportunities coming out of whether it's COVID or everything related to it? Where there's either new risk exposures that clients are looking to insure or areas of the market where maybe competitors are impaired? Are there spots you have your eye on it where we can see opportunities for Palomar?

[D. Armstrong, executive]

Matt, thanks for the question. What I would say is the answer is yes to all of what you just touched upon. I think, first and foremost, I want to kind of reiterate that we think there's considerable greenfield in our existing product suite in our existing markets. And candidly, COVID-19 is probably going to foster dislocate -- further dislocation and opportunities within those segments. So we don't want to get too far afield when there is ample opportunity in where we already traffic -- in areas where we already traffic. But we are indeed looking at new emerging segments. And I think we just look at our own experience with Palomar. Our team has done an exceptional job of transitioning to a remote working environment, and we've done a very -- we try to maintain constant communication with them all. And one of the things we've done is to try to take their temperature on whether or not they would want to return to work when the California is indeed fully open. And several have said they really enjoyed the dynamic of working from home and would like to continue to do so indefinitely. And so I think there is going to be a paradigm shift in remote work, and therefore, the coverage that, that necessitates and affords. So that's an area that we are going to do considerable work on, especially when you think about, as I said earlier, 82% of our premium is habitational in nature. So there is something for us to get our hands around there. I can't tell you what that is right now, but I do think that is an emerging line of business that is tangential at a minimum to what we do.

[Matthew Carletti, analyst]

Perfect. Very helpful. And congrats on a nice start to the year.

[D. Armstrong, executive]

Thanks, Matt.

[Operator]

Our next question today is coming from Adam Klauber from William Blair.

[Adam Klauber, analyst]

In the Residential Earthquake line, I think you mentioned that you are seeing some different channels, in particular, how are, I guess, the new -- some of the new competitors that tend to be more digital? Are you seeing more volume from them in March and April?

[D. Armstrong, executive]

Adam, I would say it's -- those channels continue to perform well for us. The one thing that I would hesitate in saying that they're driving disproportionate growth, is there probably driving disproportionate growth from a PIF perspective, but they're not from a premium perspective. They tend to be more focused on a renter or a first homebuyer, which is going to be a lower premium point than, as I mentioned, our average policyholder on Residential Earthquake, I think it's 45 kind of mass affluent, who's been in their home for a long period of time, built up considerable equity in that home that they're protecting. So the premium is a bit higher there. So they're a very good channel, and they're a very good channel immediately following events because they do have that direct-to-consumer touch point. But I would say it's more PIF count, policy count, than it is premium volume that they drive growth.

[Adam Klauber, analyst]

Great. That makes sense. And then Builder's Risk, obviously, that business is jumping up as it's a newer business. Could you talk about the build-out of the footprint, which states are you running more business today? And as we think about rollout of that business and that team, what sort of footprint do you expect to have by the end of the year?

[D. Armstrong, executive]

Adam, that's another good question. We're very excited about the traction we're getting in that segment. Right now, what we've tried to do is leverage existing distribution relationships, leverage existing reinsurance programs to kind of follow the track of our All Risk program and where we write. So it's been more in Texas and the Carolinas. Over time, we expect to see the geographic footprint broaden, in particular, in the noncoastal or wind-exposed or -- states because the Builder's Risk is not geographically limited. So I would expect us to -- we've got the filings approved in all 27 states where we were admitted, but I would expect us to see that start to deviate from the footprint of All Risk or Commercial Earthquake over time. But right now, it's mirroring it fairly closely.

[Adam Klauber, analyst]

Okay. And you covered this, but how is the flow of the business in the Commercial All Risk from the wholesale channel, particular in March and April, have you seen it slow? Is it around the same? Or just -- even just from a color standpoint, has there been changes in the nature of the flow from the wholesale channel?

[D. Armstrong, executive]

Well, Adam, I'd say we increased -- in Commercial All Risk, for instance, our distribution touch points increased by 22% in the first quarter. So submission activity has increased considerably. The metrics we're getting there are trending up. They're continuing to improve from an AO to premium perspective from a premium renewal perspective. And submission count is increasing. I do think -- I've used this term several times on the call, the dislocation in the commercial property and RS market has helped us tremendously in that line, and it's going to continue to do so.

[Adam Klauber, analyst]

Okay, great. And then switching, other underwriting expenses moved up a little year-over-year. Obviously, you're a bigger company today than you were a year ago. When we think about this level, I think it was a little over $7 million. Will we see continual sequential jumps? Or do you think that the rate of growth and that other expenses will slow a little compared to what we saw in the last couple of quarters?

[T. Uchida, executive]

Yes. Obviously, we haven't provided specific guidance around any of that. But I would say when you look at the sequential growth, all of it was planned and accounted for when we thought about the guidance we gave at the beginning of the year and then affirm today. So I think it's all really -- or most of -- a lot of it is related to the IPO and becoming a public company. Especially when you look at Q1 of last year, we were not a public company in Q1 of last year. So there is some sequential growth there. I think this is a pretty, call it, healthy level. I think we will continue to add as we need to grow and sustain that growth. But it should be at a, call it, a scalable level where the top line revenue does exceed the growth over the long-term period of time.

[Adam Klauber, analyst]

Okay. And then finally, Chris, and I think you made this point earlier, obviously, you're paying some of the excess loss reinsurance upfront, you're in the premium throughout the year. So that suggests throughout the year, the acquisition cost, if I understand it correctly, probably does moderate similar to what we saw last year. Is that correct?

[T. Uchida, executive]

Yes. I think I'm not completely sure I'm following the question, but the placement of the excess of loss. So the January 1 and that cost a little bit on the upcoming placement that we'll announce later on probably this month. At those periods of times, those earn-out or those are expensed over the term of those contracts. So the next placement, let's call it, June 1, that new reinsurance level, that will be the level of expense over whatever the term of those contracts are.

[D. Armstrong, executive]

Yes. And I think the acquisition expense will then dovetail off of what the blended net earned premium conversion rate. So if we just use 50%, the acquisition expense will be pegged off of the net earned premium converting at 50% of the gross earned. So I think it should be fairly steady, Adam. The only thing I would add is commercial business grows, that -- in the mix changes, that should help tick down the cost of acquisition modestly. So we think it's going to be fairly predictable.

[Operator]

[Operator Instructions] We've reach end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

[D. Armstrong, executive]

Well, thank you, operator, and thank you all for the time this morning. This concludes Palomar's First Quarter Earnings Call. We appreciate the time, the questions and always your support. We do believe that Palomar has the foundation in place to execute on our near and long-term strategic initiatives. We think this quarter exemplifies how our company can and will persevere through these certainly challenging and unfamiliar times.

We can't predict with utmost certainty what will transpire over the course of 2020. We can and will remain focused on providing strong results for all our stakeholders, while equally prioritizing the safety of our employees and our trading partners. We look forward to speaking with you after the second quarter. I hope that you and your families remain healthy. So thank you very much, and have a great day. Thank you for your time.

[Operator]

That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.