Palomar Holdings Inc

NASDAQ:PLMR

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, and welcome to Palomar Holdings, Inc.'s Third Quarter 2020 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference line will be opened for questions with instructions to follow at that time. As a reminder this conference is being recorded.

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

[Chris Uchida, CFO]

Thank you, operator, and good morning everyone. We appreciate your participation in our third quarter 2020 earnings call. With me here today is Mac Armstrong, our Chairman, Chief Executive Officer and Founder. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11:59 p.m. Eastern Time on November 18, 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 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 that will be filed with the Securities and Exchange Commission. We do not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to their most comparable GAAP measure can be found in our earnings release.

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

[Mac Armstrong, CEO]

Thank you, Chris, and good morning everyone. I hope those of you with us today continue to be safe and healthy. Today, I'll speak to our third quarter results at a high level and speak to our operations before turning the call over to Chris to discuss the financial results in more detail. For the third quarter ended September 30, 2020, we experienced several notable achievements.

First, the momentum of our business remains strong, as evident in our year-over-year gross written premium growth of 55.4%, figure that included meaningful growth across several product lines as we've increased our position as a specialty insurance leader.

Second, Palomar access and surplus insurance company, or PESIC, our newly established surplus lines insurer launched in August inbound policies across several lines of business during the third quarter. We believe PESIC will only enhance our ability to pursue profitable growth and respond favorably to a further hardening rate environment.

Third, during the quarter, we continued to expand our distribution network, executing several new partnerships in line like Residential Earthquake and Flood and roll out new products to existing and new distribution partners.

Fourth, we sustained our commitment to building a world-class team and grew our headcount by 10%. Among the key additions to our team, we welcome Jason Sears and experienced E&S Casualty and programs insurance executive as Senior Vice President of Programs to lead our program business as well as the scaling and diversification of PESIC.

Lastly, and subsequent to quarter end, we formally launched our ESG committee of the Board of Directors, which will not only help articulate and measure the Company's values, but reinforce Palomar's reputation as a forward-thinking employer and partner.

Turning to the third quarter. Our country experienced an unusual frequency of severe weather from the Midwest derecho to an unprecedented windstorm season to the devastating wildfires in our home state of California.

Palomar and our policyholders were impacted by the spate of hurricanes that made landfall in the United States, including Hurricanes Hanna, Isaias, Laura, Sally, and Beta. I'm very proud of our team's rapid response as we work to help our policyholders in their communities recover from these damaging events. Our swift actions are best exemplified by the fact that at the time of this report 87% of our Specialty Homeowners claims from the aforementioned storms are closed or settled, due in large part to the impact from losses associated with these events.

During the third quarter, we reported a net loss of $15.7 million compared to net income of $7.5 million in the third quarter of 2019. This result is disappointing as the clouds results of an otherwise strong quarter more so for our lines of business not exposed to the Gulf of Mexico, approximately 80%.

While we could go on about the incredibly low probability of the 2020 wind season, and how the hard market will allow us to take rate and recoup our losses, and that is something we intend to do, I want to discuss the improvements we have begun to execute. Palomar's culture is premised on continuous improvement, problem-solving and agility and is also analytically driven.

As such, we will apply the data we have gathered and lessons we have learned across our organization to enhance our underwriting, analytics and risk transfer operations and moreover, drive consistency in results and predictability in earnings. As we learn and grow as a business, we will rigorously optimize our reinsurance program, product suite and geographic mix in light of market opportunity, risk-adjusted return on capital and payback analysis.

With respect to Palomar's reinsurance program, we will look to implement new coverages that further protect the balance sheet and earnings stream from severe and frequent events. It is worth highlighting that Palomar secured incremental reinsurance coverage in October that preserved our $10 million per event retention through June 1, 2021. As it pertains to underwriting and exposure management, in October, we decided to exit Commercial All Risk on an admitted basis in Alabama, Louisiana and Mississippi as well as Specialty Homeowners in Louisiana.

Additionally, we are reducing our exposure to risk with a short proximity to the coast for Commercial All Risk. These actions, among others, reflect our focus on remaining agile, preserving our ability to invest in our core markets and new initiatives like PESIC and importantly, achieved a requisite payback from a catastrophe for Palomar, our investors and our reinsurance partners. We feel the achievability of these measures are feasible in light of what we expect will be an incrementally harder insurance market.

Operationally, we remain fairly insulated from COVID-19 and continue to believe the pandemic will not have a material impact on our profitability or growth. It is our belief that our exposure to business interruption remains negligible as our commercial property policies require loss from physical damage to the property from the name peril and future virus exclusions.

Turning to third quarter results. We experienced meaningful growth across several product lines as we expanded our position as a specialty insurance leader, driven specifically by our newer lines of business like Inland Marine, which experienced growth of 316% during the third quarter. Our Builder's Risk and Motor Truck Cargo offerings continue to demonstrate strong traction and an encouraging market opportunity.

Another major driver was our Commercial Earthquake business, which grew 115% compared to the prior year period. Commercial lines growth was a function of new distribution sources, expanded geographic footprint, incremental product attraction, and most importantly sustained pricing increases. Our third quarter commercial policy average rate increase on renewals was 14.1% versus 14.2% in the second quarter.

With respect to our Residential business, it is worth highlighting the growth of two products, Flood and Residential Earthquake. Flood grew 50% year-over-year across 11 geographically diverse states, while Residential Earthquake grew 13% year-over-year, with the prior year comparable in the third quarter of 2019, I saw a large surge in new business following the Ridgecrest earthquakes in July of that year. During the third quarter, our book experienced premium retention rates of 90%, which increased from 88% achieved during the second quarter.

Premium retention for our Residential Commercial Earthquake, Hawaii Hurricane and Residential Flood lines of businesses were all in excess of 92%. This continues to be a testament to the unique value our products offer insureds and distribution partners. Moving on to our newly launched E&S company, PESIC, we expect it will add an additional dimension of capability and growth for Palomar. As previously described, PESIC will also enable us to further leverage our analytically-driven underwriting framework to write business on a national scale and to ensure certain risks that our admitted products cannot currently satisfy.

For example, PESIC allows Palomar to compete in the layered and shared commercial property market, an area where there is currently a high level of market dislocation. In August, we entered into a new partnership with the special risk underwriting division of leading wholesaler AM Wins to underwrite and produce layered and shared property business for PESIC. We certainly anticipate this partnership in PESIC on the whole will be a growth driver for 2021 and beyond.

Spanning our distribution network remains a key priority, and we are proud of the progress we made during the quarter. During the third quarter, our retail and wholesale active producers increased 6% sequentially from the second quarter. Carrier partnerships continue to be a differentiated channel for our business, and in the third quarter, we entered into multiple new partnerships, including another Residential Earthquake partnership motivated by the continued dislocation of the California homeowners market.

Our Flood business entered into a new partnership with Torrent technologies, a flood insurance technology company and subsidiary of Marsh. The partnership will give Torrance distribution access to our Residential Flood offering in the 11 states we currently write business. These relationships take time to develop, and we are proud to provide valuable solutions to other insurance carriers. Separately, we continue to execute our geographic expansion initiatives by growing the geographic footprint for our emitted carrier to 31 states across the nation.

We are also excited to announce the launch of our new real estate errors and omissions product offering. This is a line of business that our team has extensive prior experience with and we believe it will be a beneficial addition to our product suite. As we grow PESIC in all of our business, we believe it is vital that we sustain investments, technology, analytics and talent. I already mentioned the growth of our team and the addition of Jason Sears to spearhead the execution of our program and E&S efforts.

The third quarter also included two developments within our existing leadership team that we believe reflect the ongoing evolution and focus of our business and strategy. In early August, John Christensen, our former Chief Operating Officer, took the role of Chief Underwriting Officer.

In concert with this promotion, we subsequently promoted our Chief Technology Officer, Brett Morris, to assume the role of Chief Operating Officer. The vital role that technology plays across Palomar and Brit's instrumental role in building out our technology team and platform made him a natural choice. We also expect to have rich replacement of CTO in place by the end of the first quarter.

Yesterday, we announced a renewal rights transaction with affiliates of GeoVera Holdings, whereby Palomar will offer policies to all GeoVera Hawaii residential hurricane policyholders upon renewal. This transaction will considerably increase our footprint in the state of Hawaii, a market we first entered into in 2015 and have actively looked to deepen our presence.

Lastly, subsequent to quarter end, we formally launched our ESG and diversity inclusion, community Engagement and equality or DICE committees, which will reaffirm and pursue our efforts and ongoing dedication to the environment, health and safety, corporate social responsibility, corporate governance and sustainability.

The ESG committee will meet on a quarterly basis, led by myself and Board members Daryl Bradley and Martha Notaras. This committee will be responsible for holding the Company and management accountable for our progress toward ESG goals, as established by Palomar management and in consultation with our team members.

We believe that diversity, equality and including greater organizational creativity and productivity which helps us serve our customers and partners more effectively. Delivering on our diversity commitment returns greater value to our shareholders and ultimately makes a positive impact on the communities in which we do business.

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

[Chris Uchida, CFO]

Thank you, Mac. Please note that during my portion, when referring to any per share figure, I'm referring to per diluted common share as calculated using the treasury stock method. This methodology requires us to exclude common share equivalents such as outstanding stock options during periods when we incur a net loss and include them in profitable periods.

We have adjusted the calculations accordingly. As you have seen in the earnings release, we have added new metrics describing our results, including and excluding catastrophe losses. We believe that this additional information provides better visibility into our business and results. Going forward, we will continue to show these metrics.

For the third quarter of 2020, we reported a net loss of $15.7 million or negative $0.62 per share compared to net income of $7.5 million or $0.31 per share for the same quarter in 2019. On an adjusted basis, excluding catastrophe losses, our net income for the third quarter was $13.7 million, or $0.52 per share compared to $9.6 million or $0.40 per share for the same quarter of 2019.

Gross written premiums for the third quarter were $103 million, representing an increase of 55.4% compared to the prior year third quarter. We continue to see healthy new business, rate increases and strong retention with contributions across all of our product offerings. Ceded written premiums for the third quarter were $41.6 million, representing an increase of 48.1% compared to the prior year's third quarter. The increase was primarily due to increase in reinsurance expense commensurate with our growth.

Our risk transfer strategy remains a critical component of our business, especially as we demonstrate sustained top line 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. As of June 1 this year, we retained $10 million per earthquake or wind event and repurchased $1.4 billion of total reinsurance coverage for earthquake investments.

Additionally, after multiple hurricane events during the quarter, we purchased backup reinsurance coverage, maintaining our $10 million event retention. The additional expense of $6 million for this coverage began in the fourth quarter and will run through June 1, 2021. Net earned premiums for the third quarter were $42 million, an increase of 51.9% compared to the prior year's third quarter.

Our results improved primarily due to the earning of increased gross written premium offset by the earning of ceded written premiums under reinsurance agreements. For the third quarter of 2020, net earned premiums as a percentage of gross earned premiums were 52.9% compared to 51.8% in the third quarter of 2019. We believe the ratio of net earned premiums to gross earned premiums is a better metric for assessing our business versus a ratio of net written premiums to gross written premiums.

As previously discussed last quarter, we expect that ratio to be around 53% to 54% on an annual basis, lower at the beginning of new excess of loss treaty and higher at the end with our expected growth in earned premiums. This quarter's results are in line with that expectation. But the additional expense for the backup reinsurance layer will adjust the ratio slightly below the normalized level beginning in the fourth quarter.

Commission and other income was $816,000 for the three months ended September 30, 2020, compared to $709,000 from the same period in 2019. The increase was primarily due to an increase in policy-related fees associated with and increased volume of premiums written. Losses and loss adjustment expenses were LAE, incurred in the third quarter were $41.1 million compared to $2.4 million in the prior year's third quarter.

Our losses during the quarter were primarily the result of increased catastrophe activity converging Hanna, Isaias, Laura, Sally, and Beta. We define catastrophe losses and certain losses resulting of events, involving multiple claims and policyholders, including earthquakes, hurricanes, floods, convective storms, or other aggregating events. This definition captures the catastrophe losses from this quarter and Hurricane Harvey and Florence from previous periods. We had catastrophe losses of $36.5 million for the third quarter of 2020, within the range provided in October.

The catastrophe loss ratio of 86.9% compared to no catastrophe losses for the third quarter of 2019. Our loss ratio, excluding catastrophe losses for the quarter was 10.8% compared to 8.8% in the third quarter of 2019. This increase in our attritional loss ratio is in line with the expectation that our loss ratio would increase with our growth and as we diversify the book of business in new lines like Inland Marine, where there is attritional loss.

Our expense ratio for the third quarter of 2020 was 59.4% compared to 64.6% in the same quarter of 2019. As we have previously discussed, we expected the expense ratio to increase two to 2.5 points sequentially compared to previous quarters from structural changes to our SHF and investments in PESIC. These changes will not have a material impact on net income, but do impact our ratios, such as the expense ratio, combined ratio and net earned premium to gross earned premium ratio. The combined ratio for the third quarter was 157.1% compared to a combined ratio of 73.4% for the prior year's third quarter.

Excluding the catastrophe losses in the quarter, our adjusted combined ratio was 68.9% from the third quarter compared to 63.6% in the third quarter of 2019. We believe that given the unprecedented activity in the third quarter, this is a better measure of our results for comparison purposes and offers a better sense of our business on a steady-state basis. Net investment income for the third quarter was $2.1 million, an increase of 23.7% compared to the prior year's third quarter.

The increase was largely due to a higher average balance of investments during the three months ended September 30, 2020, due primarily to proceeds from our primary stock offerings during the period as well as cash generated 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 rating of A1/A+.

Our fixed income investment portfolio book yield during the third quarter was 2.33% compared to 2.9% for the third quarter of 2019. The weighted average duration of our fixed maturity investment portfolio, including cash equivalents, was four years at quarter end. Cash and invested assets totaled $450 million at quarter end compared to $263.2 million at September 30, 2019.

For the third quarter, we recognized realized and unrealized gain on investments in the consolidated statement of income of $24,400 compared to $361,000 in the prior year's third quarter. Our effective tax rate for the third quarter of 2020 was 28.2% compared to 21.1% for the third quarter of 2019. Higher this quarter with a pretax loss in conjunction with the discrete tax deduction of stock-related compensation, this would decrease the effective tax rate in periods of pretax income.

Excluding any unforeseen events, we anticipate our tax rate exclusive of discrete permit items will settle around the 21% mark for the 2020 year. Our stockholders' equity was $361.9 million at September 30, 2020, compared to $218.6 million at December 31, 2019. For the third quarter of 2020, annualized return on equity was a negative 17% compared to 14.6% during the third quarter of 2019. Our annualized adjusted return on equity, excluding catastrophe losses during the third quarter was 14.8% compared to 18.8% during the third quarter of 2019.

The change in annualized return on equity and annualized adjusted return on equity, excluding catastrophe losses, reflects significant increase in the Company's stockholders equity, primarily due to $125.5 million in capital raised across multiple stock offerings during 2020. Looking to the remainder of the year, given the heightened cat activity during the third quarter and into the fourth quarter, we are adjusting our full year 2020 outlook.

We previously projected adjusted net income between $50.5 million and $53 million. This range did not assume any losses from major catastrophes as we define them. We are now anticipating full year adjusted net income, excluding catastrophe losses, between $51 million and $52 million, which equates to a growth rate of 35% to 37% year-over-year. These assumptions include the additional reinsurance purchase and assume that there are no major losses for business interruption legislation.

As of September 30, 2020, we had 26,271,615 diluted shares outstanding as calculated using the treasury stock method. We do not anticipate a material increase to this number during the year ahead.

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

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Carletti with JMP Securities. Please proceed with your question.

[Matt Carletti, JMP Securities]

Mac, I was hoping you could maybe dive in a little bit deeper to your opening comments about some of the potential adjustments making to the book kind of as you learn from the frequency of events that took place in the quarter. I appreciate kind of the -- you walked through a few lines and talking about kind of on the primary side exposure reduction. Can you talk a little bit about maybe some of the reinsurance tools that might be available to you to help cap that as well, and those are things that you'd expect to kind of proceed with? Or do you think that a lot of the actions you've taken on the inward side of the business I suffice?

[Mac Armstrong, CEO]

Matt, great to hear from you and thanks for the question. It's a great one. And I think the sum and substance of it is we need to do both. We need to take the underwriting actions that I can go into more detail on in addition to solve for the balance sheet protection. Because if we do the first, the former, then we're going to be very successful in the latter, but we need to marry those two and put them together in concert.

And I think it starts with -- when you look at our business, we have the luxury of certain lines having terrific margins and terrific growth opportunities and growth prospects in front of them. And when you marry that with our culture that's premised around problem solving, using data analytics to interpret data, I think what we try to do is be EPA Basin and look to continuously improve. And when you have the wind season like we did, it gives you a pretty big lens into how the book is performing.

And so, we have a target ROE on our individual products. It's in excess of what we deliver on an aggregated basis because it's based on a net basis in $1 of capital on $1 of capital. And so when you looked at the third quarter, what we saw in the Commercial All Risk business, for instance, is that we were not going to hit the target ROE, certainly with the losses, but moreover, not going to hit a target ROE in those markets that would generate sufficient cap payback.

And so if you think about it, if we're -- we have a target ROE of 20%, we need to make sure that we can get, over time, an average in a state like Louisiana, Mississippi and Alabama. So when we apply that methodology, we just couldn't see a market opportunity that we could get enough rate and have enough premium in that segment to generate the cap payback. So, that led us to take the steps that we've done like exiting Mississippi, Alabama and Louisiana on the Commercial All Risk basis, our Commercial All Risk business as well as exiting Specialty Homeowners in Louisiana.

Turning to reinsurance, I think if we do that, we are going to materially reduce our exposure in areas where we generated loss we're going to, in theory, reduce potential exposure just generally for wind store. And that will allow us to go down the path of not just buying reinsurance for severe events, but also protecting the balance sheet from multiple events. So what we will look to implement is either some type of an aggregate cover or a net quota share that really keeps losses from multiple events inside our retention.

So as I said, what it's really incumbent upon is us doing the analytics and making some tough choices as well as making thoughtful informed choices that will reduce our exposure, improve the underlying results from an underwriting standpoint and then furthermore, protecting the balance sheet with new types of risk transfer that aren't just focused on major severe events, but also potentially more frequent events.

[Matt Carletti, JMP Securities]

Great. That's very well thought out as usually the case. Just one other quick one, if I could. You mentioned a bit about buying the backup cover and keeping the per event retention at $10 million or capping it at $10 million. Is that how we should think about Delta and Zeta and the potential impacts they might have in Q4? Or are there other items that work to that might not be just kind of 20% on the high side?

[Mac Armstrong, CEO]

Yes. So the per -- you should continue to assume that losses from a single event would be $10 million, and we have secured incremental coverage. As Chris and I both pointed out, and that is kind of locked in, and there is some incremental expense, but it's expense that we'll happily incur to maintain that level of protection.

[Operator]

Our next question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.

[Paul Newsome, Piper Sandler]

I was hoping you could give us a little bit more detail on is, any sort of numbers behind it, the expected growth rates of the firm, obviously quite stunning over the last couple of years. And then as part of that, I assume that the runoff of the commercial oil risk and especially home insurance and those cat prone lines will have at least some impact on premium growth perspective, but can you give us a sense of maybe how big that would be?

[Mac Armstrong, CEO]

Sure, Paul. This is Mac. What I would say is, first and foremost, we were pleased with the growth and that we achieved in the quarter and a growth in core lines like Residential Quake, Commercial Earthquake, newer lines like Inland Marine Merlin and Flood. So we -- and we've also entered in some new partnerships and introduce some new products that are just getting up the ground.

So we think there's considerable greenfield and growth in front of us. That generate the target returns that we expect and that you all, as investors expect from us, which candidly makes -- well, difficult, some of the decisions that we've made around shrinking the all risk book, easier in some ways as well as the small step that we're taking in exiting Louisiana in Specialty Homeowners.

I think it's really more of an effort to reduce exposure then reduce premium. Those markets were not that large in totality when you look at state-by-state details of the -- that's in our yellow book filings. So it will certainly -- the All Risk lines, the growth rate will come down and that book, certainly on the amid side will contract, but there is ample growth in other segments, whether it's PESIC or the lines that I mentioned that will more than compensate for it.

And I think it's also worth pointing out that while we took the decision to exit Louisiana on the Specialty Homeowners side of the business, the rest of that book is performing rather well. On a pre-cap basis, Texas, Mississippi, Alabama, the Carolinas, the states in which we write that has a combined ratio inside of 80%. And in certain states, it's less than 70%.

So that book is well -- and it grew rapidly in the third quarter, it's continuing to perform, and it is generating the requisite payback that we need to see for cat exposure. So a long-winded way of saying, I think there's adequate growth outside of All Risk. Map book will come down, but we'll still -- we still feel very good about the growth prospects for '21 and beyond.

[Paul Newsome, Piper Sandler]

Great. My second question, I think we all expected as the book moved away from earthquake that we would see the higher attritional ratios as loss ratios over time. But I don't think most of us built in really in material cat load, respectively. But as the business mix change, particularly with some of these new efforts, should we be thinking about some level of a cat load in our expectations in 2021, 2022?

[Mac Armstrong, CEO]

Paul, I'll let Chris chime in. What I would say is the way we define CAT, it's really going to be losses that are material and more than likely going to be result in reinsurance losses. And if you look in the third quarter, of 2019, there were storms like Dorian, Marco and others. So, there will be cat that's in PCs loss that is in our standard loss ratio. And that's reflected in the 10-plus percent that we incurred on kind of a normalized basis, on a steady-state basis. So, I think we still incur severe weather activity in our normal losses because of the exposures that we write. But a storm like Laura or Sally is a different animal. But Chris, I'll let you offer your thoughts, too.

[Chris Uchida, CFO]

Yes. So Paul, we're not going to tell you exactly how to create your model. I think generally, obviously, we are hyper-focused on cat and trying to mitigate the risks that they can cause in our book. But we generally do not put it into our model, and it's part of -- it's also reflected in the way we give the guidance, is that we know that events happen, but we aren't going to be become predictors of when they're going to happen and the severity that they're going to hit us at.

So we do not usually think about large CATs, when we're doing our projections because I think it would provide too much noise and say, oh, we think the cat is going to happen in Q1, and it didn't happen, and then we outperformed for that. That's not how we think about our book. We think about it both from an operational standpoint and make sure that core is doing everything that it needs to do.

And then we build the model with reinsurance, whether it'd be quota shares, excess of loss, and then strategically with underwriting to hope and to try and make sure that that minimize the volatility that those losses will have on our book. So we think about it, but we don't try and put it into our model to predict when it's going to happen. But like Mac said, we have included catastrophes this quarter.

We backed out some of them that are larger events, but the attritional loss ratio still does have losses from, call it, smaller events, whether it be the earthquake in Utah, Crystal Ball earlier this year. So there's other call it CAT-type events that are still in the attritional loss ratio. But it's really just, what I'll call, severe events that we've kind of separated from the rest of the book to kind of show that metric.

But I think we have a lot of faith in what we're doing. And Matt talked about what we're adjusting to try and protect the book. But it's really the core operations that we try and focus on and think about with all those metrics and then making sure that we're protected when a cat does happen.

[Mac Armstrong, CEO]

And Paul, the only thing that I would add, and Chris described that well is that as we start to crystallize our thoughts on the net quota share or an aggregate, we will certainly inform you in terms of the cost that may be incremental to what's in kind of our model right now. And -- but then also what's the positive consequence of that in terms of potentially capping losses from a confluence of events like we went through in the third quarter.

So I think that might be a better way for us to help manage on a go-forward basis is just what's the shifting cost of reinsurance? And how much of that is associated with capping not to single event retention, but potentially some type of net quota share or aggregate solution that caps losses in totality from apparel.

[Chris Uchida, CFO]

Yes, and just one -- sorry, Mac. I'd say one other thing that I would add is that when we think about our historic numbers, the only other events would be Harvey and Florence that we included in our cat definition. So in 2019, there was no CATs from the way we would define them that would go into our results.

[Operator]

Our next question comes from the line of Mark Hughes with Truist Securities. Please proceed with your question.

[Mark Hughes, Truist Securities]

Mac, you say that the lines of the accounts you're exiting are not that large. Could you give us a specific number on that?

[Mac Armstrong, CEO]

Well, I mean, I think they're large in terms of their TIV and their exposure. The total premium on a year-to-date kind of in-force basis for those states on a commercial basis is around $8.5 million, Mark? Yes. Okay. That was kind of in-force at the end of September?

[Chris Uchida, CFO]

The $8.5 million in force at September.

[Mac Armstrong, CEO]

Yes. And so, these are admitted policies. So they will come up for nonrenewal and so they will wind down over the course of the year. I think, though, the one thing that's a little bit nebulous, Mark, is just the impact that as we shift our appetite for writing certain risks on the coast and move further off the coast.

That is not just limited to Mississippi, Alabama and Louisiana, that's going to be in all states because what we saw from like a storm like Hurricane Sally, where the expectation was that it wouldn't whether it was intensified or just stall because it started moving basically three miles per hour.

So it stayed on the coast for an extended period of time and did more damage from water than it did from wind that informs our underwriting perspective, on coastal risk. And so coastal risk is, again, to all states in which we're writing in the southeast, we'll pull back from there. That's harder to gauge how much of that premium will be non-renewed because it's not state specific.

[Chris Uchida, CFO]

And one thing I might add to that is, Mark, you're focusing on the premium side about it. But we're thinking about this shift more from a profitability standpoint. So when we look at our target returns, we're taking out a premium that is outside of our target returns. So hopefully, when we do this move, it helps improve the overall net income and ROE of our current book.

[Mac Armstrong, CEO]

Yes, very good point.

[Mark Hughes, Truist Securities]

The moratorium in California homeowners, I think I saw something in note today. I'm not sure how broad it is, does that make it a little more difficult to sell Residential Quake if there's a nonrenewal quarter in place?

[Mac Armstrong, CEO]

Mark, that's a very good question. My short answer is it does not. Now the more -- this is the second wave of moratoriums that the California has put in place. The first one applied to, I think, just under 1 million homes, the around 850,000. This one is a little bit larger than that, but we're close to double that. But if you look at our new business over the course of 2020, we wrote in more new business in 2020 through the first-line of the year than we did for 2019, and that's even with the big pop that we saw in the third quarter of '19 from the Ridgecrest earthquake.

So I do not believe it's going to challenge our ability to sell Residential Earthquake in California. And frankly, the continued dislocation in the homeowners market, whether there's a moratorium in certain segments. It's state wide. It's -- the wildfire season was longer. It was more dramatic and more pronounced and therefore, more impactful on the as at a minimum of homeowners insurer.

So we -- the dislocation continues, and I think it's going to persist. And I think, again, there's looking no further than the slew of partnerships that we continue to do in California with either new entrants on the E&S side or incumbents that are looking to pull back in the market.

[Mark Hughes, Truist Securities]

The GeoVera, why did they pursue a renewal rights transaction? Is there any rate action that you need to take when you take over that book?

[Mac Armstrong, CEO]

Mark, I can't speak for GeoVera's intention and their decision to exit the market. They were great to work with on this deal, and we left it the opportunity to further bolster our presence in the market of Hawaii. It's one that we're now offering multiple products in Hawaiian came most notably in flood and then some builders risking in the marine. This deal gives us true ballast and critical mass in the market. It gives us the ability to convert approximately $17 million of premium onto our book. It's in a line that does not have attritional loss in a line. That's a great diversifier from our core earthquake reinsurance program. So, we're really excited about it. And then to answer your question, specifically, the rates are very comparable. So we feel like we should have the ability to convert and feel that the risk is adequately priced.

[Operator]

[Operator Instructions] Our next question comes from the line of David Motemaden with Evercore. Please proceed with your question.

[David Motemaden, Evercore]

Mac, I appreciate the commentary you've made on the underwriting actions that you've taken in All Risk and Specialty Home exiting in those states and then also in, I guess, writing further from the coast and the remaining exposure. I guess I'm wondering if there is any sort of rule of thumb or any indication about the reduction in the PMLs that this will result in or a reduction in TIV? Like just in terms of any sort of way that we from the outside can gauge just how much the exposure has been reduced?

[Mac Armstrong, CEO]

Sure, Dave. And thanks for the questions. Those are good ones. The PML that is going to come off from those states is -- it's not insignificant. It would probably constitute close to at 15% of our total wind PML, but that would also -- and that's when you factor in way, Texas and the Carolina, so you now have a pretty good diverse and uncorrelated mix. What it does do is it gets rid of PML and AL in a pretty correlated band. Mississippi, Alabama and Louisiana tend to correlate. So, we think that will allow us to reduce P&L. It will reduce exposure. It will reduce correlated exposure.

And additionally, just simplistically, and I can tell that John Christiansen and John Knutson will roll their eyes and I say this, but it just kind of reduces targets as well. In targets where we just don't think that there's a big enough market opportunity for us to generate the returns that we wanted. So, what I -- we have done like kind of a roll forward, assuming kind of normal nonrenewal cycles by the middle and/or the height of one season next year, we'll have less than $1 million of premium in force in those markets, on the All Risk side, and there will still be some residential business there.

[David Motemaden, Evercore]

Got it. Okay. That's helpful. And I guess, just thinking about obviously, it sounds like the rate momentum has been sustained at around 14% rate increases on the Commercial side. I guess I'm just wondering in terms of and I think you kind of alluded to this earlier, Mac, just in terms of the additional rate that you think you can get to that would maybe offset the incremental cost of the reinsurance. And I say this because I'm just looking at the book of business, and I see 45%-ish of it is in resi earthquake where that is capped in terms of how much rate you can take, and you obviously wouldn't be taking rate on that for wind risk in the Southeast U.S. So I guess that's a long way of asking, do you think that you can get incremental rate on the Specialty Home side or on the Commercial Risk side that would offset the higher cost of reinsurance?

[Mac Armstrong, CEO]

Yes, Dave, another astute question. And what I would say -- I'd like to answer it in a few different ways. First and foremost, with respect to all Commercial All Risk and the wind-exposed across all states, we're pushing more rate now than 14%. On the heels of the storms, and the continued dislocation in the property market, whether it's from wildfire stereos or obviously, this wind season, we're not renewing an account at less than 20%.

Furthermore, we now have the E&S company, which allows us to be even more assertive, if you would, in our renewals. And that will allow us to further get more rate, provide more rate integrity and/or just better terms and conditions. So, I think we're going to see more rate. I think as it relates to -- so that's on the one side of Commercial Earthquake, we're continuing to drive rate there, 14%, 15%.

There's a derivative impact of rising reinsurance costs and market dislocation across property that will allow us to maintain that level of rate as well, and we're continuing to push mid-teens, high-teens rates on quake. So we feel very good about the rates we're seeing in the Commercial business. But I think it's important, though, to come back to how we buy our reinsurance outside of the new changes that we'll put in around some type of aggregate or net quota share. We buy a considerable amount of reinsurance to protect us from severe events.

And this was a season of severe events, but it's worth emphasizing that not a single event, the largest loss that we'll see as we currently have booked on a gross basis is not going to go beyond it's only going into our second layer of reinsurance, and it's inside of 14%, 15% of our total wind limit. So we buy copious amounts, and we'll continue to do so. But I think it's more important that it says that 85% of the tower is going to be renewing loss free, knock on wood.

But right now, as we sit here today is loss free. So I think that gives us ample cushion to endure rate increases, which, by the way, we already paid at 6.1. So we've kind of already beared the brunt of that. So the combination of having lose renewals, exposure that's come down because of the underwriting changes that we've made and then a very, very conducive market to pushing rate in the primary side makes us feel like we can handle the rate increases that we'll see at 6.1, especially again, because a good portion of it, what is set to renew is indeed loss freight.

[Chris Uchida, CFO]

And one thing I might add, Mac, is, David, you were talking about the Residential Earthquake. And I believe we've talked about this before. The Residential Earthquake book does have an inflation guard on it. And when you look at the overall retention above 90%, let's call it, 90% of that book does get a 5% rate increase on an annual basis. So it's not a zero percent rate increase anchor. There is still some rate that we're getting on the residential book. But like Mac said, it is loss-free when you look at it from the reinsurance side as well. No.

[David Motemaden, Evercore]

That's great color. I really appreciate that, guys. That's helpful detail. If I could just ask just a quick one on just overall growth continues to be very solid. I guess I'm wondering how much of a contribution that E&S business had to this quarter's growth, if any, if not at all?

[Mac Armstrong, CEO]

Yes, fair question, Dave. It was pretty modest. I think the E&S premium was in and around $9 million. We didn't launch it until August. That's when we really were in the market. And the majority of that came from commercial quake. So the new AM Wins program that we talked about that went live effective one in theory, but you quote that business pretty far out in advance. Some of the other partnerships that we entered into or new producers that we appointed, same thing applies. So with the exception of really Commercial Earthquake, everything else was really in its infancy. And so we feel pretty good about the prospects for Q4 and seeing the E&S company get traction.

[Operator]

Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question.

[Meyer Shields, KBW]

Great. I guess first question is I was hoping you could explain to me the mechanics of needing reinstatement premium. I guess, I would have thought they would have had to burn through like the whole $600 million one layer for that. So can you explain what I'm missing, please?

[Chris Uchida, CFO]

So Meyer, the way we -- what we have is we have prepaid reinstatements. So essentially, we had let's just use our 20 excess of 10 layers. If we burn through $20 million excess of that $10 million from multiple events we already had at reinstated. So we basically had $40 million working for us, excess of $10 million to cover us from multiple events. And that certainly applied here. And we still have some of that limit in place for storms that have hit in the fourth quarter or could or earthquake that could happen in the future, plus then we procured another limit, which is $20 mil in excess of $10 million, kind of back up to backfill that should that incremental $7 million -- or excuse me, the incremental amount that's left in the $20 million, $10 million or the $40 million blanket being totally subsumed.

[Meyer Shields, KBW]

Okay. So we don't have the entire tower doesn't drop down or whatever was, yes.

[Chris Uchida, CFO]

No, no. So we had two limits. Yes. So we have certain layers at the top of the program that cascade down, but what we've done is we have reinstatements for those two layers or those two limits, and then we bought incremental limit to backfill the two limits that we are using.

[Meyer Shields, KBW]

Okay. That's helpful. I don't think I had a sophisticated enough understanding. Another naive question, I guess. Is it just unaffordable to maintain the pre $615 million cash point for wind?

[Chris Uchida, CFO]

Yes, Meyer, candidly, yes. I mean, with the size of the book, you would more than likely be paying a rate on line that's the equivalent to trading dollars. So I think we're better served putting in some type of a net quota share or an aggregate that caps losses from multiple events at a certain level, that's certainly inside of what we experienced in the third quarter. We could try to do it, but I just think the rate on lines would be pretty egregious.

[Meyer Shields, KBW]

Okay. No, that makes sense. And just finally, the reinstatement premium. Did that impact written or earned premium at all in the third quarter? Or is that all over the next three?

[Mac Armstrong, CEO]

No. That's all over the next three. That was not placed until Q4.

[Operator]

The next question comes from the line of Adam Klauber with William Blair. Please proceed with your question.

[Adam Klauber, William Blair]

Can we talk a bit more about the rollout of PESIC? Again, you mentioned that third quarter is just going to go in fourth quarter is beginning to ramp up. Could you, just for perspective, give an idea what's the submission levels you're seeing this quarter compared to last quarter?

[Mac Armstrong, CEO]

Adam, what I would tell you is that for one of our lines, we wrote more last week than we did in totality of the quarter. So it's really starting to scale for those partnerships that we entered into in Q3 and towards the end of Q3. And there are several more that are forthcoming that will just be coming up and being brought online in Q4. So, it's really -- submission count is somewhat negligible, but I think I could just give you kind of more anecdotal direction. I would expect us to see pretty rapid sequential growth.

[Adam Klauber, William Blair]

Okay. And which products are being sold through PESIC?

[Mac Armstrong, CEO]

Right now, we are writing Commercial Earthquake, national layered and shared property, which is wind as well as quake and then Builder's Risk. We -- I have a couple of new programs that will be coming in line that will have a package, a property and a casualty component to them. But we'll give you more color. But right now, what we wrote business in is really more property kind of right up the middle for what we've done, Quake, Builder's Risk and kind of layered and shared wind.

[Adam Klauber, William Blair]

Okay. You mentioned the partnership or the deal with AM Wins, which is great given AM Wins size. Now you were dealing with major wholesalers and AM Wins RT prior, but on an admitted basis, now obviously, you're much more in the mainstream. So I guess, could you just give some perspective that what slice of the pie did you have access before from those big wholesalers compared to what slice the pie within your line? Obviously, you're not doing casualty, but within your lines, what slice of the pie do you think you have now compared to when you were just dealing with them on an admitted basis?

[Mac Armstrong, CEO]

What I would say, Adam, is, I'd really look at the wholesalers that we were working with kind of view us as a small to mid-market account rider. And that's what we're doing in All Risk, and that's what we're doing in Commercial Quake. With the E&S deal, we can -- E&S company, we can write national schedules. We can write larger accounts where we're part of a slip, so to speak.

So we might be 10% of a $100 million account, we might be 10% of a $50 million account.

When before, we were only going to be -- they'd only come to us for $10 million as a primary layer or a stand-alone layer. So, it not only gives us access to a market segment that's probably tumble the size of where we have been in Commercial Quake or National Property, but it also allows us to kind of spread our limit more effectively not be as concentrated as you are when you're lining kind of primary risks.

[Adam Klauber, William Blair]

Right. Right. Okay. And then as far as the ramp-up, I mean we talked about near term, third quarter, very, very little fourth quarter, again, it's much more from a sequential standpoint, but how many quarters does it really take to get deeper into, again, the AM Wins and RTS to really begin to match with their distribution, which is quite sizable?

[Mac Armstrong, CEO]

Adam, that's a great question. I think it's also the nature of its specific to the nature of the relationship, excuse me. So us going and doing a business arrangement -- partnership with SRU means that you start to come on to their in-force business as well as seeing submissions from other offices that we're going to go directly to our commercial quake or our builders risk team. So I think we can get scale with some partnerships quicker than getting just normal submission flow.

So that's been kind of our strategy is. Let's get normal submission flow for our existing lines, but then let's enter into a handful of partnerships that can get us a percentage of an existing book of business. And that's why we're very excited about having someone like Jason Sears. Come into lead programs for us because that allows us to go into existing lines where there are books of business that can be moved over in addition or are dislocated in addition to kind of normal submission flow. And so that's what that name with SRU deal does.

[Adam Klauber, William Blair]

Yes. Yes, that makes sense. And then this is sort of a bigger macro about the market, more ins, but my sense is that the market had been more unbundling versus bundling, meaning that PICA care that they thrown to win the earthquake, the flood and often thrown some of those coverages for free. I know in the last 6, 12 months, what I've been hearing is that there's more of a nature to unbundle to separate those. So I guess two questions is, one is that excel, is that unbundling accelerating and two, does that -- does that favor Palomar? And how does that favor Palomar?

[Mac Armstrong, CEO]

Yes, that dynamic out of met dynamic is existing. It's accelerating. It's favorable to Palomar. I look no further than the Commercial Earthquake. We do 115% year-over-year. And a good reason for that is we're now able to go into layered and shared property accounts that we previously did not have the ability to go into as an admitted insurer or somewhat structurally limited in doing so. And so while we grew, the growth in the third quarter is a lot faster or more pronounced than it was in the first half of the year. And when you look at losses from all the property losses in this quarter, wind, fire, Midwestern derecho, it only further sustained that dislocation and that unbundled win in uncoupling.

[Operator]

We have no further questions at this time. Mr. Armstrong, I would now like to turn the floor back over to you for closing comments.

[Mac Armstrong, CEO]

Great. Thank you, operator, and thank you all for your time this morning. This concludes Palomar's third quarter earnings call. We appreciate the time and questions, and as always your support. Although from a loss perspective, the third quarter was our toughest since inception, We did continue to experience very solid growth. And I believe as we apply the lessons learned from the storm season, we will emerge stronger and better positioned in which will in turn further enhance the growth opportunities for the business.

We will continue to focus on profitably growing Palomar and scaling, Palomar's capabilities as we expand. Our reach and our product footprint, we are on this journey with our investors and the team for the longer term, and Palomar remains focused on delivering for all stakeholders. And today, as Veterans Day, I do want to thank all members of armed forces for their service and all that they have done and continue to do for our country.

So with that, I hope you all remain safe and healthy during this holiday season. Thanks very much, and we'll speak to you the fourth quarter. Have a great day.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.