Earnings Call Transcript
Palomar Holdings, Inc. (PLMR)
Earnings Call Transcript - PLMR Q1 2023
Operator, Operator
Good morning, and welcome to Palomar Holdings First Quarter 2023 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference line will be opened for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir.
Chris Uchida, Chief Financial Officer
Thank you, operator, and good morning, everyone. We appreciate your participation in our first quarter 2023 earnings call. With me here today is Mac Armstrong, our Chairman and Chief Executive Officer. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11:59 PM Eastern Time on May 11, 2023. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our quarterly report on Form 10-Q 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 the most comparable GAAP measure can be found in our earnings release. At this point, I will turn the call over to Mac.
Mac Armstrong, Chairman and Chief Executive Officer
Thank you, Chris, and good morning, everyone. Following a record year in 2022, I'm pleased with Palomar's strong start to 2023. Our first quarter results demonstrate continued momentum in our business and further execution of our Palomar 2X strategy. Highlights for the quarter include 46% gross written premium growth and an adjusted combined ratio of 73.3%, and an adjusted return on equity of 20.7%. Importantly, these results were achieved even with elevated catastrophe activity during the quarter. Selected strategic and operational accomplishments in the quarter were the purchase of an additional $188 million of excess of loss reinsurance for our growth in earthquake, the acquisition of real estate errors and omissions, MGA, XCO Insurance Services, and several key hires in our casualty underwriting, data analytics, and actuarial department. At the end of 2022, I detailed four key strategic initiatives for 2023. One, sustain our strong profitable growth trajectory; two, manage the dislocation in the global insurance market; three, deliver predictable earnings; and four, scale the organization. The results of this quarter exemplify our ability to execute on each of those goals. Turning to our first quarter results. Our core earthquake franchise grew 31%. The residential earthquake grew 20%, while our commercial earthquake line grew 50%. The hard market induced dislocation in the earthquake market persisted into the first quarter, affording Palomar a chance to both grow and optimize its earthquake book of business. Increased utilization of Palomar Excess and Surplus Insurance Company, our E&S carrier in the residential earthquake line, is a prime example of this dynamic. Specifically, we wrote approximately 27% of our residential earthquake new business on the E&S paper in the quarter and now have approximately 10% of the residential quake book written on an E&S basis. The E&S lever also optimizes the use of our reinsurance capacity and enables us to maintain our margins. Also contributing to our top-line growth in the quarter were two property lines of business with limited catastrophe exposure. Inland Marine and Excess Property. Inland Marine grew 70% compared to the prior year, as we continue to expand our geographic reach and distribution footprint. Our Excess Property line grew 531% year-over-year as it builds an attractive book of non-cat exposed property business. Importantly, both products are generating attractive loss ratios and margins. All our property products continue to benefit from rate increases and enhanced terms and conditions. Commercial earthquakes saw risk-adjusted increases of approximately 20% in the quarter, with March renewals approaching 25%. Our E&S commercial all-risk book saw average rate increases north of 50% and an exposure decreasing approximately 48% year-over-year. Our Inland Marine book saw regional variance in pricing with builders risk accounts seeing inflation-adjusted new projects priced 7% to 10% above the prior year. Turning to our Casualty business. We continue to see growth of market traction across this business. Overall, casualty growth remains a key strategic imperative as new lines of business are generating attractive economics with a lower volatility loss profile than our property business. It also provides further product diversification. The casualty segment grew 143% year-over-year, highlighted by strong production in Professional Liability and Excess Liability. From an underwriting standpoint, the casualty book's loss performance remains sound. This is best evidenced by the improved ceding commission attained at renewal for 401 Professional Liability/General Casualty quota share. While we have not seen rate actions like that in the property market or casualty business, the rate environment is stable. Casualty lines saw increases in the range of 3% to 10% in the first quarter. During the quarter, we acquired XCO Insurance Services to bolster our professional lines and casualty franchise. XCO is an MGA in the real estate E&O space, focusing on mid-sized real estate brokerages in California and other Western states. XCO brings in the specialty products to Palomar, as well as enhances our professional liability margin. It provides Palomar both growth and a predictable earnings stream. Palomar Front continues to deliver rapid growth, generating $91.8 million of premium versus $29.8 million in the prior-year quarter. While we are pleased with the growth in fronting, we remain acutely focused on compliance, oversight and collateral management of our less than 10 fronting partners. Fronting strategy is premised upon providing value-added services to a select group of MGAs, carriers, and reinsurers. This approach allows us to provide a comprehensive and additive service, prudently learn the line of business and, importantly, avoid surprises. A prime example of our fronting strategies are newly cemented partnership with Advanced AgProtection, a leading crop MGA. In the quarter, Palomar became one of only 14 approved insurance providers known as an AIP with access to the $20 billion insured crop marketplace. The partnership also established a new growth vector in the specialized lines of business. Like our other fronting arrangements, Advanced AgProtection diversifies our product mix, while adding to our fee income base, the key tenants to Palomar 2X. Premium this year will be modest, but the potential for growth is significant. Turning to our reinsurance program. The first quarter was a demonstration of the quality of our book of business and our ability to navigate the choppy waters of this hard reinsurance market. During the quarter, we were pleased to successfully place $188 million of incremental excess of loss reinsurance limit to support the growth of our residential and commercial earthquake business. We are encouraged by the pricing, approximately 27% up on a risk-adjusted basis in the terms that we secured as they are in line with the assumptions used to formulate our adjusted net income guidance. Additionally, as previously mentioned, we renewed our main casualty quota share at improved economics from the expiring treaty terms. On April 1st, we elected not to renew our aggregate cover after determining that utility protection was materially diminished by the considerable reduction in our continental hurricane exposure and probable maximum loss. To provide more context on the impact of our material PML reduction and the underwriting changes made over the last several years, if 2020 wind season were to transpire in 2023, the $64 million of net losses incurred from the numerous storms of the 2020 vintage will be less than $10 million in aggregate today and only one of the stores would qualify for recovery under the expired aggregate. While there was reinsurance capacity available to support the aggregate cover, it did not make economic sense to renew. Therefore, we will explore alternative coverages to provide protection from higher frequency severe events. We are currently in the midst of our 6/1 reinsurance placement with firm order terms out of the market this week. As always, we intend to share comprehensive details once complete. Additionally, we are marketing a multiyear earthquake-only catastrophe bond, the fourth such issuance from Torrey Pines REIT that will provide incremental limit to support our growth in our bellwether line of earthquake. We continue to see value in the incorporation of multiyear ILS solutions into our comprehensive reinsurance program. We are encouraged with the progress to date on the core program and are confident that we can secure the capacity to achieve our strategic objectives in 2023 and beyond. We are optimistic that we will exit our 6/1 reinsurance placement with the risk transfer programs similar to that of years past and that the cost of reinsurance will be in line with the assumptions used to provide our full-year 2023 guidance. From a capital management standpoint, we remain conservatively capitalized with a net premium earned to surplus ratio below one time. As such, we will continue to allocate capital towards both growth initiatives and opportunistic share repurchase. We repurchased 134,680 shares at a total cost of $6.8 million in the first quarter and another 84,547 shares at a total cost of $4.6 million thus far in the second quarter. Turning to 2023 guidance. We reiterate our expectation to generate adjusted net income of $86 million to $90 million. This guidance reflects catastrophe losses incurred in the quarter and moreover, incorporates our current expectations for our reinsurance renewal, which remains at a risk-adjusted increase of approximately 30%. With that, I will turn the call over to Chris to discuss our results in more detail.
Chris Uchida, Chief Financial Officer
Thank you, Mac. Please note that during my portion, when referring to any per-share figure, I'm referring to per diluted common share as calculated using the treasury stock method. This methodology requires us to include common share equivalents such as outstanding stock options during profitable periods and exclude them in periods where we incur a net loss. As a reminder, beginning in the fourth quarter of 2022, we have modified our definition of adjusted net income, diluted adjusted EPS, and adjusted ROE to adjust for net realized and unrealized gains and losses. We have modified the current and prior period figures accordingly. For the first quarter of 2023, our net income was $17.3 million or $0.68 per share compared to net income of $14.5 million or $0.56 per share for the same quarter last year. Our adjusted net income was $20.4 million or $0.80 per share compared to adjusted net income of $18.6 million or $0.72 per share for the same quarter of 2022. Our first quarter adjusted underwriting income, which we believe is the best financial indicator for evaluating Palomar 2X, was $22.2 million compared to $21.2 million last year. Our adjusted combined ratio was 73.3% for the first quarter compared to 72.1% in the first quarter of 2022. For the first quarter of 2022, our annualized adjusted return on equity was 20.7% compared to 19.2% for the same period last year. The first quarter adjusted return on equity performance instills further confidence in our strategy of sustaining top-line growth with a predictable rate of return. Gross written premiums for the first quarter were $250.1 million, an increase of 46.3% compared to the prior year's first quarter. Net earned premiums for the first quarter were $83.2 million, an increase of 9.5% compared to the prior year's first quarter. For the first quarter of 2023, our ratio of net earned premiums as a percentage of gross earned premiums was 37% compared to 54.7% in the first quarter of 2022 and compared sequentially to 38.9% in the fourth quarter of 2022, reflecting the expected decrease from the overall growth of fronting and lines of business that use quota share reinsurance. Losses and loss adjustment expenses for the first quarter were $20.7 million, including $1.8 million of catastrophe losses from the previously disclosed California flood activity, slightly offset by favorable prior-year development of catastrophe. The loss ratio for the quarter was 24.8%, comprised of an attritional loss ratio of 22.6% and a catastrophe loss ratio of 2.2%. Attritional losses for the quarter include unfavorable development from winter storm, Elliott. While the development of Elliott this quarter would meet our definition of a catastrophe, we continue to include this event in our attritional loss results and stand consistent with other mini catastrophe events in the past. As we have done historically, our guidance expectations include mini catastrophe, but exclude large catastrophe events. We continue to expect an attritional loss ratio for the year of 22% to 24%. Our acquisition expense as a percentage of gross earned premium for the first quarter was 11.4%, compared to 20.2% in the first quarter last year and compared sequentially to 12.7% in the fourth quarter of 2022. Additional ceding commission from fronting fees continue to drive the improvement. The ratio of other underwriting expenses, including adjustments to gross earned premiums for the first quarter, was 6.8% compared to 9% in the first quarter last year and compared sequentially to 6.9% in the fourth quarter of 2022. Our net investment income for the first quarter was $5.1 million, an increase of 98.5%, compared to the prior year's first quarter. The year-over-year increase was primarily due to a higher average balance of investment held during the three months ended March 31st, 2023, due to cash generated from operations and a shift of invested assets from lower-yielding investment assets into higher-yielding investment assets with a similar credit quality. Our yield in the first quarter was 3.4% compared to 2.34% in the first quarter last year. The average yield on investments in the first quarter remains above 5%. Our exposure to the bank failures in March was immaterial to our overall portfolio. We hold $2.2 million of Silicon Valley Bank senior debt of which we recorded an expected credit loss of $660,000 through our CECL reserve. Additionally, we note our commercial real estate exposure in our investment portfolio is minimal and less than 3% of the portfolio and does not include any direct loan. We continue to conservatively allocate our positions to asset classes that generate attractive risk-adjusted returns. During the quarter, we repurchased 134,680 shares of our stock for a total of $6.8 million under our two-year $100 million share repurchase program. We have approximately $58.8 million remaining under the authorized program as of the end of the quarter. As Mac mentioned, we are reiterating our adjusted net income guidance range at $86 million to $90 million. This range includes approximately $1.8 million of net catastrophe losses incurred during the first quarter, but does not include any additional catastrophe losses for the year. On a gross earned premium basis, we expect our net earned premium ratio and acquisition expense ratio to continue to decrease in 2023 from the level reflected in the first quarter of 2023. Additionally, based on the current market, our effective tax rate for the year may remain elevated between 22% and 24%. Before opening the call for questions, I would like to note that Jon Christianson, President of Palomar, will be joining the question-and-answer session of this call. With that, I'd like to ask the operator to open the line for questions.
Operator, Operator
Thank you. At this time, we'll be conducting a question-and-answer session. Our first question is from Tracy Benguigui with Barclays. Please proceed with your question.
Tracy Benguigui, Analyst
Thank you. I wanted to talk about the choice not to renew the aggregate reinsurance treaty. Am I understanding this correctly? Essentially, you removed an ROE floor when considering guidance?
Mac Armstrong, Chairman and Chief Executive Officer
Hi, Tracy, it's Mac. Yes, it's a good question. We did opt to non-renew the aggregate. One of the utilities of the aggregate was essentially putting an ROE floor on the book, assuming that there was a multitude of frequent severe events. I think it's important to go into a little more depth on what I brought up in my prepared remarks and that is really the lack of utility from the aggregate on the heels of all the underwriting changes that we've made and really the significant reduction in the wind and earthquake probable maximum loss. So just to put a little more color around that, our wind probable maximum loss has come down from $650 million to $100 million at the peak of wind season this year. The continental hurricane risk is going to be less than 5% of our total probable maximum loss. Continental hurricane premium will be less than 3.3% of the premium for the quarter. So ultimately, if you look at 2020, only Hurricane Sally would have qualified for the aggregate as a potential for recovery. In 2021, Ida would only cause again $3.4 million loss. So, there really is not a great use from that. We can explore alternative covers like potentially a third event that would put a floor on the ROE after more than two or three retained losses that solves a similar function or purpose rather. But the aggregate relative to the risk-adjusted returns and the cost, and frankly the need, just didn't make sense. So, we can construct a floor with some other tool.
Tracy Benguigui, Analyst
Would you be willing to provide a range of potential ROE outcomes, considering that you have less exposure to winds and no longer have a floor?
Mac Armstrong, Chairman and Chief Executive Officer
Yes, if we analyze the worst wind season in 2020, our total losses from the six or seven storms with retained losses would have been $10 million. This change would reduce the overall loss from $60 million to $10 million, resulting in a return on equity in the 20% range.
Tracy Benguigui, Analyst
Got it.
Mac Armstrong, Chairman and Chief Executive Officer
So, the floor was premised after three retained events. So, we can put some type of third-event protection that solves it, but that is going to be something that we'll ascertain after we complete the 6/1 renewal.
Tracy Benguigui, Analyst
Got it. And then just sticking with reinsurance, all the iterative layers you've added on top of earthquake, is that because your probable maximum losses are rising given all your growth? Like, you didn't want to wait until the renewal season to do that?
Mac Armstrong, Chairman and Chief Executive Officer
Yes, that's a good question. We are purchasing an additional $180 million at a 4.1 rate and some at 6.1 to support the growth we are currently observing in the earthquake market, as well as some anticipated future growth. In the first quarter, total earthquake business increased by 30%, commercial by 50%, and residential by 20%. We are aware of this growth and ensuring that we have the necessary reinsurance in place. As the probable maximum loss has increased, we want to ensure we have protection that meets or exceeds the 250-year peak zone, which is associated with earthquakes in California. That's what we have acquired.
Tracy Benguigui, Analyst
Okay. So, it sounds more prospective, right? You didn't pierce through the one in 250.
Mac Armstrong, Chairman and Chief Executive Officer
No, no, no, it's not adjusted in time. It's more of a staying ahead of it.
Tracy Benguigui, Analyst
Got it. Thank you.
Operator, Operator
Our next question is from Matt Carletti with JMP. Please proceed with your question.
Matt Carletti, Analyst
Hey, good morning. Mac. I just want to ask a couple of questions on the fronting business, particularly with one of your peers kind publicly, a few months ago, had some issues with a mismatch on, it sounds like, some reinsurance language. Can you just paint us a little bit of a picture on both, just whether it's today or kind of what you expect the book to look like for the year in terms of mix of business; Ag, cyber, kind of the other major lines that you have there? And then maybe just a quick refresher on kind of how you guys go about it from that risk management side, whether it'd be experienced contract language collateral, that sort of stuff.
Mac Armstrong, Chairman and Chief Executive Officer
Yes, Matt, thanks for the question. I think it's worth reiterating that our fronting strategy is one where we are looking to have concentrated specs, so to speak, with a, I guess, less than two handfuls of partners that are subject matter experts, whether they be rated insurance companies or unrated insurance companies or MGAs or working on behalf of reinsurers. So, it's a concentrated strategy that really allows us to manage effectively the risk profile, the reinsurance placement associated with it and then feel confident in the exposure and potentially how we participate. Right now, we're only participating on two of the programs, the workers' comp and the cyber, where we take a 5% co-part. And ultimately, I think that concentrated strategy allows us to avoid surprises. The way we manage the programs is, as if we are on risk and, again, we are in a couple of them. And so what we are doing is performing a range of audits, a compliance audit, an underwriting audit, a Sarbanes-Oxley audit, a claims audit, and then we're instrumentally involved in the placement of the reinsurance. All of these programs have a diverse reinsurance panel. The cyber program has over eight reinsurers on there. All of them passed the Security Committee requirements of the large brokers that help arrange that. Additionally, on the collateral side, it depends on the nature, but typically, I'll let Chris chime in, that we are either collateralizing the unearned premium or a certain amount, but I'll let Chris explain that further.
Chris Uchida, Chief Financial Officer
Yes. Obviously, the collateral requirements depend on the counterparty risk involved. If we're dealing with a name brand reinsurer, then we're not collecting collateral. But if we are dealing with a smaller captive-type reinsurer, then we offer evaluating their overall exposure. We have an internal model that evaluates the size, capital structure, history, licensing, authorization, and then the type of collateral they want to use; then depending on where those factors fall, we will determine the amount of collateral to collect. As Mac indicated, usually we're collecting unearned premium and expected losses in the 100% to 150% range for those captive reinsurance parties.
Mac Armstrong, Chairman and Chief Executive Officer
I think, Matt, the only two other things that I would add is, one, we have in-house subject matter experts that are overseeing these arrangements, whether they'd be our property underwriters that are involved with the property programs or casualty leadership that is involved with the casualty or cyber programs. So, there's a good cross-organizational collaboration there. And then to your point on where we're going to see growth, I mean, I think we feel good about all of them having embedded growth prospects, which means we don't have to lean in and find new partnerships. We can grow with the existing ones and grow with them meaningfully, especially as we're helping place their reinsurance because we can bring reinsurance relationships to bear that others don't, because we are not only in a range of reinsurance book, we buy a lot of it.
Matt Carletti, Analyst
Great, that's very helpful. I have a quick follow-up regarding capital and leverage. Mac, you mentioned feeling very conservatively capitalized at below one to one on our earned premium capital basis. What does Goldilocks Capital look like? What level of leverage should we consider to ensure you're comfortable continuing to grow without engaging in stock buybacks or feeling like you have excess capital?
Mac Armstrong, Chairman and Chief Executive Officer
The book is evolving, which is fortunately increasing potential leverage to some extent. Historically, we aimed for a target ratio of net premium to surplus at one to one. As the casualty book has expanded and with longer-tail lines or less catastrophe-prone business, such as in marine and some excess property, that likely raises our target to around 1.2 to 1.3. This is something we discuss with our team when evaluating our ratings and ratios. So, if I were to summarize where we stand today, I would estimate it’s probably at a good level of 1.2.
Matt Carletti, Analyst
Perfect. Very helpful, thank you.
Mac Armstrong, Chairman and Chief Executive Officer
Thanks, Matt.
Operator, Operator
Our next question is from David Motemaden with Evercore ISI. Please proceed with your question.
David Motemaden, Analyst
Hi, thanks. Good morning. I have a question regarding the recent adverse development, which was reported at $3.4 million. Chris mentioned that some of this was related to winter storm Elliott. Is that the only factor contributing to the adverse development, or are there other factors at play?
Chris Uchida, Chief Financial Officer
Hi, Dave. That's a good question. Yes, most of the loss for the quarter was primarily driven by Elliott, which occurred late in the quarter. The increase was mainly on the commercial side and had some unexpected severity. We experienced a full limit loss that also arrived late. Overall, there was nothing too surprising. When we consider our overall loss ratio pick, our attritional loss ratio for the year is expected to be between 22% to 25%. For the quarter, everything was in line with our expectations, and we feel very comfortable with that. It's worth noting that the losses related to Elliott pertain to business that was re-underwritten last year. I anticipate that our loss ratio will begin to improve by the end of this year and should be much better by this time next year, as many of the Elliott losses will not be present then. We feel good about the trends. Overall, our attritional loss ratio aligns with our expectations. We view Elliott as a mini-cat, which we've discussed before. It’s accounted for in our budget and is considered in our loss projections.
David Motemaden, Analyst
Okay, great, thanks. Yes, that was helpful. Yes, it sounds like you guys have also made the underwriting adjustments on those specific policies that caused the loss. Were there any other adjustments that you made as a result of that little higher severity that you experienced?
Mac Armstrong, Chairman and Chief Executive Officer
Well, Dave, this is Mac. And just to put a little more specificity on Chris's point, the big pop, if you would, from Elliott was from a discontinued line we exited post. You just have policies that were enforced. So, that's why we have that heightened sense of confidence in that loss ratio ticking down. And so, it's really the majority of the Elliott development was from a discontinued line.
David Motemaden, Analyst
Got it. Okay, that's helpful. I've noticed that the commercial all-risk gross written premium continues to decline. I'm also interested in the probable maximum loss for a 2020-type event occurring this year. Has your one in 10 Southeast wind probable maximum loss fallen further than the 15% to 17.5% range? Does that still hold, or has it decreased even more?
Mac Armstrong, Chairman and Chief Executive Officer
Yes, Dave, that's still valid. It informs our expectations for retention on the wind side as of June 1. The commercial all-risk book has indeed declined year-over-year by nearly 25%, but exposure has decreased by no more than 50%. This indicates that with what we are maintaining, we are achieving a solid risk-adjusted increase. Consequently, we are confident in continuing with a $100 million probable maximum loss book of business, which is expected to yield much better returns compared to 12 and 24 months ago.
David Motemaden, Analyst
Okay, great. Thank you.
Operator, Operator
Our next question is from Paul Newsome with Piper Sandler. Please proceed with your question.
Paul Newsome, Analyst
Hello, thank you for the call. Any additional color or thoughts on how the acquisition will work its way into the financial statements? And maybe some follow-up thoughts just on M&A and how you are thinking about Palomar may or may want to do?
Chris Uchida, Chief Financial Officer
Yes. Thank you, Paul. That was a great question. Regarding the acquisition we announced, it's not a huge deal, but we believe it will be beneficial for us and improve our overall margins related to that segment of our business, and we are pleased with it. However, I don’t anticipate a significant impact for 2023. There might be a bit more positive effect in 2024. For 2023, we expect a slight margin improvement for that segment, estimated around $0.5 million for the year, with further growth potential next year, particularly as we push for additional growth in that area.
Mac Armstrong, Chairman and Chief Executive Officer
I think that the strategic rationale was of the acquisition and like for said, it’s pretty small, not immaterial, but what it does afford us is a chance to go deeper in a segment where we already were participating and that is in the E&O space and bring on incremental subject matter expertise, particularly in the real estate E&O section. So, we now have a group of underwriters that specialize in a targeted line of business that we can grow going beyond the Western U.S., but not changing the risk profile. So, it just gives us the ability to really extend our franchise in casualty. On M&A, Paul, I think, simply put, we do really fancy ourselves as an organic growth story. We have grown this business almost entirely organically we say for a book of business purchase and this deal. So, that's going to continue to be our plan. That's not to say we won't opportunistically look at things, but we're not going to become a roll-up. We are going to be an organic growth story with several identifiable growth vectors in front of us.
Paul Newsome, Analyst
Thanks, guys. Appreciate all the help source.
Mac Armstrong, Chairman and Chief Executive Officer
Thanks, Paul.
Operator, Operator
Our next question is from Mark Hughes with Truist Securities. Please proceed with your question.
Mark Hughes, Analyst
Yes, thank you. Mac, you mentioned a couple of programs we have co-participation on the fronting business. What proportion of the total fronting premium do you have that potential exposure?
Mac Armstrong, Chairman and Chief Executive Officer
So Mark, we take on two risks, one at 4% and the other at 5%. The 4% risk is related to workers' compensation and the 5% is associated with the cyber program. Together, these two account for about half of our premium, possibly a bit more, likely around 60%. They represent two of our larger programs.
Mark Hughes, Analyst
Yes. The earthquake authority. I don't know if you touched on this earlier in the call, but have you noticed anything different in their behavior in terms of competition, new business, marketing, that sort of things?
Mac Armstrong, Chairman and Chief Executive Officer
Sure, Mark. What I would say broadly on earthquake is there is limited competition in that market right now, whether that be because of the changes in the CEA, and I'm going to let Jon Christianson, our President, speak to that, but then also in the commercial side, capacity pullbacks. So, that's why we are very confident in our ability to grow that line. We are very pleased to buy the incremental limit to support our growth, not just where we arrived at today but prospectively. But I'll let John offer his thoughts on CEA and the earthquake market.
Jon Christianson, President
Thank you, Mac. It's great to speak with Mark. This is Jon Christianson. The CEA has revealed in recent months that it has cut its total reinsurance limit by about $1.4 billion since December. This has had a couple of impacts on the market. First, Palomar has benefited from the increased availability of earthquake reinsurance capacity. However, it also resulted in a rating downgrade by AM Best in the first quarter, which has led some producers to seek stronger options that meet their security committees’ requirements. Palomar qualifies as a stronger option as a rated player in the earthquake market. This situation allows us, as Mac mentioned earlier, to both expand and refine our business by targeting opportunities that align with our model and provide favorable risk-adjusted returns. While the CEA remains significant in the California earthquake market, their recent decisions and ongoing developments have actually opened up more opportunities for Palomar.
Mark Hughes, Analyst
Understood. And then the Inland Marine, you're getting good growth there. Is that economically sensitive? Are you noticing any changes around the margin in terms of either maybe audit premium or opportunities for new business?
Mac Armstrong, Chairman and Chief Executive Officer
So, Mark, yes, we are pleased with the growth in Inland Marine. It was 70% year over year. By definition, it's a builders risk heavy book. So, there is some exposure to macroeconomic changes or cyclicality. But we tend to be very heavy in multifamily and kind of mid-sized commercial projects and then writing a handful of large commercial projects. And there has not been a slowdown in construction and opportunity. Some of that's a function of where we are writing. We write in Texas, we write in the Carolinas, we write in California, where there is a need for housing product or ample activity and just overall commercial construction or mid-sized commercial construction. So, we do watch it, but right now, we're not seeing any slowdown there.
Mark Hughes, Analyst
Very good. Thank you.
Mac Armstrong, Chairman and Chief Executive Officer
Thanks, Mark.
Operator, Operator
Our next question is from Andrew Anderson with Jefferies. Please proceed with your question.
Andrew Anderson, Analyst
Hey, good morning. Was hoping you could educate me a bit on the zero attritional business. Is that booked at like a mid single-digit loss ratio? And I'm just thinking, given the rate improvement here and perhaps the shift to E&S, has that changed year-over-year those initial picks for that?
Chris Uchida, Chief Financial Officer
Yes, Andrew. Great question. Yes. So when we think about, let's call it, our binary book or zero attritional book, that's really for us earthquake in Hawaii and because those are relatively easy to define events. Generally speaking, we're looking at it as a 0% loss ratio. If there was something that happened in the quarter that was maybe smaller or larger, we'd probably put a pick around that, but at this stage, because these are pretty well-defined events, we usually are booking that at a zero. And that is especially true for Hawaii where even to trigger coverage, you have to have a named hurricane watch or warning for the islands or for the counties in Hawaii, before any coverage is even triggered. So, we are not generally going to be booking any type of loss pick for either of those lines of business.
Andrew Anderson, Analyst
Got it. That's helpful. And maybe on Hawaii. It seems to be slowing down a bit quarter over quarter. Can we kind of just talk about the opportunity there? Is it just looking for rate and not growing exposures?
Mac Armstrong, Chairman and Chief Executive Officer
Yes, that's exactly what we're doing, Andrew. We are focused on growing through rate increases and inflation guard. We are satisfied with our market share and risk positioning, and that area has reached a steady state. As we prepare for the June 1 renewal, we note that the cost of reinsurance for wind exposure is higher than for earthquake. We need to be careful to preserve our economics as best we can in Hawaii, where the cost of risk transfer is not as straightforward as it is for earthquakes.
Andrew Anderson, Analyst
Got it. Thank you.
Operator, Operator
Our next question is from Jing Li with KBW. Please proceed with your question.
Jing Li, Analyst
Hi, thank you for taking my questions. Just a question on fronting. Can you add some color on how the demand for funded premiums has evolved? Do these trends imply any changes to how much Palomar gets paid for the funded premium?
Mac Armstrong, Chairman and Chief Executive Officer
Thank you for the question. I would say that we are seeing strong growth with our fronting partners. We have a focused and robust relationship with these partners, which includes built-in growth opportunities, whether through their existing business or our assistance in securing more reinsurance capacity to support growth driven by market demand and the performance of their business. Regarding our financials, we have been able to maintain our economics, and our fronting fees have remained stable, and we will not let them come under pressure. In some instances, we are taking on risk from our balance sheet regarding potential losses, whether it’s in property or casualty lines. Our financial terms are critical, and we intend to protect them without experiencing any pressure.
Jing Li, Analyst
Got it, thanks. One more question if I can. So, I know Palomar has established a strong relationship with other carriers to distribute residential earthquake policies. So, what are the opportunities affiliated with these carriers for other lines?
Mac Armstrong, Chairman and Chief Executive Officer
Yes, that's a very good question. We have positioned ourselves as the earthquake experts in California and other states prone to earthquakes. This has become a significant growth channel for us. We have more than 20 partnerships, possibly up to 22, with more expected to develop. In places like Hawaii, we have expanded our partnerships to cover both earthquake and Hawaiian hurricane risks. We are also applying this strategy to flooding. The residential segment of our portfolio holds the most potential for cross-selling opportunities, which our team actively evaluates. However, our main focus has been on earthquake strategies, which we are now trying to adapt for Hawaiian flood coverage.
Jing Li, Analyst
Got it. Thank you for the color.
Mac Armstrong, Chairman and Chief Executive Officer
No, thank you for the questions.
Operator, Operator
Our next question is from Pablo Singzon with J.P. Morgan. Please proceed with your question.
Pablo Singzon, Analyst
Hi, thank you. So the first question I had is, if you look at net written premium growth, it was negative this quarter and that's down from, I think, 56% growth in '21, 14% growth in '22. I think some of that is from lines running off and also reinsurance quota shares increasing. So the question is, given that backdrop, how do you see that being growth development from here? And I guess sort of the same question for grocery index fronting, where you're seeing slower growth as well.
Chris Uchida, Chief Financial Officer
Yes. I'll begin by discussing net written and net earned premiums. There has been a shift in the mix of our business, primarily due to fronting, but this hasn't affected the overall growth when excluding fronting and our homeowners book. In Texas, we have transitioned to fronting, while we are currently winding down another segment. Without these factors, our growth for the quarter was around 27%, indicating strong overall growth in written premiums. Ceded premiums have also increased, mainly due to fronting. Overall, we are optimistic about our trajectory and our quarter-over-quarter comparisons. This is the first quarter that our specialty homeowners book has transitioned to fronting, which affects our comparisons. Additionally, we had one deal that we terminated at the start of the year, leading to a decrease in premium and slightly impacting growth. However, we are looking past that. Overall, we are pleased with the state of our business. Everything is progressing as expected, particularly regarding our net earned premium ratio for the quarter, which was approximately 37%, down from 38.9% in Q4 of last year, trending towards the mid-30s, in line with our guidance. There are no concerns, but we have experienced a mix shift in our business due to fronting, as well as growth in lines like Inland Marine and Casualty that heavily utilize quota share reinsurance to boost fee income, which have become significant parts of our portfolio.
Mac Armstrong, Chairman and Chief Executive Officer
Yes. Just to expand upon Chris's point, the areas that we are investing heavily in from a people perspective, from a reinsurance perspective, from systems and infrastructure perspective are growing rapidly. Earthquake, our largest line, grew 30%. Inland Marine grew 70%. The Casualty grew 140%. All risk, we are pruning that back relative to the exposures, bringing the probable maximum loss down to $100 million. As mentioned earlier on the call, Hawaii, we like where we are from an exposure standpoint. So, we're only going to grow through rate or inflation guards. And then we have the fronting side. So, the mix is really changing respective to the book and the relative participations that we have. But the top line is there, which frankly gives us the ability to, over time, increase our participation and retain more. So on the whole, we're very pleased with how the complexion of the book and the embedded growth in the core franchise.
Pablo Singzon, Analyst
Okay. And then second question. Maybe for you, Mac. So from a new business standpoint, can you talk about the receptivity of brokers and clients through retail E&S earthquake coverage where terms and conditions may be less generous from a client standpoint? And then as a follow-up to that, as you think about that, Inforce retail earthquake book, is there intent to migrate most of that into E&S? And if yes, what are sort of the puts and takes in achieving that outcome? Thank you.
Mac Armstrong, Chairman and Chief Executive Officer
Sure. Regarding E&S and its application in residential earthquake coverage, approximately 27% of our new business in the first quarter was E&S. There has been no resistance from the markets in this area. We have utilized it based on total insured value criteria, targeting specific producers who focus more on high-value properties, and we have also employed it with geographical considerations. This approach has allowed us to secure better terms, conditions, and rates. We plan to continue using it, taking into account the cost of reinsurance, region-specific aggregations, and concentrations in high net worth sectors. It is an effective tool for us, and I anticipate that we will keep leveraging it for the foreseeable future.
Pablo Singzon, Analyst
All right. Thank you, Mac.
Mac Armstrong, Chairman and Chief Executive Officer
Thanks, Pablo. It's a good question and it's something that we're very mindful of.
Operator, Operator
We have reached the end of the question-and-answer session. I would now like to turn the call back over to Mac Armstrong for closing comments.
Mac Armstrong, Chairman and Chief Executive Officer
Thank you very much, operator, and thanks to everyone who joined us this morning. We truly appreciate your participation, questions, and continued support. I want to express my sincere gratitude to our dedicated employees for their hard work, which is reflected in our strong quarterly results. This is an exciting time for Palomar as we expand our specialty franchise into attractive areas of the market where we can generate strong risk-adjusted returns. We remain optimistic about our prospects and initiatives, whether in the casualty business, maintaining our leadership in earthquake coverage, or implementing our reinsurance program, all while delivering our full-year guidance for 2023 and beyond. We look forward to speaking with you next quarter, and thank you for your time today.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.