Earnings Call Transcript
Palomar Holdings, Inc. (PLMR)
Earnings Call Transcript - PLMR Q1 2021
Operator, Operator
Good morning, and welcome to the Palomar Holdings, Inc.'s First Quarter 2021 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 up for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir. Thank you. You may begin.
Chris Uchida, CFO
Thank you, operator, and good morning, everyone. We appreciate your participation in our first quarter 2021 earnings call. With me here today is Mac Armstrong, our Chairman, Chief Executive Officer and Founder. And 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 13, 2021. 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 relating to the COVID-19 pandemic. 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 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. Today, I will speak to our first quarter results at a high level and then discuss ongoing efforts to expand our business and drive profitable growth. From there, I'll turn the call back to Chris to discuss our financial results in more detail. We had a strong first quarter, a quarter that generated solid financial results and a quarter that puts us in a position to reap the long-term benefits of several key initiatives. Highlights of Q1 that I would like to emphasize are as follows. First, our strong growth trajectory continued and actually accelerated as our gross written premium increased by 45% during the quarter. We grew broadly across both new and existing offerings including Residential and Commercial Earthquake, Hawaii Hurricane, and Inland Marine. Second, our E&S carrier PESIC continued to be an important driver of growth for existing products and diversification into new lines of business. PESIC grew rapidly, approaching $100 million in annualized gross written premiums, in its second full quarter of operation. Third, we continue to refine our underwriting and risk transfer strategy while benefiting from a sustained attractive pricing environment and dislocation in selected specialty insurance markets. We've spoken to this in great length on previous calls, but I'd like to emphasize that we are committed to the ongoing improvement of Palomar across all dimensions of our business. I believe our actions and results this quarter reflect this commitment and capability. Fourth, we remain focused on providing visibility into our earnings base and growth. I am very pleased that the $25 million of aggregate excess of loss reinsurance limit, which we refer to as the aggregate cover that was secured in the first quarter, will protect our balance sheet. Moreover, it establishes a floor for our earnings and return on equity. The aggregate cover is an actionable example of how we are proactively safeguarding our business and results. Finally, our business model and strategy are architected to support continued profitable growth by addressing several attractive tailwinds, and we remain confident that Palomar is still in the early stages of executing upon our long-term plan and the associated market opportunity. The launch of two new products and three carrier partnerships this quarter are prime examples of this dynamic. Turning to our results in more detail, as previously mentioned, we delivered strong gross written premium growth of 45% in the first quarter. Overall, earthquake premium grew 44%, while non-earthquake premium increased 46%. Our Commercial Earthquake products were up 96% in the quarter, driven by rate and distribution partners accessing PESIC. Our Residential Earthquake products grew 25%. Other strong contributors were Inland Marine and Hawaii Hurricane with 315% and 128%, year-over-year growth respectively. We have seen very good conversion rates on the book of business in Hawaii that we acquired in late 2020. Newer products like our real estate errors and omissions program continue to gain traction and scale. Our commercial lines premium grew 58% year-over-year during the quarter, a function of PESIC's launch, new distribution sources, expanded geographic footprint, incremental product traction, and sustained pricing increases. This growth is more impressive when factoring the runoff of our admitted all-risk policy, nearly a 7% offset to our premium growth rate. The average rate increase on renewals during the first quarter for our Commercial Earthquake policies was 18% versus 15% in the fourth quarter of 2020, demonstrating an ongoing hard market. We're seeing the strongest rate increases in the small to mid-sized accounts with larger accounts showing some deceleration after an earlier dislocation. Our other commercial lines of business are also seeing steady rate increases. In certain cases, like small account single-shot or large TIV wood frame builder's risk accounts, increases are well north of 20%. We also continue to use terms and conditions as well as risk attachment points to optimize our risk-adjusted returns. This has been most successful in our E&S all-risk program. Our premium retention exceeded 90% across our book during the first quarter, excluding the runoff admitted all-risk business. Most notably, our Residential Earthquake, Commercial Earthquake, and Hawaii Hurricane experienced retention rates above 93%. The continued high retention rates are a testament to the unique value our products offer to insured and distribution partners. Turning to our E&S company, PESIC, our conviction remains as strong as ever about the added dimension it will provide our business. E&S premiums in the quarter were $23.8 million, which constitutes 16% sequential growth from the fourth quarter of 2020. This considerable growth was driven by a combination of existing property lines of business such as Commercial Earthquake, and new lines such as layered and shared national property. In the quarter we launched two new products, excess liability and national builder's risk, that while not meaningful in gross written premium contribution in the quarter, have meaningful prospects. The excess liability program is PESIC's first casualty line of business. The builder's risk product follows our tested playbook of launching a line of business with an initial focus on regional small commercial accounts and then expanding into national large account business with a well-respected partner. Both products are buttressed by strong quota share reinsurance programs to enable successful and conservative launch. PESIC provides us with the flexibility to enter new market segments in an expedient fashion and serves as the logical extension of our commercial property franchise. Over the long term, we can see our E&S carrier approaching the size of our admitted carrier as well as eventually passing the majority of our commercial business given its superior ability to address changing market conditions. Insurance carrier partnerships continue to be a key growth driver for the company. During the first quarter, we launched a partnership with Travelers involving the marketing of Palomar's Residential Earthquake products to Travelers' agency partners in Missouri, Indiana, and Utah. This partnership further expands our retail distribution footprint in these states and will help diversify our earthquake business. Separately, we consummated another earthquake partnership in the quarter that involved the assumption of the existing book of business via a reinsurance transaction. This new partnership provided a one-time transfer of $3.6 million of unearned premium, an inception as we stepped into the risk. We believe these partnerships deliver sustainable long-term growth and serve as an important point of how Palomar can collaborate and add value to our partners. As it pertains to reinsurance matters, there are two successful initiatives in the quarter that are worth highlighting: the aggregate cover in our Torrey Pines Re catastrophe bond specifically. The aforementioned $25 million of aggregate excess of loss reinsurance limit effective April 1st of this year will provide supplemental coverage against losses from multiple severe catastrophe events including but not limited to earthquakes, hurricanes, convective storms, and floods. The aggregate coverage triggers after $30 million of pre-tax losses from a qualifying event, a threshold that could be reached through full retention losses or a number of smaller events. We believe this aggregate cover further enhances visibility into our performance by providing a floor on our earnings and return on equity. At the end of the quarter, we successfully issued a $400 million 144A catastrophe bond. Torrey Pines Re is a multiyear reinsurance agreement, whereby, Palomar is provided with indemnity-based reinsurance covering earthquake events. It fits seamlessly into our existing traditional cat reinsurance program. We are pleased to upsize the offering from $300 million to $400 million at compelling pricing and believe the success of the issuance reflects investor confidence in our ability to underwrite Residential and Commercial Earthquake business effectively. The multiyear protection strengthens our robust reinsurance program, broadens our already extensive panel of reinsurance partners and benefits policyholders, distribution, and investors by providing further transparency into our risk transfer protocol. As we speak here today, we are essentially complete with our six-month reinsurance renewal. We are pleased with the outcome and greatly appreciate our reinsurance support and moreover their acceptance of the underwriting actions taken in 2020. We intend to release an 8-K with more detail once all allocations, terms and conditions are finalized. It is worth noting that the cost of the 6/1 reinsurance renewal is reflected in our revised 2021 guidance. I want to take the opportunity to briefly touch on Winter Storm Uri. First, our thoughts remain with all those impacted by the storm and we'd like to reiterate our commitment to supporting our affected policyholders. While Chris will provide more detail regarding the event in his remarks, I will reiterate that due to our conservative and thoughtfully designed reinsurance structure for events of this nature, our net loss from this event is approximately $1 million, in line with what was signaled on our Q4 2020 earnings call. We are hyper-focused on protecting our balance sheet from both shock attritional losses and catastrophe losses which already proved to be the rare event where both risk transfer strategies were used simultaneously. I will also point out that Uri did not consume any of our aggregate cover. Finally, in late March, our Board approved the share repurchase program effective March 31 of this year. The plan authorizes the repurchase of up to $40 million of our outstanding shares over a two-year period. This program provides the company with the flexibility to opportunistically deploy our capital in an accretive fashion when we believe our shares are underpriced and ultimately drive long-term value creation for our shareholders. That said, this program is opportunistic and does not diminish our growth strategy or our ambitions. We remain as energized as ever about the long-term opportunity ahead of us to bring unique products to market, to serve a growing footprint of customers, partners, and team members, and to deliver attractive results to our investors for years to come. With the strong start to the year, we are pleased to increase our adjusted net income guidance. For the full year 2021, we believe that our adjusted net income will be between $64 million and $69 million. Additionally, we believe that with our aggregate cover in place, we have established a floor of approximately 10.5% adjusted return on equity and $41 million for adjusted net income for the year. With that, I'll 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 include common share equivalents such as outstanding stock options during profitable periods and exclude them in periods when we incur a net loss. We have adjusted the calculations accordingly. For the first quarter of 2021, our net income was $16.6 million or $0.63 per share compared to net income of $11.8 million or $0.48 per share for the same quarter of 2020. Our adjusted net income was $19.3 million or $0.73 per share, compared to adjusted net income of $12.3 million or $0.50 per share for the same quarter of 2020. Gross written premiums for the first quarter were $103.6 million, representing an increase of 44.9% compared to the prior year's first quarter. As Mac indicated, this growth was driven by a combination of new products, sustained rate increases, expansion of our E&S footprint, and extension of our distribution networks. Ceded written premiums for the first quarter were $43.4 million, representing an increase of 47% compared to the prior year's first quarter. The increase was primarily due to increased excess of loss reinsurance related to our exposure growth. Additionally, our excess of loss costs were impacted by the acceleration of expenses and charges related to the reinstatement of our reinsurance program. Separately, we had increased quota share sessions due to the growth in the volume of written premiums subject to quota shares. Ceded written premiums as a percentage of gross written premiums increased to 41.9% for the three months ended March 31, 2021, from 41.3% for the three months ended March 31, 2020. This increase was primarily due to excess of loss charges and a higher proportion of our written premiums being subject to quota shares. Net earned premiums for the first quarter were $47.1 million, an increase of 35.2% compared to the prior year's first quarter. Due to the growth in earnings of higher gross written premiums, offset by the growth in earnings of higher ceded written premiums that include the additional and accelerated reinsurance expense described earlier. For the first quarter of 2021, net earned premiums as a percentage of gross earned premiums were 51.5% compared to 53.6% in the first quarter of 2020. We believe the ratio of net earned premiums to gross earned premiums is a better metric for assessing our business versus the ratio of net written premiums to gross written premiums. With the additional reinsurance expense impacting the first and second quarter of this year, we expect a similar gross earned premium ratio of 51.5% for the second quarter of 2021. After that, we expect this ratio to be around 52% to 54% on an annual basis, lower at the beginning with new reinsurance placement and higher at the end with our expected growth in earned premium. The expected net earned premium ratio contemplates the new aggregate cover that provides increased protection and improved earning visibility if we face multiple catastrophic events similar to what we saw in 2020. Losses and loss adjusted expense (LAE) incurred in the first quarter were negative $4.4 million made up of $5.2 million of attritional losses offset by $2.4 million of favorable prior-year development on 2020 catastrophe losses and Winter Storm Uri, which I'll describe a little more later. The loss ratio for the quarter was negative 9.4%, including an attritional loss ratio of 11.1% compared to a loss ratio of 5.4% during the same period last year comprised entirely of attritional losses. Non-catastrophe losses increased due to the growth of lines of business subject to attritional losses such as specialty homeowners, flood, and inland marine. Due to Winter Storm Uri in the first quarter, we incurred additional reinsurance charges related to the reinstatement of our reinsurance program. For the first half of 2021, Uri will result in a net underwriting loss of approximately $1 million comprised of approximately $4 million of additional reinsurance expense in the first quarter of 2021 and a similar additional reinsurance expense in the second quarter of 2021, partially offset by the negative net loss in the first quarter of 2021. Our expense ratio for the first quarter of 2021 was 69.8% compared to 58.2% in the first quarter of 2020. On an adjusted basis, our expense ratio was 62.7% for the quarter compared to 56.2% in the first quarter of 2021. The increased expense ratio was driven by additional reinsurance placements with increased ceded premiums and continued investment in PESIC. Our acquisition expense as a percentage of gross earned premiums for the first quarter of 2021 was 21.2% compared to 20.1% in the first quarter of 2020. The ratio of other underwriting expenses including adjustments to gross earned premiums for the first quarter of 2021 was 11.9% compared to 11.2% in the first quarter of 2020. Our combined ratio for the first quarter was 60.4% compared to 63.6% in the first quarter of 2020. Our adjusted combined ratio, which we believe is a better assessment of our efforts, was 53.3% during the first quarter compared to 61.6% in the prior year's first quarter. Net investment income for the first quarter was $2.2 million, an increase of 9% compared to the prior year first quarter. The year-over-year increase was primarily due to a higher average balance of investments held during the three months ended March 31, 2021, offset by lower yields on invested assets. We maintain a conservative investment strategy as our funds are generally invested in high-quality securities including government agency securities, asset and mortgage-backed securities, and municipal and corporate bonds with an average credit quality of A1/A. Our fixed income investment portfolio book yield during the first quarter was 2.24% compared to 2.85% for the first quarter of 2020. The weighted average duration of our fixed maturity investment portfolio including cash equivalents was 3.97 years at quarter end. Cash and invested assets totaled $436.7 million as compared to $320.4 million at March 31, 2020. For the first quarter, we recognized losses on investments in the consolidated statement of income of $739,000 compared to a $440,000 gain in the prior year's first quarter. Our effective tax rate for the first quarter was 17.3% compared to 22.3% for the three months ended March 31, 2020. For the current quarter, our income tax rate differed from the statutory rate due to the tax impact of the permanent component of employee stock option exercises. Stockholders' equity was $376.4 million at March 31, 2021, compared to $363.7 million at December 31, 2020. For the first quarter of 2021, annualized return on equity was 18% compared to 19.7% for the same period last year. Our annualized adjusted return on equity was 20.8% compared to 20.6% for the same period last year. As Mac indicated, looking ahead to 2021, we are increasing our adjusted net income guidance to between $64 million to $69 million. This adjusted net income guidance considers the impact of Winter Storm Uri in Texas. Additionally, with some of the moving pieces associated with Winter Storm Uri described earlier, we are providing adjusted net income guidance for the first half of 2021 of between $31.5 million and $33 million. We believe the unique nature of Winter Storm Uri's impact on our financial results over multiple quarters necessitates this additional guidance. While we believe that this additional guidance is warranted in the current situation, we will only provide this type of information in the future if we believe the facts warrant such disclosure. As of March 31, 2021, we had 26,198,960 diluted shares outstanding as calculated using the treasury stock method. We do not anticipate a material increase in this number during the year ahead.
Operator, Operator
At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Matt Carletti with JMP. You may proceed with your question.
Matt Carletti, Analyst
Hi. Thanks. Good morning. Just a couple of numbers questions from me. First is on the current year attritional loss ratio. Is there anything to note in that in terms of kind of one-timers one way or the other, or is that a good kind of starting point to think about kind of where the business is today? And I would presume as we go forward, and some of the newer products grow at a faster rate than some of the earthquake products that slowly drift higher?
Mac Armstrong, CEO
Hey, Matt, this is Mac. Good to hear from you. Chris will chime in and have some thoughts on this as well. But what I would provide is, when you look at the attritional loss ratio there are a few things that I believe are worth highlighting. First is exactly what you touched upon in that it is a function of the growth in certain lines of business that have exposure to attritional loss. I'll pick one, Inland Marine for instance, it grew 315%. It has some attritional loss to it. Now mind you, it's performing in line with expectation. But as that grows at a disproportionate level or over-indexes the rest of the book, that will move the loss ratio up. Similarly, that's what you would see even with the new E&S risk line of business, which is one of the big drivers of the E&S growth. That does have attritional loss so that outpaces the growth of maybe Residential Earthquake for instance, or you're going to see that attritional loss tick up. The other point that I would make though is, we've kind of guided folks towards a slow increase of that attritional loss ratio. It was 11% in this quarter. That number is somewhat obfuscated by how Uri is being accounted for with reinstatement premiums or reinsurance expense, as opposed to being captured in the loss ratio that reduced our net premiums earned. So if you kind of normalize the 11% attritional loss ratio, it's closer to a 10%, which is just a subtle increase from the fourth quarter. So that's what I'd point out, but I'm sure Chris has a few things to offer.
Chris Uchida, CFO
Yeah. Thanks, Mac. I think you described it well obviously. When you look at it compared to what we talked about before, we have indicated – when you think about the end of 2020, the overall loss ratio for the year was about 8.5%. We had indicated that we do expect that to tick up, I think we indicated probably about two to three points for 2021, when you think about that that's right in line with that, especially when you think about the higher ceded premium that kind of makes the ratio a little bit higher. You could adjust that out and think of it more as 10%. I think seasonally also the first quarter is a little bit of a higher loss ratio month for us just naturally, because of some of the exposure that we have in Texas and other states that kind of have some hail or even with events similar to Uri. And some of our other lines had higher exposure, whether it be motor truck cargo. That was impacted by some of the icy roads that were out there. So it's just a little bit higher in nature. But overall nothing that I would say is surprising and kind of in line with what we would expect to see based on the growth of lines, we talked about and then also some of the indications we gave to the market after – following the year-end results.
Mac Armstrong, CEO
Yeah. And just to piggyback on that seasonality point even – you look at a line like flood for us where we write flood states like California and even in Hawaii, there's some seasonality to it. So we see a little bit higher loss in the first quarter of the year than we do the rest of the year, certainly in a state like California.
Matt Carletti, Analyst
Okay. Great. That's helpful. And then if I kind of follow-up there just as the – speaking about that extra $4 million of ceded premium that will also impact Q2, all else equal that 10 would look more like an 11 in Q2 as well, correct? And obviously, I understand the seasonality could be different and the mix of business different and so forth. But all else equal that will repeat itself in 2Q.
Mac Armstrong, CEO
Yes, that's correct. Yes, there will be incremental reinsurance expense associated with Uri in the second quarter. That's exactly right.
Matt Carletti, Analyst
I agree. Wonderful. Thank you very much for the color. I appreciate it.
David Motemaden, Analyst
Hi. Thanks. good morning. I just had a question. Good to see growth reaccelerate this quarter. I guess I'm wondering, was there anything sort of one-off in the growth that you would call out, or is this sort of a good indication of what we should expect to see from a growth standpoint over the course of the rest of the year?
Mac Armstrong, CEO
Hey, Dave, great question. We were thrilled to see the growth. We expected it. We touched upon it at the end of Q4 – or our Q4 earnings call that we saw very good momentum in the business. And it did manifest itself in Q1, and we think it's going to manifest itself through the rest of the year. To your question on one-offs, as I mentioned in my remarks, there was $3.6 million of premium that was associated with the earthquake book both commercial and residential for a partnership that we stepped into that you could argue as one-off. But at the same time, there also were around seven points, call it $7 million, of premium that was wound down from the all-risk book. So net-net it washes. So I guess the best way to describe it is not – when it's all said and done in this quarter, there's nothing really one-off because there's one thing to the good and one thing that was probably 2x back to the bad. So we feel very good about the growth in this quarter and how we're positioned for Q2 and beyond.
David Motemaden, Analyst
Got it. Thanks for that. And just on the all-risk book that's winding down the $7 million of headwind this quarter the seven points, is that going to remain around that level over the course of the year as that book non-renews, or are there some chunkier pieces that are rolling off in subsequent quarters?
Mac Armstrong, CEO
I believe that should serve as a solid guideline for the year. However, it is likely to be less significant in the fourth quarter, as that's when we began to not renew policies, resulting in the majority of them expiring around October. Nonetheless, I think that is a reasonable benchmark. One positive factor is the growth in our national account all-risk business, as well as the layered and shared all-risk business we are collaborating on with Amwins. This business is experiencing healthy growth and providing excellent returns, meeting or even surpassing our targets in terms of average annual loss and premium at maximum probable loss. We are optimistic about this development, which will help offset the decline and support our growth beyond 2021. However, I do expect to encounter a seven-point headwind due to the phasing out of the admitted book, which will be evident in the second and third quarters, but may be somewhat less impactful in the fourth quarter.
David Motemaden, Analyst
Got it. That makes sense. On the other side, the E&S book continues to ramp up. Could you quantify that? It seems like there were $25 million in gross premiums this quarter, compared to $21 million last quarter, indicating a significant annualized increase. Do you expect to see continued sequential acceleration in that or have we reached the capacity where it can grow? There is still strong year-over-year growth, but perhaps it will slow down a bit more sequentially?
Mac Armstrong, CEO
Yes, Dave. I don't want to give guidance on sequential growth, but what I would say is there's very good momentum in the E&S company right now and it's coming from Commercial Earthquake. It's coming from national property accounts. But there are also new programs that we launched in the second quarter as I said that were not meaningful contributors in particular; a builder's risk partnership for national builder's risk accounts and our excess liability program. All of those have great potential, terrific market conditions to be participating in or capturing and taking advantage of rather, great distribution partners that can drive production in some cases an existing book of business that we can slot into. So I would say there's terrific momentum in the lines that we launched in Q3 and Q4 of 2020. There's a lot of terrific potential in products that are just getting off the ground in Q1. And then lastly we're not done. There are several more that are in various stages of R&D so to speak. So I think you'll see more products in the E&S market come online from us this year which gives us the conviction to say that in time the majority of our commercial business could be E&S as well as it has the potential to be the same size as the admitted company.
David Motemaden, Analyst
Got it. Great. Thanks for the color.
Paul Newsome, Analyst
Congratulations on the quarter. I just have one remaining question and I apologize if I'm confused. A negative loss ratio is an interesting phenomenon; I think I've seen it once in my career. What's intriguing to me is that the current year also showed a negative number, not just in property development. Could you explain how that works from an accounting perspective, specifically how you arrive at a negative number for the current year?
Chris Uchida, CFO
Hi, Paul, it's Chris. Let me respond to your question. Yes, it’s a good thing. You mentioned something that is unusual to see. I think it happened naturally based on our reinsurance structure. We’ve discussed before that we use quota share reinsurance for many of our attritional lines of business, and we buffer that with excess of loss. This situation happened to involve an attritional loss that also went into our catastrophe tower. These reinsurance contracts do not benefit each other. One thing to note is that we view the negative loss as being offset by the ceded premium related to the reinstatement of the reinsurance layers. In Q4, this was around $4 million, and it is expected to be a similar amount in Q2 due to how the reinsurance is expensed through ceded premium. Combining those numbers, we indicated during our prepared remarks that we consider it a negative $1 million. For us, the accounting treatment displays this in two different lines, but we think of it as a combined loss. An analogy to understand this is that we use our reinsurance structure with a reinstatement premium so that when the event occurred, we were able to recover 100% of the loss and offset that with the reinstatement premium. Alternatively, we could have structured it with a co-participation scenario where instead of recovering the full amount, we only recovered the net amount, resulting in about the same $1 million loss, but it would all show under the loss line. In our case, we used reinstatement premium in our structure, so it appears in both the ceded premium and the loss number. This provides some insights into the accounting treatment and explains why it appears in different lines and across multiple quarters. This also supports the reason we provided first half year guidance, as we want to ensure the market has a clearer view of how the first half of 2021 was impacted by those reinsurance charges.
Mac Armstrong, CEO
Yes. Chris, described it well, Paul. Ultimately, it is a negative number in that loss, but it ultimately ends up collectively being, when you factor in reinstatements and the like, a loss of $1 million, a positive loss so to speak. An actual loss.
Mark Hughes, Analyst
Thank you. Good afternoon or good morning. Can you discuss capital? Specifically, with PESIC ramping up quickly, how much more capacity do you have with your current balance sheet?
Mac Armstrong, CEO
Yes, Mark, this is Mac. That's a great question. I want to emphasize that we have more than enough capital to support our growth plans. Currently, our net premiums earned to surplus ratio is about 0.5. Our long-term goal for that is between 0.9 and 1, and that target may actually increase due to the nature of the business we are writing, particularly in casualty areas that tend to have longer tail risks. As such, we believe we are sufficiently capitalized, and then some, to execute the strategy we've outlined. This confidence also drives our decision to authorize a stock buyback, as we see opportunities to strategically deploy our capital. We can proceed with acquisitions, like the one we made in Hawaii, effectively integrating new business into our operations. Additionally, we could buy back our stock at what we consider an attractive valuation, aiming for a return on equity in the mid-teens. Alternatively, we could reinvest in our business by bringing on new teams or exploring new lines of business. Fortunately, our current capital position enables us to pursue all of these options. We believe we can be very effective in capital deployment over the next several quarters and generate appealing returns across various avenues.
Mark Hughes, Analyst
Thank you for that. And then the excess liability book, how are you approaching it from an underwriting perspective? What expertise have you brought in-house? What is informing your judgment about what the pieces of business you should write?
Mac Armstrong, CEO
Yes, that's a good question, Mark. I can tell you that we have brought in Jason Sears, a leader who has overseen all our program business and has a long-standing background in casualty underwriting. We’ve also chosen a partner with whom he has a strong history to help us develop our excess liability franchise. Overall, our approach to excess liability mirrors our strategy across other lines of business, excluding earthquake and Hawaiian hurricanes. While it may seem like a shift, we are being very deliberate about how much we want to write in the first year and are approaching it conservatively in terms of the limits we are willing to accept, along with our reinsurance strategy. In this case, we will not exceed a $5 million gross line, taking about 22.5% of that, resulting in a net position of around a $1.1 million line. We are entering this excess position in a market that is currently challenging. However, we believe there is potential to develop a robust portfolio here. We are collaborating with a production partner with whom we have a solid track record in property insurance, and our goal is to familiarize them with our philosophy and strategy in the casualty space. While we see great potential, we will not rush to write $50 million of excess liability in the first year. Our initial approach will be modest, but it could evolve into a more substantial book in the second or third year.
Tracy Benguigui, Analyst
Thank you. I just wanted to follow up on some comments you made about the buyback authorization. I totally get that you're not trying to signal that you're not constructive about growth. But just help me think about how that may be attractive to you. Because usually, you tend to see companies want to buy back more stock when they're trading below or near book value and you're well above that. So if you could just help me understand the framework you have in mind.
Mac Armstrong, CEO
Yes, that's a great question. I appreciate it. Our Board and management team assess our potential for earnings growth and all the measures we've implemented to ensure consistency and stability in our earnings, such as with the aggregate cover and the cap bond, alongside the underwriting adjustments. We have strong confidence and visibility in the business, which is why we've increased our guidance. Considering my background as a former private equity investor, we evaluate earnings growth relative to the price-to-earnings growth, and we believe the current level is very appealing as it is significantly below our earnings growth trajectory. This is part of the reasoning behind our Board's comfort with the buyback.
Tracy Benguigui, Analyst
Okay. Excellent. That was very helpful. You're growing in so many different areas. But if I could just take you home to your earthquake risk, I know, it is particularly within commercial that's grown pretty substantially. And I'm just wondering if others just don't have the appetite now, like what you're seeing in terms of competition and risk appetite in that space.
Mac Armstrong, CEO
Sure Tracy. In the Commercial Earthquake segment you mentioned, we experienced impressive growth of over 96%. This growth was driven by our ability to continue taking rate, particularly in our small Commercial Earthquake segment, and by opening up our E&S company to our established distribution partners. This strategy has enabled us to engage with risks we previously had limited access to, such as mid-sized or larger accounts where our admitted offerings were often not viable due to issues with forms, coverages, and rigidities. As a result, we demonstrated strong growth in Q1 for Commercial Quake. Regarding competition, while there is activity in that market, we see good rate integrity overall. I noted earlier that in large accounts, we might be observing a slight deceleration in rate increases, whereas in small accounts, rates remain strong. Overall, I believe we have significant opportunity in Commercial Quake. While I wouldn’t guarantee that a 96% growth rate is sustainable, the market conditions are favorable for us as a new E&S player and as a long-standing participant in the admitted side, allowing us to continue gaining market share and improving terms and conditions.
Mark Hughes, Analyst
Thank you. Good afternoon or good morning. Can you talk about your sales support or field network? As you go into new products, have you been expanding that? How big is that today versus a year ago?
Mac Armstrong, CEO
Adam, this is Mac. Just to clarify you're asking about the sales support and our production plan and the like, or are you talking in general about how like, our footprint? What do you mean by the field network?
Mark Hughes, Analyst
Yes, your field support.
Mac Armstrong, CEO
Yes. No great question. So, if you look at just year-over-year, our distribution footprint grew 22%. And a line like Inland Marine that grew 300%, the distribution footprint was up 63%. Residential Earthquake was up 25% year-over-year. So these are numbers that we track very closely because they are leading indicators of future growth as well as existing growth. I'll highlight Residential Earthquake, for instance, we added on a sequential basis a couple hundred producers from Q4 to Q1. And that was driven as much by new partnerships. So the Travelers partnership, we were able to appoint new producers. Now do they all start sending over a ton of submissions and do we buy a ton of policies? No, that wasn't the case but it's a good leading indicator for what the potential can be. So we are definitely expanding our distribution network. The combination of partnerships, new products, and obviously, just opening up PESIC, the E&S company to either existing or new distribution sources is the contributing factor to that.
Adam Klauber, Analyst
Hi. Can you talk on the sales support or field network? As you go into new products, have you been expanding that? How big is that today versus a year ago?
Mac Armstrong, CEO
Yes, Adam, this is Mac. Just to clarify you're asking about the sales support and our production plan and the like, or are you talking...
Adam Klauber, Analyst
Yes, your field support.
Mac Armstrong, CEO
Yes. No great question. So, if you look at just year-over-year, our distribution footprint grew 22%. And a line like Inland Marine that grew 300%, the distribution footprint was up 63%. Residential Earthquake was up 25% year-over-year. So these are numbers that we track very closely because they are leading indicators of future growth as well as existing growth. I'll highlight Residential Earthquake, for instance, we added on a sequential basis a couple hundred producers from Q4 to Q1. And that was driven as much by new partnerships. So the Travelers partnership, we were able to appoint new producers. Now do they all start sending over a ton of submissions and do we buy a ton of policies? No, that wasn't the case, but it's a good leading indicator for what the potential can be. So we are definitely expanding our distribution network. The combination of partnerships, new products, and obviously, just opening up PESIC, the E&S company to either existing or new distribution sources is the contributing factor to that.
Operator, Operator
Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to, Mr. Mac Armstrong for closing remarks.
Mac Armstrong, CEO
Great. Thank you, Operator, and thank you all for your time this morning. This concludes Palomar's first quarter earnings call. We appreciate your participation and questions and always your support. We are pleased with our first quarter results. And more importantly, I think we're very enthusiastic about our growth prospects on a go-forward basis. We executed across all facets of our plan during the strong quarter. Illustratively, our strong premium growth laid the ground for continued momentum in existing franchises, as well as we have new lines of business that could provide incremental growth that are just getting off the ground. We have new partnerships and new geographies that we have entered into. We've also made meaningful progress on enhancing the predictability of our results. So as such, we raised our guidance. And we hope you can sense our enthusiasm for what lays ahead of us, and hopefully you share it. So thanks everyone. We look forward to speaking to you after the second quarter. Have a great day.