Earnings Call Transcript
Palomar Holdings, Inc. (PLMR)
Earnings Call Transcript - PLMR Q1 2024
Operator, Operator
Good morning and welcome to the Palomar Holdings First Quarter 2024 Earnings Conference Call. As a reminder, this conference call is being recorded. I will now hand the call over to Mr. Chris Uchida, Chief Financial Officer. Please proceed, sir.
Chris Uchida, CFO
Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me here today is Mac Armstrong, our Chairman and Chief Executive Officer. Additionally, Jon Christianson, our President, is here to answer questions during the Q&A portion of the call. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11:59 p.m. Eastern Time on May 10, 2024. 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 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. During the first quarter, Palomar celebrated its 10th birthday, and this quarter is a terrific illustration of how much we've accomplished in our young history. We produced another quarter of profitable growth and again demonstrated our ability to grow where we want while delivering predictable earnings. Five product categories generated gross written premium growth of 47.2%, with especially strong contributions from our Crop and Casualty products. Likewise, we delivered net earned premium growth of 30% in the first quarter, a nice increase from the 14% growth we achieved in the fourth quarter of 2023. Crop, Casualty and certain Other Property lines, combined with our market-leading Earthquake franchise, drove adjusted net income growth of 36% and an adjusted return on equity of 22.9%. Another exciting result of our financial performance this quarter is our stockholders' equity surpassed $500 million, moving us into the AM Best Financial Size Category 10. This level should help us open new market segments, distribution channels and attract talent. The year is off to a strong start, and we are on track to achieve the Palomar 2X goal of doubling our adjusted net income over a 3 to 5-year period. This goal was first introduced at our Investor Day in June 2022, which means we are tracking towards the shorter end of the timeframe objective. We remain steadfast in our commitment to maintain profitable growth with best-in-class risk-adjusted returns. First quarter puts us well on our way to attaining this objective in 2024 and beyond. Before I dive into our results, I'd like to point out that this quarter and going forward, we will provide performance commentary, including but not limited to gross written premium and market conditions on our 5 product categories: Earthquake, Inland Marine and Other Property, Casualty, Fronting, and Crop. We believe this will help our investors better understand how our portfolio of businesses is performing as we move forward. Starting with our Earthquake franchise, we grew premium 13% in the first quarter of 2024. It is important to point out that the first quarter of 2023 benefited from a nonrecurring premium transfer that came over in conjunction with the strategic carrier partnership. Excluding this onetime benefit, our Earthquake book grew 18% on a same-store basis. We are confident that Earthquake premiums will grow in the high-teens to 20% in 2024. Our confidence stems from several factors, most notably a residential earthquake partnership with Cincinnati Financial, consummated in the fourth quarter of 2023 that did not go live until April, as well as new partnerships, one residential and one commercial, that should increase production in the second half of the year. The Earthquake market remains stable and attractive from a pricing perspective. Commercial rates increased 11.6% this quarter as compared to 18.9% in the fourth quarter. The 8% to 9% inflation guards of residential earthquake policies are now providing the cushion above inflationary levels and provide annual increases regardless of market condition. While rate increases have moderated from 2023 levels, our key portfolio metrics, average annual loss and 250-year probable maximum loss to premium ratio, are at all-time best levels. This should translate into strong net earned premium growth as the cost of excess of loss reinsurance moderates from previous levels over the near term. Looking forward, we remain positive on the growth and profitability prospects of our Earthquake franchise. Our Inland Marine and Other Property products business grew 46% year-over-year, driven by our excess national property, Hawaii Hurricane and Builders Risk lines of business. While growth in this product set has accelerated from the pace that we saw in recent quarters, I wanted to reiterate, this is a category that best typifies our grow where we want mantra and where we are judiciously managing, and in certain cases, reducing our exposure. Specifically, we are not adding limits in continental hurricane-prone areas and reducing our balance sheet exposure in Hawaii as we transition our policies to our Laulima Reciprocal Exchange. Builders Risk, our largest in the marine product, had 16% same-store growth in the quarter. Our excess national property line saw approximately 178% year-over-year growth and 6% rate increases in the quarter as our teams built a portfolio of non-cat-exposed property business. For both Builders Risk and excess national property, we hired experienced regionally-focused underwriters that we believe will sustain the growth in these lines of business for 2024. All Risk business grew 21%, while increasing rates 18%, down from 36% in the prior quarter. Flood written premium grew 18% year-over-year in the first quarter. The growth was somewhat muted by new business moratoriums throughout the quarter in California due to the heightened rain and flood activity. Importantly, catastrophe losses associated with the major floods in California in January were in line with the estimates provided on last quarter's call. Hawaii Hurricane premiums grew 30% in the first quarter, a combination of rate increases, our inflation guard and new business written on Laulima paper. Importantly, our policyholders are embracing Laulima with approximately 92% of policies converting from Palomar Specialty Insurance Company in the quarter. It is worth reiterating that the migration of policies to Laulima transitions our business model from one that is risk-bearing to one that is fee-generative. Once complete, we will all but eliminate balance sheet exposure to hurricane losses in Hawaii. Our Casualty product set saw robust growth in the first quarter as premiums increased 327% over the previous year. Strong performing lines in the quarter were commercial contractors, general and excess liability, real estate errors and omissions, and miscellaneous professional liability. Excess liability particularly stood out as the investments made in talent and distribution over the course of 2023 allowed the book to grow fivefold year-over-year and 65% sequentially. Our contractor's general liability book had close to an identical sequential growth rate of 64%, while growing 375% year-over-year. Our professional liability line grew premiums 81% year-over-year, while seeing a 28% sequential increase. Our strong growth in Casualty products, which still comprise less than 15% of our total book, remains anchored in a conservative approach to our underwriting targeted niche segments of the market. We employ prudent risk management tactics such as modest gross and net line size, avoidance of heavy bodily injury and other high-severity exposures, and conservative reinsurance loss potential in the classes we write. Additionally, we continue to see decent rate increases across the Casualty book. Our professional liability products saw a blended increase of 6.5% with real estate errors and omissions rates increasing 10.6%. The excess liability book was up 6.7% and the contractor's general liability book saw an increase of 9.9%. While there are certain pockets of our Casualty book that are softer from a pricing perspective, private company D&O was up 2.4%. We continue to believe our rates are staying ahead of loss costs. For the quarter, the Casualty book's loss ratio remained in line with our conservative loss picks. As the predominance of the book is less than 2 years old, we are focused on building a sizable reserve base that we believe will develop favorably over time. Our Fronting business modestly grew premiums 3% year-over-year in the first quarter. Growth in the quarter was impacted by a few things. First, our cyber fronting program continued to see heightened competition and soft pricing as its average renewal decreased 6.7%. Second, two new partnerships were slower to ramp than initially forecast. Lastly, while our pipeline is strong, we did not add any new clients this quarter. As a reminder, we take a very selective approach to securing our Fronting partner portfolio to ensure comprehensive management of the programs and no surprises. We do expect to bring on new Fronting relationships in the second half of the year, but this product set will experience slower growth in 2024 than the others. Conversely, our newest product group, Crop, had a very strong start to 2024, writing $38.7 million of premium in the first quarter. Our success in market acceptance stems from our expertise and our strong partnership with Advanced AgProtection. We successfully married Palomar's data-driven risk management and underwriting model with Advanced AgProtection's longstanding market relationships, technology, and customer service to assemble an attractive and geographically-diverse book this quarter. As a reminder, for 2024, our Crop business has a participatory front, where we are taking 5% risk. The expectation is that we will take a more meaningful risk participation in 2025. Production exceeded our expectations, and we are now forecasting more than $125 million of premium in 2024, up from the previous guidance of more than $100 million. Also, Crop written premium is seasonal, so you should not expect much in the way of written premium next quarter. We are pleased with the traction to date and are confident that we will generate meaningful net earned premium in the years ahead. Turning to reinsurance, the first quarter is lighter in activity. That said, we were still engaged on several placements, including our June 1 core excess of loss placement and two quota sharing treaties, Casualty and Builders Risk. We are pleased that the ceding commission on the Casualty quota share renewed at slightly better terms than expiring, and we enhanced the treaty's terms and conditions. We also improved the economics on our Builders Risk quota share while increasing our gross and net line capacity. We are amid the 6/1 core XOL placement, as well as marketing Torrey Pines Re, our fifth catastrophe bond. We are encouraged by the progress to date on both key endeavors. As we discussed last quarter, we had two earthquake treaties renewed on January 1 at risk-adjusted decreases of approximately 5%. As we sit here today, certain layers of our core tower are bound, and the implied risk-adjusted decrease is directionally similar to the earthquake treaties renewed on January 1. While most of the placement is still outstanding, we are encouraged with the results so far. It affords us confidence that we will meet or beat the 5% price increase embedded in our full year 2024 guidance. To conclude, we are encouraged by the trends in our business and are raising the guidance range for our full year 2024 adjusted net income to $113 million to $118 million from $110 million to $115 million. And to reiterate, our guidance does assume a 5% risk-adjusted increase on our 6/1 core excess of loss program. Lastly, the midpoint of our guidance implies an adjusted ROE above our Palomar 2X target of 20%. 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. For the first quarter of 2024, our adjusted net income was $27.8 million or $1.09 per share compared to adjusted net income of $20.4 million or $0.80 per share for the same quarter of 2023, adjusted net income and earnings per share growth of 36%. Our first quarter adjusted underwriting income was $29.2 million compared to $22.2 million last year. Our adjusted combined ratio was 73% for the first quarter compared to 73.3% in the first quarter of 2023. Excluding catastrophes, our adjusted combined ratio was 69.8% for the quarter compared to 71.2% last year. For the first quarter of 2024, our annualized adjusted return on equity was 22.9% compared to 20.7% for the same period last year. The first quarter adjusted return on equity continues to validate our ability to maintain top line growth with a predictable rate of return above our Palomar 2X target of 20%. Gross written premiums for the first quarter were $368.1 million, an increase of 47.2% compared to the prior year's first quarter. Along with breaking out Crop, we also regrouped our written premium to align with our 5 key specialty insurance products: Earthquake, Inland Marine and Other Property, Casualty, Fronting and Crop. It is important to remember the seasonality of our Crop premium. Based on our current expectations, the majority of our Crop premium will be written in the third quarter of each year, with only modest premium in the second and fourth quarters. The $38.7 million of crop premium written in the first quarter should represent about 30% of the premium expected for the year. Net earned premiums for the first quarter were $107.9 million, an increase of 29.6% compared to the prior year's first quarter. For the first quarter of 2024, our ratio of net earned premiums as a percentage of gross earned premiums was 35.6% compared to 37% in the first quarter of 2023 and compared sequentially to 33.9% in the fourth quarter of 2023. The year-over-year decrease reflects our growth in Fronting and lines of business that use quota share reinsurance and the increased cost of our excess of loss reinsurance program that renewed last June.
Mac Armstrong, CEO
Losses and loss adjustment expenses for the first quarter were $26.8 million, comprised of $23.4 million of non-catastrophe attritional losses and $3.4 million of catastrophe losses from flood activity. The loss ratio for the quarter was 24.9% compared to a loss ratio of 24.8% a year ago. For the first quarter, our attritional loss ratio was 21.8% and our catastrophe loss ratio was 3.1%. We continue to expect our loss ratio to be approximately 21% to 25% for the year. Our acquisition expense as a percentage of gross earned premium for the first quarter was 10.5% compared to 11.4% in the first quarter last year and in line with the fourth quarter of 2023. Additional ceding commission and fronting fees continued to drive the year-over-year improvement. With our growth and mix of business, we expect this ratio to be flat for the full year with some potential for improvement. The ratio of other underwriting expenses including adjustments to gross earned premiums for the first quarter was 6.8%, the same as the first quarter last year and compared sequentially to 6.9% in the fourth quarter of 2023, in line with our expectations as we continue to invest in our organization while we continue to grow.
Chris Uchida, CFO
We continue to expect long-term scale in this ratio, while we may see periods of sequential flatness as we continue to invest in scaling the organization. Our investment income for the first quarter was $7.1 million, an increase of 39.4% compared to the prior year's first quarter. The year-over-year increase was primarily due to higher yields on invested assets and higher average balance of investments held during the 3 months ended March 31, 2024 due to cash generated from operations. Our yield in the first quarter was 4.2% compared to 3.4% in the first quarter last year. The average yield of investments made in the first quarter was 5.6%. We continue to conservatively allocate our positions to assets that generate attractive risk-adjusted returns. There were no shares repurchased during the quarter. While the previous plan has expired, as a matter of good corporate governance, we will be authorizing a new share repurchase program. At the end of the quarter, our net written premium to equity ratio was 0.94 to 1. Our stockholders' equity has reached $501.7 million, a testament to our profitable growth.
Mac Armstrong, CEO
As Mac mentioned, we are raising our full year 2024 adjusted net income guidance to the range of $113 million to $118 million, implying 23.5% adjusted net income growth at the midpoint of the range. It's important to remember that our loss estimate and guidance include our expectations of mini-cat such as severe convective storm activity. For the year, we expect our loss ratio to be approximately 21% to 25%, including our estimates of mini-cats, which represent approximately 2 points to 3 points of our expected loss ratio. With that, I'd like to ask the operator to open the line for any questions. Operator?
Operator, Operator
Our first question is from Paul Newsome with Piper Sandler.
Paul Newsome, Analyst
Congrats on the quarter. Is it fair to say as we look out past '24 that the attritional loss ratios should continue to rise? I think that was the answer in the past, but I just wanted to confirm that was still the case.
Chris Uchida, CFO
Thank you for your comments, Paul. You make a valid point. We still anticipate the attritional loss ratio to gradually increase throughout 2024 and into 2025 as the overall business mix changes, and we continue to expand in areas such as property, Inland Marine, special property, Casualty, and Crop. These segments will carry their own attritional losses, so we expect a moderate increase. However, we do not foresee a dramatic jump from about 21% this quarter to 40% next quarter. The increase will be gradual, possibly by 1 or 2 points each quarter.
Mac Armstrong, CEO
Yes. Paul, this is Mac. I would agree. The only thing that I would add is, like Chris said, it won't swing wildly because of our use of quota share in our balanced risk participation in the lines that he referenced. And then, our Earthquake business, we still feel like it's going to grow 18% to 20% this year. So it's not going to meaningfully under-index the growth, and that provides a nice anchor with its attritional loss ratio of 0%.
Paul Newsome, Analyst
Great. Could you provide your latest thoughts on the competitive landscape for specialty commercial and E&S? There has been a lot of discussion recently regarding the mixed data from E&S. While that might be a simplistic way to assess growth in E&S, it would be helpful to get your recent perspective on what you are observing from a competitive standpoint.
Mac Armstrong, CEO
Yes, Paul. I would describe the current market as broad-based, marking a shift from a year ago when it was more focused on the property side. There's a sense of rate integrity across the market, with pricing discipline evident. Rate increases are still occurring in property, though not at the same intensity as last year when conditions were more disruptive. In casualty, we've observed consistent rate increases except for cyber and the private company D&O segment of our MPL, which exceeded loss costs. Overall, there is rate integrity and stability in the market. Regarding the E&S side, we are engaging in traditional E&S business without seeing outflows into the admitted side.
Paul Newsome, Analyst
Great. Maybe it sounds a bit trivial, but do you see any impact from the small earthquake we had on the East Coast, either in terms of product interest or anything else? I received that question this morning.
Mac Armstrong, CEO
Yes, we often refer to those as marketing events. Recently, there was an earthquake in the Inland Empire, California, which registered a magnitude of about 4.3. It was significant enough to be featured in newspapers and on evening news, and people certainly felt it. We appreciate these events because they increase awareness and tend to result in a slight uptick in new business sales. An earthquake in New York gets some media attention, but since we don't write much business there, it's less impactful for us.
Mark Hughes, Analyst
Do you think the net earned premium ratio will reach its lowest point? Last year's third quarter was 33%. Should we expect it to be the same or possibly slightly better this year, around 34%?
Chris Uchida, CFO
Mark, that's a great question. I think as we indicated in the prepared remarks, we are still expecting an increase in our reinsurance costs as we go into the 6/1 renewal. I think there are some favorable winds out there. But right now, in our guidance and our expectations, we are still expecting a slight increase there. So with that type of mechanic and you kind of know the stair step that you see with our excess of loss and how that plays out through the net earned premium, I would expect that, let's call it, Q2 net earned premium ratio might go down a little bit from where it was in Q1. But then, as you pointed out, Q3 should still be the low point of our net earned premium ratio based on our current assumptions.
Mark Hughes, Analyst
Okay. And then, when we think about 2025, should that be migrating up a little bit, kind of offsetting some of the higher losses?
Mac Armstrong, CEO
Yes. Mark, this is Mac. I would say some of that is going to be driven, frankly, by Crop. So Crop right now is really more of a participatory front, as we described, with a 5% risk participation. Going forward in 2025, we will take it more meaningfully. So, that would help drive it up. If reinsurance pricing starts to decelerate or decline, that would be a driver of it. So you should expect decent net earned premium growth this year and that ratio potentially to tick up in '25 because our risk participation in lines like Crop and maybe a selective group of Casualty business that is beginning to mature and season more, that will help inform that as well.
Mark Hughes, Analyst
Yes. When you mention a 5% increase, what is the expected trajectory? If everything goes as planned, what are the next steps?
Mac Armstrong, CEO
I'm sorry, the 5% for Crop? Is that what you're asking?
Mark Hughes, Analyst
Yes.
Mac Armstrong, CEO
Yes. I would say 15% to 20% type participation. We're bullish on the prospects for that line and think we can build a very meaningful franchise there and for what it's worth. It was a very modest amount of premium that we wrote in 2023, but it was a very profitable book.
Mark Hughes, Analyst
Yes, exactly. How much of the commercial quake is related to overall commercial property supply and demand? Is there a different dynamic within commercial quake, or does it typically follow the trends of the broader market?
Mac Armstrong, CEO
I think Earthquake is a unique line. For commercial earthquake, especially layered and shared business, you need to have that coverage to satisfy a large commercial loan. You're writing in areas where people are very mindful of protecting assets that have considerable equity value. So I don't think it mirrors the broader property market, especially because it is the tried and true layered and shared market, where you have multiple participants on a singular risk. If you have a $500 million property schedule, you're not going to have one quake insurer. You're going to have 10 to 15. So because of that nature, I think it's pretty nuanced. It does follow the cost of reinsurance to some degree and reinsurance pricing in the primary market, but not in the sense of coverage and participants.
Operator, Operator
Our next question is from Peter Knudsen with Evercore ISI.
Peter Knudsen, Analyst
My first question is on midyear renewals. I believe you mentioned an increased expectation of costs in the prepared remarks. I'm just wondering if you could expand a bit on those updated views and how that's shaping up.
Mac Armstrong, CEO
Yes, I'm happy to provide that information. Thank you for your question. Our guidance for the year, which we have reaffirmed, anticipates a roughly 5% rise in the cost of reinsurance. We are currently in the placement process and are optimistic about the potential to surpass that figure. We renewed two smaller treaties on January 1, which saw a decrease of around 5%. Additionally, we secured some coverage in early April that starts on June 1, which also reflects a decrease of about 5%. This represents approximately 10% to 15% of the overall tower. There is still much to accomplish, so we aim to be cautious in our assumptions. However, all signs, including the initial pricing we have seen in the market for our catastrophe bonds, give us confidence that we will meet or exceed that expected level.
Peter Knudsen, Analyst
Okay. Yes, great. That's helpful. My second question is around the strong acceleration in the Casualty growth. I know you mentioned a little bit of the lines and the rate that was driving that. But I'm hoping you could talk a little bit more about the current market in some of those lines and how you guys are feeling about rate and loss trend in that space, and then, also if you're expecting that same strong growth to continue.
Mac Armstrong, CEO
We anticipate good growth in Casualty throughout the year due to significant investments in talent and leadership. Experts like Ty Robben, Brian Pushic, and Gerrit VandeKemp have joined us, bringing extensive experience and strong followings in the market. We are committed to investing in them from various standpoints, including systems and balance sheets, as well as enhancing our underwriting resources to establish a solid presence in niche markets. Currently, we are entering the market in a substantial yet conservative manner, especially concerning risk selection. We are avoiding high-severity exposed classes on both general and professional liability sides, which limits our management scope. Our maximum gross line is $5 million and net is $2 million. Given nuclear verdicts in the $100 million range, our $5 million gross line does not significantly impact our balance sheet or earnings. We have robust underwriting controls informed by our strong leadership. We believe we are obtaining adequate rates to cover our loss costs; our general casualty book increased by 9.9%, which likely corresponds to loss costs of about 4% to 5%. Excess liability saw a 6.7% increase, with similar loss costs trends. However, not all Casualty lines are experiencing the same rate increases or integrity. Financial lines are challenging, and while we do write a small amount of private company D&O under our miscellaneous professional liability, it hasn’t received the desired rate increases, prompting us to be cautious about our exposure there. Additionally, we believe our loss picks are conservative. They were recently vetted by our reinsurance panel during the renewal, leading to better terms and conditions and pricing, which serves as validation. Notably, our loss pick is significantly above the historical performance of the underwriters we have onboarded. Overall, we are optimistic about our Casualty strategy and niche focus, with strong leadership guiding us. We do not foresee releasing reserves in the near future, as we will continue to conservatively build our reserve base.
Peter Knudsen, Analyst
That's really helpful color.
Operator, Operator
Our next question is from Matt Carletti with Citizens JMP.
Matthew Carletti, Analyst
Mac, I was hoping to ask a high-level question on your residential quake book, particularly things like California and other areas where the homeowners market has gotten super tight and rates have gone up a bunch. What have you seen in terms of retention in that residential quake book kind of as that happened? My thought process has been like people are paying a ton more for homeowners. How sticky? Have you seen retentions change at all? Or are they feeling the wallet get a little tight and maybe retentions are sliding a little bit?
Mac Armstrong, CEO
Yes, that's a great question. I'm happy to report that our retention has remained stable, consistently in the mid-to-high 80s range. We've continued to grow our quake book by gaining market share and forming strong partnerships. However, new home sales and rising homeowners premiums are certainly challenges we face. Despite that, our franchise strength, partnership approach, and recent changes at the California Earthquake Authority have allowed us to maintain mid to high-teens growth in residential quake. We are optimistic and are monitoring the situation. If rates decrease and new home sales in earthquake-prone areas improve, along with an increase in inventory turnover, we could see those challenges shift to our advantage. I won’t speculate on the timing of rate changes. Instead, we will focus on navigating the current market and hope that when rate changes do happen, they will benefit us.
Operator, Operator
Our next question is from Andrew Andersen with Jefferies.
Andrew Andersen, Analyst
On Fronting, a little bit lower growth in the quarter. You mentioned some partnerships were slower to ramp. I think you had previously pointed to, for full year perhaps, growth in Fronting index and growth of overall company. Is that still the case?
Mac Armstrong, CEO
Yes, Andrew, good question. Thanks for asking it. I think it's not the case. I think it's going to under-index the growth. So the good thing is, we have a portfolio of products in 5 different categories. Some are firing on all cylinders. Some are indexing the growth rate. I would say Fronting is the one that is now under-indexing. A few of our new partnerships are slower to ramp. There is a little bit of rate headwinds in one of our larger relationships that I brought up. We have a pipeline, and we do expect to add to our portfolio of Fronting partnerships, but its growth is going to look more like the first quarter than it will the broader growth rate of the company.
Andrew Andersen, Analyst
Got it. Okay. And then, on Earthquake, it sounds like high-teens, 20%-ish for full year. If I think about the expense ratio here, does the mix of product between residential and commercial have an impact on the expense ratio? Is one lower than the other?
Mac Armstrong, CEO
Historically, residential earthquake had been a bit of a higher margin. The cost of acquisition might be a little bit lower. But right now, in this market, just because of the rates, the increases that we've seen in commercial earthquake, the underlying unit-level economics are almost at parity. So, a residential earthquake policy or commercial earthquake policy in 2024 are going to have the same margins.
Chris Uchida, CFO
Yes. One follow-up on that. When you look at our acquisition expense ratio on a gross basis, I think 10.5% for the quarter, we expect that to be pretty flat for the year, right? So overall mix of business, whether it be residential earthquake, commercial earthquake or even changes in the Fronting dynamic, we don't expect to have a material impact on that ratio as we go forward.
Operator, Operator
Our next question is from Meyer Shields with KBW.
Meyer Shields, Analyst
A bunch of like quick questions, if I can. First, I know Cincinnati is targeting higher net worth homeowners. And I'm wondering, does that translate into maybe writing accompanying residential earthquake on non-admitted paper?
Mac Armstrong, CEO
Yes, I apologize, we lost you for a second. Would you mind repeating that question? I heard the second half on non-admitted paper, but we didn't hear the first part.
Meyer Shields, Analyst
Yes. No problem at all. I know Cincinnati is looking to grow its high-net-worth homeowners, and I'm wondering whether that affords you the opportunity to write the Earthquake on non-admitted paper.
Mac Armstrong, CEO
Yes, I'm sorry. It is on a non-admitted basis. So we are writing that as an E&S policy with their high-net-worth E&S offering in California.
Meyer Shields, Analyst
Okay. Perfect. On Crop, I think Chris said that 30% of the written premiums come in the first quarter and the balance in the third. Is that a normal run rate? Or when you're ramping up, should we see higher percentages in the first quarter than this year?
Jon Christianson, President
Meyer it's Jon Christianson. For the next few years, we'd expect that to be fairly consistent. And so, you'll see the third quarter be, by far, the largest quarter of written premium. The second largest will be the first quarter, and then there'll be a little bit in the second and the fourth quarters, but really, the third quarter is going to be where you'd expect to see the largest premium share for the year.
Meyer Shields, Analyst
Okay. Perfect. And I know the retained premiums are going to be really, really low. But there are different approaches that a lot of the crop insurers take in terms of booking profitability for that line of business. In other words, waiting until, let's say, the fourth quarter before taking the combined ratio on the retained book below 100%. How is Palomar planning on, I guess, booking that line?
Jon Christianson, President
Yes, that's a good question. The premium we report for the third quarter will include some catch-up, as much of it is generated earlier. We typically wait for the acreage reports, which usually start coming in around June and mostly in July. At that point, we will account for all the written premium, leading to a slight catch-up in earned premium, which will affect the combined ratio. Thus, we will recognize some income from it in the third quarter and continue to do so for the rest of the year, as the majority of it will conclude by the year's end. We will recognize most of the written premium, with some profit expected during the third and fourth quarters for that segment of our business.
Chris Uchida, CFO
Yes. Meyer, I believe our approach will align closely with other companies in the market regarding the timing of when we recognize those profits. Typically, the modeling becomes clearer at the end of the third quarter and into the fourth quarter, which boosts confidence in the loss ratio for the year.
Meyer Shields, Analyst
Okay. Perfect. And last question, and I'm not exactly sure how to ask this, but Mac, you talked about being bigger and how that should allow for growth on more accounts. Is there any way of, I don't know, ballparking it or describing the relevance of the higher-size category?
Mac Armstrong, CEO
Yes, Meyer, I think it's hard for us to quantify right now. We had a commercial underwriting meeting a week or two ago. And our underwriters were pleased that with the increase in financial size, it's probably most relevant for our environmental team and our professional liability team. But then, they immediately asked when are we going to get an A rating? So that might be more impactful. So I would love to say it's a lot like what it was in 2020 when we got over $250 million, and that opened up a few different distribution channels that we couldn't see previously. Now it's just more about insured appetite and the credit rating requirements for certain larger accounts. So I can't quantify it right now. I think it's going to open up a lot, and I think it would definitely help from a recruiting standpoint. But I'd love to give you a dollar number. I just can't right now.
Operator, Operator
Our next question is from Pablo Singzon with JPMorgan.
Pablo Singzon, Analyst
Maybe for Mac or Chris, you mentioned about 5% price increase on reinsurance embedded in the guidance. What dollar benefit would you get if prices go up by, say, only 4% or 3%? I know the dollar cost of XOL will also depend on exposure and structure. But holding all that constant, how much dollar savings do you get if reinsurance pricing is more favorable than what you're assuming?
Chris Uchida, CFO
Yes. That's a great question. When you look at our book, and we've talked about it before that the cost of risk transfer last June 1 was about $230 million, right? So we will be buying more excess of loss reinsurance to cover the increase in our exposure. So let's say, when our exposure went up 10%, let's call it, $250-ish million, $253 million that we're going to be spending, right? We were expecting some sort of rate increase. Right now, we're saying 5% on top of that. So you kind of do that math. So you just kind of work it backwards. If you have a 1% savings on $250 million, that's $2.5 million over the full treaty year. So from our standpoint, that's probably the right way to think about it when you go in there. Now, not saying that's our exposure change or anything like that. But just when you want to do the math, we want to underscore that $230 million is probably the right base to think about what our opportunity is or what our potential additional cost is going to be at the next renewal.
Pablo Singzon, Analyst
Yes. All that makes sense. And then, second question, just thinking about the business mix change, I think Chris, you had said on this call about 1 point to 2 points deterioration in the attritional per quarter. My memory might be rusty, but it seems like that might be a tad faster than what you said before. Is that because attritional lines are growing faster? And then, as a follow-up to that, I think in the 2022 Investor Day, you guys had given all-in combined ratio guidance for Earthquake and, let's just call it, non-Earthquake. Do those margin guidance still stand as we think about the mix here?
Chris Uchida, CFO
Yes, that's a good question. I think suggesting a 1 to 2 point variation is somewhat conservative. If we reach the midpoint of our range of 21% to 25%, around 23%, we are confident about our outlook for the full year. There will be fluctuations each quarter, as you know well from the insurance sector, and we don't control the losses. So if there’s a swing of 1 to 2 points in a quarter, it doesn’t indicate any problems; it's just part of the nature of the industry, and it can also decrease by that same margin. Overall, we are very comfortable with our progress. We are experiencing strong growth in areas such as Inland Marine, special property, and some casualty lines. Everything is moving in a positive direction as expected. Reflecting on Investor Day, it seems consistent with our plans. We haven't made major changes to our quota shares, although we've started taking on a bit more, but not significantly different from what we presented at Investor Day. Our strategy there was to maintain consistent participation, which we still see as a long-term lever. As our balance sheet expands, we can take on more in these areas, contributing to profitability over time, as these are profitable business lines. We are currently sharing much of that margin with reinsurers, but over the next 5 to 10 years, more will shift to our balance sheet, which will help continue to grow our bottom line.
Mac Armstrong, CEO
And, Pablo, the thing that I would add is, we still feel very good about a sub-75% combined, even if that loss ratio moves up 1 point or 2 points, like Chris was describing.
Pablo Singzon, Analyst
Yes. That makes sense. And then, last for me, you had referenced better ceding commissions on the Casualty quota share. But then you also said that, I think, as a percentage of gross earned, you think acquisition expenses stayed flat. So it doesn't seem like that benefit on the ceding is that meaningful, right? Is that the correct read?
Mac Armstrong, CEO
I believe it's simply a matter of the business mix. Inland Marine and Other Property Casualty represents only 14% of the business, and what was included in that quota share likely accounts for about 40% of that figure. Therefore, approximately 5% of the overall business did experience a slight improvement in ceding commission. It's just the nature of the business mix.
Operator, Operator
There are no further questions at this time. I would like to hand the floor back over to Mac Armstrong for any closing comments.
Mac Armstrong, CEO
Well, thank you, operator, and thank you to all who joined us this morning. We appreciate your participation, your questions, and most of all, your continued support. To conclude, we're off to a strong start to the year. And I would be remiss if I didn't thank our team at Palomar for their continued dedication and hard work, which is ultimately the driving force behind our terrific results and success, not just this quarter, but these past 10 years. I remain confident in the growth trajectory of our business, combined with our continued focus and our ability to deliver predictable earnings and returns. As an aside, in addition to our 10-year anniversary, we recently celebrated our fifth year as a public company. And so, I want to thank our investors for their support these last 5 years. We will continue to work in earnest on your behalf and will drive shareholder value. Thank you very much. Have a nice day, and speak to you next quarter.
Operator, Operator
This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.