Earnings Call Transcript - PLMR Q2 2025

Operator, Operator

Good morning, and welcome to the Palomar Holdings, Incorporated Second Quarter 2025 Earnings Conference Call. 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.

Toshio Christopher 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 PM Eastern Time on August 12, 2025. 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.

D. McDonald Armstrong, CEO

Thank you, Chris, and good morning. I'm pleased to discuss our second-quarter results as they further demonstrate our success in building a specialty insurance market leader as well as the execution of our Palomar 2X strategic imperative. We not only achieved exceptional top-line growth of 29%, 45% on a same-store basis, but we also saw strong bottom-line growth with adjusted net income increasing 52% year-over-year. This strong growth underscores the strength and diversity of our product suite and the effectiveness of our balanced book of property and casualty and residential and commercial risks. Our financial metrics were equally impressive as we generated an adjusted combined ratio of 73% and a 24% adjusted return on equity. Our portfolio is one of a kind in specialty insurance and our second-quarter results reflect its unique nature. As I reflect on our results and the broader specialty insurance market backdrop, there are 5 key themes that I hope you take away from today's call. First, our ability to operate seamlessly across residential and commercial products in the admitted and E&S markets is a core strength and differentiator. This flexibility allows us to respond adeptly to any shift in market conditions and deploy capital where the exposure and terms and conditions are most attractive. The strategy has proven the most opportune this quarter in our earthquake and Inland Marine and other property lines of business. Second, the breadth of our specialty portfolio provides balance across insurance and macroeconomic cyclicality. Beyond the mix of E&S, admitted residential and commercial lines, products like surety and crop are not subject to traditional P&C insurance market cycles and as such, afford us distinctive earnings stability. Third, Crop and Casualty are now not only meaningful growth engines, but moreover contributors to our near- and long-term success. Both product categories had strong quarters and have exceptional leadership orchestrating our business plans. Fourth, we remain disciplined in our approach to underwriting and reserving. We are building reserves across the book and only releasing redundancies in short-tail mature lines of business. Furthermore, we are maintaining conservative gross and net line sizes as our books season in newer lines of business like casualty and surety. Fifth, our June 1 reinsurance placements were executed from a position of strength, enabling us to meaningfully reduce volatility, improve risk-adjusted returns and importantly, ensure consistency in our earnings base for the remainder of the year and into 2026. With that said, I will now offer further commentary on the performance and market conditions of our 5 product categories. Our Earthquake franchise delivered consistent results with gross written premium growth of 9% year-over-year. This performance highlights the strength of our purposefully structured portfolio of residential, small commercial and large commercial earthquake insurance products. The strategy, which has been in place since our formation in 2014, allows us to achieve steady growth and returns regardless of the market environment. With an increasingly competitive commercial earthquake market, our current focus is directed towards the Residential Earthquake book. During the quarter, we wrote record new business premium that complemented the 87% policy retention and 10% inflation guard on the existing book. Residential Earthquake continues to see growth opportunities from both the admitted and E&S markets as well as new distribution partnerships. We are seeing increased competition in Commercial Earthquake, most notably in large commercial accounts, which saw an average rate decrease above 20%, albeit from record levels. We remain disciplined on pricing in terms of conditions but are still allocating capital to large accounts business that meet risk-adjusted return targets. Small Commercial business, which represents 1/3 of the Commercial Earthquake book is more insulated to the pricing pressure exhibited in the large commercial E&S market. That said, it is still seeing rate decreases above 10%. While the conditions in the large commercial segment have softened, the strength of our residential book positioned us to sustain growth in 2025. For the remainder of the year, we expect high single-digit growth in our earthquake franchise, driven by the continued strength in Residential Earthquake. Our Inland Marine and other property category grew 28% year-over-year driven by a well-diversified mix of residential and commercial lines. Like the earthquake book, residential and residential-oriented admitted products were the best performers in the quarter. The admitted nature of the residential earthquake, Hawaiian hurricane and residential builders risk business requires considerable investment in systems, distribution, process and infrastructure and therefore, has a more pronounced barrier to entry than commercial E&S segments. Our Hawaii hurricane line grew 39% as we continue to increase rates on the held book and selectively increase the exposure in our Laulima reciprocal. Our residential builders risk products performed well in the quarter, highlighted by our admitted single location business, which grew 52% in the quarter as recently added underwriting talent was able to service new and existing distribution partners. The residential builders risk market, both standard and high value, continues to present attractive opportunities. In June, we also announced a strategic partnership with Neptune Flood to enhance our residential flood offering. The partnership with Neptune will expand our flood exposure from geographically concentrated inland flood risk to a more diversified nationwide portfolio that leverages Neptune's market-leading technology and distribution reach. Importantly, reductions in wind exposure over recent years have freed the capacity to write flood risk in coastal areas without stacking exposure and increasing earnings volatility. While commercial property rates have softened in the Builders' Risk and Excess National Property segment, we are still growing and generating compelling results. Builders Risk grew more than 30% and renewed its quota share reinsurance program at improved economics from the expiring treaty. Excess National Property grew over 50% in the quarter in the face of low teens rate decreases. The growth was driven by a 30% increase in submissions and a larger gross line. With significant prospects still available, we will continue to add underwriting talent in these commercial property lines. Casualty had another strong quarter of growth as gross written premium increased 119% year-over-year in the second quarter. The strongest performers in the quarter were the E&S casualty business led by David Sapia that continues to write buffer layer accounts that are seeing rate increases of 15%. Environmental Liability, which nearly tripled year-over-year, albeit from a modest base, and the real estate E&O franchise, which grew 87% year-over-year as we expanded our geographic reach and distribution footprint. On the whole, rate momentum remains healthy and our risk appetite remains conservative, if not modest. In the second quarter, our average casualty net line was less than $1 million with our largest line of business, E&S Casualty, having a net line of approximately $800,000. We also added stellar talent to our Casualty team in the quarter that will both strengthen our underwriting bench and also launch new products. During the quarter, we welcomed Jason Porter to lead primary E&S Casualty and Frank Castro to build out our Healthcare Liability business. Jason and Frank are well-regarded professionals with long-standing distribution and reinsurance relationships. These additions reinforce our confidence in sustaining profitable growth in the casualty market while remaining disciplined on attachment points, net lines and rate. Our new surety business performed in line with expectations, growing at a pace consistent with our overall portfolio. Similar to the other casualty lines, we added experienced underwriting talent, expanded our geographic reach and bolstered our distribution network and surety during the quarter. We remain highly confident in the long-term growth potential of this new franchise. Casualty reserve approach remains conservative. Our approach is informed by consistent monitoring of loss emergence patterns, attachment points and portfolio mix. As discussed in prior quarters, we continue to carry nearly 80% of our reserves as IBNR, well above industry standards. Maintaining this conservative stance reinforces the strength of our balance sheet and provides confidence in the stability and predictability of our future results. Our Crop franchise generated $39 million of written premium in the second quarter compared to $2.2 million in the prior year period. The elevated result in the second quarter reflects scale, execution and an earlier-than-expected reporting of acreage related to localized mild weather in geographies where we are strong, which ultimately shifted some premium volume forward from the third quarter. Our April acquisition of Advanced AgProtection has been well-received by the market. As such, we are adding experienced talent to enhance our sales, claims and technology teams. These investments should expedite our long-term plan in crop. We remain confident in attaining our $200 million premium target this year and building the business to $500 million in the intermediate term. Fronting and premium declined 38% year-over-year, reflecting the final full quarter of impact from the conclusion of our partnership with Omaha National. This headwind will be all but gone in the third quarter, allowing the underlying growth of our Fronting portfolio to become more visible. Looking ahead, we'll continue to add partners selectively, but Fronting is not our highest strategic priority. As it pertains to reinsurance, the second quarter was equally productive and successful. We completed the placement of our June 1 core excess of loss treaty, achieving a 10% risk-adjusted rate decrease, better than the flat to down 5% we originally guided towards. This terrific result locks in favorable economics through 2025 and into the first 5 months of 2026. Our reinsurance coverage now extends to $3.5 billion for earthquake events, inclusive of $1.2 billion of catastrophe bonds and $100 million for Continental U.S. hurricane events. In addition, we introduced a standalone excess of loss treaty for Hawaii hurricane policies issued by Laulima, providing up to $735 million in coverage. As a result, our core excess of loss reinsurance tower is over 95% earthquake-only coverage, which makes the program both attractive and scarce to property catastrophe reinsurers. Beyond securing the limit to support our earthquake and wind books, we also improved our risk profile by lowering our all perils, excluding earthquake, per occurrence retention to $11 million from $15.5 million, maintained a $20 million retention for earthquake events even with a 15% increase in limit and exposure and lastly, put in place a $1.5 million retention for Laulima. These retentions are considerably inside of our stated guidelines of less than 0.5 of earnings and 5% of surplus. We also successfully renewed 11 other reinsurance treaties during the second quarter, including quota shares for two large lines of business in builders' risk and our cyber fronting program. Both renewed at improved economics. Separately, I'm pleased to share that our Board has authorized a 2-year $150 million share repurchase program that permits us to opportunistically deploy capital and buy back our shares at levels that we believe are attractive. Stock buybacks will not impede our ability to capitalize on already identified or future market opportunities and that they could enhance our Palomar 2X strategic imperative. The buyback program simply demonstrates the conviction we have in our long-term strategic plan and the future of Palomar. In conclusion, we executed and delivered strong results this quarter, our 11th consecutive earnings beat in the face of a softening commercial property market. The results are a testament to our distinct portfolio of specialty products. On the heels of the second quarter's performance, we are raising our 2025 adjusted net income guidance to $198 million to $208 million from $195 million to $205 million, a midpoint that implies an adjusted ROE of 24%. With that, I'll turn the call over to Chris to discuss our financial results and guidance assumptions in more detail.

Toshio Christopher 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 second quarter of 2025, our adjusted net income grew 52% to $48.5 million or $1.76 per share compared to adjusted net income of $32 million or $1.25 per share for the same quarter of 2024. Our second quarter adjusted underwriting income was $48.4 million compared to $32.9 million for the same quarter last year. Our adjusted combined ratio was 73.1% for the second quarter of 2025 and 2024. Excluding catastrophes, our adjusted combined ratio was 73.1% for the quarter compared to 70.3% last year. For the second quarter of 2025, our annualized adjusted return on equity was 23.7% compared to 24.7% for the same period last year. Our second quarter results continue to demonstrate our ability to achieve our Palomar 2X objectives of doubling adjusted net income within an intermediate timeframe of 3 to 5 years while maintaining an ROE above 20%. Gross written premiums for the second quarter were $496.3 million, an increase of 29% compared to the prior year second quarter or 45% growth when excluding runoff business. As we've discussed on prior calls, this runoff business will add a $32 million headwind in the third quarter and then will be behind us. Net earned premiums for the second quarter were $180 million, an increase of 47% compared to the prior year second quarter. Our ratio of net earned premiums as a percentage of gross earned premiums was 44% as compared to 37.4% in the second quarter of 2024 and compared sequentially to 43.7% in the first quarter of 2025. The year-over-year increase in this ratio is reflective of improved excess of loss reinsurance and of the higher growth rates of our non-fronting lines of business, including earthquake that ceded less premium. With the timing of our core excess of loss reinsurance program renewal and the majority of our crop premiums written and earned during the third quarter, we continue to expect the third quarter to be the low point of our net earned premium ratio, increasing throughout the remainder of the reinsurance treaty year in a similar pattern to last year. While we expect quarterly seasonality in our net earned premium ratio, we continue to expect net earned premium growth over a 12-month period. Based on our performance for the first half of the year, we expect our net earned premium ratio to be in the low 40s for the year. Losses and loss adjustment expenses for the second quarter were $46.2 million, comprised primarily of non-catastrophe attritional losses with a very minor amount of favorable development on prior year catastrophe events. The loss ratio and attritional loss ratio for the quarter was 25.7%. Additionally, the results for the quarter include $6.5 million of favorable development, primarily from our shorter tail lines, such as Inland Marine and other Property business. We continue to hold conservative positions on our reserves. Favorable development is the result of our conservative approach to reserving upfront, allowing us to release reserves later. A great example of this is our all-risk business, where we initially established conservative reserves as the book grew, then subsequently trimmed our exposure, resulting in strong reserve positions that we can release. Our results for the quarter reinforce our conservative approach to reserving and use of reinsurance. For the year, we expect our loss ratio to be in the low 30s. Our acquisition expense as a percentage of gross earned premium for the second quarter was 12.6% compared to 11% in last year's second quarter and 12.3% in the first quarter of 2025. This percentage increased along with the overall diversification of our unique specialty book of business. For the year, we expect this ratio to be around 11% to 12%. The ratio of other underwriting expenses, including adjustments to gross earned premiums for the second quarter was 8.7% compared to 7.3% in the second quarter last year and compared to 7.5% in the first quarter of 2025. As demonstrated by our hires over the last year and in the second quarter, we remain committed to investing across our organization as we continue to grow profitably. As we have discussed on our first quarter call, we have continued to invest in our crop organization, acquiring Advanced AgProtection on April 1. We expect long-term scale in this ratio, although we may see periods of sequential flatness or increases due to investments in scaling the organization within our Palomar 2X framework. Based on the organizational investments made, I expect this ratio to decrease sequentially in the third quarter and be higher for the year overall compared to last year. We expect this ratio to be around 8% for the year. Net investment income for the second quarter was $13.4 million, an increase of 68% compared to the prior year second quarter. The year-over-year increase was primarily due to higher yields on invested assets and a higher average balance of investments held due to cash generated from operations and the August 2024 capital raise. Our yield in the second quarter was 4.7% compared to 4.3% in the second quarter last year. The average yield on investments made in the second quarter continues to be above 5%. We continue to conservatively allocate our positions to asset classes that generate attractive risk-adjusted returns. At the end of the quarter, our net written premium to equity ratio was 0.91:1. Our stockholders' equity has reached $847.2 million, a testament to consistent profitable growth and the capital raise. I would like to comment on our business from a modeling perspective for the third quarter in addition to expectations mentioned earlier in my remarks. While we did see more crop premium and losses in the second quarter than originally anticipated, which is influencing our view, the third quarter will continue to stand out based on our crop participation increasing to 30%, the crop book's growth and seasonal earning pattern and the first full quarter of our excess of loss reinsurance placed June 1. Taking all of that into consideration, for the third quarter, we expect the following: the highest gross earned and net earned premium dollars with the lowest net earned premium ratio, the highest loss dollars and highest loss ratio and our acquisition expense and adjusted other operating expense dollars to continue to be in line with growth expectations, but with the lowest gross earned premium ratio for the year. Thinking about the dollars sequentially from the second quarter to the third quarter, we expect a more pronounced increase in gross earned premium, net earned premium and losses. We expect acquisitions expenses to be stable, and we expect adjusted other underwriting expenses to increase incrementally from the continued investment in our organization. Overall, we expect the combined ratio to be in the mid- to upper 70s, including catastrophe losses. The apex of our combined ratio will be in the third quarter, primarily due to crop. Based on what we are seeing, I expect the tax rate to be between 23% and 24% next quarter. Turning to our guidance and as Mac discussed, reflecting our strong operating results for the first 6 months of the year, we are raising our full year 2025 adjusted net income guidance range to $198 million to $208 million. Our guidance includes $8 million to $12 million of additional catastrophe losses. Our win retention of $11 million is well within our catastrophe loss range for exposure that has been meaningfully reduced over the last few years. Importantly, the midpoint of our full year guidance range implies adjusted net income growth of greater than 50%, a full year adjusted ROE above 20% and doubling our 2022 adjusted net income in three years and doubling our 2023 adjusted net income in just two years. With that, I'd like to ask the operator to open the line for any questions.

Operator, Operator

The first question comes from Paul Newsome from Piper Sandler.

Jon Paul Newsome, Analyst

Could you discuss the property-related competition in more detail? There are concerns that the significant decline in Commercial earthquake pricing might affect growth potential for Palomar, at least in the short term. Any additional insights on this would be appreciated.

D. McDonald Armstrong, CEO

Yeah, Paul, this is Mac. Thanks for the question. I want to start by saying we are still expecting growth in earthquake for the year, with significant growth in the high single digits. Although it's down from our initial projections for 2025, it's still a healthy amount of growth in both earthquake and Inland Marine, as well as other property, which saw a 30% increase in the second quarter. It's important to note that our portfolio is balanced between residential and commercial segments in both earthquake and Inland Marine, including a mix of admitted and Excess & Surplus lines. This combination allows us to navigate market cycles while still achieving growth. Regarding our residential earthquake segment, I want to reiterate that we have a 10% inflation guard, a policy retention rate in the high 80s, and we are expanding our distribution. We are capturing market share from the largest player in the California Earthquake Authority and have established ourselves as a market leader, experiencing rapid growth. In the commercial earthquake sector, while we face rate pressure, we continue to find appealing business opportunities and are writing policies at attractive levels. As we consider the current softening in the property catastrophe reinsurance market, we are benefiting from both scale and growth in our earthquake franchise. For Inland Marine and other property, we maintain a balance between residential and commercial business. The residential side is exhibiting healthy growth, while the commercial side is facing rate pressure but presents significant opportunities for geographic expansion, adding underwriting talent, and issuing larger lines as our balance sheet strengthens alongside our portfolio growth. We are optimistic about the state of our commercial property segment. While competition exists in large commercial areas, our position in small commercial and admitted commercial business is strong, and we anticipate healthy growth for the remainder of this year and into 2026. Furthermore, on the residential side, we have several growth drivers and market-leading products, and we are confident in executing our strategy, which is why we've raised our guidance significantly this year and may do so again based on our performance. I want to reassure everyone regarding property pressures; while we are not immune to them, our diverse portfolio and expertise position us very well in this environment.

Jon Paul Newsome, Analyst

And then maybe as a follow-up and somewhat related, any thoughts on sort of green shoots as you build out other parts of the business that are new and early?

D. McDonald Armstrong, CEO

Green shoots in the property segment, Paul?

Jon Paul Newsome, Analyst

Just in general, what new businesses, you've been adding new products for a while. I'm just wondering if there's any.

D. McDonald Armstrong, CEO

We are highly focused on three product categories that show significant potential. Casualty has demonstrated strong growth this quarter, and our aim is to achieve growth not only through increased exposure but also through careful underwriting practices. I want to highlight that our average net line in our fastest-growing and largest casualty segment, which is E&S casualty, is below $1 million. Additionally, we are experiencing robust growth in the crop sector, with growth occurring slightly earlier than anticipated, which bodes well for reaching the $200 million target I mentioned. This also suggests stability in our loss consistency, as we have incurred some losses earlier due to the reporting patterns in crop insurance. Lastly, surety represents another promising area for growth. The new hires we brought on this year are expected to create additional opportunities. Overall, we have several significant growth avenues and a strong foundation in the property sector that allows us to maintain a disciplined and conservative approach as we pursue these opportunities. Thank you for your question; I could discuss the growth opportunities we see for a long time.

Operator, Operator

We take the next question from the line of Peter Knudsen from Evercore.

Peter B. Knudsen, Analyst

I'm just wondering, is there any way you'd be willing to give us any disclosure around the growth in quake between resi and commercial just to get a better sense of your guys' growth there and the competition that's going on? And then within that, I'm just curious what the assumption around Commercial earthquake pricing is moving forward within that updated high single-digit earthquake outlook that you guys provided?

D. McDonald Armstrong, CEO

Yeah, Peter. So we don't break out the growth rates between the two. What I can offer you is that residential quake is larger. It's about 55% of the book. It's got a healthy inflation guard and strong policy retention that kind of blends out to a 6% or 7% growth rate if you just apply those two. So there's obviously growth in exposure in new business, as I said, record new business. On the commercial quake, that's where we're seeing more pressure. It's more large account business. And so that's not growing at the same clip that we're seeing in residential quake. But what I would offer you anecdotally is in the month of July, we're off to a good start this quarter with the growth and think that high single digits, if not low double digits based on July is attainable.

Peter B. Knudsen, Analyst

Okay, great. And then just switching gears away from growth for a moment. Just looking at the accident year loss ratio ex cat, if you exclude the favorable development, when we calculated at 29.4%, I think increased a bit from the 26.6% in 1Q. And so I was just wondering if you could talk a little bit about the driver of that elevated ratio. Is that entirely mix driven or is there any one-off loss experience in the quarter that you would call out? And then within that, am I correct in still thinking that 3Q's attritional on your reported basis should be in the mid-30s?

Toshio Christopher Uchida, CFO

I can address that. Yes, I believe it's mainly due to the mix, as you pointed out. The significant factor is related to the Crop business, where crop earned premiums came in earlier than we initially anticipated. This early premium also leads to slightly higher losses. Looking at it over a 12-month period or across the full calendar year, it doesn't alter our overall expectations for that segment. Everything is performing as we expected, but this situation may provide a bit of a boost in the second half of the year since we anticipate losses to be lower than we had predicted, with losses originally expected in the third and fourth quarters occurring a bit sooner in the second quarter. Overall, there are no significant changes in our approach, but on a quarterly basis, we anticipate some favorable outcomes in the third and fourth quarters due to those crop losses arriving earlier than expected. In general, there are no changes or surprises in our lines of business, and we see strong results at the top line driving some higher losses and mix. Regarding prior period development, we continuously take initial reserves conservatively and have cautious loss estimates when we start our books or years. This approach allows for favorable prior period development as time progresses; while we don’t plan for it, it’s not unexpected based on our reserving strategy.

Operator, Operator

Peter, does that answer all your questions? We take the next question from the line of Mark Hughes from Truist Securities.

Mark Douglas Hughes, Analyst

The guidance, you raised the guidance, $3 million, the $198 million to $208 million. If we think about the favorable development in the quarter, it was greater than that. And so one might suggest the underlying guidance was a little bit lower. Is that a fair look at it or how would you frame that up?

D. McDonald Armstrong, CEO

We've raised our guidance three times this year with only two quarters of results. We've done this after a robust first quarter, following a successful reinsurance placement, and now again after a strong second quarter. I wouldn’t interpret this as a major signal. As Chris mentioned, there is seasonality and some premiums have been pulled forward, along with losses from crops that we haven’t taken into account yet. We also have a catastrophe load that matches our retention levels. Last year, during significant storms, we saw far fewer retention losses due to a decrease in our continental hurricane exposure. We believe this indicates a level of conservatism on our part. Our objective is to exceed earnings expectations, and we've accomplished this for 11 consecutive quarters while raising guidance eight times over the past few years. This is part of our strategy, which we followed this quarter as well. But I wouldn't attach too much significance to it, Mark.

Mark Douglas Hughes, Analyst

Understood. Yeah, 50% earnings growth is maybe a little higher, a little lower, still pretty good. When we think about the casualty opportunity, obviously, very strong growth. How would you frame up the pricing there? Any kind of marginal change in that pricing trajectory from Q1 to Q2? Any sign of maybe some deceleration there or is that still the same momentum?

D. McDonald Armstrong, CEO

It's product-specific. In excess liability, much of our E&S casualty business consists of buffer layer business. We're still seeing mid- to high teens rate increases. Some niche general liability, like environmental, has lower single digits, but still offers good terms and rate increases. We have pulled back somewhat on the professional liability side as that market has softened. Our focus remains on excess liability, general liability, and niche-focused general liability, where the rates are still healthy. The most pressure is in the professional lines, except for some miscellaneous E&O categories. Consequently, we are concentrating more on the former rather than the latter.

Operator, Operator

We take the next question from the line of Meyer Shields from KBW.

Meyer Shields, Analyst

Mac, I'm trying to just get my brain around how the Crop business worked because you talked about booking the premiums earlier. Does that mean that there's more unearned premium compared to what you might normally see on second quarter premium production?

Toshio Christopher Uchida, CFO

I believe we should consider that all pieces of the crop premium are arriving a bit earlier than anticipated. Initially, we expected most of the written and earned premium to be recognized in the third quarter. While this is still accurate, we saw some of that written and earned premium come in earlier during the second quarter. As Jon Christianson often highlights, we are discussing matters of just a few days when it comes to reporting. If something is reported on June 30, it falls in the second quarter, but if it's reported on July 1, it is recognized in the third quarter. We received more premium than we had expected in the second quarter. This has led to an increase in written premium, ceded premium, earned premium, ceded earned premium, and losses.

D. McDonald Armstrong, CEO

Losses being higher.

Toshio Christopher Uchida, CFO

So all of that kind of came in a little bit earlier. But again, when you look at this on a 12-month period of time that $200 million of crop premium that we're expecting for this year, we're still expecting it all the results to be the same for a 12-month period of time. It's really just a slight shift between Q2 and Q3, where we still expect most of that to come in, in Q3 versus what we talked about, let's call it, back at Investor Day.

D. McDonald Armstrong, CEO

And one thing I would add is underlying that is a bit of a positivity, is a bit of a positive note. Like it means there's been healthy production and yield and rain. And that, generally speaking, is a good thing for the Crop business. So another silver lining there.

Toshio Christopher Uchida, CFO

And one other thing I'd add is there's just after the April 1 announcement of the Advanced AgProtection acquisition and kind of combining our organizations together, just the acceptance and the excitement in the market that has really motivated agents to be on top of these acreage reports and send them in and just showing the good message of the combined force between Advanced AgProtection and Palomar as we move forward throughout the growing season. So it's all been well-received by the market, and I think that excitement has translated into a little bit of earlier reporting as well.

Meyer Shields, Analyst

Okay, that's very helpful and good to hear. I think we've discussed this before, but regarding what you're booking for crop profitability while we are still early in the harvest season, how should we approach the strategy for booking incurred losses in the second and third quarter before the major harvest?

Toshio Christopher Uchida, CFO

I would say any positive signs from the season will likely appear in the fourth quarter or possibly in the first quarter, depending on when things come in. This is largely dependent on individuals reporting their losses, as we need that information to understand the situation. Overall, we plan to maintain our choices. There was probably a bit more reporting coming in during Q2 from a results perspective. We anticipate that will even out by the end of the year. However, we cannot predict the exact timing for recognizing any positive or negative outcomes from the season until after the fourth quarter or possibly the first quarter of next year.

D. McDonald Armstrong, CEO

And the season so far is what we'd characterize as good to very good. But that being said, we are still in early August. And so there's a lot of time left before harvest. But the season is set up well, but we just need to continue to see favorability from a weather standpoint as we go through the rest of the year.

Meyer Shields, Analyst

Okay. That's very helpful. And if I can throw in one last question. Is there room for or need for maybe increasing the inflation guard ahead of tariffs?

D. McDonald Armstrong, CEO

Meyer, yeah, it's something we do look at. Where we sit here today, we feel that we have an ample cushion with the inflation guard and the actual replacement costs for building, whether it be for builders risk, Hawaiian hurricane or quake and flood. So it's something we'll monitor. But right now, we do believe it's an adequate cushion above inflation. Fortunately, it's an underwriting rule and change, so it doesn't require approval from an insurance department.

Operator, Operator

The next question comes from the line of Pablo Singzon from JPMorgan.

Pablo Augusto Serrano Singzon, Analyst

So first question, if we think about the reinsurance retentions across the lines you disclosed, which lines have the most immediate impact on underwriting income? I guess I'm thinking about the bridge between gross premiums and underwriting income, right, and which lines have less. It seems to me that you're getting hit more immediately by slower growth in earthquake, right? But then if you think about your faster-growing lines like casualty, for example, you're not really seeing much of a benefit to underwriting income today. Is that fair? And how would you sort of characterize how those lines feed ultimately into underwriting income?

D. McDonald Armstrong, CEO

Well, Pablo, if I understand your question correctly, it seems you're asking about where we find the most leverage in our products. In the casualty line, most of our reinsurance is quota share, and these are annual contracts. We haven't altered our risk participations in these quota shares because many of these programs are still new and involve longer tail lines. We prefer to let the portfolio stabilize before making significant changes to our risk participation. So, yes, regarding casualty, we aren't earning as much premium compared to property, which is more developed and has shorter tail risks. In the long term, there could be greater leverage in quake and all perils exposed businesses if we decide to increase our retentions. Initially, for earthquakes, we opted to maintain our retention at $20 million as of June 1. For wind, we actually reduced our retention to align better with our catastrophe load guidance. As our balance sheet expands—having achieved 50% earnings growth—it effectively compounds our book value, enabling us to raise those retentions. These lower layers do come with a high cost per line, significantly above our stated return on equity targets, which does provide us with some strategic options. Similar options are available on the casualty side, but it will take a bit longer for those to become apparent. It's a beneficial lever for us to have in the future.

Toshio Christopher Uchida, CFO

Yeah. And I would point out, Pablo, when you think about this from a, call it, a numbers and a metric standpoint, when we started this year and we thought about our reinsurance program, we talked about it being, let's call it, flat to up 5%. And you look at that from a standpoint of our net earned premium, right? For the year, we expected our net earned premium to be in the high 30s based on all of the things Mac talked about, especially making our reinsurance excess of loss program or keeping it conservative, right? We held the retention for earthquake. We lowered the retention for wind. Those aren't free. Our dollar increase in our reinsurance program was only $10 million. So with all of that, we expect our net earned premium now to be in the low 40s versus the high 30s. That is against the larger number of gross earned premium. So think about that when you think about earnings for the end of this year, but think about that also for all of 2026, we expect that benefit. So 2 to 3 points on the higher gross earned premium spread out through 2026 is how you should think about our model improving and even keeping all of our reinsurance very conservative, if not more conservative than last year and getting only a minor increase in dollar spend. So overall, we're very happy with how the book is going. And that leverage on reinsurance is going to play through over the next 12 months in our P&L.

Pablo Augusto Serrano Singzon, Analyst

Yeah. And then second question, I was curious if you're willing to provide the qualitative outlook for growth in Inland Marine and other property, right? So it seems like Builders Risk is still growing well. You probably have a headwind in commercial property, right? And then you have rate increases in the Hawaii block dropping off by the end of the year. So maybe if you could just sort of go through the bits and pieces there and put everything together to the extent you're willing to talk about sort of the growth outlook for the balance of the year.

D. McDonald Armstrong, CEO

We are not providing specific growth rates for individual products, but we believe there are several factors contributing to growth in Inland Marine and other properties. These include geographic expansion, the introduction of new underwriting talent that enables us to handle more submissions, which is particularly relevant for Builders Risk and Excess National Property. Our new partnership in the flood sector also presents a good opportunity for growth. In Hawaii, while rate increases will be implemented over time, there remains potential to expand our exposure, especially since Laulima has its own reinsurance program and that market is somewhat dislocated. Additionally, the admitted segment of Builders Risk offers significant growth potential as well. This year, we've faced rate challenges in the commercial sector of Inland Marine and other properties, and we have been reducing our All Risk book as we scale back our continental hurricane exposure. Despite these challenges, we have still achieved over 30 percent growth this year, and we are optimistic about continuing growth in this line, which is important for the overall business.

Operator, Operator

The next question comes from the line of Andrew Andersen from Jefferies.

Andrew E. Andersen, Analyst

Could you expand a bit on the Neptune relationship here and perhaps how that compares with your prior flood operations? And just remind, are you operating as a frontier or would you be taking balance sheet risk as well?

D. McDonald Armstrong, CEO

Andrew, yes, so our flood book historically has been concentrated in 5, 6, 7 states, really writing more inland flood. And so the partnership with Neptune allows us to write inland flood and coastal flood. So it expands the TAM. We will be taking underwriting risk. We've taken underwriting risk in flood since we launched the product some 6 or 7 years ago. As I mentioned on my previous remarks, we have reduced our wind exposure meaningfully. So that's allowing us to write coastal flood and not stack limit. So this will be a risk-bearing partnership with a nice operator that has really strong expertise in coastal flood and then we can marry that up with what we've done in the inland flood to get a nice balanced book of flood that's not overly concentrated from a geographic standpoint or nature of loss standpoint.

Andrew E. Andersen, Analyst

Should we think of that as benefiting any growth in '25 or is this more of a '26 type of event?

D. McDonald Armstrong, CEO

It's going to be more in 2026. It's really going live on October 1. We didn't want to launch a new coastal flood program during hurricane season. So it's really going to contribute more in 2026. Yes, that's a good question.

Operator, Operator

Ladies and gentlemen, as there are no further questions, I would now hand the conference over to Mac Armstrong for his closing comments.

D. McDonald Armstrong, CEO

Thank you, operator, and thank you all for joining us today. I'm very proud of our second quarter results. They clearly demonstrate the success we are having in building Palomar into a market leader in the specialty insurance sector, with a distinct portfolio and industry-leading products. We achieved strong growth on both our top and bottom lines, and our property balance of residential and commercial exposures has enabled us to thrive in both soft and hard markets like the ones we are experiencing today. New lines such as Crop and Casualty showed significant growth this quarter and are well-positioned to sustain this momentum in the medium term. We are equipped to maintain our growth and deliver consistent earnings and returns. Over time, our results will reflect our progress. We are very excited about the opportunities ahead. Lastly, I want to thank our team and our exceptional employees for their ongoing commitment to Palomar. Have a nice day.

Operator, Operator

Thank you, sir. On behalf of Palomar Holdings, thank you for your participation. You may now disconnect your lines.