Earnings Call Transcript
Palomar Holdings, Inc. (PLMR)
Earnings Call Transcript - PLMR Q1 2022
Operator, Operator
Greetings and welcome to the Palomar Holdings Incorporated First Quarter 2022 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference line will be open for questions with instructions to follow at that time. As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead sir.
Chris Uchida, CFO
Thank you, operator, and good morning, everyone. We appreciate your participation in our first quarter 2022 earnings call. With me here today is Mac Armstrong, our Chairman, Chief Executive Officer and Founder. As a reminder, a telephonic replay of this call will be available on the Investor Relation section of our website through 11:59 p.m. Eastern Time on May 12, 2022. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements, including, but not limited to risks and uncertainties related to the COVID-19 pandemic. Such risks and other factors are set forth in our annual report on Form 10-K 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 US 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'll provide an overview of our strong first quarter results and an update on the progress achieved executing our near and long-term strategic initiatives. Now, if we put this in perspective, it was a very good quarter for Palomar as our top line surged more than 60%. We earned $17.6 million of adjusted net income, inclusive of a $1.3 million realized and unrealized loss from our equity holdings, and generated an adjusted ROE of 18.1%. Obviously, Chris will review these results in more detail, but I wanted to get straight to the point before I went into my remarks. When we began the year, we outlined four strategic priorities for 2022: one, generating strong premium growth; two, monetizing the new investments made over the course of 2021; three, sustained delivery of consistent and predictable earnings; and four, scaling our organization. I'm quite happy to report that we made strong progress across all four initiatives during the quarter, and I'd like to spend a few minutes updating you on each. As it pertains to written premium growth, the first quarter is another great example of our ability to sustain top line growth. In the first quarter, gross written premiums increased 65% as compared to the first quarter of 2021, driven by continued strength in residential and commercial earthquake, as well as in our excess and surplus business, Palomar Excess and Surplus Insurance Company. Looking at our lines of business in more detail, I will start with our earthquake franchise. Our total earthquake book grew 24% in the first quarter, with commercial earthquake growing 18%, and residential earthquake, our largest line of business, growing 29%. Several factors drove the growth in the residential earthquake line including, but not limited to, a new partnership with Progressive, the continued dislocation in the California homeowners' market, and the California Earthquake Authority officially stating they are reducing their reinsurance purchase by the equivalent of $1 billion. These factors, along with our existing marketing efforts, led to record new business sales for residential earthquake in the first quarter. The partnership with Progressive is one I'm excited about, as it is a solution to provide progressive homeowners policyholders outside of California with a comprehensive earthquake solution via an assumed reinsurance arrangement. We're thrilled to partner with Progressive and optimistic about the potential for this relationship. As it pertains to the CEA, we believe the continued uncertainty regarding their claims paying capacity provides considerable room for continued strong growth in this important and profitable line of business. Beyond earthquake, other product lines performing well in the first quarter include marine, which grew premiums 133% year-over-year and is now our fourth largest line. Commercial all risk grew 37% year-over-year, with a large majority of the growth coming from rate increases as opposed to exposure. Flood premiums grew 31% year-over-year and National Flood Insurance Program's Risk Rating 2.0 starts to influence market conditions. As previously discussed, the NFIP rating action will likely generate a material price increase in renewal, which we believe creates an opportunity for Palomar to capture market share as we work through the year. As it pertains to our nascent casualty franchise, our real estate errors and emissions program is a standout as it continues to grow rapidly, with year-over-year growth of 151%. Shifting to our E&S business, Palomar Access and Surplus Insurance Company had another strong quarter, generating $41 million of gross written premium, representing 71% written premium growth year-over-year. Inclusive of our fronting business, the gross written premium was $67 million. PESIC's growth was primarily driven by its main products, namely commercial earthquake, national layered and shared commercial property, and builders risk. Our recently launched E&S products, including professional liability, excess liability, and contractors liability are beginning to ramp, and we expect them to be significant contributors to our growth. PESIC continues to be an important growth driver for Palomar, and we believe the business can become 50% of our premium over time. Our second strategic priority for 2022 is monetizing the investments made over the last year or so in new products and businesses. Along these lines, I'm very pleased with the initial success of Palomar Front. Launched in September, Palomar Front achieved almost $30 million in gross written premiums in the first quarter. One of its initial success stories is a fronting program for an innovative cyber MGA, with a world-class panel of reinsurers that have gained strong traction in the market and are taking advantage of the remarkably hard market pricing environment in the cyber market. On the whole, our fronting programs are performing well from an underwriting and collateral perspective, and we continue to believe that adding a fee-based revenue stream to our business will further fortify our earnings base. Given our strong start to the year, we remain confident in our goal of building the fronting business to $80 million to $100 million of managed premiums this year. We are also pleased with the progress that our newly hired underwriters are making as they build their franchises in segments like general liability, professional liability, and non-catastrophe exposed excess property. While still in the early stages of formation, these businesses will be important growth drivers for Palomar in the year ahead. That said, our focus over the first half of 2022 is to thoughtfully build these businesses while honing the necessary talent, infrastructure, and support to enable our underwriters to scale their franchises. During the quarter, considerable efforts were made in the procurement of quota share reinsurance, distribution network build-out, and the development of systems forms and filed. While the premium generated in the first quarter was modest, we're encouraged with the quality of business bound. Our third strategic priority is focusing on earnings predictability and reducing volatility in our results. While growth is certainly a priority, we are also laser-focused on growing profitably and properly managing the risk in our portfolio. Along these lines, we took three important steps during the first quarter to achieve this goal. First, we renewed our aggregate reinsurance program and in the process moved the floor on our adjusted ROE from 10% to 14%. We believe this program creates real value for our shareholders by essentially protecting the downside of our financial results. Second, we successfully placed new quota shares for our new professional lines and casualty products. These quota shares allow us to walk before we run as we conservatively build the books of business for these important new lines. They not only reduce our net limit exposure to an account and the impact of a shock loss on a nascent book, but also permit us to generate fee income. The architecture of the quota shares enables us to proceed cautiously. If we write to a 90 combined ratio, we generate half of the product's income from ceding commissions and half from underwriting, demonstrating our focus on fee income and earnings predictability. For example, on a professional liability program where we assume 25% of the risk and cede 75%, we will earn a 10-point margin on 25% of the risk that we underwrite, assuming a 90% combined ratio. We will then earn a 5% override in excess of our costs on the 75% of ceded premium. The majority of our profits come from ceding commissions. Third, we continue to reduce our continental wind exposure. Our non-Texas homeowners' business is now officially in runoff, and we are not growing the exposure of our national layered and shared commercial property business. Our fourth strategic priority is scaling the organization. What makes our platform so attractive to new hires is that we can offer them industry-leading technology and infrastructure, combined with a wealth of talent and expertise that allows our new underwriters to build a platform capable of delivering our products and services in the fastest, most efficient way possible. Competitive advantage is a strong selling point to experience talent in our industry. Our insurance and casualty lines are being led by market experts with strong tracks of success, and we see Palomar as an attractive platform to build their business. We continue to bolster our analytical, actuarial technology, and operating expertise to support our growth. Key hires this quarter included Eric Hennen, VP of Analytics, who formally helped lead the property analytics team of a global reinsurance broker, and Ben Markowski, another actuarial fellow to augment our budding casualty franchise. As you can see, we have made significant strides executing our strategic initiatives in the first quarter as we strive to position Palomar for sustainable growth, predictable earnings, and reduced volatility. At this point, I'd like to spend a few minutes updating you on what we are seeing in the market. From a pricing standpoint, we are seeing sustained rate increases across all lines and pockets of business where rate increases are accelerating. In commercial earthquake, the average rate increase has ticked up from the fourth quarter of 2021 as rate increases moved up from approximately 5% to 7% in the quarter. We expect further hardening for the next few quarters in this line of business. As previously mentioned, we are not looking to grow the exposures in our wind-exposed national layered and shared commercial property business as we believe we can generate sufficient growth from rate. For this line of business, we experienced risk-adjusted rate increases of 22% year-over-year, with over 14% risk-adjusted rate strengthening in Q1 alone. This market is becoming increasingly dislocated as the reinsurance market hardens, and we are generally seeing continued rate increases combined with improved terms and conditions. As it pertains to inflation, in addition to the use of third-party licensed data, we can leverage our builders risk program that audits construction projects on a monthly basis to inform our perspective on the cost of materials and labor. We are incorporating these factors into our underwriting and pairing them with rate increases and higher inflation guards. For personal lines like residential earthquake, we increased the inflation guards from our historical level of 5% to 8% this year. While our casualty lines remain in their infancy and therefore don't offer much in the way of renewal price increase commentary, we are getting rate increases of approximately 5% to 7% on expiring terms, with certain segments of professional lines and general liability seeing greater increases. Turning to our 6/1 reinsurance renewal, we are currently in the market placing our program and believe the combination of rate increases and reduction in our continental hurricane exposure portends a successful renewal. While it is undoubtedly a hard reinsurance market, our unique program that includes ILS market support remains appealing to reinsurers and ILS investors. We are more than 60% placed at this point and expect to finalize the placement shortly. We will provide an update to the market when the placement is complete. Turning to capital allocation, we will continue to see operating leverage in our business model and financial metrics as we scale. Additionally, we are generating cash from operations, which provides sufficient capital to fund our growth initiatives while providing ample room to execute on our $100 million share repurchase program. As a result, we were active with our repurchase program as we saw and continue to see our shares at levels we believe are undervalued, especially in light of the numerous growth vectors in our business and the adjusted ROE flow of 14%. To conclude, we are very pleased with our results and the momentum in our business as we look out to the remainder of the year. We are reiterating guidance for the full-year 2022, where we expect to generate between $80 million and $85 million of adjusted net income, representing 54% year-over-year growth and an adjusted ROE of 19%. This range factors in the additional investments that we need to make in talent systems infrastructure, the current projected cost of reinsurance, and the unrealized losses on equity securities in the quarter. 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 will be referring to per diluted common shares 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 2022, our net income was $14.5 million or $0.56 per share, compared to net income of $16.6 million or $0.63 per share for the same quarter in 2021. Our adjusted net income was $17.6 million or $0.68 per share compared to adjusted net income of $19.3 million or $0.73 per share for the same quarter of 2021. As we compare to the prior year results, it is important to remember the impact Winter Storm Uri had on our results for the first and second quarters of 2021. While Uri resulted in favorable net losses in the first quarter of 2021, we did impair additional reinsurance expense or see written premiums in the first and second quarters of 2021. Gross written premiums for the first quarter were $170.9 million, an increase of 65% compared to the prior year's first quarter. This continued strong growth was driven by a combination of increases in premiums across our core products, as well as gained momentum in our recently entered lines such as fronting. Ceded written premiums for the first quarter were $89.6 million, representing an increase of 106.5% compared to the prior year's first quarter. This increase was primarily from quota share reinsurance from our new fronting business, as well as increased catastrophe excess reinsurance related to the exposure growth. Ceded written premiums as a percentage of gross written premiums increased to 52.4% for the three months ended March 31, 2022, from 41.9% for the three months ended March 31, 2021. Our new fronting business was the primary driver of the increase in this percentage, slightly offset by the decrease in SLR percentage compared to last year that included the impact of Uri. 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. Net earned premiums for the first quarter were $76 million, an increase of 61.6% compared to the prior year's first quarter. This increase is due to the growth in earnings of higher gross written premiums offset by the growth in earnings of ceded written premiums under reinsurance agreements. For the first quarter of 2022, net earned premiums as a percentage of gross earned premiums were 54.7% compared to 51.5% in the first quarter of 2021 and compared sequentially to 55.2% in the fourth quarter of 2021. As previously indicated, the launch and expected growth of our fronting business could push this ratio below 50% on an annual basis, which will add consistent fee income that will enhance our ROE and bottom line. Losses and loss adjustment expenses incurred for the first quarter were $15 million due to attritional losses of $14.5 million and unfavorable prior year catastrophe loss development of $0.5 million. The loss ratio for the quarter was 19.7%, comprised of an attritional loss ratio of 19.1% and a catastrophe loss ratio of 0.6%. Our expense ratio for the first quarter of 2022 was 56.8%, compared to 69.8% in the first quarter of 2021. On an adjusted basis, our expense ratio was 52.4% for the quarter compared to 62.7% in the first quarter of 2021 and compared to 55.7% sequentially in the fourth quarter of 2021. Similar to our net earned premium ratio, we feel it is a better representation of our business to look at our expense ratios as a percentage of gross earned premiums. Our acquisition expense as a percentage of gross earned premiums for the first quarter of 2022 was 20.2%, compared to 21.2% in the first quarter of 2021 and compared to 22.2% sequentially in the fourth quarter of 2021. The decrease was driven by additional ceding commission from our new fronting business that is netted in acquisition expense and overall changes in our mix of business. The ratio of other underwriting expenses, including adjustments to gross earned premiums for the first quarter of 2022, was 9%, an improvement compared to 11.9% in the first quarter of 2021 and compared to 9.2% sequentially in the fourth quarter of 2021. As we continue to invest in talent, systems, and our infrastructure, we expect our business to scale over the long-term. But I wouldn't be surprised if this ratio was flatter in the coming quarters with those investments. Our combined ratio for the first quarter was 76.5%, compared to 60.4% in the first quarter of 2021. Our adjusted combined ratio was 72.1% for the first quarter, compared to 53.3% in the first quarter of 2021, which included the unsustainable negative loss ratio in the first quarter of 2021 from Uri. Net investment income for the first quarter was $2.6 million, an increase of 16.2% compared to the prior year's 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, 2022, due to cash generated from operations and slightly higher yields on our invested assets. Our fixed income investment portfolio book yield during the first quarter was 2.34%, compared to 2.24% for the first quarter of 2021. The weighted average duration of our fixed maturity investment portfolio, including cash equivalents, was 4.17 years at quarter end. Cash and invested assets totaled $533.2 million compared to $436.7 million at March 31, 2021. For the first quarter, we recognized losses on investments in the consolidated statement of income of $1.3 million, compared to losses of $739,000 in the prior year's first quarter. We will continue to take a conservative investment approach, which may impact our recognized gains and losses from quarter-to-quarter. Our effective tax rate for the first quarter was 23.8%, compared to 17.3% for the first quarter of 2021. For the first quarter of 2022, the tax rate differed from the statutory rate due to nondeductible executive compensation expense. Our stockholders' equity was $380.4 million at March 31, 2022, inclusive of the share buyback and unrealized changes to our investment portfolio, compared to $394.4 million at December 31, 2021. For the first quarter of 2022, annualized return on equity was 15% compared to 18% for the same period last year. Our annualized adjusted return on equity was 18.1% compared to 20.8% for the same period last year. As of March 31, 2022, we had 25,817,059 diluted shares outstanding, as calculated using the treasury stock method. We do not anticipate a material increase to this number during the year ahead. Before 2022, we reiterate our previously provided adjusted net income guidance range of $80 million to $85 million, representing 54% year-over-year growth and adjusted ROE of 19% at the midpoint of the range. Consistent with previous guidance, these estimates do not include any losses from major catastrophic events. As a reminder, we expect Continental US wind projected net average annual loss, or net AAL, of approximately $6 million as of September 30, 2022, the peak of wind season. This net AAL is an industry metric used to assess Continental Hurricane and severe convective storm exposure. During the quarter, we repurchased 219,061 shares or $13 million worth of shares under our previously announced two-year $100 million share repurchase program. We have approximately $87 million remaining under the authorized program. While we are not pivoting from our established growth strategy, we view our current shares as undervalued and we will take an opportunistic approach to share repurchases under this program. While our goal of investing for profitable growth remains our core focus, we believe the share repurchase program is an appropriate use of our capital in order to increase long-term shareholder value. This bifurcated capital allocation strategy reinforces our confidence in the strategic direction of the company for long-term growth. With that, I'd like to ask the operator to open the line for any questions.
Operator, Operator
Thank you. We will now conduct a question-and-answer session. Our first question comes from Matt Carletti with JMP. Please proceed.
Matt Carletti, Analyst
Yes, thanks. Good morning. Mac, I wanted to start with a question about the recent actions taken by the CEA. Could you elaborate on that? First, I want to confirm my understanding; is it correct that by purchasing less reinsurance, member companies are taking on more assessment risk, which may make them less inclined to sell a CEA quake policy? Second, I noticed this news came out quite late in the quarter. How much of an impact are you seeing from that yet, or do you expect it to influence results moving forward?
Mac Armstrong, CEO
Hey, Matt. Good afternoon, good morning, depending on which coast you're on. Yes, it's a great question, and I think, first and foremost, you're right; the actions of the CEA were later in the quarter. And so, the declaration of the reduction of around $1.2 billion of claims paying capacity really hadn't taken full root in the market in the first quarter. The market, frankly, is still digesting it. As it pertains to the participating insurers, I think what it does do is create a circumstance where there is less claims paying capability, which means there is a higher potential assessment applied to them. As you recall, that would mean that they had to put more capital up, but also it means that they're likely to be more inclined to find alternatives to the CEA. There was a decree in December which did allow participating insurers to explore alternatives in conjunction with the CEA and the mandatory offer. So, long story short, we think this is something that will really impact or extend the growth in this line on a prospective basis for the rest of this year into next year. When you marry that with just the overall dislocation in the California homeowners market, which we've talked about, it's a nice catalyst for extended growth in residential quake for an indefinite period of time.
Matt Carletti, Analyst
Great. Yeah sure. Go ahead.
Mac Armstrong, CEO
Sorry, and I think the one thing also that the claims paying capacity does potentially impact is just the ratings of the CEA. So, I think Fitch took some action there; there have not been others, but that could also lead to a bit more tumult too, sorry.
Matt Carletti, Analyst
Thanks again. That's great. I have a quick follow-up question for Chris. I noticed that you listed the Palomar front premiums separately this quarter. Can you remind us what the gross written premium was in the last quarter for that business?
Chris Uchida, CFO
Yeah, it was modest in Q4. I don't think we've disclosed the exact number of what that was yet, but I would say it was less than $5 million in Q4 of last year, and last year, or in Q4, that was in the other bucket. So, and it was modest, yeah.
Matt Carletti, Analyst
Okay. Great. Thank you for the answers. I appreciate it.
Chris Uchida, CFO
Thanks, Matt.
Operator, Operator
Our next question comes from Pablo Singzon with JPMorgan. Please proceed.
Pablo Singzon, Analyst
Hi. The uptick in the accident year loss ratio was a bit higher than I would have thought. And I assume a lot of that was driven by the new lines you're writing. Was there anything unique about this quarter? And are the losses on the new lines consistent with your expectations? Given that you're growing faster in those lines, I was hoping you could provide some perspective on how that loss ratio could progress over time. Thanks.
Chris Uchida, CFO
Thanks, Pablo. Yeah, that's a great question. When we look at the loss ratio, it's important to remember a few things. First and foremost, our business is still anchored by the binary lines. Our Hawaii hurricane, our earthquake lines are relatively binary and obviously not contributing to the attritional loss ratio. If you exclude the fronting premium from that, that book has remained relatively consistent. About 55% of that premium is still from those binary lines and about 45% of the premium is from the lines with attritional loss. So it hasn't changed the dynamic too much. It's also important to remember, when you think about fronting, fronting does not add anything to the loss ratio or to the net earned premium. The only thing that really does is it kind of reduces the acquisition expense. Also, when we think about the loss ratio, it's important to note that these lines are still very profitable lines. These are lines that we are comfortable with. When you look at it, these obviously, we've said this before; as long as there are several hundred, they are accretive to the ROE and the bottom line. But when you look at it on a gross basis and you look at Q4, these lines we're writing probably around a 40% loss ratio in total. So still very profitable lines of business. Specifically, on the first quarter, obviously, it is up a little bit from where it was in Q4. I think if you remember our adjusted number for Q4 was about 15.7%. I had indicated that I expect that to go, call it one to two points a quarter up. But on an annualized basis, I expect it to be around three to four points up for the year. This is well within that range. So we're very comfortable with where it's at. I do also want to reiterate that generally, the first and second quarter of the year are a little bit heavier for us. We are exposed to tour hail and other exposures, which definitely are higher in the first two quarters of the year. So it is potential for that number to decrease or stay flat for the year. But when I look at it on an annualized basis, three to four points up is well within the range. It's probably a little higher sequentially than the call it one to two points that I'd indicated, but well within our comfort zone. So, with that, I don't expect it to move a ton for the remainder of the year; it could be lower, it could be higher, but I expect that three to four points on an annualized basis to be a good target from full-year results.
Mac Armstrong, CEO
Yeah Pablo, this is Mac, and Chris described it well, but the only thing I would add is that if you look at the lines that are major contributors, it tends to be the specialty homeowners book. As a reminder, a good portion of that specialty homeowners book is going into runoff. When you combine the fact that it's going into runoff, I think that adds some stability to what Chris is talking about in maintaining it in that plus or minus three to four points year-over-year. But this also tends to be seasonally aberrant; there's higher PCS activity in the first and second quarters of the year. So, we think it's well confined and moreover, the newer casualty lines, real estate E&O, and flood are within our targets, and frankly, performing better than the expected loss ratio.
Pablo Singzon, Analyst
Thank you for that. My follow-up is a numbers question here. How much fee income did funding produce in the quarter? Thanks.
Chris Uchida, CFO
We haven't broken out specifically what that fee income is. Obviously, we wrote about $30 million. We are earning that premium and earning that fee. I would say, it's generally going to be plus or minus around that 5% range. So you can do the math depending on when that came in the quarter and how you're earning it. But now, we'll take that and let's call it a 5% fee over the next two or 12 months from when it was read. But we haven't disclosed the specific number. The one thing you can note when you look at it sequentially and you look at the acquisition expense on a gross earned basis, it was about 22% in Q4 and that has decreased to about 20% in the first quarter of this year. So, you can kind of see that ceding commission or additional ceding commission run through, and that's really driven by the fronting premium. There is a little bit of mix differential from quota shares on the other attritional lines of business, but the main driver is that fronting premium or that fronting ceding commission, lowering the acquisition expense.
Pablo Singzon, Analyst
Got it. Thanks, Chris.
Operator, Operator
Our next question comes from Mark Hughes with Truist Securities. Please proceed.
Mark Hughes, Analyst
Yeah. Thank you. Could you talk about the capital situation? You talked about your bifurcated strategy. You're obviously growing very rapidly and buying back some stock. How much more room do you have in terms of your current capital base? Obviously, with your returns being pretty high that's adding to it. So just some thoughts about your runway from here?
Mac Armstrong, CEO
Sure, Mark. This is Mac, and I'll take the first crack, and then Chris can chime in. I think in the first quarter we bought $13 million of stock back, and that was in conjunction with the $100 million share repurchase program that we authorized. That's over a two-year period of time, so kind of on a $50 million run rate, if you would, but that's also a reflection of where the stock was trading and the value that we saw. I think it's important to point out that holding aside the unrealized changes in the investment portfolio, we still generated increased surplus on a pure cash flow basis. Our net income was $17.6 million, and we bought back $13 million of stock. So I think we're going to want to continue to build our surplus, opportunistically buy back stock as we see it present itself. Where we are writing right now from a net premiums are in the surplus base; we still feel that we have ample capital to do both those things. So there's certainly cushion to grow free cash flow, buy back stock opportunistically, and our growth plans are not impeded at all.
Chris Uchida, CFO
And specifically on numbers that Matt was talking about on our ability to write premium on a trailing 12-month basis, net written premium to ending capital was a little bit higher than it was last quarter, at about 0.85 times right now but still well within the range. If we were purely a cat company, we have said that we were comfortable writing up to 1:1. With the growth in the other lines that are not as cat exposed, some of the attritional lines, whether it be inland marine, whether it be the casualty lines that can have a longer tail, we definitely feel comfortable going over that 1:1 ratio. We still have ample capital room from a net written premium basis to grow the premium base and still look at buybacks opportunistically, as our share price looks still as we feel a little undervalued.
Mark Hughes, Analyst
And then from the cyclical standpoint, Mac, you had pointed out that the pricing increases were sustained and accelerated in some cases. When you say sustained, are you saying sustained at the same rate of increase, or are you seeing any kind of deceleration? There seems to be a bifurcated discussion about whether there's some deceleration or sustained or acceleration. A little more on that would be helpful.
Mac Armstrong, CEO
Yeah, absolutely. So again, I think it is sustained, or excuse me, it's sustained in certain products, it's accelerating in others. It really is bifurcated. So the segments of our book where it's you’re still seeing rate increases, call it 5% to 7%, tends to be the newer lines like the casualty lines. That being said, there are within the casualty segment pockets where you're getting better increases in that 10% to 20%; a GL package may have some auto exposure, for instance, or sub-classes within there that had higher loss activity. For us, where we're seeing it accelerate again is in earthquake and the commercial all risk. So that what we call national layered and shared property program, that's where we're seeing it accelerate. And then I think what you have in the residential business, earthquake; we are increasing our inflation guards. We are using our E&S company more effectively, especially for higher value accounts where we can get better risk-adjusted returns. So really it's product specific, but we don't have any line within our portfolio where rate increases are flat. We are seeing it either up modestly at consistent levels or accelerating.
Mark Hughes, Analyst
And why the acceleration in Commercial Quake?
Mac Armstrong, CEO
It's capacity; the reinsurance market is hardening. Therefore, there are capacity limitations, or the cost of risk transfer is higher than the prior year. It's probably more pronounced in mid-size to large commercial accounts, and there will probably be a catch-up in small commercial accounts that you'll see. But as I mentioned on the call, we went from an average rate increase of 5% in the fourth quarter to 7% plus in the first quarter, and that was a reversal of three to four quarters of decelerating rate increases. I don't think that's going to reverse back; I think we're going to continue to see an acceleration of rate increase.
Mark Hughes, Analyst
Thank you very much.
Operator, Operator
Our next question comes from Dave Motemaden with Evercore ISI. Please proceed.
Dave Motemaden, Analyst
Hi, thanks. I just had a question just as a follow-up for Chris, on the attritional loss ratio, continuing to hold the outlook of it being up three to four points for full year 2022 versus 2021. I guess, could you just remind me what base I should be using? Because I know there were some exited lines that are obviously gone now that impacted the ratio last year. So I wonder if you could, just help me out on that point.
Chris Uchida, CFO
Yeah. The right way to think about the base, or the way I think about the base, is when you look at the fourth quarter of last year, the blended or the adjusted loss ratio after you back out the admitted all-risk book that we were running off last year, and that we did still have some losses from in the fourth quarter. That blended loss ratio, or the adjusted loss ratio, excuse me, was about 15.7%. So for me, that's my starting point sequentially as the book evolves, and I think about where it's going to go for 2022. On an annualized basis, I think that's going to be up three to four points for the full year. I previously had also said; if you and I think about that sequentially, that could be one to two points a quarter. I would also say that it could be plus one a quarter or minus one a quarter and still kind of be within that comfort range. I think the number this quarter was definitely within that range; it's a little bit higher than we'd like to see, but well within the comfort zone,especially when you think about Q1 and Q2 being a little more volatile for our attritional lines when you think about the storm and hail season in Texas, where we still have a large portion of our specialty homeowners book in La Marine. It does also have a little bit of exposure in there. So, nothing surprising in that number, and I think definitely something that we can still feel comfortable about blending to that three to four points up from that 15.7%,when I talked about a little bit earlier for the year.
Dave Motemaden, Analyst
Got it. Thanks. And Mac, I guess just a kind of a related question on your loss trend assumptions, and if you made any changes in the quarter in response to the inflationary environment on some of the short-tail lines?
Mac Armstrong, CEO
Yeah. So it's a good question, Dave. And on the short-tail lines, the loss trends, we think we have a very good sense of inflation, whether it be how we are incorporating our third-party data analytics with our frontline information that we're getting from our builders risk book. What we are doing is measuring and accurately gauging the IPB and making sure that the base level exposure is accurate. We're using those data sources, both third-party and proprietary, and taking what we're seeing in builders' risk and using them for specialty homeowners, then we're overlaying an inflation guard, then we're overlaying rate increases. So it's kind of a three-prong approach. I guess that's a long-winded way of saying that we feel that we have the right loss picks in place based on the utilization of those three tools. As we look at things going forward, we can continue to use the E&S Company for potential selected residential risk to be more nimble, not be reliant on insurance department approval for certain rate changes. That's probably most relevant for residential quake, Hawaiian Hurricane, and those short-tail lines you're touching upon.
Dave Motemaden, Analyst
Got it, okay. That's great information. Thanks, I appreciate that. If I could just ask one more question. The adjusted expense ratio at 52.4% was definitely better than I had anticipated. I'm curious about the sustainability and future improvement from these levels. I believe Chris mentioned that the other underwriting expense ratio would remain relatively stable for the rest of the year. How should I consider the acquisition ratio as you increase the fronting business throughout the remainder of the year?
Chris Uchida, CFO
No. That's a great question. When I think about the other underwriting expense, if you go back to my commentary in Q4 or for Q4, I definitely said that it could potentially be flat to up. It improved a little bit this quarter, so we are still seeing some good dynamics there. Like I said in the prepared remarks, I would be surprised if it was flattish for the near-term quarter, maybe a quarter or two, but I definitely expect it to still improve, and definitely improve compared to last year. On a long-term basis, there's still plenty of potential in the other underwriting expenses for margin expansion and to scale the organization. But a good lead-in into the near-term, I expect to see more or faster improvement on the acquisition expense ratio, and that is really driven by the fronting premium. You saw it this quarter, especially compared to last year on a gross basis; I talked about a little bit earlier. Acquisition expense in Q4 on a gross basis was 22%. It's 20% in Q1. I would expect that to continue to improve. You should see continued improvement in the near-term from the fronting business seating commission driving down acquisition expense, and I expect to see that throughout the remainder of the year, especially as Mac talked about, we would like to get to $80 million to $100 million of printing premium. We wrote 30% in the first quarter. So, I think we're on track for that. But with that premium, I expect the acquisition expense ratio to improve faster than the other run rate expenses, but you still expect long-term improvement in the underwriting expenses.
Dave Motemaden, Analyst
Great. Thank you for the color.
Chris Uchida, CFO
Thanks, Dave.
Operator, Operator
Our next question comes from Meyer Shields with KBW. Please proceed.
Meyer Shields, Analyst
Great. Thanks very much for taking my question. Mac, you talked about raising the inflation guards to 8%. Can you let us know, I guess, what the filing requirements and status of that is? And I guess the second related question is the current environment at 8% level?
Mac Armstrong, CEO
Hey Meyer, yeah, that's a great question. Fortunately, there's no filing requirement associated with or approvals associated with that, so we can implement it. I do think 8% is enough because you have to remember this is for residential earthquake. We have had a 5% inflation guard in place since we formed the company. If you think about a policy that was bound in the first year of operations, we averaged 90%-plus policy retention for that line; we would have something that since its initial bind, the underlying TIV and exposure would have increased more than by more than 50%. Furthermore, when we underwrite and price that risk, we take the greater of our estimate or the associated homeowners policy. We think we rely on the homeowners policy estimate or our own to determine what is the base TIV. We also manage the portfolio, we are constantly looking at using a tool like that from CoreLogic and our own to determine what the underlying replacement cost is in the market and overlaying that. Again, that's how we come up with our base level against the homeowners' policy to calibrate. So, it's a very long-winded way of saying we think the 8% inflation guard is sufficient, but this is a tool that we've had in place well before 2021 and 2022 inflationary pressures started to rate.
Meyer Shields, Analyst
No, that's okay. Look, the answer is more than welcome. So, that's great. Next question I guess, and I apologize if I missed it. Just I was hoping for an update on new money yields on the investment portfolio compared to book yield, particularly because I assume that most of your investment portfolio is fairly short tenure?
Mac Armstrong, CEO
Yes, you're right. It is fairly short tail, especially when you start to think about the growth from fronting premium just to grow the investment portfolio. The new yields that we're seeing right now are around 3.8% or so compared to historical yields of in a quarter. There is a pickup, and it's obviously not at the expense of security. The credit risk remains identical. We think that is a good thing for us long-term, but Palomar makes the majority of its money through underwriting, and it always will. But that's not a bad tailwind to have.
Meyer Shields, Analyst
Sorry to the downside. One last question if I can. You discussed how the fronting premium production in the first quarter compared to your expectation?
Mac Armstrong, CEO
Sure. It exceeded our expectations. We said we wanted to do $80 million to $100 million, and we feel very good about that number. As I mentioned in my remarks, we have one large deal with a very reputable and strong-performing Cyber MGA that has a terrific panel of reinsurers basically funding for those reinsurers. As you know, Meyer, the cyber market is very hard, and so the rates that they are seeing exceeded our initial expectations. The one thing that I would temper that with is when we put a lot of these programs together, we do put premium caps on them because we want to be mindful of collateral and not overextending our exposure. But when you have rates that are 50% to 100% up, depending on the size of the account, the underlying PIP is meaningfully less than we thought. So, that's a nice dynamic to have. We're exceeding our projections on the fronting side and we have a nice pipeline of deals that we think will help us build this into a nice franchise.
Meyer Shields, Analyst
Perfect. Thank you so much.
Mac Armstrong, CEO
Thanks Meyer.
Operator, Operator
Our next question comes from Tracy Benguigui with Barclays. Please proceed.
Tracy Benguigui, Analyst
Hi. I'd like seeing the breakout in your disclosure of the subsidiary level premium. So, I noticed that E&S premiums now represent nearly 40% of your mix. I'm just wondering, prospectively, how you think that could shift over time?
Mac Armstrong, CEO
Yes, Tracy, that's a good observation. We're pleased with how the E&S company is performing, and it currently represents 40% of the premium. We believe it can reach 50%. However, I should note that part of that 40% is attributable to fronting. The actual figure for the quarter on the E&S side was around $41 million. Excluding fronting, it is closer to 25% or 26% of the book. When including fronting, the total was $67 million, leading to the 40% figure. We still believe that the core business we are underwriting and retaining risk on can achieve 50%, although the fronting may inflate that as we utilize both the admitted and E&S company.
Tracy Benguigui, Analyst
Got it. And then, looking at the fronting business, I recognize these days most reinsurers are hybrid; they also have primary operations. So, what structurally do they need to get from you versus maybe writing this risk on their own paper and then maybe doing internal reinsurance back offshore?
Mac Armstrong, CEO
Yeah. Tracy, it's really deal-specific. We have one deal that we are fronting for another insurance company that has a statutory limitation. We have another deal where that we just talked about, where it's really an MGA that we have the relationship with, and we bring them a panel of reinsurers. Those reinsurers could potentially try to go and do it on a primary basis, but they'd be dislocating the MGA or ourselves who are in the market. So that's the deal. The MGA deals, they need a primary front; the reinsurers that we work with are the reinsurance business, not in the primary business. We also have other deals where it may be for another insurance company that doesn't have the requisite investment rating. It's a hodgepodge of transactions that we'll do as a fronting carrier. We also view fronting as a great R&D tool for us to learn about markets where we may end up taking some risk over time. In doing that, we control the program and can steer the reinsurance as we deem fit.
Tracy Benguigui, Analyst
Great. Just maybe one other question. I remember years ago there was an issue in the industry with reinsurance recoverable being a large part of the balance sheet. Given that, do you see a lot of your premiums? Is that a metric that you're monitoring?
Mac Armstrong, CEO
Yeah, absolutely. I think we feel very good about the quality of our reinsurers. We also feel very good that we have a rather diverse reinsurance panel that's over 60 panelists and no one’s more than 6% to 7% of the total limit. We also have cat bonds where it's collateralized. But that being said, we constantly look at the underlying credit ratings of our reinsurers. Our brokers have security panels that they report back to us on. We have provisions in our reinsurance contracts that give us the right to call if someone is downgraded and force a redemption, so to speak. It's something that we actively monitor. Fortunately, we have never had any issues to date with recoverables, and I'll knock on wood in my head when I say that.
Chris Uchida, CFO
Yeah, and I'd say financially, obviously, we look at this from a CECL standpoint or a credit standpoint. When we look at the activity that we had in 2020 and 2021, we did have some lessons, and we still do have some reinsurance recoverables. We evaluate that on a quarterly basis to see if any changes to our reinsurers and anything any action needs to be taken. But we have not had to decrease our receivable or take a write-down on any of our receivables due to credit quality, specifically on the printing side. Depending on the quality of the reinsurer, we run each of our counterparties through a collateral analysis to determine whether or not we need and how much collateral we need to collect. We look at their size, capital structure, history, licensing, and authorization to determine that type of capital. When we look at the unearned premium, we look at the expected losses. Depending on the counterparty, we could be collecting 100% to 150% of that required collateral from the reinsurer involved to make sure we do have adequate capacity on the high end and make sure that is either in trust or we are either holding it in kind or looking at different types of arrangements to ensure that we do have that cash available. It's something that we are very focused on, and we want to make sure that there is no additional risk that we are taking from the reinsurance parties that are involved in these transactions.
Tracy Benguigui, Analyst
Okay. Thank you.
Operator, Operator
Thank you. At this time, I would like to turn the call back over to Mr. Armstrong for closing comments.
Mac Armstrong, CEO
Terrific. Thank you, operator, and thanks to all who were able to join. We appreciate your participation, questions, and importantly your support. I also want to thank our team at Palomar for their exceptional work and commitment; they are instrumental in our success. So to conclude, I'm proud of our results and the progress we made executing against our 2022 strategic initiatives during the quarter. We did indeed deliver strong growth. We monetized or continue to monetize our new investments. We are enhancing our earnings predictability, and we're scaling. We do believe that we can continue to cultivate the new businesses, harvest the existing ones, and attract outstanding talent to the company. We have the foundation in place to deliver strong growth at a better-than-industry-average ROE that will generate value for our investors and shareholders. Along those lines, we are thrilled to announce that we'll be hosting an Investor Day on June 15th in New York City to discuss these topics in more detail. We hope that you can join our full team and business heads for a deep dive into our strategic plan that we are calling Palomar 2x. We will be sharing further details on the event in coming days, which will be posted to the IR section of our website. We look forward to seeing you in New York on June 15. Thank you again and enjoy the rest of your day. Take care.
Operator, Operator
Thank you. This does conclude today's teleconference and webcast. You may disconnect at this time, and thank you for your participation. Have a great day.