Earnings Call Transcript
Palomar Holdings, Inc. (PLMR)
Earnings Call Transcript - PLMR Q3 2020
Operator, Operator
Good morning, and welcome to Palomar Holdings, Inc.'s Third Quarter 2020 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference line will be opened for questions with instructions to follow at that time. As a reminder this conference 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 third quarter 2020 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 Relations section of our website through 11:59 p.m. Eastern Time on November 18, 2020. 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 quarterly report on Form 10-Q that will be filed with the Securities and Exchange Commission. We do not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to their most comparable GAAP measure can be found in our earnings release. At this point, I'll turn the call over to Mac.
Mac Armstrong, CEO
Thank you, Chris, and good morning everyone. I hope those of you with us today continue to be safe and healthy. Today, I'll speak to our third quarter results at a high level and touch on our operations before turning the call over to Chris to discuss the financial results in more detail. For the third quarter ended September 30, 2020, we experienced several notable achievements. First, the momentum of our business remains strong, as evident in our year-over-year gross written premium growth of 55.4%, a figure that included meaningful growth across several product lines as we've increased our position as a specialty insurance leader. Second, Palomar Access and Surplus Insurance Company, or PESIC, our newly established surplus lines insurer launched in August, received inbound policies across several lines of business during the third quarter. We believe PESIC will further enhance our ability to pursue profitable growth and respond favorably to a further hardening rate environment. Third, during the quarter, we continued to expand our distribution network, executing several new partnerships in areas such as Residential Earthquake and Flood, and rolling out new products to existing and new distribution partners. Fourth, we maintained our commitment to building a world-class team and grew our headcount by 10%. Among the key additions to our team, we welcome Jason Sears, an experienced E&S Casualty and programs insurance executive as Senior Vice President of Programs to lead our program business and the scaling and diversification of PESIC. Lastly, subsequent to quarter end, we formally launched our ESG committee of the Board of Directors, which will help articulate and measure the Company's values while reinforcing Palomar's reputation as a forward-thinking employer and partner. Turning to the third quarter, our country experienced an unusual frequency of severe weather from the Midwest derecho to an unprecedented windstorm season to the devastating wildfires in our home state of California. Palomar and our policyholders were impacted by the spate of hurricanes that made landfall in the United States, including Hurricanes Hanna, Isaias, Laura, Sally, and Beta. I’m very proud of our team's rapid response as we help our policyholders and their communities recover from these damaging events. Our swift actions are exemplified by the fact that at the time of this report, 87% of our Specialty Homeowners claims from the aforementioned storms are closed or settled, due in large part to the impact from losses associated with these events. During the third quarter, we reported a net loss of $15.7 million compared to net income of $7.5 million in the third quarter of 2019. This result is disappointing as it clouds results of an otherwise strong quarter, more so for our lines of business not exposed to the Gulf of Mexico, approximately 80%. While we could discuss the incredibly low probability of the 2020 wind season, and how the hard market will allow us to increase our rates and recoup our losses, and that is something we intend to do, I want to talk about the improvements we have begun to execute. Palomar's culture is based on continuous improvement, problem-solving, agility, and is also analytically driven. As such, we will apply the data we have gathered and lessons we have learned across our organization to enhance our underwriting, analytics, and risk transfer operations to drive consistency in results and predictability in earnings. As we learn and grow as a business, we will rigorously optimize our reinsurance program, product suite and geographic mix in light of market opportunity, risk-adjusted return on capital, and payback analysis. Regarding Palomar's reinsurance program, we will look to implement new coverages that further protect the balance sheet and earnings stream from severe and frequent events. It’s worth highlighting that Palomar secured incremental reinsurance coverage in October that preserved our $10 million per event retention through June 1, 2021. As for underwriting and exposure management, in October, we decided to exit Commercial All Risk on an admitted basis in Alabama, Louisiana, and Mississippi, as well as Specialty Homeowners in Louisiana. Additionally, we are reducing our exposure to risks close to the coast for Commercial All Risk. These actions reflect our focus on remaining agile, preserving our ability to invest in our core markets and new initiatives like PESIC, and, importantly, achieving a requisite payback from a catastrophe for Palomar, our investors, and our reinsurance partners. We feel that these measures are feasible in light of what we expect will be an incrementally harder insurance market. Operationally, we remain fairly insulated from COVID-19 and continue to believe the pandemic will not have a material impact on our profitability or growth. We believe that our exposure to business interruption remains negligible as our commercial property policies require loss from physical damage to the property from named perils and future virus exclusions. Turning to third quarter results, we experienced meaningful growth across several product lines as we expanded our position as a specialty insurance leader, driven specifically by our newer lines of business like Inland Marine, which experienced growth of 316% during the third quarter. Our Builder's Risk and Motor Truck Cargo offerings continue to demonstrate strong traction and present an encouraging market opportunity. Another major driver was our Commercial Earthquake business, which grew 115% compared to the prior year period. Commercial lines growth was a function of new distribution sources, expanded geographic footprint, incremental product attraction, and, most importantly, sustained pricing increases. Our third quarter commercial policy average rate increase on renewals was 14.1% versus 14.2% in the second quarter. With respect to our Residential business, it’s worth highlighting the growth of two products, Flood and Residential Earthquake. Flood grew 50% year-over-year across 11 geographically diverse states, while Residential Earthquake grew 13% year-over-year, with the prior year comparable in the third quarter of 2019 seeing a large surge in new business following the Ridgecrest earthquakes in July of that year. During the third quarter, our book experienced premium retention rates of 90%, increasing from 88% achieved during the second quarter. Premium retention for our Residential Commercial Earthquake, Hawaii Hurricane, and Residential Flood lines of businesses were all in excess of 92%. This continues to be a testament to the unique value our products offer insureds and distribution partners. Moving on to our newly launched E&S company, PESIC, we expect it will add an additional dimension of capability and growth for Palomar. As previously described, PESIC will also enable us to further leverage our analytically-driven underwriting framework to write business on a national scale and to insure certain risks that our admitted products cannot currently satisfy. For example, PESIC allows Palomar to compete in the layered and shared commercial property market, an area where there is currently a high level of market dislocation. In August, we entered into a new partnership with the special risk underwriting division of leading wholesaler AM Wins to underwrite and produce layered and shared property business for PESIC. We certainly anticipate this partnership and PESIC as a whole will be a growth driver for 2021 and beyond. Expanding our distribution network remains a key priority, and we are proud of the progress we made during the quarter. During the third quarter, our retail and wholesale active producers increased 6% sequentially from the second quarter. Carrier partnerships continue to be a differentiated channel for our business, and in the third quarter, we entered into multiple new partnerships, including another Residential Earthquake partnership motivated by the continued dislocation of the California homeowners market. Our Flood business entered into a new partnership with Torrent Technologies, a flood insurance technology company and subsidiary of Marsh. The partnership will give Torrent distribution access to our Residential Flood offering in the 11 states we currently write business in. These relationships take time to develop, and we are proud to provide valuable solutions to other insurance carriers. Separately, we continue to execute our geographic expansion initiatives by growing our geographic footprint for our admitted carrier to 31 states across the nation. We are also excited to announce the launch of our new real estate errors and omissions product offering. This is a line of business that our team has extensive prior experience with, and we believe it will be a beneficial addition to our product suite. As we grow PESIC and all of our business, we believe it is vital that we sustain investments in technology, analytics, and talent. I already mentioned the growth of our team and the addition of Jason Sears to spearhead the execution of our program and E&S efforts. The third quarter also included two developments within our existing leadership team that reflect the ongoing evolution and focus of our business and strategy. In early August, John Christensen, our former Chief Operating Officer, took the role of Chief Underwriting Officer. In concert with this promotion, we subsequently promoted our Chief Technology Officer, Brett Morris, to assume the role of Chief Operating Officer. The vital role that technology plays across Palomar made him a natural choice. We expect to have a replacement for the CTO in place by the end of the first quarter. Yesterday, we announced a renewal rights transaction with affiliates of GeoVera Holdings, whereby Palomar will offer policies to all GeoVera Hawaii residential hurricane policyholders upon renewal. This transaction will considerably increase our footprint in Hawaii, a market we first entered in 2015 and have actively looked to deepen our presence. Lastly, subsequent to quarter end, we formally launched our ESG and diversity inclusion, community engagement, and equality committees, which will reaffirm and pursue our ongoing dedication to the environment, health and safety, corporate social responsibility, corporate governance, and sustainability. The ESG committee will meet on a quarterly basis, led by myself and Board members Daryl Bradley and Martha Notaras. This committee will hold the Company and management accountable for our progress towards ESG goals, as established by Palomar management and in consultation with our team members. We believe that diversity and equality foster greater organizational creativity and productivity, which helps us serve our customers and partners more effectively. Delivering on our diversity commitment returns greater value to our shareholders and ultimately makes a positive impact on the communities in which we do business. With that, I will turn the call over to Chris to discuss our results in more detail.
Chris Uchida, CFO
Thank you, Mac. Please note that during my portion, when referring to any per share figure, I'm referring to per diluted common share as calculated using the treasury stock method. This methodology requires us to exclude common share equivalents such as outstanding stock options during periods when we incur a net loss and include them in profitable periods. We have adjusted the calculations accordingly. As you have seen in the earnings release, we have added new metrics describing our results, including and excluding catastrophe losses. We believe this additional information provides better visibility into our business and results. Going forward, we will continue to show these metrics. For the third quarter of 2020, we reported a net loss of $15.7 million or negative $0.62 per share compared to net income of $7.5 million or $0.31 per share for the same quarter in 2019. On an adjusted basis, excluding catastrophe losses, our net income for the third quarter was $13.7 million or $0.52 per share compared to $9.6 million or $0.40 per share for the same quarter of 2019. Gross written premiums for the third quarter were $103 million, representing an increase of 55.4% compared to the prior year third quarter. We continue to see healthy new business, rate increases, and strong retention with contributions across all of our product offerings. Ceded written premiums for the third quarter were $41.6 million, representing an increase of 48.1% compared to the prior year's third quarter. The increase was primarily due to an increase in reinsurance expense commensurate with our growth. Our risk transfer strategy remains a critical component of our business, especially as we demonstrate sustained top-line growth. As we grow our business, we expect to incur additional excess of loss reinsurance expense as we maintain a conservative level of overall coverage. As of June 1 this year, we retained $10 million per earthquake or wind event and repurchased $1.4 billion of total reinsurance coverage for earthquake investments. Additionally, after multiple hurricane events during the quarter, we purchased backup reinsurance coverage, maintaining our $10 million event retention. The additional expense of $6 million for this coverage began in the fourth quarter and will run through June 1, 2021. Net earned premiums for the third quarter were $42 million, an increase of 51.9% compared to the prior year's third quarter. Our results improved primarily due to the earning of increased gross written premium offset by the earning of ceded written premiums under reinsurance agreements. For the third quarter of 2020, net earned premiums as a percentage of gross earned premiums were 52.9% compared to 51.8% in the third quarter of 2019. We believe the ratio of net earned premiums to gross earned premiums is a better metric for assessing our business versus a ratio of net written premiums to gross written premiums. As previously discussed last quarter, we expect that ratio to be around 53% to 54% on an annual basis, lower at the beginning of a new excess of loss treaty and higher at the end with our expected growth in earned premiums. This quarter's results are in line with that expectation. But the additional expense for the backup reinsurance layer will adjust the ratio slightly below the normalized level beginning in the fourth quarter. Commission and other income was $816,000 for the three months ended September 30, 2020, compared to $709,000 from the same period in 2019. The increase was primarily due to an increase in policy-related fees associated with an increased volume of premiums written. Losses and loss adjustment expenses incurred in the third quarter were $41.1 million compared to $2.4 million in the prior year's third quarter. Our losses during the quarter were primarily the result of increased catastrophe activity converging Hanna, Isaias, Laura, Sally, and Beta. We define catastrophe losses as certain losses resulting from events involving multiple claims and policyholders, including earthquakes, hurricanes, floods, convective storms, or other aggregating events. This definition captures the catastrophe losses from this quarter and Hurricane Harvey and Florence from previous periods. We had catastrophe losses of $36.5 million for the third quarter of 2020, within the range provided in October. The catastrophe loss ratio was 86.9% compared to no catastrophe losses for the third quarter of 2019. Our loss ratio, excluding catastrophe losses for the quarter, was 10.8% compared to 8.8% in the third quarter of 2019. This increase in our attritional loss ratio is in line with the expectation that our loss ratio would increase with our growth and as we diversify the book of business in new lines like Inland Marine, where there is attritional loss. Our expense ratio for the third quarter of 2020 was 59.4% compared to 64.6% in the same quarter of 2019. As we have previously discussed, we expected the expense ratio to increase two to 2.5 points sequentially compared to previous quarters from structural changes to our Specialty Homeowners Fund and investments in PESIC. These changes will not have a material impact on net income, but do affect our ratios, such as the expense ratio, combined ratio and net earned premium to gross earned premium ratio. The combined ratio for the third quarter was 157.1% compared to a combined ratio of 73.4% for the prior year's third quarter. Excluding the catastrophe losses in the quarter, our adjusted combined ratio was 68.9% from the third quarter compared to 63.6% in the third quarter of 2019. We believe that given the unprecedented activity in the third quarter, this is a better measure of our results for comparison purposes and offers a better sense of our business on a steady-state basis. Net investment income for the third quarter was $2.1 million, an increase of 23.7% compared to the prior year's third quarter. The increase was largely due to a higher average balance of investments during the three months ended September 30, 2020, primarily due to proceeds from our primary stock offerings during the period, as well as cash generated from operations. Funds are generally invested conservatively in high-quality securities, including government agency, asset- and mortgage-backed securities, municipal and corporate bonds with an average credit rating of A1/A+. Our fixed income investment portfolio book yield during the third quarter was 2.33% compared to 2.9% for the third quarter of 2019. The weighted average duration of our fixed maturity investment portfolio, including cash equivalents, was four years at quarter end. Cash and invested assets totaled $450 million at quarter end compared to $263.2 million at September 30, 2019. For the third quarter, we recognized realized and unrealized gains on investments in the consolidated statement of income of $24,400 compared to $361,000 in the prior year's third quarter. Our effective tax rate for the third quarter of 2020 was 28.2% compared to 21.1% for the third quarter of 2019, higher this quarter with a pretax loss in conjunction with the discrete tax deduction of stock-related compensation, which would decrease the effective tax rate in periods of pretax income. Excluding any unforeseen events, we anticipate our tax rate exclusive of discrete permanent items will settle around the 21% mark for the 2020 year. Our stockholders' equity was $361.9 million at September 30, 2020, compared to $218.6 million at December 31, 2019. For the third quarter of 2020, annualized return on equity was a negative 17% compared to 14.6% during the third quarter of 2019. Our annualized adjusted return on equity, excluding catastrophe losses during the third quarter was 14.8% compared to 18.8% during the third quarter of 2019. The change in annualized return on equity and annualized adjusted return on equity, excluding catastrophe losses, reflects a significant increase in the Company's stockholders' equity, primarily due to $125.5 million in capital raised across multiple stock offerings during 2020. Looking to the remainder of the year, given the heightened catastrophe activity during the third quarter and into the fourth quarter, we are adjusting our full year 2020 outlook. We previously projected adjusted net income between $50.5 million and $53 million. This range did not assume any losses from major catastrophes as we define them. We are now anticipating full year adjusted net income, excluding catastrophe losses, between $51 million and $52 million, which equates to a growth rate of 35% to 37% year-over-year. These assumptions include the additional reinsurance purchase and assume that there are no major losses from business interruption legislation. As of September 30, 2020, we had 26,271,615 diluted shares outstanding as calculated using the treasury stock method. We do not anticipate a material increase to this number during the year ahead. With that, I'd like to ask the operator to open up the line for any questions.
Operator, Operator
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Carletti with JMP Securities. Please proceed with your question.
Matt Carletti, Analyst
Mac, I was hoping you could dive in a little deeper on your opening comments about some of the potential adjustments you're making to the book as you learn from the frequency of events that took place in the quarter. I appreciate you walking through a few lines and talking about the primary side exposure reduction. Can you talk a little bit about some of the reinsurance tools that might be available to you to help cap that as well, and whether those are things you'd expect to proceed with? Or do you think that a lot of the actions you've taken on the inward side of the business suffice?
Mac Armstrong, CEO
Matt, great to hear from you and thanks for the question. It's a great one. I think the crux of it is that we need to do both. We need to take underwriting actions that I can go into more detail on, in addition to ensuring balance sheet protection. If we do the first, then we're going to be very successful in the latter, but we need to marry those two together in concert. It starts with when you look at our business; we have the luxury of certain lines having terrific margins and growth opportunities in front of them. When we combine that with our culture of problem solving and using data analytics, we aim to continuously improve. After experiencing the wind season like we did, it gives us a big lens into how the book is performing. We have target ROE on our individual products that exceeds what we deliver on an aggregated basis because it's based on a net basis on $1 of capital. For instance, in the Commercial All Risk business, we realized we were not going to hit the target ROE, especially with the losses. As a result, if we cannot generate the necessary rate from a market opportunity, we cannot achieve the required cap payback. Therefore, we opted to exit Mississippi, Alabama, and Louisiana on the Commercial All Risk basis and the Specialty Homeowners in Louisiana. As for reinsurance, taking these actions will materially reduce our exposure in areas where we generated losses. Consequently, we will not only seek to buy reinsurance for severe events but also to protect our balance sheet from multiple events. What we will implement is some type of aggregate cover or a net quota share to keep losses from multiple events inside our retention. In essence, it is crucial for us to harness analytics and make informed choices that yield risk improvement, while also managing balance sheet protection with new types of risk transfer that address both severe and frequent events.
Matt Carletti, Analyst
Great. That's very well thought out, as usual. Just one other quick question, if I could. You mentioned a bit about buying the backup cover and keeping the per event retention at $10 million or capping it at $10 million. Should we think about Delta and Zeta and the potential impacts they might have in Q4 in that regard? Or are there other items potentially there working that would be more than just kind of 20% on the high side?
Mac Armstrong, CEO
Yes. You should continue to assume that losses from a single event would be $10 million, and we have secured incremental coverage. As Chris and I both pointed out, and that is somewhat locked in. There is some incremental expense, but it's expense that we will happily incur to maintain that level of protection.
Operator, Operator
Our next question comes from the line of Paul Newsome with Piper Sandler. Please proceed with your question.
Paul Newsome, Analyst
I was hoping you could give us a little bit more detail on any sort of numbers behind it, particularly around the expected growth rates of the firm, which has obviously been quite stunning over the last couple of years. I assume the runoff of the commercial oil risk and especially home insurance and those cat prone lines will have at least some impact on premium growth perspective, but can you give us a sense of maybe how big that would be?
Mac Armstrong, CEO
Sure, Paul. This is Mac. What I would say is, first and foremost, we were pleased with the growth and that we achieved in the quarter and a growth in core lines like Residential Quake, Commercial Earthquake, and newer lines like Inland Marine and Flood. We also entered into some new partnerships and introduced some new products that are just getting off the ground. We believe there’s considerable growth in front of us that will generate the target returns expected from us, which makes the difficult decisions around shrinking the All Risk book easier as well as the small step we are taking in exiting Louisiana in Specialty Homeowners. As far as the growth rates, the All Risk lines will decline, but we expect ample growth in other segments whether it be PESIC or the lines I mentioned that will more than compensate for it.
Paul Newsome, Analyst
Great. My second question, I think we all expected as the book moved away from earthquake that we would see the higher attritional ratios as loss ratios over time. But I don't think most of us built in really in material cat load, respectively. But as the business mix change, particularly with some of these new efforts, should we be thinking about some level of a cat load in our expectations in 2021 and 2022?
Mac Armstrong, CEO
Paul, I'll let Chris chime in. What I would say is, the way we define CAT is really going to be losses that are material and more than likely going to result in reinsurance losses. If you look in the third quarter of 2019, there were storms like Dorian and Marco. So, there will be CAT in PC's loss that is in our standard loss ratio. That being said, we still incur severe weather activity in our normal losses because of the exposures that we write, but a storm like Laura or Sally is different. Chris, feel free to add.
Chris Uchida, CFO
Yes, Paul, we're not going to tell you exactly how to create your model. I think generally, we are hyper-focused on catastrophes and trying to mitigate the risks they can cause in our book. However, we generally do not put it into our model as we think it would provide too much noise and say, oh, we think the cat is going to happen in Q1, and it didn't happen, and then we outperformed. This isn’t how we view our book. We build our model with reinsurance, whether it be quota shares, excess of losses, and strategically with underwriting to minimize the volatility that those losses will have on our book.
Mac Armstrong, CEO
And Paul, the only thing that I would add is that as we start to clarify our thoughts on the net quota share or an aggregate, we will certainly inform you in terms of the cost that may be incremental to what's in our model right now and the positive knock-on effects that may lead to capping losses from multiple events like we went through in the third quarter. This might be a more effective way for us to manage going forward.
Chris Uchida, CFO
Yes, and just one more point I might add for context, Paul, is when we look at our historic numbers, the only other events would be Harvey and Florence that we included in our catastrophe loss definition. So, in 2019, there were no CATs from the way we would define them that would go into our results.
Operator, Operator
Our next question comes from the line of Mark Hughes with Truist Securities. Please proceed with your question.
Mark Hughes, Analyst
Mac, you say that the lines of the accounts you're exiting are not that large. Could you give us a specific number on that?
Mac Armstrong, CEO
Well, I mean, they are large in terms of their total insured value and their exposure. The total premium on a year-to-date basis for those states on a commercial basis is around $8.5 million.
Chris Uchida, CFO
That was in-force at the end of September.
Mac Armstrong, CEO
Yes. These are admitted policies. So they will come up for nonrenewal and will wind down over the course of the year. The one thing that is harder to gauge is the impact as we shift our appetite for writing certain risks on the coast and move further off the coast. That’s not just limited to Mississippi, Alabama, and Louisiana; that will be in all states.
Chris Uchida, CFO
And one thing I might add, Mark, is while you're focusing on the premium side, we're thinking about this shift more from a profitability standpoint. We're removing premium that lies outside of our targeted returns, hopefully improving overall net income and ROE of our current book.
Mac Armstrong, CEO
Yes, very good point.
Mark Hughes, Analyst
The moratorium in California homeowners, I think I saw something in the notes today. I'm not sure how broad it is, does that make it a little more difficult to sell Residential Quake if there's a nonrenewal quarter in place?
Mac Armstrong, CEO
Mark, that's a very good question. My short answer is it does not. This is the second wave of moratoriums that California has put in place. The first one applied to just under 1 million homes, this one is a little bit larger than that, but we’ve written more new business in 2020 through the first-line of the year than we did in 2019, and that includes the big spike we saw in the third quarter of '19 from the Ridgecrest earthquake. I do not believe that it will challenge our ability to sell Residential Earthquake in California.
Mark Hughes, Analyst
The GeoVera, why did they pursue a renewal rights transaction? Is there any rate action that you need to take when you take over that book?
Mac Armstrong, CEO
Mark, I can't speak for GeoVera's intention and their decision to exit the market. They were great to work with on this deal, and we left open the opportunity to bolster our presence in Hawaii, where we now offer multiple products, most notably in flood and builders risk. This deal gives us true ballast and critical mass in the market and allows us to convert approximately $17 million of premium onto our book. It's in a line that does not have attritional loss and is a great diversifier from our core earthquake reinsurance program. We feel like we should have the ability to convert this and that risk is adequately priced.
Operator, Operator
[Operator Instructions] Our next question comes from the line of David Motemaden with Evercore. Please proceed with your question.
David Motemaden, Analyst
Mac, I appreciate the commentary you've made on the underwriting actions that you've taken in All Risk and Specialty Home exiting in those states and then also in distancing from the coast and the remaining exposure. I guess I'm wondering if there is any rule of thumb or indication regarding the reduction in the PMLs that this will result in or a reduction in TIV? Like just in terms of any sort of way that we, from the outside, can gauge how much the exposure has been reduced?
Mac Armstrong, CEO
Sure, Dave. Thanks for the question. The PML that is going to come off from those states is not insignificant. It would probably constitute around 15% of our total wind PML, but it would also help us in isolating correlated exposure. Specifically, Mississippi, Alabama, and Louisiana tend to correlate. This will allow us to thin our exposure and refine our targets in areas where we do not see viable market opportunities to generate the returns we want. By the time of the height of the hurricane season next year, we expect to have less than $1 million of premium in force in those states on the All Risk side, though some residential business will remain.
David Motemaden, Analyst
Got it. Okay, that's helpful. And I guess just thinking about it, it sounds like the rate momentum has been sustained at around 14% rate increases on the Commercial side. I guess I'm just wondering— and I think you kind of alluded to this earlier, Mac—just in terms of the additional rate that you think could offset the incremental cost of the reinsurance. And I say this because I'm looking at the book of business and seeing about 45% of it is in residential earthquake, where that is capped in terms of how much rate you can take, and you obviously wouldn't be taking rate on that for wind risk in the Southeast US. So I guess that's a long way of asking, do you think that you can get the incremental rate on the Specialty Home side or the Commercial Risk side that would offset the higher cost of reinsurance?
Mac Armstrong, CEO
Yes, Dave, another astute question. What I would say is, with respect to Commercial All Risk and wind exposure across all states, we're pushing for higher rates now than 14%. On the heels of the storms and market dislocation, we're not renewing accounts at less than 20%. Furthermore, our E&S company enables us to be more assertive and push for better renewals, providing us a chance for increased rate integrity. I believe we're on the path to see additional rate increases. For Commercial Earthquake, we're pushing mid-teens, high-teens on the rates. There is a positive derivative impact from rising reinsurance costs due to market dislocation across property, which allows us to maintain those levels. We also have significant reinsurance to protect us from the severe events, so while it was a severe event season, the majority of our tower is loss free. So I believe that as we proceed, it allows for further compensation for potential reinsurance increases.
Chris Uchida, CFO
And one thing I might add is, David, you were talking about Residential Earthquake. We've discussed that before. The book does have an inflation guard, with about 90% of it receiving a 5% rate increase annually. So there is still some upward potential in that book, too.
Operator, Operator
Our next question comes from the line of Adam Klauber with William Blair. Please proceed with your question.
Adam Klauber, Analyst
Can we talk a bit more about the rollout of PESIC? You mentioned that third quarter was just getting started and that fourth quarter would be when things ramp up. Could you provide some perspective on submission levels you're seeing this quarter compared to last quarter?
Mac Armstrong, CEO
Adam, I would tell you that for one of our lines, we wrote more last week than we did in totality during the last quarter. It's really starting to scale from the partnerships we entered into in Q3 toward the end. There are several more partnerships forthcoming in Q4, so overall submission count is still growing. However, we expect to see a pretty swift sequential increase in submissions.
Adam Klauber, Analyst
Okay. And which products are being sold through PESIC?
Mac Armstrong, CEO
Right now, we are writing Commercial Earthquake, national layered and shared property, which is wind as well as quake, and then Builder's Risk. We have a couple of new programs with property and casualty components coming in line. But for now, we are primarily focusing on property risks.
Adam Klauber, Analyst
You mentioned the partnership or the deal with AM Wins, which is great. Given AM Wins' size, you were previously dealing with major wholesalers, but now you’re much more in the mainstream. Could you just give some perspective on what slice of the pie you had access to before from those big wholesalers compared to what slice of the pie you have within your line? Obviously, you're not doing casualty, but within your lines, how much more access do you think you have now compared to when you were just doing business with local carriers?
Mac Armstrong, CEO
What I would say is that our previous relationships with wholesalers categorized us more as small to mid-market accounts. With the E&S company, we can work on larger accounts and be part of a slip, allowing us to be 10% of a $100 million account or 10% of a $50 million account. Prior to this, we might only secure $10 million on a standalone basis. This not only provides access to a much larger market but also allows us to spread our limits more effectively without becoming concentrated. As it stands currently, we could get rapid scale with some of our partnerships faster than flow through submissions.
Operator, Operator
We have no further questions at this time. Mr. Armstrong, I would now like to turn the floor back over to you for closing comments.
Mac Armstrong, CEO
Great. Thank you, operator, and thank you all for your time this morning. This concludes Palomar's third quarter earnings call. We appreciate the time and questions, and as always, your support. Although from a loss perspective, the third quarter was our toughest since inception, we did continue to experience solid growth. I believe that as we apply the lessons learned from the storm season, we will emerge stronger and better positioned, which will enhance the growth opportunities for the business. We will keep focusing on the profitable growth of Palomar while scaling our capabilities as we expand our reach and product footprint. We are on this journey with our investors and the team for the long term, and Palomar remains focused on delivering for all stakeholders. Lastly, I want to take a moment to thank all members of the armed forces for their service, especially today on Veterans Day, and all that they have done and continue to do for our country. I hope you all remain safe and healthy during this holiday season. Thank you, and we'll speak to you in the fourth quarter. Have a great day.
Operator, Operator
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.