Palomar Holdings, Inc. Stock

Greetings, and welcome to the Palomar Holdings Incorporated Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me here today is Mac Armstrong, our Chairman and Chief Executive Officer. Additionally, Jon Christianson, our President, is here to answer questions during the Q&A portion of the call. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11:59 p.m. Eastern Time on August 19, 2026.

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.

Thank you, Chris, and good morning, everyone. We delivered another strong quarter, highlighted by record adjusted net income, our 15th consecutive earnings beat and the third increase to our full year adjusted net income guidance.

Gross written premium increased 27% year-over-year. Adjusted net income grew 31%. Adjusted earnings per share grew 34%. Our adjusted combined ratio was 77% and our adjusted return on equity was 26%. These results demonstrate our ability to execute in a dynamic insurance market while maintaining discipline in underwriting and capital allocation.

Our diversified portfolio remains one of Palomar's greatest strengths, and we believe it truly is one of one within the Specialty Insurance market. No single product group represented more than 1/3 of gross written premium during the quarter. Approximately half of our portfolio is property business. Nearly 20% is generated from lines of business that are not correlated to traditional P&C market cycles and 52% of the book is written on an admitted basis.

The deliberate diversification strategy we have executed over the past half decade bolstered and enhanced our business model and financial results. It has translated directly into strong profitable growth and an industry-leading ROE that has proven durable through all market cycles. The combination of admitted and E&S products, residential and commercial property lines, niche casualty businesses and the growing contribution from crop and surety allows us to navigate changing market conditions.

As portions of the commercial property market continue to soften, the breadth of our portfolio provides stability and opportunities to deploy capacity into areas where risk-adjusted returns remain attractive. We believe this unique mix of business differentiates Palomar and is a key reason we have consistently generated profitable growth and maintained best-in-class financial metrics throughout varying market cycles.

Now let's turn to the performance of our product groups. For the Earthquake franchise, year-to-date written premium is up 1% year-over-year. During the quarter, gross written premium was down less than 1 percentage point. As I said before, the continued strength in Residential Earthquake is offsetting ongoing pressure in the Commercial Earthquake business. Residential Earthquake, which represents approximately 64% of the Earthquake book, continues to serve as a stable and predictable foundation for both the franchise and Palomar overall.

New business production was very strong in the quarter with both new business premium and policy count increasing year-over-year from the second quarter of 2025. Premium retention exceeded 96% and renewal policies continue to include a 10% inflation guard. We continue to closely monitor the inflation guard and price elasticity and encouraged by the residential book's strong premium and policy retention.

In Commercial Earthquake, which now constitutes 36% of the Earthquake premium, market conditions remain highly competitive. Average rate decrease in the book was more than 20%, with decreases more pronounced in large commercial layered and shared business.

In addition to the rate pressure on renewals, large commercial new business pricing is under even greater pressure. In certain instances, we are seeing new business account prices below what we consider technical pricing levels. Pricing that adequately compensates for expected loss load, reinsurance costs, acquisition and underwriting expenses and capital requirements.

While these conditions remain challenging, we hope pricing at these levels is indicative of market approaching a bottom. We are optimistic that the pace of rate declines could moderate but not dissipate in the large account space over the remainder of 2026. Small Commercial Earthquake, which we define as less than $40 million of total insured value, is not experiencing the magnitude of rate degradation that the large commercial layered and shared market has, although the market remains quite competitive. During the quarter, pricing declined in the low double digits. As the business we write is predominantly admitted and we generally ensure the full policy limit, we maintain greater control over renewals, and therefore, are slightly more insulated from the rate environment of the layered and shared large commercial segment. While competition continues to pressure new business, we remain disciplined in our underwriting. We will not pursue business that does not meet our return thresholds.

Looking at the profitability metrics of the Earthquake book, specifically the AAL to premium ratio, the overall portfolio ended the quarter at the same level as that at the end of the second quarter of 2023. Importantly, the Residential Earthquake book's metrics have remained stable over the last 3 years, while the Commercial Earthquake book increased and then subsequently declined by approximately 30% over the same period.

This consistency underscores the benefits of our balanced approach to portfolio management and reflects our discipline in allocating capacity across the franchise. Overall, the strength and spread of risk of the book as well as what we are seeing in the third quarter to date provide confidence that we will achieve our previously stated outlook for premium growth in the Earthquake book this year.

The story for our Inland Marine and Property Group is very similar to that of our Earthquake book. We saw strong performance from our residential and admitted property products and intense competition in layered and shared large account business, where rates in the quarter were down 16%.

The diversity within the Inland Marine and Property Group also allows us to lean into markets generating compelling returns and walk away from business in areas lacking attractive economics. Gross written premium for Inland Marine and Property increased 11% year-over-year, driven by strong performance in admitted Builder's Risk, construction engineering, residential property and motor truck cargo.

Residential property, which is 36% of our Inland Marine and Property franchise performed well, led by Hawaiian hurricane, which continues to benefit from limited competition, rate adequacy and the forthcoming earn-in of our approved 12% rate increase. Importantly, Laulima, the reciprocal we manage and use to write Hawaii hurricane business, purchased its own reinsurance and maintains $1.5 million event retention. This limits our direct balance sheet and earnings exposure to Hawaii hurricane, which certainly helps manage the potential impact of an El Niño-driven wind season.

Additionally, our residential flood partnership with Neptune generated solid growth while improving our geographic spread of risk. Although still a relatively small contributor today, we believe it further strengthens our residential property portfolio. Our motor truck cargo program grew 22% and is well positioned to maintain that growth level in the second half of the year as it just received approval for a 13% increase on policies written in California, its largest state.

We continue to invest in our Builder's Risk franchise, adding underwriting talent in Texas and New York to broaden our reach and product offerings. This led to another strong quarter in construction engineering for which we expanded the range of technically complex projects we support, including data centers during the course of construction. Our Builder's Risk book remains well diversified across Admitted and E&S products, Residential and Commercial Exposures and projects ranging from smaller local developments to technically complex engineered risks.

Supported by our experienced underwriting team and enhanced reinsurance capacity, we believe our Builder's Risk book is well positioned to drive profitable long-term growth. Additionally, we have brought on a new leader to build out our homebuilders practice, which is currently limited to a single state in Texas. The addition of a seasoned professional should allow us to establish a national homebuilders presence.

While competitive pressure persists in the large commercial property market, we are disciplined and are not chasing growth. The luxury of the balanced property portfolio Admitted and E&S, Residential and Commercial allows us to be steadfast in our appetite and underwriting discipline. We will source and invest in attractive long-term opportunities and prioritize underwriting profitability over premium growth.

Turning to casualty. Our portfolio of 7 niche lines in selected third-party administered programs grew gross written premium 37% year-over-year. This growth is a function of the investments we have made in new products, systems, underwriting talent, distribution relationships and select program partnerships over the past several years.

Underpinning this performance is our portfolio management strategy. We manage the business as a collection of distinct specialty lines, each with its own underwriting objectives, profitability targets and growth expectations. Additionally, each line has its own market pricing dynamics. For instance, excess casualty average rate increase is up more than 10% over the last 4 quarters and was up 5.8% this quarter, whereas the real estate E&O has averaged a 1.6% decline over the last 4 quarters and was down 3.9% in the second quarter of 2026.

The portfolio is unified in the approach to limit management's reinsurance strategy and disciplined underwriting. We maintain modest line sizes and conservative attachment points that contribute to a shorter tail development dynamic across the casualty portfolio. In addition, auto exposure is intentionally limited. Notably, we do not write auto within our E&S casualty business and only 9% of our primary general liability policies have auto coverage.

Reviewing loss costs and related rate adequacy remains an important area of focus. We are encouraged that the annual ISO general liability loss cost change across our top 5 states was 4.4% compared with a blended 7.5% rate increase across our GL portfolio. This framework gives us the flexibility to actively manage the portfolio by allocating capital to the most attractive opportunities while reducing exposure where returns no longer justify the risk.

That was evident this quarter as we reduced our exposure to transactional liability and cyber. In both cases, pricing no longer met our return hurdles. Just like our property team, our casualty underwriters are willing to walk away from business when economics no longer meet our standards. As the casualty books mature, we continue to gain confidence in our own loss trends while benchmarking our experience against broader industry data. We are not facing the legacy reserve issues affecting some peers and are comfortable with the pricing we are achieving. Our reinsurance treaty renewals have continued to price favorably, reflecting our reinsurers' confidence in our underwriting performance.

Lastly, we maintain a conservative reserving philosophy with more than 84% of casualty reserves held with IBNR. One other casualty matter worth noting is that the growth in the book continues to benefit from the rollover of established casualty books migrating to Palomar from long-standing program administrators. These are seasoned portfolios from well-established program administrators with in-place distribution and reinsurance. As the policies convert onto our paper, our underwriters and program team can price, improve, optimize and manage these books under our framework. Additionally, certain of these new programs are supported by meaningful risk participation from affiliated carriers or sidecar reinsurers, aligning our interests.

Turning to crop. Gross written premium increased 96% year-over-year, significantly exceeding our initial expectations and reflecting the continued success of our franchise and the experience and expertise of our leadership team. The crop business has rapidly become a contributor to our earnings base in addition to diversification and top line growth. The resounding success of our crop team is a clear demonstration of our ability to build specialty franchises.

Beyond the strong production, the highlight of the quarter was the launch of PLMR.Farm, our innovative AI-developed policy administration platform and what we believe is the first new software policy administration in the crop industry in over a decade. The platform encompasses underwriting, customer service and claims administration while providing a scalable foundation to efficiently support the growth of our business as well as our agent partners.

In the crop market, an AIP's differentiation is established through service claims and technology. PLMR.Farm should prove to be a differentiator. It is worth providing a brief update on crop conditions. Some winter, we'd experience challenging conditions early in the growing year in portions of Oklahoma and Kansas. However, weather has subsequently approved in certain areas and our use of the standard reinsurance agreement and third-party reinsurance should mitigate a meaningful portion of the impact.

Current crop conditions within our Midwestern footprint would indicate profit expectations within historical norms. Additionally, developing El Niño conditions should not affect our 2026 crop year results. The combination of strong production, continued investment in the platform, talent additions and stellar operational execution reinforces our confidence in the long-term trajectory of the business.

Our strong year-to-date performance and up-to-date sales results informed the increase of our full-year crop premium outlook to more than $400 million for calendar year 2026, up from our previous outlook of approximately $320 million. 2026's performance further strengthens our conviction that crop can ultimately become a $1 billion franchise. As a reminder, the higher crop premium naturally results in a higher current quarter loss ratio for Palomar due to the margin profile of the business.

Moving on to Surety and Credit. Gross written premium increased 236% year-over-year to approximately $39 million, incorporating the full quarter's results from Gray Surety. The integration of the acquired business is substantially complete, and our focus is now pivoting to franchise building through the addition of new underwriting talent, geographic expansion and new product capabilities.

Specifically in the quarter, we hired new commercial surety underwriters to expand that practice and honed our FAST Act credit platform, which will enable us to streamline the underwriting process for smaller bonds. As well, we successfully completed our surety excess of loss reinsurance program on July 1. The new treaty allows us to write our full T listing limit bond authorization of $70 million while keeping a net retention of $3.5 million.

Together, these new initiatives and investments provide a clear path toward building a top 20 surety franchise and enhancing another source of earnings that is largely independent of the traditional P&C market cycle.

Palomar was both very busy and successful in the reinsurance market in the second quarter. As previously announced, we successfully completed our June 1 reinsurance placement on attractive terms. We added approximately $421 million of incremental limit, bringing our total coverage to $3.92 billion for earthquake events and $135 million for Continental U.S. hurricane events. Importantly, we maintained our earthquake and hurricane event retentions at $20 million and $11 million, respectively, despite growth in our earnings and capital.

These retentions remain modest relative to our earnings and stockholders' equity, supporting the consistency of our results while preserving the opportunity to generate additional savings in future renewals. It is also worth mentioning that the lowest layers of our reinsurance program were the most competitively priced in the tower. In fact, they were at technical levels that made the decision to maintain existing retention levels very easy.

We also executed our seventh Torrey Pines Re catastrophe bond and expanded Laulima's Hawaii hurricane coverage to $865 million while maintaining its $1.5 million event retention, a level that we are particularly comfortable with in an El Niño year.

Beyond our catastrophe programs, we placed 14 treaties during the quarter, all of which were renewed at either better or existing economics from the expiring program. We secured additional capacity for Builder's Risk, excess national property and our high-value residential Builder's Risk program, enabling us to write larger limits while not disproportionately stressing the balance sheet.

We also placed 5 casualty treaties in the quarter, all of which saw improved economics as well as the maintenance of our session percentages. In one instance, we chose to increase our session. This is a nice validation of the underwriting performance of our casualty team as well as the strict adherence to our risk-adjusted rate targets. Lastly, as we mentioned, we placed our surety excess of loss treaty to support our go-forward surety plan. Collectively, these actions position Palomar for continued profitable growth and limited earnings volatility.

I want to highlight 2 recent additions to our leadership team. First, Sheri Scott joined us as Chief Actuarial Officer. Sheri is a highly experienced actuary who spent almost 2 decades at Milliman and strengthens our actuarial analytics and risk management capabilities. Sheri has been an adviser and a [ pioneering ] actuary and a strategic partner for Palomar since our inception. We are thrilled to have her on the team.

Second, we welcome Madison Ragozin as our Head of AI. Madison joined us from Intuit and is championing the deployment of AI across the enterprise. Her initial focus will be managing 4 existing high-impact AI initiatives; an underwriting workbench for our property team, enhanced claims capabilities, efficient operations and customer service; and the continuing rollout of PLMR.Farm. Beyond these initiatives, Madison is responsible for prioritizing AI investments based on ROI and ensuring we allocate capital to the highest value opportunities.

Our strong and consistent earnings, attractive returns and healthy balance sheet provide ample capacity to not only invest in the business driving our Palomar 2X strategy, but also return capital to shareholders. During the quarter, we repurchased 368,719 shares at attractive prices. In addition, our Board authorized the introduction of a quarterly dividend of $0.45 per share payable on September 2 to shareholders of record as of August 19. Importantly, the dividend does not change our growth strategy or limit our ability to execute Palomar 2X.

Our attractive returns and the growing contribution from less capital-intensive businesses such as crop surety and selected casualty lines provides the flexibility to fund organic growth, maintain a strong balance sheet, repurchase shares opportunistically and return capital through a regular dividend.

In summary, our results demonstrate the strength of our business model and our continued strong execution. We manage each business against defined underwriting and profitability objectives and are willing to reduce participation in non-renew accounts and shrink selected areas of the portfolio when pricing and projected returns do not meet our standards.

Simply put, we will always sacrifice premium for profitability, but we will not sacrifice profitability for premium. Based on our record-setting second quarter performance and outlook for the balance of the year, we are increasing our full year adjusted net income guidance to $270 million to $280 million. The updated range continues to include our expected catastrophe loss provision. At the midpoint, the revised range implies adjusted net income growth of approximately 27% and an adjusted return on equity of 26%.

With that, I'll turn the call over to Chris to discuss our financial results and guidance assumptions in greater detail.

Thank you, Mac. Before I begin, please note that during my portion of the call 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 2026, our adjusted net income was $63.8 million or $2.36 per share compared to adjusted net income of $48.5 million or $1.76 per share in the second quarter of 2025. Adjusted net income grew 31%, reflecting the continued strength of our diversified specialty portfolio, higher net earned premiums coupled with disciplined underwriting, and strong investment income. Our earnings per share grew at a greater rate of 34%, driven by opportunistic buybacks over the last 12 months.

Adjusted underwriting income for the second quarter was $67 million, an increase of 38% compared to $48.4 million in the prior year quarter. Our adjusted combined ratio was 76.7% compared to 73.1% in the second quarter of 2025 and compared sequentially to 76% in the first quarter of 2026. Our growth and diversification resulted in an increase of our adjusted combined ratio, primarily driven by higher underlying loss ratio, partially offset by a lower adjusted expense ratio. We expect this dynamic between loss ratio and an adjusted expense ratio to continue as we grow the business, resulting in ongoing attractive adjusted combined ratios.

For the second quarter, our annualized adjusted return on equity was 26.3% compared to 23.7% in the prior year period. While continuing to invest in personnel, technology and recently launched businesses, we generated returns well above our Palomar 2X threshold of 20%, demonstrating the earnings power and capital efficiency of our platform.

Gross written premiums for the second quarter increased 27% to $630.5 million as compared to the prior year second quarter, continuing to demonstrate the strong momentum that we have across our unique diversified specialty portfolio. Looking at our key Specialty Insurance products, it's important to remember the seasonality of our crop business, given that the majority of the premium is written and earned in the third quarter of each year, with only modest premium in the second and fourth quarters. We will update our expectations for the seasonality of our specialty portfolio in our investor presentation, which is a useful guide as you model our business.

Net earned premium for the second quarter increased 59.5% year-over-year to $287 million. As expected, our net earned premium ratio, the ratio of net earned premiums as a percentage of gross earned premiums, increased to 51.9% compared to 44% in the second quarter of 2025 and was in line sequentially with the first quarter of 2026.

The year-over-year increase in this ratio is reflective of our improved excess of loss reinsurance at the last 2 renewals, growth of our lines of business that use quota share reinsurance, such as our crop business, where we retained more premium than previously as we continue to leverage our growing balance sheet and the acquisition of Gray Surety.

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 and a similar pattern to last year.

Losses and loss adjustment expenses for the second quarter were $99 million compared to $46.2 million in the second quarter of 2025. Attritional losses for the quarter were $99.4 million, partially offset by $0.4 million of favorable catastrophe development. The total loss ratio for the quarter was 34.5% compared to 25.7% in the second quarter of 2025 and compared sequentially to 33.3% in the first quarter of 2026.

In line with our expectations and guidance, the increase in our losses and loss ratio was driven primarily by higher attritional losses associated with growth in lines of business such as crop and casualty. It's important to remember that crop losses show up earlier than the premiums. Thus, for the current year, it has higher losses and loss ratio in the first half of the year, which was amplified by our higher premium expectations for the year.

Our second quarter loss results include $14.3 million of favorable prior year development, the majority from our Inland Marine and Property and crop business with additional favorability from casualty. Favorability from casualty is from some of our historic programs in fronting business. Importantly, the favorable development provides additional evidence supporting the conservatism embedded within our reserving philosophy and the quality of the business we wrote and are writing today.

Currently, 79% of our total reserves and 84% of our casualty reserves are in IBNR. As we have discussed previously, we established conservative reserves and regularly evaluate emerging loss trends across the portfolio. The favorable development recognized this quarter as well as the favorable development reported throughout 2025 and the first half of 2026 continues to reflect disciplined strength of our underwriting and our fundamental conservative approach to reserving.

Our acquisition expense as a percentage of gross earned premiums was 12.9% for the second quarter compared to 12.6% in the prior year period and compared sequentially to 14% in the first quarter of 2026. The year-over-year increase was primarily driven by business mix, including the growth of our Surety and Credit franchise, which carries a higher acquisition expense ratio as well as increased premium retention across the portfolio, resulting in lower ceding commissions. These dynamics are consistent with our expectations and reflect the continued evolution of our business mix.

The ratio of other underwriting expenses, including adjustments to gross earned premiums for the second quarter was 9.1% compared to 8.7% in the prior year quarter and compared sequentially to 8.5% in the first quarter of 2026. These results now include a full quarter of Gray's underwriting expenses. As we have communicated, we remain committed to investing in talent, technology and systems to support the scalable platform we are building.

While these investments can create some near-term pressure, we continue to expect operating leverage over time as the organization grows within the Palomar 2X framework. Our net investment income for the second quarter was $20 million, an increase of 49.2% compared to $13.4 million in the prior year quarter. The increase was primarily due to higher yields on invested assets and a higher average balance of investments held due to cash generated from our operations, including a full quarter of our acquisition of Gray.

Our yield in the second quarter was 4.9% compared to 4.6% in the second quarter last year. The average yield on investments made in the second quarter remains over 5%. At quarter end, cash and invested assets totaled approximately $1.7 billion and the weighted average duration of the fixed maturity portfolio was 4.3 years.

Stockholders' equity increased to $980.9 million during the quarter, including the repurchase of approximately 369,000 shares of our common stock for $41 million, an average price of $111 per share. These repurchases reflect our continued belief that share repurchases represent an attractive use of capital given the strength of our operating performance, earnings outlook and long-term growth opportunities.

Our growing balance sheet remains well capitalized with ample flexibility to support organic growth opportunities, execute our capital management strategy and maintain a prudent risk profile. After careful consideration, we are excited to announce that we are initiating a quarterly dividend. The first dividend of $0.45 per share will be paid on September 2 to shareholders of record as of August 19.

We continue to invest in our business within the framework of our Palomar 2X philosophy. Our consistent and growing earnings results in a healthy and growing capital position, allowing us to continue investing in Palomar 2X in conjunction with regular and opportunistic capital return strategies. We are committed to maintaining a disciplined and flexible capital allocation strategy. Our diversified specialty portfolio is a key driver of our consistent earnings growth.

The steadiness of our business is evident in our model. From a modeling perspective, we expect the same trends shared previously. Our 2025 full year net earned premium ratio was 44.9%. We continue to expect this ratio to increase into the upper 40s for 2026 with the low point of this ratio in the third quarter. On a gross earned premium basis, our full year 2025 acquisition expense ratio was 12.1%, and our adjusted other underwriting expense ratio was 8%. We expect slight improvements in both ratios for 2026.

Similar to last year, the acquisition expense ratio and other underwriting expense ratio should be higher in the first half of the year and lower in the second half of the year with the crop earned premium influence. We expect our loss ratio, including catastrophes and prior year development to be in the mid-to-upper 30s for 2026. We expect our adjusted combined ratio for 2026 to increase to the mid-70s. We expect the high point in our loss ratio and combined ratio in the third quarter. These expectations reflect our expected growth, business mix and use of capital as we build our Specialty Insurance platform.

Lastly, with our strong performance and consistent earnings, we are increasing our full year adjusted net income guidance to $270 million to $280 million. The increased guidance fully contemplates the previously mentioned capital return strategy. The updated range includes our expectations for $8 million to $12 million of catastrophe losses, in addition to the many catastrophe losses historically contemplated in our guidance. At the midpoint of our guidance implies approximately 27% year-over-year adjusted net income growth and even stronger EPS growth, more than doubling 2024 adjusted net income in just 2 years, while continuing to generate an adjusted return on equity above 20%.

With that, I'd like to ask the operator to open the line for any questions. Operator?

[Operator Instructions] The first question comes from David Motemaden with Evercore.

Just a question on the casualty reserve development, the favorable development there. Obviously, a good sign to see. Mac, I was wondering if you could just unpack that a little bit more, discuss what specific lines in casualty that was on, what accident years that impacted? Yes, just sort of wondering if you could unpack what you saw there that gave you some comfort to release reserves?

Yes, Dave, thanks for the question. And Chris should chime in as well. But what I would say is, we were pleased with the strength of the reserve base across the board, property and casualty alike. The conservatism in our reserving approach is really informing our casualty reserves across the board, but we did release some reserves from really an older fronted program where we had a risk participation in the workers' comp space.

So as you may recall, a few years back, we were fronting for a company, Omaha National, and we took a risk participation there to the tune of 7% to 10% depending on the years, '21, '22. And so that was the predominance of the casualty releases that we had. Overarchingly, the casualty book and, for lack of a better term, the youth in it means that we are putting the large predominance of the reserves in the form of IBNR. And much like last quarter, IBNR stands at 84% of the casualty book.

But as Chris says, our view is, we take the bad news upfront and hopefully let the good news come to fruition over time, and that was the case with the casualty book and really being from a participatory front in the workers' comp space.

But Chris, anything to add?

Yes. No, Mac, you outlined that well. I think the only thing I would add in some of your comments on conservatism is you really see this play out over the last 6 quarters, right? We've had it play out on our property book of business where we talk about that approach where we are very conservative upfront. We react to bad news quickly and then we react to good news deliberately.

So that has played out where you see favorable development in our property lines, and you're seeing that now a little bit on some of our more historic casualty lines. So this is something that we've kind of built into our results and expectations and aligns with what we've seen really over the last 6 quarters. So we're pleased with the results. It's not going to change our philosophy. We are still reserving conservatively upfront. We're doing that for crop. We're doing that for property, and we're doing that for casualty. So we're happy with the results. We expect that to continue to play out that way, and that's why we approach our reserves conservatively upfront to hopefully get that result in the future.

Got it. I appreciate that detail. My follow-up is just on the accident year loss ratio, excluding catastrophes. So that increased to 39.6% this quarter. Obviously, the favorable PYD has been solid this quarter as well as last quarter, and that's helped bring in the attritional loss ratio as you guys define it. But I'm just wondering on that accident year loss ratio ex cat, it sounds like that is just sort of, as you would expect it, just given the mix shift to crop. So I'm wondering what your outlook is on that and how we should think about just loss ratios in general as we head into next year and the mix shift continues?

Yes, that's a great question. We've talked about our loss ratio a lot. We mentioned it in the prepared remarks about that. From an overall basis, we still expect the loss ratio to be in the mid-to-high 30s. You see that in the current accident year with those results. But overall, when you look at the modeling and the comments really over the last couple of quarters, we have kind of stuck to that kind of loss ratio target or expectation. So there's really been no change in our view, so -- meaning the underlying accident year loss ratios are very well in line with our expectations.

Crop is growing at a faster rate than we had talked about, now seeing over $400 million of crop premium for the year. We know that crop is a heavier loss ratio product by nature. We also know that crop losses come in earlier. So Q2 was a little bit higher than that for -- our crop losses were a little higher in the quarter than we would have expected, really driven by some of that growth. But overall, nothing is changing our overall expectation for the year.

Going out a little bit, right, when you think about that, we do expect the loss ratio to continue to increase. That is not a surprise. Wouldn't be surprised if it still goes up next year or the year after, really from the mix of business.

Our binary lines, really Earthquake and Hawaii, our Earthquake has been flatter. Hawaii has been growing well, but obviously have a much smaller base. So we're happy with that. But our other products with attritional losses are growing at a faster rate. They are performing well, in line with our expectations, but their loss ratios are higher than 0. So we do expect, as the mix and the specialty portfolio that we built continues to diversify, we do expect the loss ratio to go up.

As I also mentioned in the prepared remarks, we do expect to see some savings on the expense side. So it's not going to be dollar for dollar, but I don't expect the same, call it, increase in our loss ratio to go straight to the adjusted combined ratio. I do expect some favorability there. We will also see some favorability expected in our net earned premium ratio. That has been going up. I expect that to continue to go up as our participation on these lines, around these lines continue to grow.

So that's a lot of points there, but the loss ratio should go up. You're going to see favorable net earned premium. You're going to see some favorable acquisition expense ratio offsetting some of that.

Yes, Dave, this is Mac. The only thing that I would add is the loss ratio obviously being driven up by the crop outperformance. That's a good thing. Crop is going to be adding to the bottom line growth. It's candidly well ahead of plan. We said initially, we thought the crop book would grow 30% to 40%, up from a $230 million base. Now at the $400 million target we're giving you, it's almost doubling.

So excellent execution from our crop team. It does lead to higher losses, but it does not change the overall direction of the business, like Chris described to you. But I think it does enhance the long-term prospects for profitable growth, consistent returns and a higher ROE because of the uncorrelated nature of the line with the rest of the property book.

Got it. No, that's helpful. Maybe just following up there on the crop side. Good to see the favorable PYD from crop this quarter. I'm just wondering where is the '25 year, what sort of combined ratio has that developed to? And where are you booking 2026 on -- if we sort of think about the combined ratio?

Yes. I'm going to start with the latter part of that question. Right now, it's safe to say that our '26 reinsurance year or crop year is being booked closer to 100% on a net basis, right? It is early. Like I said, crop losses show up earlier than the premium. That just kind of equates itself to a higher loss ratio at the beginning of the year, the way we recognize premium. That premium, as you are aware, we do not recognize most of it until we get the acreage reports. Those acreage reports usually come in, in July. So most of that premium will be written and earned in the third quarter.

So that kind of cycle or quarterly fluctuation does result in an expected higher loss ratio especially on net basis in the first couple of quarters of the year. We expect that to, I'll call it, [ slightly ] true up in the third quarter and the fourth quarter as the results kind of come into where we see the overall losses or the overperformance of those crops for the year is. So we do expect that to be higher at the beginning and then kind of start truing up in the latter half of the year and really even some of that through the beginning of the next year, kind of what you're talking about with our favorable development, really that's coming from prior years.

Most of that, obviously, based on cycle is going to be related to the '25 crop year. We haven't given out specific numbers, but I think it's performing in line with the industry, which is probably going to be around that 80%. I think '25 year was a little more favorable industry-wide. So I think we're seeing those same results. It's, call it, a big product, a big universe, and we kind of performed in line with that, but we try and select reinsurance geographies that perform well.

And Dave, just -- as I said in my remarks, this year looks like it's in line with historical averages. So the crop year appears to be maybe not 25%, but it's in a good steady state.

The next question comes from Mark Hughes with Truist.

You talked about the rollover of existing books of business on the Palomar's books. How much more is there? Where are you in that process? How many more quarters with -- what you have in hand? And then is that something you're pursuing? Is there a pipeline of potential new opportunities?

Mark, this is Mac. Good question. Thanks for asking it. To the first part of it, we have one program, which is a decent-sized general liability or vertically focused GL program that is probably midway through its rollover. And then there's another one that the third quarter will be the final rollover.

So I would say there's still more to come in the third and fourth quarters. It might not be as pronounced as it was in the first part of 2026. But I think it goes -- it's worth saying these are long-standing relationships that we at Palomar have had with these program administrators. They are best-in-class in the lines of business in which they're operating. They have a meaningful risk participation that creates alignment of interest.

And we have internal underwriters that oversee those programs alongside our programs team to make sure they are pricing risk consistent with how we look at it and how we would price it on our own books in the open market.

There is a pipeline. I would say that pipeline has a higher degree of scrutiny maybe than in certain years in the past because of where we are in market cycles. I'd say that -- but this is going to continue to be a lever of growth for us, probably not as pronounced in casualty as it may be in property or in the marine and other. But it will remain a facet and component of our strategy because it's a nice complement to what we do internally.

In the surety business, how would you describe the level of competition? And then, is there any upward pressure on commission rates?

Yes. Mark, good question. I would say surety is -- it's competitive right now. And I would say for us, that's riding kind of really smaller market bonds. It's been competitive in the sense that you've seen some delay in projects. And so existing bond renewals can be fought after some. We're not seeing much pressure on the expense ratio side. It's really more on the service side and more often than not, too, kind of in the smaller bonds, projects are being delayed. So it's harder to project the timing.

But on the whole, we feel great about the growth. Obviously, 239% is strong. We feel great about the integration of our 2 surety organizations and the leadership we have there and feel good about the prospects for -- second half of '26 and '27 because of the larger T listing and what that affords us, the reinsurance that we have that's allowing us to write larger bonds on both a gross and net basis.

And then furthermore, some of the enhancements we've made on our servicing platform. So I think we can play through a little bit more competition than what we saw last year in surety for all the reasons I just outlined.

Yes. And Mark, one thing -- this is Jon Christianson. One thing I'd add to those comments is, as we think about competition in the surety space, certainly, there are plenty of options out there for brokers to look at, but we're seeing less pressure on rates or the original price of the business. So there's capacity, but we're not seeing rate pressure like you might see in other more standard P&C lines.

Yes, very good point.

The next question comes from Pablo Singzon with JPMorgan.

So reserve releases have become a larger component of your earnings over the past 1.5 years, since you had [ Chris ]. So I guess the question is, would it be fair to expect reserve releases to grow over time from here in order to support your Palomar 2X goal of doubling earnings over some medium-term time frame?

Yes. I think overall, when you look at the overall reserve base and kind of Mac talked about it, we have over 84% of our casualty reserves in IBNR. We have greater than 79% of our total reserves in IBNR. So we feel we are reserved conservatively. We hope that portends to growing reserve releases. We're not going to speculate, but I would hope that, that continues. That has been a nice trend that we've been able to demonstrate over the last 6 quarters, based on the philosophies that we direct our actuaries to use. We would expect that to continue.

But I'm not going to try and predict all of the pluses and minuses that goes on. There's obviously puts and takes in our loss ratios. We don't bet 1,000%. As Mac likes to indicate, we have had to trim lines historically, and we will continue to manage our book of business that way. But we are very confident in what we are doing. We have a very good reserve base. We feel great about our underwriting teams and all the books that they're building. So I hope that, that is a nice contributor to Palomar 2X, but the overall book of business that we're building, the growth in underwriting, the teams that we're building, the books of business overall are the real drivers of the Palomar 2X philosophy and growing that earnings base. So overall, it is just one smaller component to a greater big picture that we are building here.

Yes. And then second one, just about your reinsurance strategy. I'm just curious how you're thinking about that given the current environment and I guess, the potential for slower growth, right? I think some companies are designing to retain more to maximize growth and underwrite the income dollars, while others are choosing sort of like take advantage of arbitrage and cheaper capacity, right? So I guess, sort of how -- given where the market is and your own plan, how you're thinking about that aspect of your operations?

Yes, Pablo, it's a very good question. And I completely agree with what you described it. There are ways to play it. Sometimes you want to retain more and keep it on your paper. Sometimes you want to seed potentially more off because you're getting compensated more for the origination of that business. I think our answer to that is we're going to do all of the above, and we really are going to look at it on a line-by-line basis.

As I mentioned, with the casualty treaties that we placed in June 1 and over the course of the second quarter, we elected to keep the session percentages flat, which means we are going to get paid a little bit more for the origination of that business, which I think is a nice testimony to the strength of the underwriting. And as those books of businesses mature, we have that option to take more on or potentially restructure and move away from quota share to something that might be more excess of loss.

The property book, shorter tail, potentially a little bit more seasoned than the casualty book. We've been increasing capacity and increasing our net commensurate with the growth of the balance sheet or where we think we can improve our blended returns and margins. So again, there's kind of 2 different approaches that we've taken.

And then I think lastly, when you look at -- the other thing we have to look at, though, especially with catastrophe pricing is just the underlying margin that is being ceded or retained. And so when we decided this year to keep our cat retentions flat, we looked at the technical pricing of those lowest layers, and they were very thin from a margin over the expected loss.

And so it would sound risk transfer for us to maintain the retentions and not essentially take on more risk than what the models would say should be applied or should be charged for. So you have to look at it individually and balance that within the portfolio and kind of have some guideposts for each line of business that you use when you go out into the market for renewal.

The next question comes from Paul Newsome with Piper Sandler.

Maybe a little bit more on the underlying assumptions to the earnings guidance. Should we be reading anything into it that the earnings guidance seems to be a little bit less than the earnings beat? Are we thinking a little bit more conservativeness in the back half of the year?

Paul, thanks for the question. So when you look at our first half of this year, we grew 27%. The guidance kind of points to the fact that we expect to grow for the full year around 27%. So we feel very good about that guidance. We do -- we have increased it now a couple of million dollars at the midpoint. So overall, this is performing well, right?

We are increasing our guidance in a choppier insurance market right now, right? It's very competitive. There are tides going in and out in both directions. So we feel that we are very confident in what we're doing, that we're investing in the business, and we are able to increase that guidance, right? That also includes the fact that we are deploying capital to our shareholders.

During the first half of this year, we spent about $64 million on buybacks. The opportunity cost of that buyback is, call it, short term, right? So we did sacrifice short-term earnings growth to kind of get a higher return to our shareholders on a long-term basis. We view that as a very good return of capital. It's also the same fact that we looked at when we started the dividend, right?

We have a very high amount of capital that we're able to leverage and grow the business, invest in Palomar 2X, but also return capital to shareholders. So all those factors going into how we're growing the book of business and our overall guidance, we feel very good about the earnings guidance. We feel good about the growth that we're getting and also delivering, call it, doubling 2024 in less than 2 years is still very strong growth.

So overall, we're happy with how we're performing. We're happy with the 27% earnings guidance for the growth for the year, and we're happy that we're able to return more capital to our shareholders as we deliver more capital to the bottom line.

Paul, this is Mac. I would echo everything Chris said. I would just also want to reiterate something I said in the outset of the call, we've beaten guidance 15 straight quarters, and we've raised guidance 3 times this year. So I think we are establishing a track record of execution, and our intention is to continue that track record in the second half of 2026 and well beyond.

[Operator Instructions] There are no further questions in queue at this time. I would like to turn the call back over to Mr. Armstrong for closing comments.

Thank you, operator, and thanks all for joining us today. We are very pleased with our record second quarter results and the execution of the team during the first half of 2026. Our diversified platform is performing well and is well positioned for the balance of the year. As evidenced by our share repurchase activity during the quarter as well as the newly announced dividend, we have confidence in the long-term value of the franchise and the strength of the business model and its earning power.

We are focused on executing our long-term strategy, investing in the business where we see the greatest opportunities, maintaining the underwriting discipline that has defined Palomar since our inception and creating value for our shareholders. We look forward to further proving the value of our one of one portfolio, business model and moreover team. So thank you to our employees, our distribution partners, our reinsurers and shareholders for their continued support and commitment to Palomar. We'll speak to you soon.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.

Good morning, and welcome to Palomar Holdings, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me here today is Mac Armstrong, our Chairman and Chief Executive Officer. Additionally, Jon Christianson, our President, is here to answer questions during the Q&A portion of the call. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11:59 p.m. Eastern Time on May 14, 2026.

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 the 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 some 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.

Thank you, Chris, and good morning, everyone. I'm very pleased with our first quarter results as they reflect a strong start to the year and are another example of our team's ability to deliver consistent profitable growth. Our results reinforce the durability of our model and the uniqueness of our one-of-one specialty product portfolio and its ability to generate compelling risk-adjusted returns. Our book consists of a broad array of specialty products and is truly diverse.

The following breakdown of Q1 in-force premium illustrates this diversity. A 57%-43% split between admitted and E&S premium a 60-40 split between property, including Earthquake and Casualty Premium, a 45-55 split between residential and commercial property and 90% of the Q1 premium are from lines not impacted by the traditional P&C market cycle. Our differentiated portfolio is intentionally built to perform through any market cycle. We are well positioned to deploy capital toward more desirable opportunities while reducing exposure in areas where market conditions or loss trends are less favorable. Our strong first quarter results reflect this capability.

Looking closely at the quarter, gross written premium increased 42% year-over-year. Importantly, growth was broad-based across all five product categories, including Earthquake, profitability and capital efficiency also remained strong, highlighted by adjusted net income growth of 23%, and adjusted combined ratio of 76% and an adjusted return on equity of 27%. These results marked our 14th consecutive quarterly earnings beat, extending the track record of consistent performance in our business. In recognition of our belief in the long-term opportunities we possess, our ability to execute the Palomar 2X strategic imperative and what we feel is the depressed value of our shares, we repurchased 190,255 shares in the quarter.

Furthermore, our Board authorized a new 2-year $200 million share repurchase program on May 6. I'd like to briefly talk about the current market conditions in our business. The marketplace is constantly changing and pricing varies significantly between different segments. In the property sector, competition remains strong, especially for larger commercial accounts where prices are still declining by double digits. Our residential business lines continue to offer rate stability, balance and diversification, notably in...

[Operator Instructions]

double-digit rate increases. Casualty pricing varies with some lines like health care liability, which has rates of 35%, experiencing strong increases while other casualty lines like cyber face intense competition from new entrants or standard carriers returning to the market. We maintain disciplined underwriting practices and are prepared to non-renew accounts if pricing fails to align with our return requirements. Uncorrelated growth vectors in the surety and credit and crop space fortify this conviction. Overall, we believe our portfolio of specialty product...

[Operator Instructions]

Turning to our Earthquake franchise, which is 58% residential and 63% admitted, we delivered 3% year-over-year gross written premium growth despite continued pressure on Commercial Earthquake. Pricing in Commercial Earthquake remains competitive with rates decreasing approximately 18% on renewals and new business coming in at a higher average annual loss than the existing portfolio. We are pursuing opportunities outside peak zones and are willing to increase line size and high-quality existing large accounts at renewal when returns are compelling.

Importantly, we remain committed to underwriting discipline and are not willing to pursue premium at the expense of profitability, especially on new business. Our residential Earthquake business is performing well. As with our other admitted property products, market conditions remain favorable, with steady new business production, stable rates, constructive engagement with the California Earthquake Authority and its participating insurers and a healthy partners pipeline.

The balance of this line of business is clearly seen in our stellar premium retention, which was approximately 97% on our flagship admitted product in the first quarter. Looking ahead, we remain confident in our Earthquake outlook and our ability to deliver growth as well as strong profitability for full year 2026. In Inland Marine and Property, gross written premiums grew 47%, up from 30% in Q4. Like Earthquake, the balance of our specialty portfolio across residential and commercial lines, a 34% to 66% split, respectively, as well as admitted and E&S products, a 70%-30% split, respectively, is fueling the success of this line.

As it pertains to our commercial product suite, builders risk remains a key contributor with standout performance this quarter from our admitted portfolio. We are expanding our underwriting footprint, including the recent opening of an underwriting office in the Northeast. As well, we are pleased with the progress of our newly launched construction engineering line with strong reinsurance backing, new team members and enhanced infrastructure, our first quarter results are performing well above our initial plan.

As a reminder, this business also provides an entry point into the data center market, which we view as an exciting long-term growth opportunity. The excess national property and large county E&S property lines faced the most intense competitive pressure with rate decreases remaining in the range of 12% to 15%. Overall, our commercial property book is generating attractive risk-adjusted returns. Our seasoned underwriters are focused on retaining renewals and selectively writing new business. Our residential property practice was led by the Hawaii hurricane business.

La Lima continues to perform well, benefiting from limited competition, strong rate adequacy and embedded growth, which will be maintained by a recently approved 12.5% rate increase. We're encouraged by the progress of our flood partnership with Neptune, the growth and improved spread of risk from Neptune allowed us to endure elevated flood activity in Hawaii. Fortunately, prior period catastrophe gains offset flood losses. So our $8 million to $12 million annual catastrophe load was not subsumed by the catastrophe activity in the first quarter.

Turning to Casualty business. Gross written premium increased approximately 55% year-over-year, reflecting slower sequential growth from the fourth quarter of 2025. Strong performing lines included environmental liability, primary general liability and contractors general liability. Overall, casualty growth in the quarter was driven by geographic and distribution expansion, recently added underwriting talent getting to scale, rate increases as well as the launch of a sports and entertainment general liability program with a long-standing MGA partner.

Our MGA strategy is founded on forming partnerships with a carefully selected group of established market leaders in business lines where we possess internal expertise. This approach allows our programs to be effectively managed by and seamlessly integrated with our in-house underwriting teams. As I mentioned earlier, conditions remain dynamic and increasingly nuanced in the casualty space. We continue to see rate increases in health care liability, primary contractors, general liability, E&S casualty and environmental liability.

That said, the rate increases are moderating in several lines due to increased competition from admitted carriers and new market entrants. Since our entry into the market, we have actively managed limits attachment points and exposures with a focus on lower net line sizes and avoiding more volatile classes with elevated severity risk. We are comfortable pulling back where underwriting conditions deteriorate. In addition, we maintain a conservative reserving philosophy with more than 85% of casualty reserves held as IBNR. The increased ceding commissions earned on our casualty reinsurance renewals this year reinforce our confidence and validate the quality of underwriting in the portfolio. In an evolving market, we take confidence in the expertise of our casualty underwriting team who diligently manage our portfolio, maintain disciplined approaches to pricing and limit management and rigorously apply clear walkaway criteria for each individual account.

Turning to crop. We're off to a strong start for the year. Gross written premiums rose 82% year-over-year. Over the course of last year, we added marketing, underwriting and claims professionals who focus on crop products and territories that are written in the first and fourth quarters of the year. The first quarter of 2026 benefited from this experienced talent who drove strong production in winter wheat and other off-cycle crop insurance products.

Lastly, we are benefiting from strong sales of our enhanced coverage option products driven by higher demand resulting from increased subsidies under the one big beautiful bill. Commodity prices established in February remained generally in line with last year. We do not expect any meaningful impact from higher energy prices or tariffs. Current drought conditions put pressure on results in winter wheat in states such as Oklahoma and Kansas and PRF products in Mountain West and Plains states. That said, these results should be partially mitigated by our risk-sharing structure. Importantly, most of our retained exposure is tied to Midwest corn and soybeans, where planting is just beginning.

Looking ahead, we now expect to deliver 35% growth versus the previously expressed level of 30% in nice profitability in 2026. Surety and Credit, our newest product category increased by 131% year-over-year. This segment includes our FIA and Gray Surety acquisitions along with other surety and credit insurance, we write on an assumed reinsurance basis. The integration of Gray, which is now rebranded as Palomar Casualty and Surety, is going well, providing a strong foundation to build a leading franchise.

The Palomar Surety leadership team has acclimated well to our organization, and they continue to bolster their already strong team of underwriters with key hires in targeted expansion markets. A key milestone Palomar Surety achieved this quarter was the receipt of a T-listing authority for the group of more than $72 million. This will create an exciting long-term opportunity to write more bonds and federal projects in the years to come. That level of authority will increase our relevance to a larger distribution channel and attract new talent.

We now have a surety platform with meaningful scale and geographic reach and a clear path to becoming a top 20 surety market in time. As previously mentioned, surety and credit alongside crop further diversifies our earnings base and reduces volatility caused by the traditional P&C cycle.

In reinsurance, we completed six placements, three casualty and three property treaties, all with better economics and successfully issued our latest Torrey Pines Re catastrophe bond. On the property side, we're able to secure incremental capacity for the builders' risk, including construction engineering and excess national property lines of business. Besides the strong economics earned through the treaty, this added capacity further expands our ability to offer larger limits and opens new admitted market retail distribution channels in the case of builders risk.

The casualty quota shares renewed at higher ceding commissions while maintaining their expiring cession percentages, again, a testament to the performance of these casualty lines. Last week, we completed our seventh Torrey Pines Re catastrophe bond issuance, securing $410 million, a fully collateralized multi-year reinsurance protection for California Earthquake and, for the first time, a stand-alone Hawaii hurricane.

On a risk-adjusted basis, pricing was down approximately 15%, which is in line with the assumption at the higher end of our adjusted net income guidance range. Before concluding, I want to touch on our organizational effort to leverage AI across Palomar. As a highly regulated and asset-intensive business, we view AI not as a source of obsolescence, but rather, to the contrary, as an important tool to enhance efficiency, strengthen decision-making and support our people.

AI-enabled processes and tools are in use across departments such as underwriting, actuarial and analytics. Reinsurance, customer service and operations, technology and claims. They are enhancing operational workflows, improving risk selection, accelerating system development times and automating more clerical and perfunctory tasks. Our approach combines the use of innovative third-party tools with internally developed solutions and these initiatives are already generating measurable gains. Advancing AI capabilities will remain a key strategic priorities we continue to scale the business.

In summary, we are confident in our strong start to 2026 and our ability to sustain profitable growth and attractive returns in this market or any for that matter. As a result, we are increasing our adjusted net income guidance from $260 million to $275 million to $262 million to $278 million. As an aside, this marks our eighth adjusted net income guidance increase since 2024.

With that, I'll turn the call over to Chris to discuss our financial results and guidance assumptions in more detail.

Thank you, Matt. Before I begin, please note that during my portion of the call when referring to any per share figure, I'm referring to per diluted common share as calculated using the treasury stock method. This methodology requires us to include common share equivalents such as outstanding stock options during profitable periods and exclude them in periods when we incur a net loss.

For the first quarter of 2026, our adjusted net income was $63.1 million or $2.31 per share. Compared to adjusted net income of $51.3 million or $1.87 per share in the first quarter of 2025, representing adjusted net income and EPS growth of 23%. Adjusted underwriting income for the first quarter was $62.8 million, an increase of 22% compared to $51.6 million in the prior quarter. Our adjusted combined ratio was 76% compared to 68.5% in the first quarter of 2025 and compared sequentially to 73.4% in the fourth quarter of 2025.

The increase in the adjusted combined ratio was primarily driven by a higher loss ratio, offset by a slightly lower adjusted expense ratio associated with the growth and mix. For the first quarter, our annualized adjusted return on equity was 26.6%, in line with our ROE reported last year. Our first quarter results continue to validate our ability to sustain profitable growth while maintaining returns well above our Palomar 2X threshold of 20%. Gross written premiums for the first quarter increased 42% to $629.8 million as compared to the prior year's first quarter, further demonstrating the strong momentum that we have across our unique diversified specialty portfolio.

Looking at our key specialty insurance products, it's important to remember the seasonality of our crop segment given the majority of the premium is written and earned in the third quarter of each year, with only a modest premium in the second and fourth quarter. We will provide more information during the quarter on the expected impact of seasonality throughout our specialty portfolio.

Net earned premiums for the first quarter grew 59% year-over-year to $261.4 million. As expected, our ratio of net earned premiums as a percentage of gross earned premiums increased to 51.9% in the first quarter. Compared to 43.7% in the first quarter of 2025 and compared sequentially to 48.2% in the fourth quarter of 2025. The year-over-year increase in this ratio is reflective of our improved excess of loss reinsurance at the last renewal, growth of our lines of business that use quota share reinsurance such as our crop business, where we retain more premium than previously as we continue to leverage our growing balance sheet and the acquisition of Gray Surety.

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 a low point of our net earned premium ratio. Increasing throughout the remainder of the reinsurance treaty year in a similar pattern to last year.

Losses and loss adjustment expenses for the first quarter increased to $87.1 million compared to $38.7 million in the first quarter of 2025. Losses for the quarter were comprised of $86.8 million of attritional losses and $0.3 million of catastrophe losses. The total loss ratio for the quarter was 33.3% compared to 23.6% in the first quarter of 2025 and compared sequentially to 30.4% in the fourth quarter of 2025. In line with our expectations and guidance, the increase in the loss ratio was driven primarily by higher attritional losses associated with the growth in casualty and crop.

Our losses for the quarter include $3 million in catastrophe losses from the flooding event in Hawaii at the end of March. Additionally, our first quarter results include $10.3 million of favorable prior year development $7.6 million of attritional and $2.7 million of catastrophes. Favorable prior year development was primarily from our short-tail Inland Marine and other property lines of business. As we have discussed previously, favorable development reflects our long-standing conservative approach to reserving. We continue to establish reserves with appropriate margin, which allows for modest releases over time as claims mature, particularly in our short-tail lives.

Similar to the favorable development we saw during 2025, this quarter is another good example of the conservative approach to reserving and where we are seeing continued reserve releases. Our acquisition expense as a percentage of gross earned premiums for the first quarter was 14% compared to 12.3% in the prior year quarter and compared sequentially to 13% in the fourth quarter of 2025. The increase was driven primarily by business mix, notably surety, which has a higher acquisition expense and lower loss ratio and our increasing retained business resulting in lower ceding commissions.

The ratio of other underwriting expenses, including adjustments to gross earned premiums for the first quarter was 8.5% compared to 7.5% in the first quarter of 2025 and compared sequentially to 8.1% in the fourth quarter of 2025. These results include 2 months of Gray's underwriting expenses. As we have consistently communicated, we remain committed to investing in talent, technology and systems to support the scalable platform we are building, while these investments create some near-term pressure we continue to expect operating leverage over time as the organization grows within our Palomar 2X framework.

Our net investment income for the first quarter was $18 million, an increase of 49% compared to $12.1 million in the prior year 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 our operations, including the Gray acquisition. Our yield in the first quarter was 4.9% compared to 4.6% in the first quarter last year.

The average yield on investments made in the first quarter was over 5%. At quarter end, cash and invested assets totaled approximately $1.6 billion and the weighted average duration of the fixed maturity portfolio was just over 4 years. At the end of the quarter, our net written premium to equity ratio was approximately 1.1:1. At March 31, 2026, stockholders' equity was $959 million, reflecting continued earnings generation, offset by shares repurchased and transaction fees incurred during the quarter.

Our balance sheet remains strong and well positioned to support continued growth across the portfolio. From a modeling perspective, we do not expect to see anything different from what we shared with you on the last call. Our 2025 full year net earned premium ratio was 44.9%. We expect that ratio to increase into the upper 40s for 2026. On a gross earned premium basis, our full year 2025 acquisition expense ratio was 12.1% and our adjusted other underwriting expense ratio was 8%.

We expect slight improvements in both ratios for 2026. Similar to last year, the acquisition expense ratio and the other underwriting expense ratio will be higher in the first half of the year and lower in the second half of the year with the crop earned premium influence. We expect our loss ratio, including catastrophes, to be in the mid of our 30s for 2026. Our full year 2025 adjusted combined ratio was 72.7%. We expect our adjusted combined ratio for 2026 to be in the mid-70s as demonstrated in the first quarter. These expectations reflect our expected growth, business mix, integration of Gray Surety and the use of capital as we build our specialty insurance platform.

Turning to our 2026 adjusted net income guidance. We are increasing our full year guidance up to $262 million to $278 million. This range still includes $8 million to $12 million catastrophe losses in addition to many catastrophes that we have historically included in our guidance. The midpoint of the range represents 25% year-over-year earnings growth more than doubling 2024 adjusted net income in 2 years and an ROE north of 20%.

Lastly, during the quarter, we repurchased 190,255 shares at a cost of $23.1 million as our shares have continued to trade well below what we believe to be fair value. Through May 5, 2026, we have repurchased an additional 38,875 shares at a cost of $4.2 million. Additionally, our Board of Directors authorized a new 2-year $200 million share repurchase program, replacing the previous plan effective May 6, 2026. At recent valuations, we are buyers of our stock, especially for a company with an earnings CAGR of over 30% since 2023 through their midpoint of our 2026 guidance and who consistently beats the street and raises earnings guidance.

With that, I'd like to ask the operator to open the line for any questions. Operator?

[Operator Instructions] And our first question comes from the line of Andrew Andersen with Jefferies LLC.

As casualty pricing maybe moderates a bit here, how are you thinking about the interplay with retention decisions? And does a moderating price environment on long-tail kind of slow the pace at which you're thinking about increasing the net retentions.

Andrew, it's Mac. Yes, it's a good question. And what I would say is, across the portfolio, the term we've used is it's nuanced. We are seeing rate increases hold, if not actually intensify in health care liability. And then in certain lines, E&S casualty kind of in the low excess layers, it's moderating some. As mentioned in the call, we have had in the quarter a few casualty quota shares renew and they renewed at favorable economics. And we held the sessions flat.

So I think right now, especially as the books in many instances are still somewhat immature 1, 2, 3 years of development experience like we are more inclined to kind of hold the retentions flat. So I think you should expect to see that. The other thing I'd add is there are certain lines of business where rates aren't moderating, but rather might be soft. And I think that's where we are actually taking a more proactive stance towards triaging. And an example of that would be a participating front we have in cyber, where we take a modest retention, call it, less than 10%.

And that market, we have gone through and tried to push rate. We have changed eligibility requirements as well as sublimit -- increased sublimit utilization. But if that market is not going to take those, the market doesn't bear that, we are more than happy walking away from business. So long-winded answer, but I'd say, simply put, like, expect cessions to remain consistent where they are right now, but also expect to see us in many instances walk away from business and in fact, prune books, too.

And then on Commercial Earthquake, I think I heard minus 18% price that's a bit more than where the fourth quarter was. How are you thinking about kind of the pricing pressure on the commercial quake line throughout the rest of the year and maybe kind of going all the way up to just total Earthquake premium volume trends?

Yes, Andrew. So yes, I would say it was a bit worse, but it's -- if you really went into it, it's kind of account specific, and we have in the first quarter, probably a little bit more large commercial business renewing than we do small commercial percentage-wise. So -- and also, we did not see rate pressure in the first quarter of 2025. So this was really kind of the last quarter where you were renewing accounts for the first time in the soft commercial property market.

So on the whole, we expect rate decreases to persist for the commercial quake market through '26. And we think that's going to be offset by the strong performance on the residential side that will allow us to grow Earthquake for the year. I think the other thing that I would add is on the residential quake, we are seeing strong new business production just even in the start of this quarter, we had a record day that over the record in terms of the last 365 days. So it's provided a nice anchor. We will benefit from reinsurance savings across the Earthquake portfolio, but because of the stability of the residential quake book, we expect to see margin expansion. And you'll see it increase as an overall percentage of the quake mix. Residential will be a growing percentage.

Our next question comes from the line of Peter Phipson with Evercore ISI.

My first one on the casualty book, you guys noted having 85% of the casualty reserves in IBNR. I'm just wondering if you could talk about how this has changed over the accident years. I know you guys obviously noted expanding into geographies and a new product line, so it may not be a clean compare, but I'm just wondering if this has shifted around at all?

Well, I would say the IBNR that it's been north of 80% for basically since we've started our casualty practice, and I think it probably ticked up slightly this quarter. So as newer lines come on and you use that example like we have the new sports and entertainment general liability. That's going to be more than 87% IBNR in its first quarter. It's going to be about 100% IBNR. So that might push it up some. But on the whole, IBNR is the -- if not the totality, it's the strong lion's share of the reserve base. But Chris, I don't know if you want to offer anything there.

Yes. No, I think, obviously, we've talked about this a lot that we take a very conservative approach to reserving upfront. That is shown in that metric where, as Mac mentioned, it has been improving. I think last quarter, we were just above 80%. Now we're above 85%. So as Mac said, the majority of these losses or the reserve base is sitting in IBNR where we don't have claims in yet. We are taking a conservative approach where we are not reducing that reserve base, right?

If anything, we are adding to it. We've talked about this too, that we are going to react quickly to bad news where we take reserves up, but we are not going to release any of that reserves to offset that. You can see some of that were there was some slight unfavorable on the casualty side, but overall, nothing that is causing any major concerns or large changes in the accident year expectations.

So the book is performing well. We are seeing strong growth and still very profitable, as you can see through the overall combined ratio and the additional underwriting income that we're adding to the bottom line.

And I think the only thing that I would add is just a reminder, the net reserves on the casualty book are less than 19% of surplus.

Great. And then just as a follow-up to the earlier question on the quake growth. In your comments, you guys said you're expecting the commercial quake decreases to persist. I'm just wondering, in your outlook for quake, is that expecting them to maintain where they are or continue decelerating declining like they worsened in the first quarter relative to last quarter. And sorry if I missed it, but could you potentially call out the growth in the resi book and what -- how that looked?

So the assumption that we are using is that the rate decreases will maintain at a similar level. So think about it in the mid- high teens. We have not broken out the residential quake versus commercial quake, but you can kind of back into it when you know that rates are down 15% on commercial, the Earthquake book grew 3% and residential quake just under 60%. So it's you can -- you better math than I am, Peter, but I think it speaks to it being close to double digits.

And our next question comes from the line of Mark Hughes with Truist Securities.

Chris, the amortization of the intangibles was about $6.1 million this quarter. Is that going to be an ongoing line item? And where does it show up? And, yes, I'll leave it at that. Is it ongoing? Where does it show up in the P&L?

Yes. So the amortization of the intangibles will be ongoing based on the acquisitions that we've done over the last 2 years, there have been three acquisitions. Obviously, the largest of those acquisitions happened in the first quarter with the Gray Surety acquisition. So there are intangibles with that book that we are amortizing. I think as you guys probably follow insurance companies.

I think as you guys probably follow insurance companies, you've heard of this thing called VOBA. I've heard about other companies calling that out. We do have some of that, that we're amortizing. We are including, let's call it, the profit component of that in our add-backs. So you can see that going through. That is a large component of the differential between, let's call it, the straight GAAP combined ratio and what we're calling our adjusted combined ratio to kind of get you level set with a normalized year-over-year calculation of what that would be.

But yes, that amortization will be ongoing. It is sitting in the amortization portion is sitting in other adjusted underwriting expenses, and that's kind of where we would expect it to sit. It should, call it, assuming no other acquisitions over the next couple of years, the dollar amount should decrease as some of the pieces of that are quicker to amortize. But overall, yes, we expect that to remain in there for, call it, the next 5 to 10 years as you look at those books of business that we were able to acquire.

Appreciate that. And then, Mac, the Inland Marine, it sounds like you've got some good growth initiatives there. Generally speaking, is that -- how is the pricing kind of the competitive dynamic more broadly within inland marine, and it's been a great contributor. What should we think about that going forward?

Mark, yes, good question. I think first and foremost, you should -- it has been a great contributor and you should expect it to be so on a go-forward basis. When you break down within that book, around 1/3 of that is residential business. So that would include flood, where we are getting rate on renewals, it would include Hawaii where we're getting rate on renewals.

And then also even our Texas homeowners book where you've seen rate increases and stable performance. So that's a nice anchor to offset what is really a fraction of the book that is seeing the rate pressure and that is going to be layered and shared kind of large excess national property accounts as well as E&S layered and shared builders risk accounts. So the balance of the book, including -- and I think it's worth highlighting the admitted builders risk has very stable rates. It's also reaping the benefit of geographic expansion, new capacity from third-party reinsurers and then our growing balance sheet, which means we can take more net.

So that's going to really drive performance in addition to what you're seeing on the residential side. So I would say the breadth of the portfolio, the mix of admitted and residential business in addition to the growth that we've made from an infrastructure standpoint is going to more than offset pressure we're seeing in a small segment of that book.

And you had alluded to the potential to get involved in the data center line. Is that something you're not doing now, but have visibility for that? And what's the timing there?

Yes. So thanks for asking that. Yes, we have alluded to it, I mentioned in my prepared remarks, we have hired Matt Tennison and a team of underwriters in the construction engineering practice. And our approach right now with data centers is to write it more from a builder's risk standpoint than as a stabilized asset standpoint.

We have put reinsurance in place for the existing builders risk with A+ backed relationships or autofac relationships that allow us to write large limits on a gross basis. It obviously nets down pretty modestly with what we retain. But -- so I would say our data center focus right now is more builders risk than it is on the stabilized asset side.

Yes. And I'd add, Mark, to that. In addition, we've talked in the past about how we have such a strong experienced team of underwriters in that builders risk segment that are geographically spread where the markets our opportunity in a similar fashion, Matt and the team that we have on the engineering construction side are also long-tenured underwriters that have great experience in larger types of projects.

[Operator Instructions] And our next question comes from the line of Meyer Shields with KBW.

Just one really basic question to start with. You mentioned drought as an issue for crop. Was that something that impacted first quarter results? Or is that something that we should see based on what we know so far in the third quarter or the rest of the year.

Yes, Meyer, it's -- the drought would impact our winter wheat products, but it would ultimately manifest itself over the course of the year. But as I mentioned, those winter we products are heavily reinsured. And so what's really going to drive the underwriting year results will be the Midwestern soybean and corn and wheat. So on the whole, we're watching really Oklahoma and Kansas and its impact on the winter wheat. But the rest of the year, the fall seems to be kind of in line.

Okay. That's helpful. And you sort of alluded to, I guess, inflationary pressures maybe stemming from the Middle East. And we're hearing some concern specifically about fertilizer. And I was wondering how, I guess, the farmers that you're ensuring are thinking about that and how we should think about any exposure there?

So at this point, as we think about how the insurance product for crop responds, we do not see at this time for the growing season, any kind of impact as may be a consequence of any kind of fertilizer disruption coming out of the Middle East. So while it may impact farmers across the globe and on more of a long-term basis as we think about the growing season in 2026, has not emerged as an issue for us.

Yes, Meyer, I think the simplest way is like it may impact the cost to run the farm, but not necessarily the yields and which is what we're protecting against or insuring against.

Okay. I didn't know whether there was enough concern for yield impact, but I think that.

Not at this point.

Okay. And for the time being, at least for the time being, I assume that the guidance update does not contemplate any change to reinsurance attachment points to June 1.

Yes, Meyer, that's correct. Our guidance range assumed 10% to 15% down. So you could say the midpoint of the guidance range is -- yes, the high end of the guidance range, excuse me, rather, would assume a 15% rate decrease. So we have not made any changes to retentions in those assumptions.

And our next question comes from the line of Mark Hughes with Truist Securities.

Yes. This is just more for my own curiosity. If you're insuring yield and the farmers don't use as much fertilizer is -- does that have an impact? Or is it based on kind of broader industry aggregates when you're looking at yield performance?

Yes, Mark, a lot of the fertilizer that goes into the '26 growing season had been secured by many of these farmers prior to a lot of the pressure that we saw that we've seen come on in the last month or 2.

Is that a thing though? I mean, is that something to consider as you're looking at underwriting is the potential for different usage of fertilizer?

On a long-term basis, that could be considered as we look kind of on a year-to-year basis as we underwrite crop insurance. We don't see that emerging as an issue this year. You could have made a similar argument last year coming out of some of the tariff discussions on April 1. And ultimately, it was near record yields for the '25 growing season.

It also will be reflected in the commodity prices that would be reset next year. So the commodity prices are set for this year based on the cost of fertilizer for that Jon was referring to. So the market is efficient, right? And if there is pressure on the cost of fertilizer and that impact on the cost to produce that will be reflected in the commodity prices that will be reset in February, March of '27.

And our next question comes from Pablo Singzon with JPMorgan.

Did you change any of your initial loss picks in casualty or crop relative to last year, Or is the year-on-year change in attritional purely mix?

Sorry, Pablo, could you repeat that question? You kind of broke up there for us.

Yes. Sorry, I was asking if you changed any of your initial loss picks in casualty or crop relative to last year? Or is the year-on-year trend in attritional purely mix?

Yes. No, that's a good question. No. At this stage, we have not changed any of our initial loss picks for our business. Kind of as we've said earlier, we still remain very conservative on these lines of business. So we want to make sure that we kind of maintain those loss picks. As we look at our book, we obviously do evaluate how everything is performing and look at that. But at this stage, there's been no reason for us to change any of our overall loss picks on our attritional lines of business.

Okay. And then the second question I had, it's about resi Earthquake. Can you talk about the broad competitive environment there? Are you seeing or hearing about new competitors?

Sorry, we lost you again, apologies.

Yes. Sorry about that. I was asking about the competitive environment for residential Earthquake. Are you seeing or hearing about new competitors? And how do you think your offering is differentiated.

Yes. Pablo, sorry, we lost you, but I think we caught the gist of the question. We remain the market leader in residential Earthquake outside of the California Earthquake Authority, and we remain a very collegial competitor with the California Earthquake Authority in bringing solutions to their participating insurers that need a more robust and comprehensive product offering.

So a traditional competitor in the market is GeoVera. They remain a good competitor, but there has been plenty of opportunity for us to continue to drive growth and the uniqueness of our product in terms of the flexibility in the coverages, the flexibility in deductible options as well as your ability to kind of bespoke your coverage and pay a price that you want to remains something that is distinct. And as I said, we just -- in the second quarter, we had a record new business day and our premium retention was 97%. So we think that we are in a good spot there.

And with that, there are no further questions at this time. I would like to turn the floor back to Mac Armstrong for any closing remarks.

All right. Thank you, operator, and thank you to all the participants on the call this morning for their time. We greatly appreciate your support and interest. Thank you to the Palomar team for your continued hard work and excellent execution. Our sustained strong results are a reflection of all you do to make us a market leader in the specialty insurance space.

And then lastly, I do just want to reiterate the conviction we have in our plan and the results we will achieve. And as such, we will use the tools that we have to enhance our returns and take advantage of what we feel is an undervalued and underappreciated stock and story right now. So we look forward to sharing our success with you next quarter and those to come. Have a great day.

Thank you. And with that, ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time, and have a wonderful rest of your day.

Good morning, and welcome to Palomar Holdings, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me here today is Mac Armstrong, our Chairman and Chief Executive Officer. Additionally, Jon Christianson, our President, is here to answer questions during the Q&A portion of the call. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11:59 p.m. Eastern Time on February 19, 2026.

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.

Thank you, Chris, and good morning, everyone. I'm excited to review our strong fourth quarter and full year results. In 2025, we delivered record levels of gross written premium and adjusted net income as well as strong broad-based profitable growth. For the full year, Palomar grew gross written premium 32%, increased adjusted net income by 62% and achieved an adjusted return on equity of 26%. We also meaningfully exceeded our initial full year adjusted net income guidance of $180 million to $192 million, finishing the year at $216 million. We meet earnings every quarter of the year, resulting in 4 upward revisions to our outlook as performance continued to strengthen and exceed expectations. .

At the start of 2025, we outlined 4 strategic imperatives: integrate and operate, build new market leaders deliberately, remember what we like and don't like and generate consistent earnings, and I'm proud to report that we executed across all 4 efforts in all 4 quarters. We scaled our newer verticals in Casualty and Crop while maintaining underwriting discipline. We purposely built a balanced book of both admitted and E&S in residential and commercial property and Casualty products to ensure consistent results in any market cycle. We added outstanding talent across all our departments, including underwriting, investment, claims, data and actuarial, growing our team to over 500 exceptional professionals.

Finally, we successfully integrated 2 specialty franchises, First Indemnity of America and Advanced AgProtection, and at the end of January, announced the closing of our third acquisition, Gray Casualty and Surety now Palomar Casualty and Surety. The myriad achievements of 2025 enabled us to reach our Palomar 2X target of doubling adjusted net income for both the 2022 and 2023 cohorts, a significant and impressive milestone that underscores the strength of our execution. We exit 2025 with the national footprint with offices and team members located across the country. We are attracting the best talent in the industry. Our people in 2025's accomplishments give us strong confidence in our ability to sustain Palomar 2X.

Turning to the fourth quarter specifically. Our strong performance marked a fitting close to an exceptional 2025. The quarter was highlighted by record adjusted net income and a robust top and bottom line growth with gross written premium increasing 32% and adjusted net income growing 48% across our differentiated and diversified portfolio. As I said, our specialty product suite is designed to perform consistently through market cycles and generate attractive returns and strength demonstrated by an adjusted combined ratio of 73% and a 27% adjusted return on equity. Collectively, these results highlight the growth, durability, balance and quality of our franchise.

Turning to our business segments. Our Earthquake franchise declined 2% year-over-year a level slightly lower than our previously stated expectation for low single-digit growth in the fourth quarter. Our year-over-year results were muted by a onetime headwind from a large under premium transfer in the fourth quarter of 2024. Adjusting for this onetime benefit in '24, we would have delivered growth in the quarter. As we've discussed, our Earthquake book consists of residential and commercial policies written on an admitted and E&S basis. This balance allows us to successfully optimize our Earthquake risk-adjusted returns and navigate any market condition. In the fourth quarter, the Commercial Earthquake book continued to face pressure with rates of 15%.

Competition remained elevated, and we believe this environment could persist through much of 2026. We remain disciplined in our underwriting, but also note that the commercial book is still generating attractive returns. Conversely, our Residential Earthquake book, which ended the year at 58% of the total Earthquake premium continued to perform in line with expectations. During the quarter, we saw year-over-year growth in new business written and a premium retention rate of a healthy 97% for our admitted flagship product. As we've said before, the 10% inflation guard on our Residential Earthquake policies affords our compelling operating leverage in a softening property catastrophe reinsurance market. In addition, we are encouraged by our pipeline of high-quality Residential Earthquake partnerships which could bolster growth in '26 and in 2027.

The softening reinsurance market combined with the growth of the Residential Earthquake book should allow us to absorb the primary rate pressure in the commercial market. Overall, we expect our Earthquake book to deliver modest premium growth and margin expansion in 2026 even with commercial pressure persisting. Our Inland Marine and Other Property group grew 30% year-over-year in the fourth quarter, driven by strong performance from our admitted and E&S builders risk book and Hawaiian Hurricane products as well as record production in our flood book stemming from the early success of our [ Neptune ] flood partnership. Like our Earthquake business, the mix of residential and admitted offerings provided balance to the group, allowing us to offset pressure in certain E&S commercial lines. For instance, we have pending rate increases of more than 10% for our Hawaii Hurricane Motor Truck Cargo book in California, whereas our large E&S builders risk accounts are seeing rate decreases in the low single digits.

Like Commercial Earthquake, the underwriting performance and profitability in commercial property was very strong in the quarter. All risk, excess national property and E&S builders risk each had a loss ratio below 25%. The strong underwriting results in commercial property are driving further investment in talent and geographic expansion. During the quarter, we added professionals in Texas and the Northeast to support profitable growth of the commercial side of the group. Additionally, we recruited [ Matt Thins ] to launch and lead our new construction engineering practice. Matt is a long tenured expert in this dynamic space, which we believe represents a significant market opportunity.

With our strong track record and builders risk, the growth in our balance sheet, our A rating from A.M. Best and expanded reinsurance capacity, we believe now is the right time to enter this market and supplement our property franchise with a book of large complex infrastructure projects such as bridges, roads and data centers. Consistent with our disciplined approach to new lines, we will begin with modest net line sizes supported by robust reinsurance. Our Casualty business delivered 120% year-over-year gross written premium growth in the fourth quarter. Casualty book ended 2025 to 20% of the total gross written premium for the company. Fourth quarter results were driven by strong momentum in E&S Casualty, primary and excess contractors general liability and environmental liability. The E&S general liability segment of the Casualty book, both excess and primary continue to see a healthy rate environment. In Q4, rates on excess policies increased on average in the low teens, while primary rates were up mid- to high single digits.

Our professional lines remain in a stable pricing environment with certain areas showing selective improvement such as miscellaneous professional liability, private company D&O and real estate agents E&O. We are also encouraged by the early traction in health care liability which is probably the most dislocated market we currently underwrite with technical rates increasing approaching 35%. In the fourth quarter, we added to our already strong team of Casualty underwriters, which should open new geographies and distribution sources and ultimately drive growth. We remain conservative in managing our Casualty exposure and reserves. Our disciplined focus on low and short attachment points, combined with the use of both facultative and quota share reinsurance should limit volatility in the Casualty book and allow the portfolio to season in a controlled manner.

Through the fourth quarter, the average net line size across Casualty remained below $1 million, with E&S Casualty, our largest line of Casualty business averaging approximately $700,000. Our reserving approach in Casualty remains conservative and unchanged. It is grounded in continuous evaluation of loss development, attachment structures and portfolio mix. As previously discussed, approximately 80% of our Casualty reserves are held as IBNR, well above industry norms. This conservatism underpins balance sheet strength and reinforces confidence in the stability and predictability of future results.

Our Crop franchise generated $248 million of gross written premium in 2025, exceeding our original $200 million expectation in our most recent revised guidance of $230 million. Our performance was driven by strong execution and the successful recruitment of top-tier talent as we expanded into attractive states and products. The broader footprint also drove higher-than-expected fourth quarter production with $40 million of premium written. Importantly, this incremental business is diversifying from spring season [ MPCI ], providing a nice complement to the portfolio.

From an underwriting standpoint, 2025 was a good year for our Crop book as we generated a loss ratio under 80% and still hold a conservative reserve base as we sit here today. Given the experience of our team, the short-tail nature of the risk and the growth of our balance sheet, effective 1/1/2026, we increased our retention to 50% and net of the SRA. We will support and protect our retention with stop-loss reinsurance consistent with last year. On a prospective basis, we expect Crop premium to grow more than 30% in 2026 and remain on track to achieve our intermediate-term target of $500 million in premium and our long-term target of $1 billion in premium.

As previously discussed, Fronting is no longer a strategic focus of the business. While we still continue to support our existing relationships, we are not devoting resources and capital towards an earnest pursuit of new Fronting partnerships. We simply believe we can achieve better risk-adjusted returns in all other product groups. As a result, we are reconstituting our product groups and Fronting will no longer be a stand-alone category. Our existing and any future Fronting partnerships will be categorized in alignment with the underlying class of business starting in the first quarter of 2026. For instance, our cyber fronting program will be in the Casualty product group, and our Texas homeowners fronting program will be in the Inland Marine and of the property product group.

Following the closing of the Gray Surety acquisition, surety and credit will become the fifth product category we report on going forward. As a frame of reference, pro forma for the acquisition of Gray, surety and credit would have constituted 6.5% of Palomar's total premium base in 2025. Gray Surety significantly strengthens our surety franchise, adding management expertise, system scale and geographic reach, complementing our existing operations and accelerating our path toward building a market leader in an attractive sector. We believe surety and credit will serve as a stable long-term growth driver for Palomar while providing meaningful diversification to our book and earnings base.

Turning to reinsurance. The fourth quarter was both eventful and productive we renewed 4 quota share treaties on 1/1, all at approved economics and completed 2 new placements. Key highlights of the quota share activity included a Commercial Earthquake quota share that renewed approximately 15% down on a risk-adjusted basis in our primary and excess Casualty quota share that saw a nice improvement in the [ expiry and seating ] commission. As it pertains to excess of loss reinsurance, we placed [ Assure-XOL ] and renewed 2 Earthquake excess of loss treaties. The Earthquake places renew more than 15% lower on a risk-adjusted basis.

Looking ahead to the 6/1 renewal, market conditions remain favorable for reinsurance buyers, and we are confident in further pricing improvement across our property capital. Our diversified portfolio delivered strong top and bottom line results in the quarter and the full year. While I'm very proud of our results and the execution over the past year, I'm even more excited with the many opportunities that lie ahead. The success of 2025, the momentum in the business and our team's collective enthusiasm for the year ahead are reflected in our 2026 earnings guidance. Adjusted net income of $260 million to $275 million. The guidance midpoint implies approximately 24% adjusted net income growth and an adjusted return on equity greater than 20%. The midpoint of our guidance assumes a $10 million catastrophe [ loan ] and a decrease of 10% on our excess of lost property catastrophe reinsurance renewal on June 1.

To help us deliver on these opportunities, we are implementing 4 strategic imperatives for 2026. One, leverage our scale to enhance profitable growth. Two, curate a one-of-one distinct portfolio. Three, deepen our position in existing markets and unlock new opportunities. And four, integrate, optimize and execute. To support these imperatives, we are strategically deploying AI across our organization. Current initiatives underway are focused on enhancing our underwriting workflow, portfolio optimization, process automation and operational efficiency. These efforts involve the use of both third-party tools and internally developed agenetic solutions that should allow us to increase productivity and scale our organization. If we execute our plan and these imperatives, we will achieve our Palomar 2X objectives in 2026 and beyond.

With that, I'll turn the call over to Chris to discuss our financial results and guidance assumptions in more detail.

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 fourth quarter of 2025, our adjusted net income was $61.1 million or $2.24 per share compared to adjusted net income of $41.3 million or $1.52 per share for the same quarter of 2024, representing adjusted net income growth of 48%.

Our fourth quarter adjusted underwriting income was $62.3 million, an increase of 52% as compared to $41 million for the same quarter last year. Our adjusted combined ratio was 73.4% for the fourth quarter compared to 71.7% last year. For the fourth quarter of 2025, our annualized adjusted return on equity was approximately 26.9% compared to 23.1% for the same period last year. Our fourth quarter results continue to validate our ability to sustain profitable growth while maintaining returns well above our Palomar 2X target of 20%. Gross written premiums for the fourth quarter were $492.6 million, an increase of 32% compared to the prior year's fourth quarter. Net earned premiums for the fourth quarter were $233.5 million an increase of 61% compared to the prior year's fourth quarter.

For the fourth quarter of 2025, as expected, our ratio of net earned premiums as a percentage of gross earned premiums increased to 48.2% compared to 39% in the fourth quarter of 2024 and compared sequentially to 43.4% in the third quarter of 2025. Losses and loss adjustment expenses for the fourth quarter were $70.9 million comprised of $72.9 million of attritional losses, including $0.7 million of favorable development and $2.1 million of favorable catastrophe loss development, largely from Hurricane Milton.

Favorable development was primarily from our short-tail property lines of business. The loss ratio for the quarter was 30.4% compared to 25.7% in the prior year quarter. Losses for the quarter were driven primarily by higher attritional losses associated with growth in our Casualty and Crop business, partially offset by favorable development. 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. This quarter is a good example of this as we had conservatively reserved for Hurricane Milton as well as a few other smaller events where we are seeing modest reserve releases.

Our acquisition expense as a percentage of gross earned premiums for the fourth quarter was 13% compared to 10.9% last year's fourth quarter and compared sequentially to 10.8% in the third quarter of 2025. A little higher than expected driven by mix of business for the quarter, resulting in higher commission and lower ceding commission. The ratio of other underwriting expenses, including adjustments to gross earned premiums for the fourth quarter was 8.1% compared to 7.2% in the fourth quarter last year and compared sequentially to 7.9% in the third quarter of 2025. As demonstrated by our continued investment in talent, technology and systems, we remain committed to scaling the organization profitably.

We continue to 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. Our net investment income for the fourth quarter was $16 million, an increase of 41.3% compared to the prior year's fourth quarter. The year-over-year increase was primarily due to higher yields on invested assets and a higher average balance of investments held during the quarter due to cash generated from operations. Our yield in the fourth quarter was 4.8% compared to 4.5% in the fourth quarter last year. The average yield on investments made in the fourth quarter was above 5%.

At the end of the quarter, our net written premium to equity ratio was slightly above 1:1. Our stockholders' equity has reached $942.7 million, a testament to our consistent profitable growth. Looking at our full year 2025 results, our strong top line performance continued to translate to the bottom line. Our gross written premium increased 32% to $2 billion while our net earned premiums increased 57% to $802.6 million. Our adjusted combined ratio for the full year was 72.7% compared to 73.7% in 2024, resulting in adjusted underwriting income of $218.9 million, growth of 63%, reflecting strong underwriting performance and continued operating leverage. Our net investment income for the full year was $56 million, an increase of 56% compared to 2024.

All of this coming together where our full year 2025 adjusted net income grew 62% to $216.1 million and our adjusted diluted earnings per share grew 54% to $7.86. Resulting in an adjusted return on equity of 25.9% compared to 22.2% in 2024. It is also worth noting that our 2020 -- that our final 2025 results are $30 million or 16% ahead of the midpoint of our initial guidance provided at this time last year of $186 million, equivalent to an additional $1.10 per share for our shareholders.

Our Palomar 2X philosophy continues to show in our results. Our 2025 adjusted net income more than doubled technically 2.3x from 2023 in 2 years off of our goal of 3 to 5 years with an ROE well above our target of 20%. Palomar 2X is a nice segue to our 2026 guidance. We are initiating our 2026 adjusted net income guidance with a range of $260 million to $275 million, including $8 million to $12 million of catastrophe losses and incorporating the recently closed acquisition of Gray Surety. The midpoint of the range implies 24% adjusted net income growth and doubling our 2024 adjusted net income in just 2 years.

From a modeling perspective, we expect many of the trends we have been sharing to continue in 2026. Our 2025 full year net earned premium ratio was 44.9%. We expect that ratio to increase into the upper 40s for 2026. On a gross earned premium basis, our full year 2025 acquisition expense ratio was 12.1%, and our adjusted other underwriting expense ratio was 8%. We expect improvements in both ratios for 2026. Our full year 2025 loss ratio was 28.5%, favorable to our original expectations. With that as a reference, we expect our loss ratio, including catastrophes, to be in the mid- to upper 30s for 2026.

Our full year 2025 adjusted combined ratio was 72.7%. We expect our adjusted combined ratio for 2026 to be in the mid-70s. These expectations reflect our expected growth, business mix and use of capital as we build our specialty insurance platform. We continue to expect quarterly seasonality in our operating results, driven primarily by [indiscernible]. We believe our 2025 results provide a strong framework to model the business seasonality going forward.

I would like to spend a moment on our Gray Surety acquisition to provide some context on our surety business for 2026. We closed the Gray Surety acquisition on January 31, 2026 with an estimated purchase price of $311 million financed with a $300 million term loan and cash on hand. The current interest rate on the term loan is SOFR plus 1.75%, given the ability to improve the spread depending on our total debt to capitalization ratio. Given the interest expense from the term loan and the timing of the deal, we expect the addition of Gray Surety to be modestly accretive in 2026 before scaling in 2027. Pro forma for Gray, the unaudited written premium for our surety line would have been approximately $110 million in 2025.

As Mac mentioned, given our investment in the surety space and the reduced emphasis on Fronting. We will changing our written premium categories in 2026. For 2026, our written premium categories are Earthquake, Inland Marine and Other Property, Casualty, Crop and surety and credit. Fronting will be redistributed into these 5 product categories. We plan on providing a revised breakdown of our 2025 written premium in these categories in our next investor deck.

With that, I'd like to ask the operator to open the line for any questions. Operator?

[Operator Instructions] Our first question comes from the line of Pablo Singzon with JPMorgan.

First question, just on the higher retention on Crop. Would you give size how much that will contribute to earnings next year versus what you earned in '25?

Yes. No, I think Crop is a great example of the diversification of our business and the use of the capital as we start retaining more. We've talked about before that Crop is a lower margin business than some of our other but also very stable, so providing a very consistent earnings base. Generally speaking, it's going to have a combined ratio in the low 90s, so say 92%. So for every, call it, $100 million and 10 points that we keep, that's adding another $8 million let's say, of pretax income to the bottom line.

Got it. And then my second question, the 10% reduction in reinsurance costs you're assuming, is that on a risk-adjusted basis or is that absolute dollars you're talking about?

That's on a risk-adjusted basis, Pablo. So that's just assuming that the -- if you have like-for-like exposure would be down 10%. So we -- when we think about the forecast, we are assuming growth in quake this year. We said there's modest growth for Earthquake and there's also would be some exposure expansion, which would lead to us buying more limit.

Our next question comes from the line of David Motemaden with Evercore ISI.

Mac, in your prepared remarks, you had talked a bit about a few new hires that you've made here in the fourth quarter as well. I know you guys made a few more even before that. I'm specifically interested on the underwriting side and the underwriting teams that you're adding. Is there any rule of thumb to think about how much growth you guys are expecting those teams to contribute in 2026 and 2027 if we think about just gross premiums written?

Yes, Dave, thanks for the question. It's a good one. Let me start by saying you're absolutely right, we've added some really strong talent to our organization over the course of 2025. And as we sit here in '26, we continue to recruit and add really strong underwriters. And it's across both the Casualty and the property franchise. We when we give our guidance, there is certainly an assumption around production from those various new hires. But it really depends on the market that they're going into. A strong addition to our builders risk franchise in Boston, like that opens up several million dollars or a few more million dollars of potential production there versus someone like [ Matt Teens ], who joins us on the construction engineering side, where it's a much larger TAM and much larger exposures.

But I think overarchingly, the most important point to mention is for all of these new hires, we are not expecting them to burn their way into a market or overextend themselves. We want to walk before we run, and that's something that we've done for -- since we started the business. And what that means is when they go into a market, whether as a property underwriter or a cash generator, they're going to have a comprehensive and robust reinsurance solutions supporting them. And then they are also going to have modest gross and net line sizes that they are deploying while we build traction.

Good thing is there's a lot of infrastructure that needs to be built out. So we don't want to open up the proverbial floodgate to not be able to service and underwrite the business effectively. So it's also very moderate in terms of distribution. I'll just close with as an aside, like for instance, we did write an interesting construction engineering risk, one of Matt's first. The gross line was $76 million, our net was $4 million on it. And that's because of the strong reinsurance relationships we have, we are able to -- we were able to use an existing facility and then we're also able to buy facultative reinsurance. And I think that fact that you have, that type of strong reinsurance support both facultative and treaty is a reflection of the quality of the underwriters and their experience.

Got it. Great. That's encouraging. For I guess just another one on the Earthquake growth. Is there any way you can just help us think through, it sounds like commercial was down just in terms of gross premiums written residential was growing. Could you just break that out how much the residential book grew in the fourth quarter and how you're thinking about that within the modest growth that you outlined in 2026?

Yes, Dave. So what I would offer you is as I mentioned that the residential quake is approaching about 60% of the book. It's got strong policy retention and it's writing good new business. So I think residential quake is you're looking at what we hope would be high single digits to double digits growth. And then the commercial is going to be obviously continue to see some pressure, especially in more large commercial business, where rates were down 15%. And I think I would say from a rate deceleration standpoint, the rate decreases, we expect them to hover at this level for certainly the next several quarters.

So I think that's what I would offer you is residential quake is going to grow and should offset the deceleration in the commercial. And then most of all, and most importantly, is we should see margin expansion. The fact is that property cat pricing should allow us to really scale the residential quake and then absorb the softening on the primary rates in the commercial side.

Got it. Yes. And it sounds like the -- I guess, the [ XOL ] pricing at down 10% is actually not as good as you guys were able to get on some of the stuff that you renewed here recently. But maybe just one more, if I could, for Chris. So I heard you on the loss ratio being in the mid- to upper 30s. I'm sort of looking at that versus the 31% accident year loss ratio, excluding cats in 2025. So it feels like that's getting a little bit worse than I think the old rule of thumb, which was 2 to 4 points deterioration a year. So I'm wondering if you could just unpack that a little bit. What -- is it mix? Is it higher picks? That would be helpful if you could just unpack that a little bit.

Yes. I think the simplest answer is going to be that it's no change in our picks. I think we've said this a lot of times that we are going to continue to reserve conservatively upfront, react to bad news quickly and do good news slowly and deliberately. That has proven true throughout this year where we're able to have some favorable development. If you go back, call it, this time last year, we were expecting a low 30s loss ratio for this year. I think this year was probably a little bit better than we expected. Crop contributed to that. Crop was a little bit favorable to where we expected. So maybe our loss ratio was a little bit better. But overall, when I think about that 2 to 4 points, I feel like this is right in line with that expectation, let's say we were call it, 31%, 32%, we're at 4 points, we're at 36%, right?

The other thing you got to think about is that we are expecting some still really strong growth from Crop. The other assumption we're changing there is we're going to be taking 50% of that book versus 30% this year. So that, while adding profit to the bottom line does move the ratios a little bit. We've talked about it a lot. I just talked about it a little bit. That Crop does operate at a higher combined and a higher loss ratio. Mac said, it was better than 80%, but even an 80% loss ratio, that is higher than 31% or 32%. So if you're taking, call it, 20 points more of that, if you're at 30% and taking 20% more or about 66% more of the losses plus higher growth, it's going to influence the loss ratio.

But overall, when you think about it, and the reason we're not saying that our combined ratio is going to jump at the same rate is we do expect to see some scale or leverage in the operating expenses. And so when we talk about right now, our low 70s combined ratio for the year and kind of getting into the mid-70s for 2026, I think that is taking all those factors into account. Yes, the loss ratio is going to go up as expected and as we've talked about, you're going to exceed some savings potentially on the expense side. But overall, we're going to be mid-70s combined ratio with a growing diverse book of business that's delivering consistent profitability into the marketplace. That's something we've talked about for the last 2 or 3 years, continuing to do, and that's what we plan on doing. So overall, we feel like we're in a good spot. Loss ratio is doing exactly what we expected. And overall, the book is performing very well.

And Dave, if I could just come back to the one point you made on the reinsurance. Yes, 10% is the assumption. It is a little bit less -- a lower risk-adjusted decrease than what we saw in the first quarter, but that's for the midpoint of the guidance. So there's certainly an opportunity to outperform that 10% down, but I think that's the right level for us to assume at 6/1.

Our next question comes from the line of Matt Carletti with Citizens.

Mac, I appreciate your comments on kind of the Casualty book that was really helpful. Can you maybe just kind of zoom out and as we look at the book today, maybe year-end '25, broad strokes, like how much of the book is in kind of excess and primary GL, how much is kind of professional live exposures? Whatever the big buckets are that you got to think of, could you help us with that? And then secondarily, how much of that is directly written by Palomar? And is any of it done through some sort of program or delegated authority arrangement?

Yes, Matt, thanks for the question. I'm excited to talk about the Casualty franchise because it really is performing well and been a nice success story. So just the predominance of the book is going to be what we call E&S Casualty, which would be GL kind of niche segment GL. And then there is some professional lines. But again, the majority of it is going to be excess and primary general liability. We are not writing wheels business for the majority of cases, we do have a small amount of wheels business that's in our contractors primary contractors GL. But on the whole, it's going to be niche categories of GL and then professional liability that's going to be more E&O or health care liability, which is a new example and that's the one that we got into earlier this year.

I think it's important to just talk about overarchingly on the Casualty side, we remain very disciplined whether that's in our reserving, 80% as I said, of the IBNR approximately of the total reserve is IBNR. We have several lines of business and the excess liability, where it's 100% of the reserve is IBNR. Casualty is only 16.4% of Casualty reserves only 16.4% of our surplus. Our limits are very conservative. Our average net limit is $1 million. Our largest net line would be $2.3 million. And our largest line of business, as I pointed out, which is our E&S casualty is $700,000 on a net basis.

I think the other fact that worth highlighting here is just the underwriting approach. And it's going to be really focusing on writing if it's excess, it buffer layers. So we're avoiding social inflation. So if we get a pop, like it's not a circumstance where it's a surprise and there's a nuclear verdict and we were attaching 20 excess of 100 and we get hit, we're going to be attaching excess of 1 or we are writing the primary one. So it confines the volatility in that book. And then I should have started with this, the talent we have is exceptional. These are professionals that have been in this business for decades in the case of David Sapia, [ Frank Castro, Jason Porter ] and our Casualty leaders.

I think it's also important to point out that we do have program business right now, although it's about close to a little more than half are programs. Those leaders are involved in the underwriting of those programs, setting underwriting rules, helping with the claims administration and adjudication. So it's really -- the philosophy that we had in property where we work with the program administrator and builders risk or earthquake, and we also write it internally. It just -- it affords sharing of ideas. It affords the ability to access market segments that you couldn't potentially do on a direct basis. So we think it's a very good model.

And then I think the last thing I'd say about the Casualty business, if you look at how we use reinsurance, we view that as a terrific validation of the underwriting. We buy both treaty and [ fac ] and so [ fac ] reinsurance underwriters are looking at individual risk and pricing them with us. Treaty are looking -- treaty underwriters are looking at the portfolio. And as I mentioned, we had several quota shares renew at 1/1. Two of them were for programs, 2 of them were for internal casualty, all of them had improved economics. So again, I think our Casualty approach -- the execution rather, has been exceptional, and I think our approach is well established and thoughtful.

Our next question comes from the line of Andrew Andersen with Jefferies.

Just on the reinsurance update, the quake that you mentioned that was renewed, was that commercial quake? And did you purchase any incremental limit this year?

Andrew, yes, good questions. So the quota share that renewed was for Commercial Earthquake. We did have a Commercial Earthquake quota share renew. And then we bought incremental limit that's for all of the quake book. But it was a very modest amount. Most of the incremental limit will be procured at 6/1. So -- and then we had one existing layer that renewed at 1/1. And again, those were all down in the 15% range.

Got you. And maybe bigger picture here, as the cycle and some of the lines softens and it doesn't seem like there's any constraint on capital here. But how would you kind of rank capital deployment opportunities across organic, increased retention, share repurchases and opportunistic tuck-in deals, which you have some history of doing?

Yes. I think overarchingly, opportunistic is the right term. Today, share buybacks looks pretty compelling as we scratch our heads inside our conference room. But nonetheless, we still want to grow organically. And we think we have multiple growth vectors to grow the book organically and we also think we have the capital base to do so. We certainly, as the balance sheet has grown, it does afford us the opportunity to take -- increase our retentions like we're doing in Crop, it's certainly something we can look at on cat retentions. Probably more specifically for earthquake cat retentions as that approaches it 6/1. .

And for our property business, our Inland Marine and Other Property business has performed really well. So I think our desire is to potentially put out larger lines in selected classes like both admitted and E&S builders risk and excess national property. So I think it's a combination, really, ultimately, opportunistic M&A. We're proud that we bought 3 great businesses over the last 15 months. But that's really will be more opportunistic. I think you should be thinking about is organic growth, leveraging the scale of the organization, the balance sheet to potentially take more of our own cooking and then also think about opportunistic capital management through selective buybacks and repurchases.

Our next question comes from the line of Mark Hughes with Truist.

On the commercial quake, you said you expect competitive pressure to continue through 2026. How does it look sequentially this down 15%? Is it continuing to decline sequentially? Or has it stabilized at a low level and then you just got some tough comps?

Yes, Mark, this is Mac. That's a good question. I think we're still -- we started to see commercial quake pricing really soft in the second quarter of '25. So we think we're still a couple of quarters to go there. And then hopefully, the comps lead to a deceleration. I think the other thing too is one dynamic where you have the all-risk players, potentially retaining more of the quake, they'll start to -- as they get through a 12-, 15-month period of that, they'll start to get to a point where they'll be managing capacity and overall limits in aggregates. So I think that will help stabilize it some. But our view, and when we talk about this year of having modest growth in earthquake is that pressure will persist in '26 and certainly the first half of '26 in a more pronounced fashion on commercial quake.

And then on the Crop, your retention moving up to 50%. If things go as planned, does that continue to move up? Or is 50% [ is tight ] again?

Well, I think we will -- it's a good lever to have to be able to pull. If you talk to Benson Latham, who's been in the Crop business for a very long time, he would tell you the way to make money in Crop is to retain more of it, and you will make more money over the long term doing that. And so that's something that we do see as, again, a potential lever. The one thing that we want to be mindful of is just capital allocation. And while Crop is not a capital -- overly capital-intensive line, the growth we're having is pretty strong. As I said, we're targeting over 30% growth. So the combination of growth and an increase in retention could start to put a little more pressure on how much capital we have allocated. So that's something that we'll watch. But that's really once we get beyond that $0.5 billion threshold mark. So I think in the interim, we can continue to increase our retention and grow the book, and then we'll take stock at what is the right risk transfer structure from there.

[Operator Instructions] Our next question comes from the line of Paul Newsome with Piper Sandler.

I was hoping you could maybe expand upon a question on getting from investors, which is sort of inevitably as the business mix moves away from earthquake as well as takes increasing retention do you inevitably end up with returns on equity that are less given that you essentially have less reinsurance leverage? Or is the model so such that you have some more balance in that regard. Just -- and I'm not really talking about 2026. I mean just as you think out longer term, is that what we should be thinking about in terms of how the business delivers returns?

Paul, this is Mac. I'll offer my views. We continue -- I think I'll start with saying we continue to believe that Palomar 2X is achievable for the intermediate future. And we will have -- based on the guidance we're giving, we will double our adjusted net income from [ 24% ] in 2 years. while maintaining ROE that is above 20%. And so we think that is sustainable, maybe not doubling it every 2 years but certainly maintain ROE that's over 20%. And that is with changing complexion of the book. You have to remember, we still have earthquake is our largest or top 2 largest line. We're now adding surety, which has very attractive margins as well. That's a sub-80 combined ratio book. .

This is not a circumstance where we're all of a sudden going to become a 12% ROE business and a 95% combined. Until we say otherwise, we're going to be generating an ROE that's in excess of 20%, and we're going to be growing our bottom line at a very attractive rate. And I think the guidance that we gave this year is illustrative of that. And I think the investments that we're making in the business afford us the ability to sustain those parameters.

A couple of things I'd add to that just for a clarification, right? Remember, as we diversify and as the portfolio grows, we are able to leverage our capital base a little more efficiently versus earthquake is very capital-intensive. So as we get to diversify the base and use our capital a little more efficiently, that helps the ROE. The thing we don't talk about a lot, but when you talk about thinking out years is also our investment leverage. We have a very low investment leverage. As our retention increases and our portfolio diversifies, investment leverage will also come into play, and we'll be able to use that as part of our earnings growth as well.

Yes, just to echo what Chris is saying, if you just look at -- I mean, I think that's important to point out, too, just to sample these margins like our net reserves as a percentage of surplus is under 30% and our investment leverage is 1.43% compare those to industry averages, you should feel like there's a fair bit of operating leverage in the model.

That's great. Second question, just on the Fronting business. Is the thought that without additional Fronting operations, essentially the [ seize ] of stability and of that unit prospectively because I think we're at the point -- I think where we've lapped the 1 front-end arrangement that went away. Is that kind of the baseline thinking there?

Yes, Paul, I think our thinking is just Fronting is not a strategic focus for us. And the premium has declined as you've pointed out. And as a result, it's really just not a meaningful reflection of the operating results of the business and the organizational focus. I think the other thing that's just worth pointing out is the Fronting market has evolved to where it's really not a risk-free fee generative business. These all -- most Fronting deals that we see are participatory fronts. And so if they are going to require us to take 20% of risk. It's not a circumstance where we can -- we're comfortable. So we'd rather support a handful of Fronting relationships that we have and focus our capital and resources on programs, but also just most importantly, internal efforts. So yes, I mean, I think it's just the evolution of the Fronting market, combined with our strategic focus is led us to this decision to just collapse it into the appropriate product categories.

Makes sense to me. As you know, I agree with you.

Yes. I think you've told me once picking up nickels in front of a steamroller. So it was a [ laugh ].

Our next question comes from the line of Meyer Shields with KBW.

Mac, one quick question on the guidance, and I apologize if I missed this, but what are the cat excess of loss attachment points that are embedded in the 2026 guide?

Yes, Meyer. Good question. And we didn't offer it, but we will. I assume the retentions remain at the same levels as expiring. So a wind retention in around $1 million in earthquake to $7 million above that.

Okay. All right. That's a good place to start from. With regard to the engineering, does that require new distribution relationships, both in general and with regard to data centers?

Well, it does both. So it can leverage existing distribution relationships but also it does bring new ones to bear. And that's why we hired [ Matt ]. Matt actually was at [ Willis Towers Watson ] before he joined us and has a long-standing history of writing with kind of the traditional [ Alphabet ] houses here. But then there will also be a lot of wholesale produced business, which is kind of our bread and butter for commercial property. So it's a combination of the two.

Meyer, this is Jon. One of the things to think about with regard to distribution with what Matt brings on in the engineered space is up until he came on board in the fourth quarter, we were kind of in all corners of that builders risk market from small single-family homes all the way through commercial property with the exception of engineered risk. And so now this -- as we think about our -- the way that we face our distribution, we really come with a full solution across that Inland Marine department to be able to service all kind of major components of builders' risk in the U.S. market.

Okay. That's very helpful. And then one last question. I just wanted to get a sense of current maybe planned retentions on the Casualty quota share.

So the Casualty quota shares, we renewed that and kept our retentions flat year-over-year. And that's a 1/1. So that's kind of locked in for the next 12 months. And we can write up to a $10 million limit within that treaty. The average net though, is going to be typically -- our average gross limit is going to be $3 million and the average net will be less than $1 million.

Thank you. And we have reached the end of the question-and-answer session. I'd like to turn the floor back over to Mac Armstrong for closing remarks.

Thank you, operator, and thank you, everyone. I appreciate your time and support of Palomar. As I close the earnings call, I want to thank our incredible team here at Palomar. Your execution and work in 2025 was exemplary as evidenced by the strong guidance for 2026, we feel great about our prospects, and we look forward to sharing our success with our investors in 2026 and beyond. Have a great day. We'll speak to you soon.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good morning and welcome to the Palomar Holdings, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir.

Thank you, 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, the telephonic replay of the call will be available on the Investor Relations section of our website through 11:59 p.m. Eastern Time on November 14, 2025.

Before we begin, let me remind everyone 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 to 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.

Thank you, Chris, and good morning. Today, I'm pleased to walk through our exceptional third quarter results. It was another outstanding quarter for Palomar, highlighted by record gross written premium, record adjusted net income the 12th consecutive earnings beat and our fourth adjusted net income guidance increase in calendar 2025.

These results underscore the strength of our distinct franchise and the effectiveness of our disciplined underwriting, diversified portfolio and consistent execution. We've intentionally constructed a portfolio of specialty products designed to perform through all parts of the insurance market cycle. Our portfolio consists of a unique mix of admitted and E&S, residential and commercial property and casualty risk that provide balance and earnings consistency.

Additionally, our newer businesses, like Crop and Surety are scaling nicely and enhance the diversification of the book given their lack of correlation to the broader P&C market. Even with the increasing balance of our book, we are not standing still. The Palomar team remains not only entrepreneurial, but also steadfastly committed to profitable growth. We continue to strengthen our franchise, entering select specialty markets that offer compelling risk-adjusted returns. As part of this effort, last week, we announced the acquisition of the Gray Casualty and Surety Company, a leading surety carrier with a strong national presence and an exceptional management team. This transaction meaningfully enhances Palomar surety platform, bolstering our market position and complementing our existing operations. The acquisition mainly adds scale and provides access to attractive markets such as Texas, Florida and California. Gray only enhances the sustained execution of our Palomar 2X initiative of doubling adjusted net income over a 3- to 5-year time frame. We are thrilled to welcome the great team to Palomar.

Returning to the third quarter. We delivered another quarter of strong financial results, highlighted by 44% gross written premium growth and 70% adjusted net income growth. Our operating metrics were equally as strong with an adjusted combined ratio of 75% and an adjusted return on equity of 26%, demonstrating the strength of our underwriting discipline and the earnings power of our model. Our strong top line growth was not driven by a single line of business as all our product groups say for fronting experienced double-digit growth in the third quarter. The balance in our mix of business, commercial and personal lines products written on an admitted and excess and surplus basis allows us to navigate property and casualty market cyclicality definitely. The balance book, combined with the numerous growth directors across all our lines of business allowed us to outperform industry growth and profitability benchmarks in the third quarter, emboldens us to do so for the indefinite future.

Turning to our business segments. Our earthquake franchise is a great example of the balanced approach we take to construct in our portfolio. Our book of admitted and E&S residential and commercial earthquake products grew 11% year-over-year in the third quarter, a sequential improvement from the second quarter. Growth was driven by the sound performance in the residential earthquake market as we continue to see healthy new business production and strong policy retention and robust 88% for our flagship residential earthquake business. We continue to benefit from our 10% inflation guard, which affords our Residential Earthquake book meaningful operating leverage, a softening property catastrophe reinsurance market. Additionally, we have a robust pipeline of high-quality residential earthquake partnerships that we believe will provide incremental growth as we move into 2026.

In our Commercial Earthquake business, the rate pressure experienced in the first half of the year persisted into the third quarter. During the quarter, the average commercial decreased approximately 18% on a risk-adjusted basis, with large commercial accounts seeing more pressure to small commercial risks. Despite the rate pressure in the market, our commercial or quick book grew during the third quarter, which reflects the strength breadth of our franchise. We do not believe the rate pressure in commercial earthquake will ease over the near term, but we still expect to see growth the remainder of the year 2026. We expect that the earthquake book will experience single-digit growth in the fourth quarter, although that is somewhat exacerbated by a onetime under premium transfer received in the fourth quarter of 2024. Overall, we remain convicted in our [indiscernible] to profitably grow our earthquake business. The underlying profitability is at a very high level with our earthquake average annual loss at a level considerably below that of 2023 and 2022. The stature of our residential earthquake book, which was 61% of the total earthquake book in the third quarter, combined with the expected further softening of the property cap reinsurance market will enable us to grow net earned premium in primary commercial rate decline in 2026. As we have said time and time again, we have purposely built the quick book of business to navigate any market cycle.

Our Inland Marine and Other Property category grew 5% year-over-year, which is a strong acceleration from the 28% growth in the second quarter. The course performance was driven primarily by our admitted and residential property products, including, but not limited to, Hawaii Hurricane, E&S flooded admitted builders risk. The Hawaii book grew close to 20% and La Lima has emerged as the second largest writer of stand-alone hurricane coverage in Hawaii. Our residential flood product, while still a modest contributor to premium today has experienced strong steady growth. We also believe our partnership with Neptune flood will dive as a key catalyst accelerating the product growth over the next 3 years. The Neptune partnership commenced writing new business on October 1, and we encouraged with the initial production, which has been amplified by the temporary closure of the National Flood Insurance Program.

Our builders risk franchise continues to stand out, growing 52% in the quarter. Like our earthquake business, our suite of builders risk products includes commercial and residential products written on both an admitted and E&S basis. Builders' Risk is a national product with no geographical boundaries, and we are investing in talent, where building activity remains robust. During the quarter, we added experienced underwriters in the high-growth markets of flossing in Dallas to sustain our growth and extend our reach. Importantly, we are achieving this growth in our Inland Marine and Other Property Group despite the challenging commercial property market that has impacted our excess national property and commercial all-risk lines. Again, underscoring the value of our differentiated and balanced mix across residential and commercial admitted in E&S products.

Our casualty business delivered 170% year-over-year gross written premium growth, representing a nice sequential improvement from the 119% growth in the second quarter. We remain focused on segments of the casualty market where there is sustained rate adequacy. We are maintaining a disciplined approach to attachment points and net limits, leveraging quota share reinsurance to manage volatility and allow the portfolio to season appropriately. Through the third quarter, our average net line across Casualty remained below $1 million with our largest line of business General Casualty, averaging roughly $750,000. In the quarter, we saw a strong performance from the access and primary general casualty, which grew more than 110% year-over-year in our environmental liability business that was up 119%. Real estate E&O, which is our longest tenure casualty line grew 65%. This quarter, we also wrote our first health care liability premiums, providing capacity of a segment amidst the hard market with technical rate increases exceeding 20%.

Our casualty reserving philosophy also remains conservative and consistent. It is informed by ongoing analysis of loss emergence trends, attachment points and portfolio composition. As we've discussed in prior quarters, we continue to carry more than 80% of our casualty reserves as IBNR, well above industry standards. Maintaining this conservative position reinforces the strength of our balance sheet and provides confidence in the durability and predictability of our future results.

Fronting and premium declined 32% year-over-year, a function of the last quarter of impact from the termination of the Omaha National partnership. Fourth quarter results will better reflect the underlying performance in the fronting business. We remain selective in choosing our counterparties, and while we expect to add new partners in the coming quarters, Fronting is not our highest strategic priority. Our crop franchise delivered $120 million of gross written premium in the third quarter, doubling the $60 million produced in the same period last year. This strong year-over-year growth puts us well ahead of the pace to exceed our full year guidance of $200 million. Beyond the production during the quarter, we added talent focusing on the Kansas and Oklahoma markets that will help have seasonal production in the first and fourth quarters of each year. These additions in form a revised premium expectation of $230 million for 2025. We remain confident in building the business to $500 million over the intermediate term. Additionally, the crop marketing conditions have been favorable so far this season, with strong planting activity and growing conditions appear to be better than historical averages. Based on what we are seeing today, we expect results to outperform the 15-year average industry loss ratio. These dynamics are an encouraging indicator for the remainder of the year.

The third quarter is generally not considered a major reinsurance renewal period. However, it was active for Palomar as we placed [indiscernible] treaties. Importantly, all treaties renewed on turns equal to or better than expiring. We also had successful first-line placements for our new flood and health care liability programs. Market conditions remain conducive to reinsurance buyers. And at this point, we are confident we will see further decreases in property cat treaty pricing.

Before I hand over to Chris, I want to provide a little more color on Gray's Surety. The $300 million acquisition is expected to close in the [indiscernible] quarter of 2026, and it should be accretive to earnings in its first year of incorporation into our organization. We intend to finance the transaction with the new term loan and excess cash on hand. Gray's terrific leadership team of Colin Piske and Michael Petry will continue to lead Gray Surety, which we reband and Palomar Surety. They will join forces with our team in New Jersey to build a top 30 national surety carrier. Adding great on our portfolio further diversifies our book and when combined with crop results in approximately 50% of our premium base being not subject to property and casualty market cyclicality.

To conclude, I'm very proud of our third quarter results and more over the team that delivered them. We generated strong top and bottom line growth, a top-tier return on equity and our 12th consecutive earnings fee. We are raising our 2025 adjusted net income guidance to $210 million to $215 million from $198 million to $208 million, the midpoint implying an adjusted ROE of 24%. The revised guidance applies the achievement of the Palomar 2X tenant of doubling adjusted net income in an intermediate time frame in the case of our 2022 cohort, a 3-year time frame in our 2023 cohort 2 years. We continue to believe this is an attainable target for the foreseeable future.

With that, I'll turn the call over to Chris to discuss our financial results and guidance assumptions in more detail.

Thank you, Mac. Please note that during my portion, 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 for profitable periods and excluding periods when we incur a net loss.

For the third quarter of 2025, our adjusted net income grew 70% to $55.2 million or $2.01 per share compared to adjusted net income of $32.4 million or $1.23 per share for the same quarter of 2024. Our third quarter adjusted underwriting income was $56.7 million, compared to $31 million for the same quarter last year. Our adjusted combined ratio was 74.8% for the third quarter of 2025 as compared to 77.1% for the year ago third quarter. For the third quarter of 2025, our annualized adjusted return on equity was 25.6% compared to 21% for the same period last year. As Mac discussed, our third quarter results continue to demonstrate our ability to achieve our Palomar 2X objectives of doubling adjusted net income within an intermediate time frame of 3 to 5 years while maintaining an ROE above 20%. Gross written premiums for the third quarter were $597.2 million, an increase of 44% compared to the prior year's third quarter or 56% growth when excluding runoff business.

Looking at the fourth quarter, this headwind is now fully behind us. Gross earned premiums for the third quarter were $518.8 million, compared to $395.9 million in last year's third quarter and sequentially to $408.8 million in the second quarter of 2025. Year-over-year growth is driven by the overall performance of all lines of business while sequential growth is significantly influenced by the crop earning pattern. Net earned premiums for the third quarter were $225.1 million, an increase of 66% compared to the prior year's third quarter. Our ratio of net earned premiums as a percentage of gross earned premiums was 43.4% as compared to 34.3% in the third quarter of 2024 and compared sequentially to 44% in the second quarter of 2025. 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 a low point of our net earned premium ratio, increasing throughout the remainder of the reinsurance treaty year in a similar pattern last year. While we expect quarterly seasonality in our net earned premium ratio, we expect net earned premium growth over a 12-month period of time. Our net earned premium ratio was 43.7% for the first 3 quarters of the year. Based on our performance through the first 9 months of the year, we expect our net earned premium ratio to be in the low to mid-40s for the full year, a slight improvement from our view after the second quarter.

Losses and loss adjustment expenses for the third quarter were $72.8 million, which were predominantly attritional losses. The loss ratio for the quarter was 32.3%, comprised of an attritional loss ratio of 31.5% and a catastrophe loss ratio of 0.8%. Additionally, our third quarter results include $6.1 million of favorable prior year development, primarily from our short tail in the marine and other property business. We continue to hold conservative positions on our reserves. Favorable development is a result of our conservative reserving upfront, allowing us to release reserves later. Our year-to-date loss ratio was 27.7%, with the strong results so far, we expect our loss ratio to be around 30% for the year, slightly more favorable than after the second quarter. Our acquisition expense as a percentage of gross earned premium for the third quarter was 10.8% compared to 10.5% in last year's third quarter and 12.6% in the second quarter of 2025. The percentage this percentage decreased sequentially from the higher gross earned premium for the quarter. Year-to-date acquisition expense was 11.8%. For the year, we expect this ratio to be around 11% to 12%, in line with previous expectations. The ratio of other underwriting expenses include adjustments to gross earned premiums for the third quarter was 7.9% compared to 5.9% in the third quarter last year and compared to 8.7% in the second quarter of 2025.

As demonstrated by our hires over the last year and in the third quarter, we remain committed to investing across our organization as we continue to grow profitably. As we have discussed on prior calls and today, we have continued to invest across our company as we work to further expand our reach and drive profitable growth given the attractive risk-adjusted returns that we continue to generate. 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. Year-to-date, this ratio was 8%. We continue to expect this ratio to be around 8% for the full year. Our investment income for the third quarter was $14.6 million, an increase of 55% compared to the prior year's third quarter. The year-over-year increase was primarily due to higher yields on invested assets and a higher average balance of investments due to cash generated from operations and the August 2024 capital raise. Our yield in the third quarter was 4.7% compared to 4.6% in the third quarter last year. The average yield on investments made in the third quarter continues to be above 5%, accretive levels compared to the most maturing securities. We continue to conservatively allocate our position through asset classes that generate attractive risk-adjusted returns.

During the quarter, we repurchased approximately 308,000 shares for $37.3 million under the $150 million share repurchase authorization. At the end of the quarter, our net written premium to equity ratio was 1:1. Stockholders' equity has reached $878 million, a testament to consistent profitable growth. Our strong capital position allows us to continue to profitably invest in and grow our lines of business and to acquire great surety with a combination of debt and cash. I would like to make some brief comments on our business from a modeling perspective in addition to the expectations mentioned earlier in my remarks. As we have previously indicated, the third quarter will continue to stand out from other quarters because of the crop book and its seasonal written and earning patterns in addition to the first full quarter of our excess of loss reinsurance placed June 1. Taking all of this into consideration and focusing the dollars as we spoke about ratios earlier, we expect the third quarter of each year will have the highest gross written premium, gross earned premium, net earned premium losses and acquisition expense.

Looking to 2026, our third quarter and full year 2025 results should provide a good framework to model our business. Reflecting our strong operating results for the first 9 months of the year, we are raising our full year 2025 adjusted net income guidance range to $210 million to $215 million. Importantly, the midpoint of our full year guidance range implies adjusted net income growth of greater than 59%, a full year adjusted ROE above 20% and doubling our 2022 adjusted net income in 3 years and doubling our 2023 adjusted net income in just 2 years. Our Palomar 2X objective remains in focus, and we plan on doubling adjusted net income every 3 to 5 years.

With that, I'd like to ask the operator to open the line for any questions. Operator?

[Operator Instructions] And your first question comes from Paul Newsome with Piper Sandler.

I was hoping you could talk a little bit more about the market opportunity in surety. And maybe a little bit more specificity about exactly who may or may not be competing and it is really pretty broad class of business.

Sure, Paul. Thanks for the question, and good morning afternoon to you as well. We are really excited to bring gray surety into the organization. They are a very nice complement to what we have in New Jersey, which is Palomar Surety, the company known as First Indemnity of America. It's really writing contract surety, kind of mid-small lit bonds, on average, you're talking about bonds that are less than $2 million. The combination of the 2 affords us greater regional expense. As I said in my prepared remarks, gray surety is very strong in kind of high-growth Sunbelt regions, Texas, Florida, California. FIA is the Northeast, bringing them together, it gives us over $100 million of kind of in-force bonds and premium and writing a nationwide presence, but really strong in like 15 markets. I think the opportunity for us is to take this from approximately a top surety on a combined basis to a top 20 in the not-so-distant future, and that's going to be driven by a few things. One, continuing to extend our reach. The gray team has a terrific market entry model that's replicable they understand what it takes from underwriting investment and a system investment standpoint, to enter into a market, the premium that must be generated to cover the cost and generate the requisite margin. So we will do a lot of that. I think there's an opportunity to cross-sell distribution between the 2 entities and FIA and Gray Surety.

And then thirdly, our balance sheet will afford us more to do. Putting us together, I'm going to have an entity that's approaching book value in excess of $1 billion. And moreover, our intention is to have Palomar Specialty T-listed, which will give them the ability to write larger bonds and participate in larger T-listed bonds. Right now, the combined entity can do around a $12 million T-list -- has a $12 million T-listing approximately. So I like the combination of going deeper in existing markets, expanding into new markets, writing some larger limit business and the cross-selling distribution will allow us to get to that top 20 status. But again, the footprint that we have, just once they come together, gives us a meaningful position in the market and really strong expertise, helping us build a franchise that you think can be an even bigger leader.

And then for my second question, maybe you could talk as well about the potential future of the crop business. Obviously, this year has the effect of the acquisition. I don't think it's crop as being a growth business in general, but it's also fairly competitive. I don't know if that's a business that can grow a lot organically prospectively and maybe you can you can just direct us into where that may go as well.

Yes. So well, I think first off, I want to applaud our team Benson Latham, Jon [indiscernible] and others for what they've done this year. This is our second full year of operation, but the first full year where we've had that leadership team as well as AP inside our 4 walls. So they are executing very well. And I think the strength of their execution has been, a, leveraging their historical experience and relationships in the market. I mean these are professionals that have been in the crop space for decades. And then secondly, there's been their ability to attract talent. I highlighted on the call, some new additions that we brought in the Oklahoma and Kansas market that's going to extend not only our geographies, but also our product offering, allowing us to write more kind of offseason winter week type business. stuff that's written more in the fourth and first quarters of the year. But overarchingly, Paul, we do think we're going to continue to grow in crop. We've said that we plan on getting this $0.5 billion of premium in the next several years, the next couple of years. And then the ultimate goal is to get this to $1 billion of premium. And the way we're going to do it is really on service and technology. And so we're making the investments right now to get to $0.5 billion and to get to $1 billion and particularly on the technology side. while attracting best-in-class talent. So this is going to be a growth driver for us for the next few years, and we are very confident in our ability to execute.

Your next question is from Andrew Andersen with Jefferies.

Just on the net income guidance. I didn't hear anything about cat. Is there anything embedded within that?

Yes. No. So we obviously had about $1.9 million of cats in the quarter. From our viewpoint, we do include mini cats in our loss ratio expectations of -- now we've kind of updated to you a little more favorable or around 30% for the year. In our view, that includes everything that we would expect to happen for the year and knock on where there are no major cats at the end of the year or in this quarter.

Okay. And sorry, go ahead.

Just on the commercial quick, I think it was down 20% in 2Q in terms of rate down 18% this quarter. Do you think we're kind of past the peak deceleration of rate where maybe it'll still be soft, minus 10, minus 5, but it's not going to get much worse from here? Or how are you kind of thinking about the next 12 months?

Yes, Andrew, it's a good question. And I do think we have seen a deceleration, but we are not hanging our hats on a reversal. So I would say that you're going to continue to see a softening. But what I would like to point out is if you just look at the expanse of our earthquake book, residential quake now is 61% of the book at the end of the third quarter. The area where we're seeing the most pressure from a rate standpoint, it's about 1/4 of the book and frankly, it's around 8% of our book in totality. So we think we are very well hedged against softening rate on the primary side in commercial quake by the softening P&C -- or excuse me, property cat reinsurance market plus the inherent levers that we have in residential quake. So yes, I think you're going to continue to see large account pressure, probably not to the degree that you saw in the second and third quarter, but we're not going to make a call that it's going to recede. But we will make the call that the health of our residential earthquake book and the softening property cat reinsurance market is going to allow us to grow both top gross written premium in '26 as well as have scale from a net earned premium perspective on the earthquake book prospectively.

Your next question comes from Mark Hughes with Truist Securities.

Chris, did I hear you probably the ratio of net -- or yes, net growth should continue to increase? It should step up on the fourth quarter and then step up further in the first half of next year. Is that correct?

Yes, that's the correct way to think about it. We think of the third quarter as our low point for the net earned premium ratio. Couple of factors now, obviously, before and currently, it still has a lot of impact from the XOL and this being the first full quarter of any new XOL placement even though there was rate savings on that. We still buy for growth. So the dollar spend on that does increase to support that growth. And then now this year and a little bit last year, but obviously, with the growth in crop this year and still seeing 70% of that. We expect the net earned premium ratio to be at the low point in the third quarter of every year and then going up incrementally from there all the way until call it, Q3 of next year.

Yes. I appreciate that. The impact from the Omaha National in 3Q, did you give that specifically, you mentioned that 4Q should show the underlying trend in fronting and I'm just sort of curious what that underlying trend looks like at this point?

Yes. No. So the third quarter, I want to say it was about $30 million last year in our written premium. And so at this stage, that, call it, headwind has been pushed aside or has the right phrase for that.

Right its course.

Yes. You pushed the headwind. Mac, you had mentioned a pipeline of quake relationships. Is that -- is there something -- some new developments there? Or is that just ongoing course of business?

Yes, Mark, I'll let Jon Christianson chime in, too. I would say it's an ongoing course of business. We have over 20 carrier partnerships for earthquake, where we are their dedicated partner to provide an earthquake, whether it's to satisfy mandatory obligations or to bundle with other products. And sometimes, they come over lumpy. Sometimes they are a bit of a hunting license, and they grow. And so we have seen good execution and good conversion from partnerships over the course of '25, but we also do have a pipeline. But Jon, feel free to chime in.

Yes. No, I agree with all that. And I'd add that we're always searching for new strategic opportunities. And what we're finding now is that because we have been known as a strong strategic partner for earthquake, we're also taking inbound increase from others that are looking to better address the earthquake exposure that they may have or add value to their customers by adding earthquake. As Mac mentioned, some of the more high-profile household name type of partnerships at mine over the last few years. They don't all come on at once in certain cases. And so as time has gone on, and we've been working together a longer period, we have seen increased traction with a number of large partners. And that's paid off so far this year.

Yes. And so sometimes, it can be in a relationship where we are working with them in all states, but California and then California has opened up to us or it's vice versa. We're the California partner, then all of a sudden, they think about us handling Pacific Northwestern New Madrid. So Jon and his team do an excellent job of chasing down these partnerships and then executing and implementing them. So we feel that '26 should provide 1 or 2 other new deals. .

[Operator Instructions] Your next question comes from Meyer Shields with KBW.

Chris, second question a little more on the guidance. I'm trying to get a sense as the expectations for the underlying loss ratio, excluding reserve development and excluding the major catastrophe losses so far this year. Is there any -- can you help us think about that?

Yes. So I think from our standpoint, when you look at the book of business and the maturity and the lines of business that are growing, whether it be crop, casualty, in land-marine other property are growing at a very strong rate, not to say that earthquake growth isn't still very good, but those lines that are growing at a higher rate do have attritional losses with them. So overall, earthquakes still has a nice 0% loss ratio, but these other lines that are growing at a higher rate do have attritional losses with them. So I expect the loss ratio to continue to move up. I think the one thing that we were saying at the end of last quarter is that we expected our loss ratio to be about, call it, low 30s for the year. I think now based on some of the favorable results that we've seen so far, we expect that kind of to be around 30 that could be plus or minus 1 or 2 points on either side of that. But overall, we feel a little bit more favorable about where we did before. But overall, nothing has really changed that we still expect it to move up. It's still moving up in line with those attritional results. But there's been no, call it, underlying unfavorability in any of the results. It's kind of just a natural change in our book of business and portfolio and diversification that is having that loss ratio move up a little bit. But again, like I said before, it's not jumping, didn't jump from 10 points like anyone was thinking before. But overall, we felt that it was going to just move up incrementally and is kind of doing exactly what we expected.

Okay. That's very helpful. Can you talk a little bit more about the health care liability, I guess, book that you're writing? The specific question is whether there's like actual growth and amortization exclusions, but more broadly, what you're looking for?

Yes, Meyer. So we launched that 71. We hired a gentleman named Frank Castro, 30-year-plus underwriter spent time at RLI, access and actually have worked as a risk manager for a large hospital system, too. So great experience. Launched 71 with a nice reinsurance program it's like we've done with other casualty. It's a walk before we run. Our gross limits are about $5 million. Net limit is going to be inside of [ 2 ]. His book, what we're targeting is about 60% hospital liability, 25% managed care E&O and then 15% kind of Allied Health. And his timing is good as it pertains to hospital liability because you are seeing the SME or [indiscernible] liability exclusions more frequently or sub limited. And as I mentioned on the call, again, the timing is good in the sense that there is meaningful rate to be grabbed here. So this is another example of the walk before you run, but it's led -- and it's also another example of a great underwriter overseeing a market that's a bit dislocated.

Okay. Yes. The timing certainly makes a lot of sense. And one last question, if I can. How should we think about the stickiest flood policies that you're writing while these federal programs set down?

Yes. Happy to take that, Meyer. This is Jon Christianson. So I think what we found historically both preshutdown and what we're seeing now is strong stickiness of policy renewals. And I think more importantly, in the last couple of months, we've seen a greater interest in new business and great confidence in the private market, delivering relative to the uncertainty around the NFIP. So strong product, a great partner, strong distribution, and I think as every day passes, there's a greater validation and credibility in how the private market can deliver a better product than what has traditionally been in the market.

Your next question comes from Pablo Singzon with JPMorgan.

The question of loss ratio deterioration versus accelerating premium growth always comes up for you, right? Because if you're changing mix, and that's before you're thinking about things like reinsurance retentions and CD commissions and the like, right? But just given your Palomar 2X aspiration to double earnings in 3 to 5 years, would it be fair to simplify the discussion here and assume that you're also planning for a similar growth trajectory in your net underwriting income, right? So I don't know, something like 20% to 30% growth a year in the medium term. Is that a fair way to think about your portfolio in a very simple way.

It is, Pablo. Yes, and thanks for bringing that up. I mean I think we feel that Chris has talked about it, that we have levers to pull from retentions and that's going to potentially amplify net earned premium growth over net premium growth and similarly on the investment side. But to answer your question, simplistically, yes, I think that is an accurate way to categorize it.

Okay. And then second question also, I guess, on growth, Mac. So clearly, good growth you're experiencing right now. I'd be curious to hear at what point do you think you'll have to reload whether it's in respect to new hires or even M&A as you see the big Gray in order to sustain the current pace as opposed to sort of like past hires ramping up? And growing in adjacent life like low-hanging fruit that what you have now can achieve versus incremental hires or debt stressing for [indiscernible]?

Yes. I mean I think, obviously, Gray was unique in that it was an acquisition. We've been really an organic growth story up until the last year or so. But I think Gray afforded us the ability to really kind of supercharge our entry into the surety marketing and give us a scale that we wanted. We said our goal was to get to $100 million, bringing Gray and for it to allows us to do it a lot quicker. But I think having gray and that's going to give us another organic growth vector. And that's because they can enter into new markets. And so Pablo, I think we're going to continue to grow organically by investing in talent, expanding geographic reach, entering into adjacencies, and then we'll be opportunistic if there is some inorganic growth driver that allows us to bring in an expertise or a competence that we don't think we can build in-house as effectively. I don't want to say that we're going to -- well, definitely I want to say that we're not going to stop hiring talent that complements what we're doing or can help enhance our growth trajectory because we will continue to do that. But I do want to say that we -- all of our lines of business earthquake included, have growth vectors. Some lines of business have headwinds in them, commercial property. But if you really feel it back commercial property is less than 9% of our book. So when you look at crop casualty, now the surety franchise, the builder's risk franchise, residential quake like there are growth vectors across the board. So 44% growth is very strong. and that's not going to be at infinitum. But we remain very confident in our ability to achieve the Palomar 2X goals. And so that's going to have to come from gross written premium to some degree. And then the net earned premium, which you highlighted earlier. So we just think that we are well positioned and to attain Palomar 2X and also just to grow organically.

There are no questions at this time. So I will turn the call over to Mac Armstrong for closing remarks.

Thanks, operator, and thank you all for joining the call today. I'm very proud of our third quarter results. They demonstrate the strength of our business and the diversity of our unique specialty insurance portfolio. It's a balanced book of E&S and admitted residential and commercial property and cash products. That's being supplemented now by the newer lines of business like Crop and Surety, that are uncorrelated to the PC market cycle. So we think we are very poised to deliver consistent growth, and we're confident in our plan do so. And the third quarter only gives us more conviction of what we have in front of us. So I'll conclude just with welcoming our new teammates to Gray Surety. And as always, I want to thank our employees for their commitment to Palomar. Thanks again, and enjoy the rest of your day.

Thank you. All parties may now disconnect.