Palomar Holdings, Inc. (PLMR) Q2 2019 Earnings Call Transcript

Palomar Holdings, Inc. (PLMR 0.73%)
Q2 2019 Earnings Call
Aug 13, 2019, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Palomar Holdings Inc. second-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Uchida, chief financial officer.

Thank you. You may begin.

Chris Uchida -- Chief Financial Officer

Thank you, operator, and good morning, everyone. We appreciate your participation on our second-quarter 2019 earnings call. With me here today is Mac Armstrong, our chief executive officer and founder. And as a reminder, the 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 20, 2019. 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 that will be filed with the Securities and Exchange Commission today, August 13, 2019. 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 the most comparable GAAP measure can be found in our earnings release. At this point, I'll turn the call over to Mac.

Mac Armstrong -- Chief Executive Officer and Founder

Thank you, Chris, and good morning, everyone. I'm very proud of our second-quarter results, highlighted by gross written premium growth of approximately 56% year over year, a combined ratio of 69%, an adjusted combined ratio of 64% and an adjusted return on equity of 21%. In addition, our pre-tax income grew in excess of 46%, excluding the impact of expenses associated with our IPO, cash restructuring, stock-based compensation and the retirement of debt. We believe these results reflect the continued execution of our strategy and the benefits of scale as we grow the company.

Our strong performance in the second quarter was driven by balanced gross written premium growth across our product portfolio. Our earthquake products grew 57% and our non-earthquake products, highlighted by our commercial all risk offering were 55% compared to second quarter of last year. At the end of the first quarter, we became an AM Best financial size category eight. insurance company, which has led to additional distribution sources and increased submission activity for our commercial all risk products.

This expanded distribution, as well as an improving pricing environment, led to growth in our commercial lines of 114% compared to the second quarter of last year. Furthermore, our personal lines products grew 42% due in part to the rollout of national carrier partnerships. While we expect continued gross written premium growth from our current offerings, we remain focused on developing innovative new products that address underserved markets. To that end, our recently launched inland marine and assumed reinsurance divisions both generated written premium during the second quarter.

Turning to the market, we believe that the exchange value that we offer to insurers and producers are best demonstrated by our strong premium retention rates. Average monthly premium retention across all lines of business was 88% compared to 84% during the second-quarter 2018. Our commercial lines products generated an average written premium rate increase of 5% during the second quarter, and demonstrated overall average premium retention of 86%. Our personal lines products also attributed continuing strong retention, highlighted by our residential earthquake and Hawaiian hurricane products, which both achieved average premium retention above 93%.

Thoughtfully managing our risk exposure and risk transfer strategy, especially as we experience sustained growth, remains a critical feature of our business. At June 1, we successfully renewed $470 million and purchased an incremental $200 million of reinsurance limit, expanding our excess of loss program up to $1.05 billion of total coverage. This added limit continues throughout Palomar to maintain protection beyond the one-in-250-year peaks on probable maximum loss, which we refer to as PML. And it significantly exceeds stimulator losses from any recorded historical event.

To provide some perspective, as of June 30, 2019, a theoretical earthquake equivalent to the 1994 Northridge or the 1906 San Francisco earthquake, the two most significant historical events relative to our portfolio, would generate a gross loss of approximately $715 million or $634 million, respectively. Our per event retention for earthquake or wind events remains $5 million, or approximately 2.5% of our circumvent at June 30, 2019. In addition to the renewal of our quota excess of loss program, we completed the inaugural placement of our specialty homeowners facility, which I will refer to as the SHF, to provide quota share in excess of loss reinsurance specifically for our specialty homeowners business in Texas, Mississippi and Alabama. The SHF also includes coverage for states that have been identified as expansion opportunities, and is illustrative of our strategy of generating a well-balanced combination of fee and underwriting income.

Furthermore, the SHF preserves our ability to manage the attritional loss complement inherent in writing homeowners' insurance. June reinsurance renewal experienced a bit of price tagging across the property record. That said, we are very pleased with our non-loss affected layers of reinsurance, renewed flat to modestly up on an exposure-adjusted basis. Our single loss in active layer of $10 million attached in excess of $5 million for wind-only coverage, did experience a 15% exposure adjusted increase.

We believe these results are a testament to the unique attributes of our program and the consistent historical results we have generated for our reinsurance partners.Our panel now consists of 80-plus reinsurers who are either rated A- or better by AM Best in post collateral. No single reinsurer constitutes more than 5.5% of the excess of loss limit. The June 1 renewal is emblematic of Palomar's strategy of limiting our exposure to major catastrophes, reducing volatility in earnings and protecting our balance sheet to capitalize on post-event market demand and dislocation. Our thoughtful approach to reinsurance not only provides loss protection, but also superior visibility into our earnings.

I would now like a take a few minutes to touch upon the recent earthquakes in Southern California this past July. First off, our thoughts are with all those impacted by the July 4 and 5 events, which obviously were outside the second quarter. For those not familiar, the July 4 and 5 earthquakes were the largest Southern California has experienced in over 20 years, and occurred within approximately seven miles of each other. But the magnitude of these events serves as a reminder of the potential destruction from earthquakes.

Due to the proximity in both location and time, as well as the definition of covered events in our reinsurance program, we will discuss these earthquakes as a single event that we are calling the Ridgecrest earthquake. I'm very proud of our teams who immediately responded to support our policyholders affected by the events, making contact with those most likely impacted to ensure safety and to address immediate needs. We previously issued press releases disclosing our exposure in the impacted areas, summarized by the following: 14 residential earthquake policies within a 30-mile radius of the epicenter; 14 total residential earthquake policies within a 45-mile radius of the epicenter; no commercial earthquake policies within a 45-mile radius of the epicenter. Fortunately, we have received a limited number of claims to date, and we do not expect meaningful losses from the event.

Historically, major catastrophe events typically lead to an increase in new business for our earthquake products, given that earthquake insurance is a voluntary purchase. This dynamic was certainly the case following the Ridgecrest earthquake. New business generated following the earthquake was stronger than historical experience from events like Hurricanes Harvey, Irma, and Maria, the next course to the earthquake and California wildfires. As an example, July 2019 new business from our value select residential earthquake products was approximately double that of the trailing 12-month new business average as of June 30, 2019.

As we look ahead to the second half of the year, we remain focused on profitable growth. With that, I would like to turn the call over the Chris for a more detailed review of our financial results.

Chris Uchida -- Chief Financial Officer

Thank you, Mac. During my portion, when referring to any per share figure, I'm referring to the per diluted common share unless otherwise specifically noted. For the second quarter of 2019, our net income was $6.7 million or $0.30 per share compared to net income of $6.9 million or $0.41 per share for the same quarter in 2018. While the second quarter of 2019, our adjusted net income was $8 million or $0.36 per share compared to net income of $6.9 million or $0.41 per share for the same quarter of 2018.

Second-quarter 2019 adjusted net income excludes expenses related to the company's IPO, tax restructuring, stock-based compensation and $1.3 million of expenses associated with the retirement of debt, including the tax impact of those expenses. Excluding these expenses, our pre-tax income grew in excess of 46% year over year as Mac mentioned earlier. Gross written premiums for the second quarter were $58.3 million, representing an increase of 56.2% compared to the prior-year second quarter. As Mac indicated, this growth was driven by strong premium retention in new business across our product portfolio, as well as by an improving price environment, specifically for our commercial lines.

Ceded written premiums for the second quarter were $24.6 million, representing a decrease of 7.7% compared to the prior-year second quarter. Recall that during the second quarter of 2018, we ceded approximately $11.8 million of unearned premium related to our specialty homeowners business in Texas in conjunction with a shift to operating as a front-end carrier for that business, an arrangement that ended in June of this year, when we took the business back on our balance sheet while placing reinsurance coverage for it through the SHF Mac described earlier. Excluding that impact, our ceded written premiums grew 36.6% compared to the prior-year second quarter. Mac reviewed our reinsurance renewals at June 1.

I would like to touch upon our reinsurance expense. As we grow our business, we expect to incur additional reinsurance expense as we maintain a conservative level of overall coverage. Due to the timing of our reinsurance placements and the terms of the underlying contracts, there may be a lag between earned premiums and a reinsurance placement or expense. But over time, we expect these impacts to smooth out and their trends to look the same.

We currently retain $5 million of risk per earthquake or wind event and have $1.05 billion of first event coverage in place. We will continue to stress the conservative risk transfer strategy oriented toward limiting our exposure in the event of a major catastrophe and reducing volatility in earnings. Our balance sheet will be protected in order for Palomar to capitalize on post-event disruption and heightened market demand that typically follows catastrophes, including the Ridgecrest earthquake that Mac described. Net earned premium for the second quarter were $23.2 million, an increase of 27% compared to the prior-year second quarter due to the growth in earning of higher gross written premiums offset by the earning of ceded written premiums.

Commission and other income for the second quarter was $721,000, an increase of 14.6% compared to the prior-year second quarter as we expanded our fee related activities of underwriting on behalf of third-party capacity. Losses and loss adjustment expenses incurred in the second quarter were $643,000, a decrease of 12.2% compared to the prior-year second quarter. Our loss ratio for the second quarter was 2.8% compared to 4% in the prior-year second quarter. Decrease was driven by ongoing efforts to manage attritional losses in our business, primarily through the use of quota share reinsurance, such as the funding arrangement and the new SHF, while increasing our visibility through consistent earnings.

Our expense ratio for the second quarter of 2019 was 66.4% compared to 61.1% at the end of the second quarter of 2018. The year-over-year increase was largely due to expenses associated with the retirement of outstanding debt. On an adjusted basis, our expense ratio reflected significant expenses related to the building out our team and systems to capture the market opportunity in front of us but track more in line with historical averages of 61%. We continue to believe our business will scale over the long term.

Our combined ratio for the second quarter was 69.2% and compares to a combined ratio of 65.1% for the prior-year second quarter. The adjusted combined ratio, which we believe is a better assessment of our efforts during the quarter, was 63.8%, a decrease compared to 65.1% in the prior-year second quarter. Net investment income for the second quarter was $1.5 million, an increase of 103.4% compared with the prior-year second quarter. The increase was largely due to increased interest income generated by the IPO proceeds.

We maintained a conservative investment strategy as our funds are generally invested in high quality securities, including government agent securities -- agency securities, asset and mortgage-backed securities and municipal and corporate bonds, with an average credit rating quality of AA. The weighted average duration of our fixed maturity investment portfolio, including cash equivalents, was 3.9 years at quarter end. Cash and invested assets totaled $245.3 million at quarter end as compared to $157.3 million at December 31, 2018. For the second quarter, the company recognized realized and unrealized gain on investments in the consolidated statement of income of $493,000 compared to $255,000 in the prior-year second quarter.

Our effective tax rate for the three months ended June 30, 2019, was 21.1% compared to 0% for the 2018 comparable quarter. The increase in our effective tax rate is due to our restructuring in the earlier part of this year. All of our operations are now taxable of the U.S., where in prior periods, our Bermuda operations were not subject to U.S. tax expenses.

Excluding any unforeseen events, we anticipate that our tax rate will settle around the 21% mark for the remainder of 2019. Our stockholders' equity was $199.6 million at June 30, 2019, compared to $96.3 million at December 31, 2018. This increase was primarily due to the addition of IPO proceeds, which will put downward pressure on our return on equity in the short term, while providing capacity for continued growth over the long term. For the second quarter of 2019, our annualized return on equity was 17.8% compared to 32.1% during the second quarter of 2018.

Similarly, our annualized adjusted return on equity during the second quarter was 21.2% compared to 32.1% during the second quarter of 2018. I would now like to turn the call back to Mac for concluding comments.

Mac Armstrong -- Chief Executive Officer and Founder

Thank you, Chris. To conclude, we are pleased with our second-quarter results driven by the strong performance across all of our product lines. We continue to expand our distribution network, develop partnerships, roll out new innovative products that we believe provide a differentiated solution to the marketplace and expand our geographic footprint, which now is 26 states. Our strategic vision for the business has been validated by the strong premium retention that we have, experience coupled with the growing demand for our specialty products.

Additionally, the successful completion of our reinsurance program renewal at June 1 will allow us to profitably grow, minimizing downside risk and ultimately providing strong visibility into our earnings. With that, I'd like to ask the operator to open up the line for any questions. Thank you. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question is coming from Mark Hughes of SunTrust Robinson Humphrey.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

The strength you see in July, did you say that was both residential and commercial? Or was it just residential?

Mac Armstrong -- Chief Executive Officer and Founder

Yes, hey Mark, it's Mac. So we are seeing more, in a more pronounced fashion in residential. We do see it in commercial, but I was referring to an earnings transcript specifically to our largest residential earthquake product. And again, it gets back to, residential earthquake is a voluntarily product, it's not complicit with the mortgage.

So you do see these for fairly material surges, and certainly in this case, it's a material surge.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

And anything you can say about the duration of that? How have you seen that trend in the recent weeks, what's your experience in the past with this sort of thing?

Mac Armstrong -- Chief Executive Officer and Founder

So if there is a surge that -- it tends to -- well, I guess, specifically right now, we are seeing it continue. Obviously, the first week after the earthquake it's most pronounced, but it's kind of sustained at a level the last several weeks now. But usually, by the end of the quarter following the event, it does start to dissipate some. But what we've seen in the past is that you do kind of get a new normal, if you would, from a new business standpoint.

So I would say for the remainder of the year, you're going to see probably higher than historical averages. But right now, we feel pretty good about it being sustainable for the next couple months.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

And then, where do you stand in terms of the impact of the partners on the earthquake business? I think some of those were just ramping up? How much of a contribution are they making? And how much more perhaps in the coming periods?

Mac Armstrong -- Chief Executive Officer and Founder

Yes. So if you look at some of the partners where we have assumed reinsurance relationships, you are likely to see potentially a bump. More of our newer partnerships like we have put into place with, in Allstate, that tends to be one where it worked the proverbial hunting license. And so what we have seen following the events is more appointment of agents.

You do see a pop in new business, but it's more of a, OK, there's awareness, the agents want to get appointed, get acclimated with our system, so hopefully that translates in the future, less than the kind of immediate surge that you see from the existing distribution footprint.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Then a final question, when you think about ceded premium ratio, I know there's a lot of moving parts there, but is there -- kind of some rough guidance, as we think about the second half of '19, in the next year given what you know about your, the programs that you've just renewed and then kind of the mix of business. What's the right ceded premium ratio?

Chris Uchida -- Chief Financial Officer

Yes, hey Mark, it's Chris. I would say, when you look at that amount, touch on a couple different points regarding that and give you the -- I'll give you the short answer first. I think right now, if you look at our gross earns, you ceded earned premium, our ratio's hovering right around 50%. I think that is probably a good mark, plus or minus 5% either direction depending on what's happening from a quarterly basis.

And the reason for that it is, Mac touched upon in one of the press releases earlier in the quarter, then also in the call, is the new SHF. That is something that we put in place for our specialty homeowners business. It's something that replaced the Texas front that started June of 2018, and so that was -- that funding arrangement expired June 1 of 2019. We were able to put the SHF in place to basically replace that funding arrangement and that is not something that we originally had planned on in our business model, so that is something that is new for our book of business.

And so that increased the ratio of ceded premium to gross earned premium related to that. So I think if you had looked at it earlier, I would expect that ratio to drop down to where the ceded premium was more like 40%, but with that new SHF in place, I would expect it to hover probably around 50%. And the one thing I would know with that, and if you look at it and the loss, as you can really see how the funding arrangement and how the SHF and also other quota shares that we have around our commercial program, play into the losses and help protect the brand balance sheet, but then also protect the -- any type of volatility in earnings and sustaining those earnings on a quarter-over-quarter or year-over-year basis. So it's something we're excited about and something that we think the investors would really appreciate as we're unable to kind of make sure that our earnings volatility is minimal from a quarter-over-quarter basis.

Mac Armstrong -- Chief Executive Officer and Founder

And I think the other component, Chris lays it out well, is that it drives down the acquisition expense, because you are getting a ceding commission from the quota share reinsurance partners that we are working with on -- with this SHF. So that will help commensurately reduce the underwriting expenses as well.

Operator

Our next question is coming from David Motemaden of Evercore ISI.

David Motemaden -- Evercore ISI -- Analyst

Just had a question, just on your reinsurance coverage and the purchases that you made. What sort of growth were you considering when you reupped your coverage for earthquake? And are there any more incremental purchases that you need to buy to get more coverage, just given the expected spike or the spike that you guys are seeing on the demand side?

Mac Armstrong -- Chief Executive Officer and Founder

Yes, hey Dave, it's Mac. That's a good question. What I would say is, when we bought -- we procured another $200 million of limited -- allow us to grow with projections that we had effective around the IPO, but also effective 6/1. So on the heels of the surge in demand for residential earthquake, there is a likelihood that we will need to procure more limit.

The timing of that is fluid, but we certainly would grow -- we're going to make sure that we protect the balance sheet appropriately and adequately. We have this sacrosanct rule of always wanting to be -- have a healthy cushion above, you want a 250-year PML. So there is, if the new business that we're seeing is sustained through the third quarter, there's a likelihood that we will buy it. But the one thing that I would tell you is, when you look at, for residential earthquake, where we're keeping the predominance on our balance sheet, a good rule of thumb for that is you could say we're kind of targeting the low-60s combined on that business.

So you can feel pretty good about that growth that you see there, assuming there's no loss, having kind of a low-60s combined. So that would be a rule of thumb to apply. And that would reflect the cost of acquisition, as well as the cost of reinsurance.

David Motemaden -- Evercore ISI -- Analyst

Got it. And any sort of early indication if that, if the earthquake has caused any movement on reinsurance pricing?

Mac Armstrong -- Chief Executive Officer and Founder

Early indication is that it's not. As I said on the call, we have not seen much in the way of claims or losses. Certainly, I don't expect anyone to have reinsurance losses. Our losses right now are inside of $100,000.

David Motemaden -- Evercore ISI -- Analyst

Got it. OK. Great. And then I guess, just a question on commercial.

On the pricing side, I think you said it was up 5% this quarter, which is the same it was up last quarter. Just wondering if you could unpack that a bit because I'm a little surprised that it didn't accelerate during the quarter? Maybe it was due to mix or something else?

Mac Armstrong -- Chief Executive Officer and Founder

Yes, so what I would say -- Dave, this is Mac again. That's a good question. What I would tell you is, it was accelerating if you compared April to June. You are seeing acceleration.

And I think you have to remember that there was a fair bit of dislocation that was starting to manifest itself in the first quarter, in the commercial property market, and particularly in the E&S space, but a lot of times you still have people that have legacy MGA relationships that they were contractually obligated to satisfy for a period of time. So you still saw a few, I don't want to say, less-disciplined participants in the market, but you weren't going to see that right integrity that you're seeing now. And certainly what we saw in June compared to April. So I think -- we think that it's sustainable, and you'll probably going to see a bit of an acceleration if June versus April is any guide pole.

David Motemaden -- Evercore ISI -- Analyst

OK. Great. And then if I could just sneak one more in for Chris. Just on the prior period development, was there any this quarter that helped the loss ratio?

Chris Uchida -- Chief Financial Officer

Yes. Let me just flip to that page and some of my notes real quick. Yes, there was a little bit of prior-year development, I wouldn't call it material. You'll see this in the actual results in the Q.

So the total losses for the quarter were $643,000, within that number is about $92,000 of prior period development. So not what I would call a material number. But I think, just to reiterate, that loss ratio is driven by a lot of the quota shares and special -- our different reinsurance arrangements that we've put in place to help minimize the impact of losses or attritional losses have on our book of business from quarter to quarter.

Mac Armstrong -- Chief Executive Officer and Founder

Yes, David, if I could just add one more comment to that. I think -- as we really do try to espouse this mantra of predictability in minimizing volatility earnings, you have also reflect back to that 70% of our book of business is earthquakes and Hawaiian hurricane, where you know what your losses are of the day at the end of the quarter -- the day back to the end of the quarter. So there's a fair bit of predictability inherent in that. So you marry that with, what Chris has outlined, in these quota shares that minimize attritional loss.

You're not going to see big swings in losses or development, which I think lends itself to predictability.

Operator

[Operator instructions] Our next question is coming from Jeff Schmitt of William Blair.

Jeff Schmitt -- William Blair & Company -- Analyst

The -- for gross premiums written last quarter, there was this new residential quake partnership, I think it added $8 million to premiums. Was that just a Q1 event? Or did that add any to Q2 premiums?

Mac Armstrong -- Chief Executive Officer and Founder

Hey Jeff, it's Mac. Well the good thing about that, I think, as we talked about on the last quarter's earnings call, it added $8 million of premium, there was $6.5 million -- approximately $6.5 million of unearned premium that bolstered us. What you see now in the second quarter is kind of steady state performance from that partnership. So it's probably composed of approximately $3 million of gross written premium.

So it was not like a material bump again. It's just now part of this -- the, for a lack of better term, the base that we have. We did bring on a couple of other partnerships, one, I touched upon earlier with Allstate, which is more again, I use this term, hunting license, where basically we have the ability to sell our products to their agents, in particular residential earthquake and Hawaiian hurricane. Another one was with a smaller California homeowners company, that was looking to us, looking to find a product specialist who would allow them to focus more on wildfire and the attritional off-lined homeowners insurance and not have to focus on earthquake, but satisfy the required mandatory offer that the California Department of Insurance mandates.

Jeff Schmitt -- William Blair & Company -- Analyst

OK. And then it looks like the growth of those commercial products is obviously really high, both the quake and the all-risk. Can you maybe talk about that competitive landscape? Or are there fewer competitors on that commercial side? Are those bigger markets than the residential? Or what's your prospects there?

Mac Armstrong -- Chief Executive Officer and Founder

Yes. Jeff, this is Mac. Let me cut -- bifurcate the two. I think overarchingly, one of the things that we touched upon in the IPO that was going to be helpful for our commercial lines of business was improving our financial size category to a financial size category eight, and that has indeed opened up distribution sources for our commercial earthquake, and you saw that in the quarter, commercial earthquake grew I think 110%-plus.

So that was one driver of it. I think you couple that again with what we're talking about earlier, which is the improving price environment, that allowed us to get scale, as well as improve our scale in commercial earthquake. So certainly, opening up new distribution sources, a healthy price environment that's driven by certain people pulling out of the commercial earthquake market or just trying to get drive rate, so that's one contributor to it. The commercial all risk, I think we continue to see improving rate, and furthermore, a broadening of the distribution base.

But I think what it really comes down to there is there has been some pullout of that market and our product is unique. We offer brokers, wholesalers or retail the ability to offer their clients an admitted insurance product that has the flexibility and pricing and coverage of an E&S product. So I think that's really just continues to resonate in the market. And to your question around the size of our -- yes, the all -- commercial all risk market is a much larger market than commercial and residential earthquake.

So we think we've got room for growth there, and we're pleased that that's growing close to 140% year over year.

Jeff Schmitt -- William Blair & Company -- Analyst

Right. And then for attritional losses, obviously, really low, 3% in the quarter, more like 2% in the first half. How should we think about that in the second half, excluding major events? Is there is seasonality there? Could it be under 5%? Or is it going to be more like 10% or 15%?

Mac Armstrong -- Chief Executive Officer and Founder

Yes, no. Hey Jeff, it's Chris. That's a good question. We're not going to give guidance on what we expect the loss ratio, to our specific guidance on what we expect the loss ratio to be quarter versus quarter.

I would say that we've talked about it and I'll reiterate it, that we put different quota shares in place for our specialty homeowners business and for our commercial all risk business that help minimize the impact losses will have on our overall portfolio and earnings. So I do think that 2% or 3% for the year and for the quarter is a very good loss ratio. I do expect that over time it will start to go up just naturally as our overall books of business from the specialty homeowners business and from the commercial all risk lines and the inland marine or builder's risk line, that Mac mentioned before, those lines do just have attritional losses associated with them, as those books of business become a larger component of our overall portfolio of risks. Loss ratio will start to just to creep up naturally.

I don't expect it to jump up to 15%, but I would expect it to naturally increase with the growth in those lines of business. But I don't expect there to be any, I'll call it, shock losses or anything like that that are going to come with it. But there is, because it's homeowners and some of it is in Texas and the Southeast and the same with All Risk, there is some seasonality around it. I would say it's probably more around the -- toward the hail season than anything else.

But it's going to follow your traditional homeowners or commercial property seasonality. So maybe I'll call it fire season around Christmas and Thanksgiving or sometimes a spike around those types of losses, but nothing that I would call just spiky in nature, it should be relatively smooth quarter over quarter. But increasing slightly over time, just have those lines increase.

Operator

Our next question is coming from Meyer Shields of KBW.

Meyer Shields -- KBW -- Analyst

I want to follow up on Mark's question with regard to the post-California earthquake demand surge. What can you do to ensure that the persistency over time of this new demand is higher than it has been in the past four earthquake underwriters?

Mac Armstrong -- Chief Executive Officer and Founder

Yes, Meyer, it's Mac. That's an interesting question. I think what we typically hope for is -- we have very strong retention in residential quake, so we feel it's in and around -- it's north of 90%, so we feel if we get a consumer to procure it, we think we'll have a nice lifetime relationship with that customer, a lifetime value the customer will be for fairly lengthy. So what is important to us to hopefully sustain it is see not only a surge from demand from policyholders that are part of the existing distribution footprint, but hopefully it entails us adding more producers.

So you get calls from new producers want an appointment with us, who want access to our value select or flex or even our heritage products. So hopefully what we're going to see is increasing amount of producers in our distribution plant, and that will allow us to hopefully sustain it for a lengthier period of time. And this goes back to one of the encouraging things about this new partnership we have with Allstate, is that we have 500 agents that we appoint to kind of in, probably two-thirds of those were on the heels of the Ridgecrest earthquake. So if we do a good job of converting them and helping them sell the product, we should be able to sustain.

Meyer Shields -- KBW -- Analyst

OK. Fantastic. That's helpful. Second question.

If we take out the non-occurring and the nonessential expenses, it looks like other operating expenses were flat sequentially about $5.5 million. Is that a good run rate for the rest of the year?

Mac Armstrong -- Chief Executive Officer and Founder

Meyer, it's Chris. Yes. I think, obviously we're not giving specific guidance on this, and looking at that number, I think you outlined it well. Obviously, you got to take the adjustments out.

I would think that, when you look at 2019 and Q2 specifically, that was the first quarter that we were operating as a public company. Some of those expenses are not, I'll call it, fully baked into the quarter. So I would expect the true dollars to increase slightly. I think if I had to measure and guess, I would probably say that Q3 is going to be a better indicator of what I would call our at-scale operating expenses from a dollar standpoint should be.

But I wouldn't expect Q2 dollars and expenses to increase materially from where they are and as you outline. And I would also say that, from a pure scale standpoint, I would still expect that the growth in written and earning of that written offset by ceded premium, the growth in the revenue side of it will still exceed the growth in the expenses. So I wouldn't expect to see a little more scale in Q3, and then that developing in the future -- in future periods, I guess.

Meyer Shields -- KBW -- Analyst

OK. Fantastic. And then one last, I guess big picture question. Are you hearing any whispers of new competition for any of your products?

Mac Armstrong -- Chief Executive Officer and Founder

Hey Meyer, this is Mac. What I would tell you right now, if you -- we're not seeing much in the way of new entrants. I think if you look at -- you bifurcate it by product line, like you -- let's talk about the wind products that we have, the all risk, Hawaiian hurricane, there still is probably more of a capacity pullback driven by some of the dislocation in the E&S market. And then our Flood product, we're seeing very strong growth.

We don't see new entrants there. We've got a pretty unique model focusing on inland flood that we have developed, and so we're very encouraged about the growth there, albeit it's a small line of business. And then when you look at earthquake, and particularly in the residential earthquake, which at 50-plus percent is our largest line, California insurance companies are much more focused on wildfire exposure than they are earthquake exposure right now. So you are seeing a lot of new entrants that are coming into the California homeowners' market that are trying to come up with the proverbial better mousetrap to assess wildfire exposure and wildfire risk, but what they're looking for is, more often than not, they want to find a partner to take the earthquake exposure off the table.

So we actually think that the dislocation in the California homeowners' market driven by wildfire loss is a beneficiary to us, because we can be a partner for them, because more often than not, they're selling for reinsurance budget to buy cover for wildfire, not earthquake. And they don't want to spend the money on earthquake. They went to spend the money on the wildfire coverage. So we can be a beneficiary there, and make a benefit from our expertise.

So the long-winded answer, we are not seeing new entrants right now. More on the contrary.

Operator

Our last question today will be coming from Mark Hughes of SunTrust Robinson Humphrey.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Just again on the reinsurance arrangements you've got in place, the SHF. It sounds like we talked about the reinsurance model, ceded premium, probably a little bit higher now, based on things you put in place. And likewise, the volatility around the loss is lower and presumably the absolute level of losses would be at a lower level kind of compared to what the model looked like pre-IPO, is that fair?

Chris Uchida -- Chief Financial Officer

Hey Mark, it's Chris. Yes, no I think when we look at what we planned for 2019 originally and earlier in the year, or end of last year even, we expected to -- that funding arrangement, for our Texas specialty homeowners book to end on June 1 of 2019, the SHF, for all intents and purposes, is very similar to a pure funding arrangement. We do have a small portion of risk less than 20% that we participate on. But like you said, we do expect that to help keep the loss ratio low from a pure percentage standpoint and also from a dollar standpoint.

So I would agree that it's not something that we originally planned for. But I think the overall losses ratio and from dollars is going to be lower than we would've told you at the beginning of the year we were thinking about.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

And then the ceding commission also is an offset to expenses as well, is that correct?

Mac Armstrong -- Chief Executive Officer and Founder

That is correct. So if you look at acquisition expense, I would expect the ratio to be a little bit better because we are getting more ceding commission throughout the year. And then just -- when you look at Q2, obviously, there's only one month of the 3 that, would that had been taken into account. I think you will have noticed it more in Q -- excuse me, Q2, one month, but you'll notice it more in Q3 when you have a full 3 months of the SHF, which is something that we did not contemplate at the beginning of this year.

Operator

At this time, I'd like to turn the floor back over to Mr. Armstrong for closing comments.

Mac Armstrong -- Chief Executive Officer and Founder

Thank you very much, operator. So that concludes our second-quarter 2019 earnings call. We appreciate your time, and moreover, your continued support of our company. We look forward to speaking with you in October, and wish you all the best.

Thanks very much.

Operator

[Operator signoff]

Duration: 44 minutes

Call participants:

Chris Uchida -- Chief Financial Officer

Mac Armstrong -- Chief Executive Officer and Founder

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

David Motemaden -- Evercore ISI -- Analyst

Jeff Schmitt -- William Blair & Company -- Analyst

Meyer Shields -- KBW -- Analyst

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