I am taking issue with the conclusion that we are living in a simulation even given premise (1) and (2) being true.

So I am struggling to understand his reply to my argument. In some ways it simply looks like he's saying either we are in a simulation or we are not, which is obviously true. The claim that we are probably living in a simulation (given a couple of assumptions) relies on observations of the current universe, which either are not reliable if we are in a simulation, or obviously are wrong if we aren't in a simulation.

If I conclude that there are more simulated minds than real minds in the universe, I simply do not think that implies that I am probably a simulated mind.

If we are not in a simulation, then the reasoning he uses does apply, so his conclusion is still true.

He's saying that (3) doesn't hold if we are not in a simulation, so either (1) or (2) is true. He's not saying that if we're not in a simulation, we somehow are actually in a simulation given this logic.