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RLI Corp. (NYSE:RLI) Q1 2024 Earnings Call Transcript

RLI Corp. (NYSE:RLI) Q1 2024 Earnings Call Transcript April 23, 2024

RLI Corp. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the RLI Corp. First Quarter Earnings Teleconference. After management's prepared remarks, we will open the conference up for question and answer. Before we get started, let me remind everyone that through the course of the teleconference, RLI management may make comments that reflect their intentions, beliefs or expectations for the future. As always, these forward-looking statements are subject to certain factors and uncertainties, which could cause actual results to differ materially. Please refer to the risk factors described in the company's various SEC filings, including in the annual report on the Form 10-K as supplemented in the Form 10-Q, all of which should be reviewed carefully.

The company has filed a Form 8-K with the Securities and Exchange Commission that contains the press release announcing third quarter results. During the call, RLI management may refer to operating earnings and earnings per share for operations, which are non-GAAP measures of financial results. RLI's operating earnings and earnings per share from operations consist of net earnings after the elimination of after-tax realized gains or losses and after-tax unrealized gains or losses on equity securities. RLI management believes these measures are useful engaging core operating performance across reporting periods but may not be comparable to other companies' definitions or operating earnings. The Form 8-K contains a reconciliation between operating earnings and net earnings.


The Form 8-K and press release are available at the company's website at I will now turn this conference to RLI's Chief Investment Officer and Treasurer, Mr. Aaron Diefenthaler. Please go ahead.

Aaron Diefenthaler: Thank you, Candice. Good morning, everyone. Thanks for joining RLI's earnings call covering the first quarter of 2024. We have the usual team assembled, including Craig Kliethermes, President and CEO; Jen Klobnak, Chief Operating Officer; Todd Bryant, Chief Financial Officer. We will follow the same cadence as in prior quarters where Craig will kick things off with some initial thoughts. Todd will run down the financial results for the quarter and Jen will offer some commentary on market conditions and our product portfolio. The operator will then open the line for questions, and Craig will close. Craig?

Craig Kliethermes: Well, thank you, Aaron. And good morning, everyone. We're off to a solid start for 2024 with double-digit growth and underwriting profitability across all of our reporting segments. As Todd and Jen will go into in a minute, we continue to lean into opportunities where we have the expertise and track record to differentiate ourselves. We remain cautious where the risks are more dynamic, difficult to quantify or where we choose to temper the volatility to the bottom line. I will let Todd and Jen go into more detail on the financials and the market in general. Todd, it's all yours.

Todd Bryant: Thanks, Craig. Good morning, everyone. Yesterday, we reported first quarter operating earnings of $1.89 per share, aided by strong underwriting performance and continued growth in investment income. Overall, we posted a combined ratio of 78.5 for the quarter and grew top line 13%, with nearly all products contributing to growth. Investment income advanced 21% in the period as book yield and our invested asset base continued to grow. Operating cash flow remains supportive at $70 million for the quarter. Net earnings per share were $2.77 for the quarter, favorably impacted by realized and unrealized gains recorded on the investment portfolio. Realized gains totaled $6 million, while unrealized gains on the equity portfolio totaled $45 million.

Fluctuating levels of unrealized gains and losses on the equity portfolio impact the comparison of net earnings between periods, as mentioned on prior calls. From an underwriting income perspective, the quarter's 78.5 combined ratio compares to 77.9 reported last year. Our loss ratio was up 2.7 points to 39.9 as storm losses were higher and although favorable development on prior years was positive, the overall reserve release was down on a comparative basis to first quarter last year. Storm losses totaled $12 million in the quarter and were almost entirely contained within the property segment. Storm losses added 9 points to the property segment's loss ratio versus 4 points last year. Attritional losses in this segment remained very low and were spread across a much higher revenue base.

From a prior year's reserves perspective, all 3 segments benefited from favorable development. Casualty posted $18 million of favorable loss emergence across a number of product lines and over multiple accident years. Notable products include general liability, professional liability and umbrella. Property experienced $19 million in favorable development as marine, E&S and admitted property lines posted loss reductions. We did not revise our estimate for Maui wildfire losses, which remain at $61 million net of reinsurance and inclusive of reinstatement premium. For surety, favorable reserve development was $5 million, modestly above last year's level, which explains the majority of the decrease in that segment's loss ratio. On the expense front compared to last year, our expense ratio decreased 2.1 points.

This ratio is benefiting from our significant increase in revenue, most notably within the property segment. We continue to invest in people and technologies to support growth and enhance the customer experience. Bonus and retirement accruals were higher in the quarter, reflective of solid financial achievements and investment that we have been making in our associate owners over the last several years. From a segment perspective, there is 1 item to highlight. For surety, we recorded $2 million of reinsurance reinstatement premiums related to increased reserves on a prior period loss. These premiums are fully earned as recorded and result in lower net premiums earned from a trend perspective. These elevated ceded premiums earned adversely impact the expense ratio comparison.

On an overall basis, the expense ratio impact is muted, but for surety, the result is a 5 point increase in the expense ratio for the current period. Turning to investments. It was a quarter where equities were the largest contributor to our 1.8% total return. For us, bonds still managed a modestly positive result as yield overcame declines in bond prices. Our strategy around new purchase activity has remained unchanged with a focus on investment-grade fixed income. We are still finding solid opportunities to add high-quality positions that are accretive to booking. In the quarter, purchase yields averaged 4.9% and we are well positioned to take advantage of wider credit spreads or a new lower in equities should that transpire. In regard to investee earnings, the contribution from prime was $4.8 million compared to $3.9 million in the same period last year.

A smiling couple walking hand-in-hand out of a modern insurance office, illustrating the company's commitment to its customers.
A smiling couple walking hand-in-hand out of a modern insurance office, illustrating the company's commitment to its customers.

Although net earnings were up in the quarter, the recent decline in bond prices weighed on Q1 comprehensive earnings which came in at $2.50 per share. With that comprehensive yield, book value per share was up a respectable 8% to $33 when adjusting for dividends. All in all, a very good quarter and a strong start to the year. And with that, I'll turn the call over to Jen.

Jen Klobnak: Thank you, Todd. I'll jump right in the segment results. Property premiums grew 14% in the quarter. E&S property once again drove the increase with 15% growth in premium and a 19% increase in rates. The rate increases over the last few years have made a positive impact to our bottom line as the premium earns through. During the first quarter, we continued to grow through rate, while our hurricane exposure has decreased a bit. Competition has resurfaced in the hurricane market. While rates were still up 25% in the quarter, the increases are slowing. Our competitors, particularly the MGA utilizing oil capacity have become more aggressive. They are increasing limit deployment, which reduces the number of carriers needed to participate on layer accounts and our more aggressively pricing business.

For our underwriters, new business is more difficult to win although we continue to achieve rates above our renewable book on those accounts that we buy in. with an elevated hurricane forecast, the market is tenuous and could easily restrict capacity or coverage of significant landfalling storms occur this season. We stand ready to assist our policyholders if that happens, and we'll continue to adapt to changing market conditions. All other property businesses are also growing. Generally, submissions are up double digits. Our Hawaii homeowners book continues to grow due to our high level of service and due to several select competitors pulling back from the market. We remain focused on resolving claims from the Lahaina wildfire and have closed over 70% of reported claims as of the end of the first quarter.

In Marine, we continue to push rate and achieved a 6% increase in the first quarter with premium growth largely attributed to inland marine, a freight recession and some underwriting adjustments created headwinds for our ocean marine business. We've been staying in front of all our property producers and continue to be very responsive. As a result, we've been rewarded profitable growth opportunities. Surety gross written premium grew by 12% this quarter, although all areas of surety contributed, contract led the way. Overall growth is being driven by elevated construction material costs, growing our expertise in various commercial surety segments and investing in our people to ensure a high level of service. Surety remains highly competitive even though there have been increased industry losses in both commercial and contract surety.

We are not seeing increased frequency. In fact, claim counts are flat. But we have seen a couple of larger claims during this market cycle. Todd mentioned that we adjusted 1 loss reserve that triggered reinsurance reinstatement premiums for the quarter. Despite this loss, our surety portfolio remains profitable and is well positioned. We have grown more slowly than the industry as we focused on underwriting and risk selections during this extended period of economic uncertainty. We have some momentum from investments we've made in underwriters, producer relationships and capabilities and anticipate further growth where it makes sense in this segment. In the casualty segment, premium grew 13%, while rates were up 7%. This was led by personal umbrella, which grew 33%, including a 13% rate increase.

The personal lines primary market continues to be impacted by changes in underwriting appetite, which has increased the demand for our stand-alone for some umbrella products. We monitor our growth closely in terms of risk characteristics like geography, to ensure we maintain a balanced risk profile. We have also enhanced digital capabilities for our producers and insurers, resulting in new business and improving our retention ratio. These actions seem to be working. And we continue to experience a lot of momentum in this book. Transportation premium grew 27% with submissions up 8%. Some of the growth was explained by 1 large trucking account that renewed early this quarter. With the adverse loss development reported by the industry, we have observed some competitors introducing underwriting changes.

This is causing accounts to . Existing customers appreciate our loss control service and claim expertise, which has resulted in a steady renewal retention ratio. Because risk selection is vital, we carefully choose which accounts to spend time on and are typically successful when we decide to issue a quote with elevated severity for this class in the industry, we know it's important to continue pushing roots. We achieved a 9% rate increase for the quarter, a similar level to what we have obtained in each of the last several years. Premium grew 6% for our E&S casualty brokerage business. This includes primary and excess liability coverage with a concentration in the construction industry. Contractors are still experiencing issues with financing and the need to extend projects.

This has created opportunities for us as we individually evaluate and carefully select risk. Several carriers have reported adverse loss development for general liability and have referenced construction business. We have not seen this trend emerge in our own business but are aware that claims are taking more time to resolve. This data point, in addition to increased severity in the industry has resulted in an even more cautious approach in initial loss estimates and in our reserving analysis. Some of our competitors are taking underwriting actions based on their results, but we continue to see less disciplined markets who are buying the business to meet top line goals. We have also encountered new carriers and MGAs in particular that are hoping to take advantage of the E&S market momentum.

We have served the construction market with liability coverages for decades, and we'll continue to adjust to these changing market conditions as leaders and remain disciplined in our efforts. One area of our product portfolio that continues to feel market pressure is our executive products group, which includes our directors and offices business. Premium declined by 8% with rate decreases becoming more moderate at negative 3%. The rate decreases are concentrated in public company professional liability coverages, which represents about 1/3 of our book. This quarter was marked by consistent growth across all 3 segments. We capitalized on several new business opportunities due to our strong relationships, which we continue to invest in and enjoy productive in-person visits with many of our peers and partners during the quarter.

We obtained rate increases on almost all of our coverages. Considering claim counts increased at a much slower pace than premium, loss activities were manageable. Developing and connecting our people has resulted in new partnerships and opportunities to support our sustainable business model. Although competition remains persistent in a number of the markets we participate in, we started the year with strong momentum and see opportunities for continued profitable growth in all 3 of our product segments. Now I'll turn the call back over to the moderator to open it up for questions. Thank you.

See also

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10 Dividend Stocks with Over 9% Yield According to Analysts.

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