RLI Corp. (RLI)

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RLI Corp. (RLI)

Q4 2008 Earnings Call

January 27, 2009; 11:00 am ET


Jon Michael - President & Chief Executive Officer

Joe Dondanville - Senior Vice President & Chief Financial Officer

Mike Stone - President & Chief Operating Officer of RLI Insurance Company

John Robison - Treasurer


Mike Grasher - Piper Jaffray

Bijan Moazami - FBR Capital Markets

Eli Fleminger - Stifel Nicolaus

Beth Malone - Wunderlich

DeForest Hinman - Walthausen & Co.

Ken Billingsley - Signal Hill

Mike Grasher - Piper Jaffray

Mark Dwelle - RBC Capital Markets



Good morning and welcome ladies and gentlemen to the RLI Corp. fourth quarter earnings teleconference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions-and-answers, after the presentation.

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 and expectations for the future. As always, these forward-looking statements are subject to certain risk factors which could cause actual results to differ materially.

These risk factors are listed in the company’s various SEC filings, including in the annual Form 10-K, which should be reviewed carefully. The company has filed a Form 8-K with the Securities and Exchange Commission that contains a press release announcing fourth quarter results.

RLI management may make reference during the call, to operating earnings and earnings per share from 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 investment gains or losses. RLI management believes this measure is useful in gauging core operating performance across reporting periods, but may not be comparable to other company definitions of 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 www.rlicorp.com. At the request of the company, we will open the conference up for questions-and-answers following the presentation.

I will now turn the conference over to RLI’s Treasurer, Mr. John Robison; please go ahead sir.

John Robison

Thank you. Good morning to everyone. Welcome to the RLI earnings teleconference for the fourth quarter of 2008. Joining me for today’s call are Jon Michael, President and CEO of RLI Corp; Joe Dondanville, Senior Vice President and Chief Financial Officer; and Mike Stone, President and Chief Operating Officer of RLI Insurance Company.

We will conduct this call as we have in past quarters. I’ll give a brief review of the financial highlights and discuss the investment portfolio. Mike Stone will talk about the quarter’s operations. Then we’ll open the call to questions and Jon Michael will finish up with some closing comments.

Our fourth quarter operating earnings were $1.30 per share. Included in this quarter’s earnings are $10.2 million in pretax favorable development and prior year loss reserves. The favorable development came from our casualty and surety books of business. For the full year 2008, our operating earnings were $4.99 per share and our net earnings per share were $3.60. Given the turmoil in the markets and the recessionary environment, we believe these results are stellar.

The combined ratio in the fourth quarter was 81.7, resulting in underwriting income of $24 million. Gross written premiums were down slightly during the quarter and down 8% for the year. As we have demonstrated over time, we are an underwriting company focused on underwriting profits in hard and soft markets. While the soft market impacted our top line, this is our 13th straight year of posting an underwriting profit and we have delivered underwriting profits in 28 out of the last 32 years.

Turning to the investment portfolio; if the first nine months of the year were considered volatile, the last three months were chaotic. With the S&P posting at second worst annual return since the early 1900s and US treasuries outperforming all major asset classes, this was certainly a year to remember or forget, depending on your perspective.

Our investment income for the year was relatively flat. While our cash flow had been very strong, a large portion of our cash flow in ‘07 and ‘08 have gone to fund the share repurchase program. In addition, short-term rates are near zero as a result of the significant interest rate cuts by the Federal Reserve. Other comprehensive earnings show a loss of $12.3 million for the quarter. This is a result of market fluctuations and reflects the net change in market value of our $1.7 billion investment portfolio.

Net losses on investments for the quarter were $34.3 million, pretax. The majority of these losses were classified as other than temporary impairment charges. The largest of these impairment charges is from a high yield municipal bond fund and other securities tied to the financial sector. Our portfolio is well diversified, but not immune to market conditions. While we are never proud of a negative return, given the turmoil in the capital markets, our negative 4.4% total return in 2008 is commendable.

Given the turmoil in the markets, I wanted to provide additional insight into our investment portfolio. Our fixed income portfolio has an overall credit quality of AA and duration of roughly 4.4. At 12/31, roughly 85% of our total investment portfolio was in fixed income and short term investments. For a complete breakdown, 18% is in Fannie and Freddie senior debt, all rated AAA; 17% is in corporate bonds. Overall, the rating is A.

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