RLI Corp. (RLI)

RLI 
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RLI (RLI)

Q2 2013 Earnings Call

July 18, 2013 11:00 am ET

Executives

Aaron H. Jacoby - Vice President of Corporate Development

Thomas L. Brown - Chief Financial Officer, Principal Accounting Officer, Vice President and Treasurer

Michael J. Stone - Director, Member of Finance & Investment Committee, Member of Strategy Committee and President of Rli Insurance Company

Aaron P. Diefenthaler - Chief Investment Officer and Vice President

Jonathan E. Michael - Chairman, Chief Executive Officer and President

Analysts

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Randy Binner - FBR Capital Markets & Co., Research Division

Mark A. Dwelle - RBC Capital Markets, LLC, Research Division

Kenneth G. Billingsley - Compass Point Research & Trading, LLC, Research Division

John Thomas

Presentation

Operator

Good morning, and welcome, ladies and gentlemen, to the RLI Corp. Second Quarter Earnings Teleconference. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions]

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. And 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 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 the press release announcing second 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 operation earnings and earnings per share from operations consist of net earnings after 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 companies' definitions of operating earnings.

The Form 8-K contains 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 question-and-answers following the presentation.

I would now like to turn the conference over to RLI's Vice President, Corporate Development, Aaron Jacoby. Please go ahead.

Aaron H. Jacoby

Thank you. Good morning to everyone. Welcome to the RLI earnings call for the second quarter of 2013. Joining me on today's call are Jon Michael, Chairman and CEO; Mike Stone, President and Chief Operating Officer; and Tom Brown, Vice President and Chief Financial Officer. I'll turn the call over to Tom first this morning to give some brief opening comments on the quarter's financial results. Then Mike will talk about our operations and market conditions. We'll then open the call to questions, and Jon will finish up with some closing comments. Tom?

Thomas L. Brown

Thanks, Aaron, and good morning, everyone. We are pleased to announce another solid quarter of profit and growth.

Starting with profitability. The combined ratio of the quarter was a very strong 83.4. Included in this result is $24.6 million of favorable development, positively impacting the combined ratio by 16 points. Each of our 3 segments contributed to this favorable result, most significantly from the Casualty segment and from the more recent accident years, 2008 through 2012. Meanwhile, spring storms decreased underwriting income by $8.8 million or about 6 points of the combined ratio, which by comparison was less than similar storm activity experienced in the second quarters of 2012 and 2011. Halfway through the year, the combined ratio stands at a very attractive 84.8.

Turning our attention to premium growth. Gross premium was up 11% over last year. Continuing the segment trend of late, Casualty was the biggest driver, up 18%, as a result of new product initiatives, as well as certain products achieving both rate and exposure growth. The Property and Surety segment each grew at 5% to 6%, which is actually better growth that had been in the case in the more recent quarters. Worthy to note was the fact that the net written premiums was up 15% or 4 points higher than the gross premium growth rate, which is a result of our January 1 Casualty reinsurance treaty renewal, where we took the opportunity to retain more of the attractive business we write as positive pricing trends continue.

Turning to investments. It was a tale of 2 asset classes. The good news was the equity portfolio generated a total return of 2.4%. The bond portfolio meanwhile was a negative 2.9% return due to rising interest rates in May and June as a result of the Fed's recent comments. Investment income was down 13% in the quarter, although higher interest rates will over time work their work way into an improved investment income results. Not to be overlooked, our equity investment in Maui Jim continue to add favorably to earnings, contributing 12% earnings growth over last year and 15% on a year-to-date basis. The combination of underwriting and investment results drove operating earnings per share of $1.27 per share, up from $1.17 per share last year.

In summary, a positive quarter and first half to 2013. I will now turn the discussion to Mike Stone. Mike?

Michael J. Stone

Tom, thanks, and good morning, everybody. Another good quarter, not as good as it gets but pretty good, combined ratio of 83, 83.4; gross written premium growth of 11%; net at 15%. As Tom indicated, we increased retentions in our Casualty book on 1/1, obviously, deciding to take more risk with the underwriters that we know and have performed well.

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