RLI Corp. (RLI)

RLI 
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RLI Corp. (RLI)

Q3 2009 Earnings Call

October 20, 2009 11:00 am ET

Executives

John Robinson - Treasurer and Chief Investment Officer

Jonathan E. Michael - President and CEO

Joseph E. Dondanville - Senior Vice President and CFO

Michael J. Stone - President and Chief Operating Officer

Analysts

Mike Grasher - Piper Jaffray

Doug Mewhirter - RBC Capital Markets

Ken Billingsley - Signal Hill

Michael Nannizzi – Oppenheimer & Co. Inc.

Eli Fleminger - Stifel Nicolaus

Presentation

Operator

Good morning and welcome, ladies and gentlemen, to the RLI Corp. third quarter earnings teleconference. 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 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 the third quarter earnings results.

RLI management may make reference during the call to operating earnings, 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's management believes this measure is useful in gauging core operating performances across reporting periods, but may not be comparable to other company’s 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 up the conference up for questions and answers following the presentation. I will now turn the conference over to RLI's Treasurer and Chief Investment Officer, Mr. John Robinson. Please go ahead, sir.

John Robinson

Thank you. Good morning to everyone. Welcome to the RLI earnings teleconference for the third quarter of 2009. Joining me for today's call are John 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 John Michael will finish up with some closing comments.

Our third quarter operating earnings were $1.18 per share. Included in this quarter’s earnings are $15.1 million in pretax favorable development and prior years loss reserves. The favorable development came from our causality book of business which offset the unfavorable development in our property book stemming from our marine book of business.

The combined ratio for the third quarter was 81.3 resulting in underwriting income of $23 million. Gross written premiums were down 7.5% versus the third quarter of 2008 and down 6% through nine months of 2009. As we have demonstrated over time, we are an underwriting company focused on underwriting profits in hard and soft markets. We will grow when margins are acceptable and contract when we are not being compensated for the risks we are taking.

Turning to the investments portfolio, the total return on the investment portfolio was 5% for the quarter and 8.6% year-to-date. As of September 30th our overall allocation was 79% in fixed income, 13% in equities and 8% in short term investments.

Our equity and fixed income allocations are up slightly from last quarter while our short term investments have decreased a couple of percentage points. These increased are due to positive market changes and investing some of our cash flow and short terms investments into the capital markets. Most of this has been invested in fixed income securities, including high quality corporate bonds and mortgage back securities.

The capital markets were up strongly in the third quarter on better than expected second quarter earnings in continued accommodated monetary policy. SMP index was up for the seventh straight month and finished its biggest back-to-back quarterly rally since 1975. The bond market was up broadly as well with spreads tightening across the board. We certainly benefited from the market rally in the third quarter. Book value is up 16% from year end to $38.23.

Our fixed income portfolio has an overall rating of AA with the duration of roughly five years. The tax equivalent book yield on our fixed income portfolio is approximately 5.3%. Investment income is down 14% year-to-date. In addition to a lower interest rate environment, this decline is primarily do to our eliminating the more volatile assets classes earlier this year including positions in a high yield mutiny bond fund and preferred stocks, both of which had yields north of 7%.

Net realized gains on investment securities were roughly $7 million. This quarter we did not recognize any other than temporary impairment charges. We are not market timers. Our investments philosophy is to protect policy holder funds and for the long term benefit of our shareholders. We do however alter our asset allocation based on our forecast and expectations.

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