RLI Corp. (RLI)

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Q3 2013 Earnings Call

October 17, 2013 11:00 am ET


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

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


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

Adam Klauber - William Blair & Company L.L.C., Research Division

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

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



Good morning, and welcome, ladies and gentlemen, to the RLI Corp. Third Quarter Earnings Conference. 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.

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 the press release announcing third 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's management believes that 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.

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

Aaron H. Jacoby

Thank you. Good morning to everyone. Welcome to the RLI Earnings Call for the Third 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'm going to turn the call over to Tom first, to get some brief opening comments on the quarter's financial results, then Mike will talk about our operations and market conditions. Next, we'll open the call to have 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 that the trend of solid quarter results continue through the current quarter. Starting with profitability, the combined ratio for the quarter was a very strong 80.5. Included in this result is $20 million of favorable development, positively impacting the combined ratio by 12 points. Our Casualty segment was the biggest driver, with the benefit coming from more recent accident years, 2007 through 2012. So 3/4 of the way through the year, the combined ratio stands at a very attractive 83.3. Focusing our attention on premium growth, gross premium was up 3% over last year. Growth in net written premiums, which was up 7% in the quarter, continues to benefit from our decision at the beginning of the year to buy less reinsurance as we keep more of our attractively priced Casualty business.

Turning our attention to our 3 segments. First, Casualty continued to lead the way, with top line growth of 16% driven by new product initiatives, as well as certain products achieving both rate and exposure growth. The impact of both increased prices as well as improved loss experience led to a decrease in our Casualty booking ratio. Combined with the impact of favorable reserve development, cash recorded a very nice 75 combined ratio. Overall, our Property segment reflected a decline in premium of 15%. Consistent with our history of underwriting discipline, we pulled back in certain lines such as Marine and Assumed Reinsurance.

We posted an 88 combined ratio as a result of a lack of catastrophes and favorable reserve development on previous years. Meanwhile, the Surety segment continued steady contribution to underwriting profit, turning in an 83 combined ratio. Premium was down slightly at 3%, which was relatively in line compared to recent quarters of being up or down a few points. Competitive forces, in particular, hampered growth in this generally high-margin space.

Turning to investments. There were a few positive trends during the quarter. While investment income was down 4% compared to the third quarter of 2012, it was modest by comparison to some of the double-digit declines that we had been experiencing, as the investment portfolio turned over in the previously falling interest rate environment.

From a total return standpoint, the fixed income portfolio posted a positive 0.9% return in the quarter, as interest rates generally stabilized and our equity portfolio had a good quarter, up 3%. Lastly, our equity investment in Maui Jim continued to add favorably to earnings, contributing 38% earnings growth over last year and 20% on a year-to-date basis. To sum it up, the combination of underwriting and investment results drove operating earnings per share of $1.40 per share, up 40% from $1.02 per share last year. In summary, a positive quarter and first 3 quarters of 2013.

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