RLI Corp. (RLI)

RLI 
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RLI Corp. (RLI)

Q4 2009 Earnings Call

January 26, 2010 11:00 am ET

Executives

John E. Robison - Treasurer and Chief Investment Officer

Jonathan E. Michael – President and Chief Executive Officer

Joseph E. Dondanville - Senior Vice President and Chief Financial Officer

Michael J. Stone - President and Chief Operating Officer of RLI Insurance Company

Analysts

Michael Grasher – Piper Jaffray

Doug Mewhirter – RBC Capital Markets

Michael Nannizzi – Oppenheimer & Co. Inc.

Meyer Shields – Stifel Nicolaus & Company, Inc.

Matthew Carletti – Macquarie Research Equities

Ron Bobman – Capital Returns

Kathy Buck - Wayne Hummer Asset Management

Stuart Johnson – Philo Smith

Presentation

Operator

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 the press release announcing second (sic) 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 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 and Chief Investment Officer, Mr. John Robison.

John E. Robison

Thank you. Good morning to everyone. Welcome to the RLI earnings teleconference for the final quarter of 2009. 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 John Michael will finish up with some closing comments.

Our fourth quarter operating earnings were $1.17 per share. Included in this quarter’s earnings are $11.9 million in pre-tax favorable development and prior year’s loss reserves. The favorable development came from our casualty and surety books of business which offset the unfavorable development in our property books stemming from our marine book of business.

The combined ratio in the fourth quarter was 80.6 and we finished the year with an 82.3 combined ratio. These results mark our 14th consecutive year of underwriting profits. Gross written premiums were down 11% in the quarter and down 7% for the year. 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 shrink when we are not being compensated for the risks that we are taking. This discipline is ingrained in our culture and our compensation systems. We reward profits, not premium.

Turning to the investment portfolio, the total return on our investment portfolio was 1.3% for the quarter and 10% for the year. As of December 31, our overall allocation was 80% in fixed income, 14% in equities, and 6% in short term investments.

What a difference a year makes – in 2008 our investment portfolio lost 4.4%. This year our portfolio returned 10%. It certainly has been an interesting couple of years. Our outlook is still one of concern. While the markets have clearly benefited from improved liquidity and strengthening fundamentals, the question for us is, can the private sector replace the massive amounts of stimulus as a result of monetary and fiscal policies?

As long as unemployment remains high, consumer confidence, incomes, and spending will remain under pressure. In addition, the same drivers that propelled returns in the 1990s, things like deregulation, leverage, housing, etc., are now considered expletives. We continue to maintain a diverse portfolio of high quality assets matched to liabilities with equities representing 32% of shareholders’ equity. We believe this allows us to effectively protect policyholder funds and grow book value for shareholders.

Investment income declined 14.7% for the year. We exited higher yielding securities such as preferred stocks and a high yield muni bond fund and held higher short term balances throughout the year. In December we put some of our cash balances to work in the fixed income portfolios. We purchased GFC debt with defensive structures in a rising interest rate environment, including coupons that step up over time. We continue to review our muni holdings and have reduced our exposures to lower quality names that could experience continued fiscal stress given the local economies.

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