RLI Corp. (RLI)

RLI 
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RLI (RLI)

Q4 2013 Earnings Call

January 23, 2014 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

Craig William Kliethermes - Executive Vice President of Operations

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

Analysts

Jason Oetting - FBR Capital Markets & Co., Research Division

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

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

John Thomas

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

Kevin Shields

Vinay Misquith - Evercore Partners Inc., Research Division

Presentation

Operator

Good morning, and welcome, ladies and gentlemen, to the RLI Corp. Fourth 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. As always, these forward-looking statements are subject to 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 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 are earnings per share from operations consisting 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 Fourth Quarter of 2013. Joining me on today's call are Jon Michael, Chairman and CEO; Mike Stone, President and Chief Operating Officer; Tom Brown, Vice President and Chief Financial Officer; and Craig Kliethermes, Executive Vice President, Operations.

I'm going to turn the call over to Tom first to give some brief opening comments on the quarter's financial results. Then, Mike and Craig will talk about our operations and market conditions. Next, we'll open the call to questions and Jon will finish with some closing comments.

Tom?

Thomas L. Brown

Great. Thanks, Aaron. And good morning, everyone. We are pleased to announce another solid quarter and an excellent finish to the year.

Starting with our most important metric, the combined ratio. We posted an 82.4 in the quarter, which allowed us to finish the year with an excellent 83.1 combined ratio. This marks the 18th consecutive year of underwriting profit and, as Jon pointed out in the press release, the ninth straight year below 90.

While continued favorable development contributed to this outstanding result, $15 million in the quarter and $70 million on the year, so too did our core underwriting discipline and benefits of prior rate increases, which led to improved current accident results, particularly in our casualty segment.

Turning our attention to premiums. Gross premium was up 5% in the quarter over last year and 15% on a net basis. For the year, gross premium grew 7%, while net premium's faster growth rate of 12% was driven largely by our strategy to purchase less reinsurance, as well as some mix changes within our product portfolio.

Digging into our 3 segments, casualty premium continue to lead the way, up 10% for the quarter on a gross basis and 24% on net basis. The gross increase was driven by product -- new product initiatives, as well as certain products achieving both rate and exposure growth. The higher net premium growth was driven by less reliance on reinsurance, as previously mentioned. The impact of both increased prices, as well as improved loss experience, led to a decrease in our casualty booking ratio. In line with the impact of favorable reserve development, casualty reported a very nice 82 combined ratio in the quarter and 83 for the year.

Our property and surety segments were also strong contributors. Sureties’ growth premium -- gross premium was relatively flat in the quarter, while property was down slightly, but both turned in excellent combined ratios: property at an 85 and surety at a 79, both in line with full year results as well.

Turning to investments, there were few positive trends in the quarter. Although investment income was down due to continued low reinvestment rates, both the bond and equity portfolios turned in positive total returns for the quarter. In addition, our equity investment in Maui Jim continued to add favorably to earnings, contributed positively to earnings in a cyclically slow fourth quarter. While on a full year basis, earnings were up a strong 23%.

The combination of underwriting and investment results drove operating earnings per share of $0.72 per share, a figure which is adjusted for the two-for-one stock split last week. For 2013, operating earnings per share was $2.57 per share, up 28%, which drove book value per share growth of 15%, inclusive of dividends for the year.

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