RLI Corp. (RLI)

RLI 
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RLI Corp. (RLI)

Q1 2014 Earnings Conference Call

April 17, 2014 11:00 ET

Executives

Aaron Jacoby - Vice President, Corporate Development

Tom Brown - Vice President and Chief Financial Officer

Mike Stone - President and Chief Operating Officer

Craig Kliethermes - Executive Vice President, Operations

Jon Michael - Chairman and Chief Executive Officer

Analysts

Jason Oetting - FBR Capital Markets

Ken Billingsley - BGB Securities, Inc

Meyer Shields - KBW

Mark Dwelle - RBC Capital Markets

Presentation

Operator

Good morning, and welcome, ladies and gentlemen to the RLI First 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 in the Annual Form 10-K which should be reviewed carefully. The company has filed a Form 8-K with the Securities & Exchange Commission that contains the press release announcing the first 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 performances 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 Jacoby - Vice President, Corporate Development

Thank you. Good morning to everyone. Welcome to the RLI earnings call for the first quarter of 2014. 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 get some brief opening comments on the quarter’s financial results. Then, Mike and Craig will talk about operations and market conditions. Next, we’ll open the call for questions and Jon will finish up with some closing comments. Tom?

Tom Brown - Vice President and Chief Financial Officer

Thanks, Aaron and good morning everyone. We are pleased to announce another positive underwriting quarter and a solid start to the year. Starting with our most important metric, the combined ratio we posted 86 in the quarter which is consistent with the ratio achieved in the first quarter of last year. Profits are strong in each segment with Casualty at 93, Property at 78, and Surety at 75. Reserve releases benefited each segment but most notably in the casualty segment. We continue to feel good not only about these calendar year results, but also the underlying accident year figures as a result of our core underwriting discipline.

Meanwhile, premium was up 2% on gross basis in the quarter and 6% on a net basis. The higher net growth rate was a function of both reduced reinsurance cost as well as mix changes within the portfolio. For our segments, Casualty grew 8% in the quarter which represents a deceleration from 2013. Surety is up 4% which we consider strong given the competitive surety market environment Mike has spoken about in previous quarters. Property gross premium was down 9%, although significant parts of this can be attributed to particular lines such as marine, crop and our certain reinsurance business.

Moving on to investments, there were several positive trends in the quarter not the least of which was the 5.4% growth in investment income. In addition, both the fixed income and equity portfolios turn in positive total returns enabling a combined portfolio’s return of 2.7% for the quarter.

Maui Jim’s contribution in the quarter was roughly in line with last year. I will point out that new to this quarter, we have a second investment that is included in both the income statement and balance sheet in a similar manner as Maui Jim. As we pointed out in press release in February of this year, we took minority stake in Prime Holdings Insurance Services, a specialty E&S company. While we believe that Prime will be additive, we expect Maui to be the relative driver over investees line item for sometime in the future. I’ll also note that in addition to the ownership stake, RLI is a quota share reinsurer of Prime. The incremental premium from this quota share was modest in the quarter and likely to be somewhere between $8 million and $10 million of premium for the full year. We believe Prime is a terrific company within its outstanding track record and we’re pleased to have this new relationship.

Ultimately, the combination of underwriting and investment results drove operating EPS of $0.57 per share up 10% from last year. Meanwhile, book value per share was up 4.9% in the quarter, a strong start to the year.

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