Aaron Jacoby - VP Corporate Development Jon Michael - Chairman and CEO Mike Stone - President and COO Tom Brown - Vice President and CFO Craig Kliethermes - EVP, Operations.

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Good morning, and welcome, ladies and gentlemen to the RLI Corporation’s Second 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 second 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..

Thank you. Good morning to everyone. Welcome to the RLI earnings call for the second 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?.

Thanks Aaron. Good morning thanks for joining us today. We are pleased to announce another solid earnings quarter on the strength of both underwriting and investment results. Starting with our most important metric, we posted an 84 combined ratio in the quarter, which is consistent with what we achieved in the second quarter last year.

Profits were strong across each segment with Casualty at 83, Property at 95, and Surety at 69 combined ratio. Reserve releases benefited both the casualty and surety segments. Property had a $6.8 million of spring storm related losses lower than last year's second quarter, but in line with our expectations given the weather events during the quarter.

Ultimately this quarter was a testament to our underwriting discipline. On the premium side, gross premium was up 3% and net premium was up 4%, our casualty products continue to offer the best relative growth opportunities of function of both market conditions and recent initiatives.

Property and surety were roughly flat in the quarter, which we consider a good result in light of continued challenging competitive conditions that Mike and Craig will elaborate on. Turning to investments, there were several positive trends in the quarter including the 8.8% growth in investment income for second consecutive quarter of such growth.

In addition, both the fixed income and equity portfolios turned in positive total returns enabling a combined portfolio total return of 3% for the quarter and 5.8% year-to-date. Not to be left out Maui Jim also had an excellent results in the quarter contributing $5.7 million of investee earnings up 24% from last year.

Ultimately the combination of underwriting and investment results drove operating earnings per share of $0.66 up 5% from last year and book value per share growth of 4.9% in the quarter bringing year-to-date book value growth to 11%. I’ll now turn over the discussion to Mike Stone.

Mike?.

Thanks Tom. I am going to talk a little bit about the insurance market and what we’re seeing. First another outstanding underwriting quarter with an 84 combined ratio. Gross written premium up 3%, net up 4%, you might think more the same boring, but I assure you this doesn’t result with our hard work skillful underwriting and superior claim handling.

The market, it’s tough out there but we continue to find new opportunities and have been able to effectively manage our renewal books. Casualty to combined ratio with gross written premium up 7% in the quarter or 8% year-to-date still some good pockets of opportunity.

Our GL or general liability it’s our primary liability surplus lines of book was up 2% as we are still getting a better rate in some sub parts and are benefiting from increased construction activity. Transportation is up 5% gross written premium as we continue to see more opportunities due to the exit by a number of our competitors late last year.

In our Professional Services Group, products basically are architects and engineers, gross written premium up about 15% as we build out our footprint in this space and I might add that we eked out a small underwriting profit this quarter.

And the package business that we've been building to augment professional liability and contractors was up about 20% in the quarter. We expect that to continue to roll as we build out this business. All-in-all, [cat] will be still a positive story.

Property a different matter, can't read a trade publication without some mention of alternative capital and what it's doing in this space, especially the tax space, but and I emphasize but, we have an excellent reputation, deep relationships with producers and most importantly superior underwriting and claim talent and we will continue to perform well in this tough environment.

Our DIC business, our gross written premium down 8% but we're still making our margins and we're well within our exposure tolerances. We have a long-term presence in this space and we will continue to maintain the business here even as we reduce our exposures with the rates coming down and premium being tough.

Our fire wind business, down 3% gross written premium, again making our margins and well within our exposure tolerances. I won’t say we're waiting for an event, but we're well prepared to manage following one. In marine, gross written premium down 14% as we complete our re-underwriting of this book.

We believe, we have this business on the right track and are prepared to grow it if the market will corporate. Surety business, competition intensifies and I'll say but again, we continue to perform very well with the 69 combined ratio with gross written premium being flat.

We have a well diversified product mix, good geographic spread with deep underwriting talent and producer relationships. We will continue to slug it out in this space. I'll say it again as I have in the past, as new competitors enter the surety space, it's really not that easy.

We deep underwriting skill, superior technology and producer relationships built over the past quarter century. We’ll still be in this place thriving when others run away not unlike the transportation business.

So overall, excellent underwriting quarter, a testament to all of our associates and I would like to thank each and every one of them for their effort and performance. This does not get ho-hum to me. Now Craig will talk about freights, crop that’s (inaudible) and reinsurance..

Thank you, Mike. First on the pricing front, I think we would view pricing overall as it’s -- we have seen some plateauing and increasingly competitive market, driven mainly we believe by the benign loss trends, lack of shock losses and cheaper capital that’s available to us and also competing with us.

We could have bucket our pricing in the couple groups, we still have some spots that are strong but slowing a bit in our umbrella space transportation, auto in general is still, the pricing is pretty good and our marine business we continue to get mid-single digit price increases.

In a more moderate group, our package businesses, our fire non-cat businesses and our personal specialty personal line businesses flat but at least covering trend, loss trend.

So we are still pretty positive about those and then there is a group we call the weakening group which is some of the E&S based on the casualty particularly, the D&O on an excess side and our medical professional as we are starting to feel that as we are running through renewals now, are seeing some decreases run through that business that we bought.

And particularly as Mike mentioned in the cat base that is becoming increasingly competitive. On the reinsurance front, which does tie in here obviously, we placed three treaties during the year or during this quarter that makes up about 25% of the placements from a premium perspective during the year.

That covers our marine, our D&O and our earthquake DIC treaties. We were fortunate to receive about a 15% to 20% exposure adjusted rate decrease on those treaties.

So, we are the benefactor of that, although we are increasingly concerned about the spillover effect as people will be, our competitors seem to be willing to give that fairly quickly and we'd rather hold on to that for as long as we could.

We did receive better returns we would say across the board in addition to the rate decreases in regards to we were able to buy down our retention on our marine business, cat, we have a little more coverage for still less premiums and we feel pretty good about that result.

You can see in our numbers also the net written premium continues to grow a little bit faster pace than our gross written premium, mainly because of some of the restructuring we've done in our reinsurance treaties over the last couple of years as well as the benefit of the rate decreases that we received.

Mike could ask me to talk a little bit about crop. Crop is -- there is not a lot to say at this point in the year. Premium is down a little bit in crop 4% or 5% on a gross basis. That’s mainly driven by -- crop prices are down as you probably noticed, also the government has decided to lower rates again.

So, the rates the farmer pays relative to that price is down. Although offsetting that somewhat is farmers, we have seen the trend that farmers are actually buying up more coverage since they are saving much like you're seeing -- seem to do.

On the reinsurance side, they are buying -- they are spending about close to the same amount of money, but there is buying down their deductibles. Weather was good so far, there has been a little bit of hail activity this year, which has led to the -- in line with past years on the hail.

But certainly the weather looks good for the main [MPCI] business and crops are growing well, of course we still need heat and rain.

So, finally just on other new products, Mike mentioned that a bit, our professional liability business or CBIC acquisition and integration the prime business that we acquired security guards (inaudible) and all these things businesses that we’ve invested recently in the last three to five years we’re seeing very good traction in that business and seeing a lot of growth coming from that overtime.

With that I’ll turn that over to Aaron..

Thanks Craig. We can now open the call up for questions..

Thank you. The question-and-answer session will begin at this time. (Operator Instructions). And we will take the first question from (inaudible). Please go ahead your line is open..

Hi, thanks. I just had a couple of quick questions. First, I know obviously reinsurance capacity has been impacting primary property rates.

But to what extent, you sort of touched on this, but to what extent do you expect it to spill over into casualty and start impacting pricing there?.

This is Mike Stone. I’ll give it a try. I think it probably will at some point in time. I think it really depends on the performance in the property side, a big event might slow things down quite a bit. So I think it’s a little early to make any accurate prediction in that space.

I think it really will depend on how things perform over the next probably 18 months. And if it performs well I would suspect we’ll see some entry there.

It’s a lot more difficult, it takes more than a model and somewhat it cushion the button to evaluate casually risks and it's long tail, they don't attend to be a long tail from the standpoint of returns. So it will be a bit more difficult, but I think that their performance turns out to be pretty good and we'll probably see some of them try it.

That is all or what?.

Okay, thanks that's helpful.

And I know it's still early for this two, but I just want to see if you had any preliminary thoughts on your willingness at a year-end to continue your special dividend?.

Yes, we'll evaluate that, we continually evaluate that, we'll evaluate it before the end of the year..

Thanks.

And lastly was there anything in particular that drove Maui Jim strong performance or…?.

Maui Jim continues to perform well, their sales are up nicely, margins have improved from Maui Jim and it’s showing up in the earnings so..

Okay, perfect. Alright. Well, thank you so much..

Thank you..

(Operator Instructions). And we'll go next to [Scott Maliniach]. Please go ahead. Your line is open..

Yes, hi, good morning. Just had a couple of quick questions. First is on cas, just wondering what how much more run way, you think you have for growth there in some of the lines that you guys have been growing it nicely over the past couple of quarters.

Do you kind of expect that to continue or do you see some of the competition you're talking about kind of spilling over to casualty into the second half for '14 and into '15?.

This is Craig, Scott.

I think we continue to expect to see momentum, we've seen momentum in that space for the last, at least over the last two years that's where a lot of our smaller investments I guess have been in businesses, but we tend to like to grow things a little slowly and make sure gain confidence overtime that we are doing; particularly in this market because it’s challenging but I think we’ll continue to see growth there because we continue to expand relationships with producers in geographic areas.

So I think you will continue to see that..

And it’s Mike Stone, just to augment that we our packaged business, we just spent a lot of time, made a lot of investment on, we have finally got that completed in all 50 states. So we are up and running so we would expect some momentum there. But like Craig said it’s not going to be rapid growth it’s going to be moderate control.

So but we like those new businesses..

Okay. And then just had a quick question too about the property premiums which were pretty much flat to down a little bit in the quarter. I know they have been weak over the past two or three quarters and obviously pricing is under pressure there.

So just wondering where you saw the opportunities or why we didn’t see a bigger decline there or if you can touch on the premium trends there?.

Scott this is Craig. Our RV business that we have invested in the specialty personal space that’s really build momentum and actually we have taken even rate increases in that space recently. So almost all the property growth is coming out of that investment..

Okay. .

And offset some of the declines in some other spaces..

Okay. And just had one more question, just on the investment income side. Investment income has been up sort of I think first quarter was up 5% this quarter up 9%.

And is there anything that’s driving that just beyond higher invested asset balances, are you getting any benefit from any dividends in portfolio or anything else that we should be thinking of?.

Let me touch on your last question first on the dividend, nothing distinguish in the dividend space. I think it's -- the primary driver is we're up about $90 million since year end on the investment portfolio. And we are seeing reinvestment rates approximating where we were on our book yield of little over 3%.

So, we're moderating there as I think the market cycle has stabilized a bit. And we have made a little bit of a push into some maybe perhaps higher yield but a very modest amount allocated to that sector..

Okay. Thanks a lot..

And we'll go next to [Ken Billingsley]. Please go ahead, your line is open..

Hi, thanks for taking the call. One of the follow up on the property business, the accident year loss ratio improved pretty dramatically year-over-year.

And given where rates have been, is that all rate driven or can you talk about maybe what's driving that big improvement?.

This is Craig, Ken. I think most of that will be driven by mix..

So, the mix, so where are you seeing specifically more growth or where are you pairing down versus on those area?.

On the property side, our RRV business continues to grow, as I mentioned. And our marine space has continued to shrink which has had a higher loss ratio historically. So, you kind of got both those things moving in the opposite directions. So that you can imagine how that makes pretty big impact..

Okay. And then on -- kind of follow up on opportunities, in other words to focus just on the property side, you talked about (inaudible) question.

Given where freights are, where reinsurance is likely to be for the next say 18 months to 24 months, are there any lines of business either that you are currently active in or looking at that you think might have an opportunity in general for the market given where pricing is where reinsurance opportunities may exist?.

Ken, this is Mike Stone.

You’re talking about property space?.

Anywhere, just opportunities for RLI in general, like where do you -- I mean looking at your capital that you have, to deploy that capital where do you guys see yourselves moving?.

Well again, I think the casualty business continues to be a positive story. We have -- a lot of our new opportunities are in the casualty space that we would expect to grow out over the next 12 months to 24 months. And our E&S business continues to perform well.

There is pockets of opportunities there that some underserved areas that we are -- I don’t like the word exploiting, we’re thinking, optimizing if you will. And we see other products. I mean we’ve entered some heath care space and we would expect to grow that out over time. That’s a casualty product.

So, we think casualties will continue perform, continue to provide opportunities. And you never know when property, property is a much more volatile, it’s subject to much more volatility. I mean an event, I think one relative event will change things markedly but it might put a halt to the slide.

It might change the appetite of some alternative capital. So, 12 months to 24 months, a lot of things can happen in that space. Same thing in surety, all of a sudden you can see some surety losses that will change the underwriting appetite and the order of some of these new entrants..

Just to clarify, I thought maybe I wrote wrong down that Craig had said that one of the weakening groups was E&S space, you’re saying that you’re seeing some opportunities?.

Yes. It is, let me clarify so that Craig and I are saying the same thing. All I am saying is there is pockets of opportunity. So we’re seeing opportunities in some areas where we are getting some rates, so example [OL&T] space, commercial umbrella in certain areas.

Overall, it's trending a little negative, but there is pockets of opportunity, those opportunities expand and we see some likelihood that they might then things will look up. Again, the E&S space is also subject to a little bit more volatility, more new entrants, people accident, people get in trouble, you saw that in 2013.

So I would suspect that you might see some more of that as time goes on..

Very good. Thank you for taking my questions..

(Operator Instructions). And if there are no further questions, I'll now turn the conference back to Mr. Jonathan Michael..

Thank you. Thanks very much. Good quarter, good earnings. Premiums earned were up over 9% for the quarter, a little bit more than that year-to-date, nearly 10, revenue sub 13%. Our book value increased year-to-date 11%.

So very good first half for us; the market as we mentioned, new capital in the market reflective of the reinsurance pricing, decreases that we've seen the last 18 months really and that continues.

So, but on the positive side, we do have new products that are helping to offset some of the competition that we're seeing especially in the E&S space and others. So thanks very much for attending and we look forward to talking to you next quarter. Bye..

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-888-203-1112 with an ID number of 2222171. This concludes our conference for today. Thank you for participating. And have a nice day. All parties may now disconnect..