Aaron Jacoby - VP of Corporate Development Tom Brown - VP and CFO Craig Klithemes - EVP of Operations.

Arash Soleimani - KBW Investments Randy Binner - FBR Ken Billingsley - Compass Point Research & Trading Mark Dwelle - RBC Capital Markets Jeff Schmidt - William Blair.

Good morning, and welcome, ladies and gentlemen to the RLI Corp’s Third 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 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 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 of Corporate Development, Mr. Aaron Jacoby. Please go ahead, sir..

Thank you. Good morning to everyone. Welcome to the RLI earnings call for the third 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. We are pleased to announce another good quarter on the strength of our underwriting results and continued growth and investment income. Starting with our most important metric, we posted an 83 combined ratio in the quarter which is consistent with our year-to-date combined ratio of 84.

Underwriting profits were strong in each segment with the casualty and property segments both coming in at an 86 combined ratio, while surety reported an impressive 67. Consistent with prior quarter’s reserve releases had a positive impact stemming from both casualty and surety segments.

Test results were nominal in the quarter with the American-Canadian earthquake impacting operating earnings per share by less than $0.01. Again this quarter the numbers that test for our underwriting discipline. On the premium side, gross premium was up 3% and net premium was up 8%, both growth rates consistent with year-to-date performance as well.

Each of our segments experienced growth in the quarter. And we are particularly pleased to see 6% growth in surety premium because it represents our lowest combined ratio segment and also one with continued competitive pressures.

All in all this quarter’s growth was consistent with our expectations and market conditions as well as our ongoing emphasis on underwriting profitability. Craig and Mike will elaborate more on market conditions in a moment. Turning to investments. Growth in investment income remains a positive contributor of 4.4% in the quarter and 6.2 year-to-date.

Although we have been able to maintain average yields on our larger invested asset base in recent quarters, we are acutely aware they will face with the challenging current yield environment. On a total return basis, fixed income effectively earned its coupon in the quarter returning 0.6%.

Equities however down over the quarter posting a negative 1.1% return. Investee earnings contributed favorably to results in the quarter with 2.9 million of investee earnings up 14% from last year. This increase is primarily attributable to our investment in Maui Jim.

In total the combination of underwriting investment results drove operating earnings per share of $0.68 in the quarter which when combined with the first two quarters drove a strong 12% growth in book value year-to-date. I will now turn over the discussion to Mike Stone.

Mike?.

Tom, thank you. Good morning everybody. Another excellent underwriting results again this quarter. It’s a testament to our discipline, our underwriting discipline and our product diversification. As Tom indicated 83 combined ratio for the quarter, 84 year-to-date.

Gross written premium up 3% but net was up 8% due to better reinsurance terms that we obtained throughout the year. In our casualty business gross written premium was up 3%, our professional liability and package business continues to grow at its footprint. And now is up and admitted in all 50 states. Gross written premium up some 27% in this space.

And our commercial umbrella business gross written premium was up 8%. The growth rate slowing and some competition has reentered this space. We are still seeing a little bit of rate in this space as well. Transportation was down 27% due to competitive pressures; however we were up some 50% in the third quarter last year.

Again the industry has a short memory as only a few quarters back much pain was being felt in this space. We will see what happens next. Medical professional liability also a very competitive gross written premiums down 27% in the quarter.

In our largest product general liability, our primary liability surplus lines business was up some 2% for the quarter, and we are still seeing basically flat rates in this space. Overall casualty rates basically flat overall was up 1% in the quarter, still a good story but casualty becoming less robust.

In our property segment, gross written premium up 2%. In the cat business that’s wind and quake, we are seeing burgeoning competition from standard companies, surplus lines companies, alternative capital and we saw cat wind rates down some 10% for the quarter and quake down some 6%. This space will continue to be challenging through year-end.

Another benign nearly non-existent U.S. cat quarter along with increased capital allocation to this space will continue to drive rate south. RLI has deep producer relationships, experienced innovative frontline underwriters on long time excellent reinsurance partners. So we will continue to perform well in this product arena.

In our Recreational Vehicle business which is reflected in this segment, experienced an increase in physical damage claims throughout the year resulting in an increase in reserves of some $2 million. We are actively raising rates and vigorously re-underwriting this product.

Our Marine business continues to improve while gross written premium was down some 13% year-to-date and 4% for the quarter. They were essentially breakeven. We will take the applause now. We are still pushing rates some up 5% in the quarter. Our Surety business as Tom indicated a good story here.

Gross written premium up 6% in the quarter, 3% year to date combined ratio of 67 in the quarter and 70 year to date. Surety results reflect some 20% increase in gross written premium in our account-driven commercial surety. And both miscellaneous and our transactional surety business and contract surety business were up as well.

While our energy business was down some 10% and some 15% year-to-date. We continue to see heightened competition in this space and significant new competition in energy surety arena. Just a word to the wise. We have 30 plus years of de-underwriting expertise in the energy surety area. It’s not a space for generalists or neophytes.

Overall another excellent underwriting quarter, a testament to RLI Associates who perform yeoman work in deteriorating insurance market environment. We are well positioned with a diverse product portfolio, superior underwriting and support talent to outperform the competition. Craig will now discuss our crop and reinsurance issues. .

Thank you Mike. I didn’t want to hit on the ceded insurance, we don’t actually place any significant treaties this quarter in the third quarter, however I did want to comment a little bit on the net written premium growth relative to gross written premium.

I have seen some notes and comments about what were the drivers and I want to set that record straight. First and foremost the risk adjusted reinsurance prices have decreased 10% to 20% across our entire portfolio and that has been the main driver of the net premium growth.

We have also had product mix changes; it continues to evolve for with heavier weighting on transactional space where we cede less because need less capacity. We have also added about $7.5 million year-to-date premium from prime insurance which we take all net.

Lastly but it seems to be the lead what I have seen and read is that that we have taken in a few select spots we have increased our retention but that is not a major driver for us. We did take smaller or little bit bigger retentions in places where we reached scale and the underwriting has warranted it.

Overall we are preparing for 2015 right now, where we still see an abundance of reinsurance capacity. On the crop front, year-over-year premiums relatively flat, during the quarter we did increase the loss ratio couple of points of MPCI to reflect lower commodity prices overall.

We expect bountiful yields to offset lower prices but we also expect the net impact of these movements to fall right about at farmer’s typical deductible. So there will be some claims and we felt this loss ratio adjustment at this time to correct cautionary move.

As you know our partner ProAg CUNA announced the recent change in ownership in late September, we were given notice of cancellation on the assumed crop program effective at year end 2015. The provisions of our contract permit us to retain a 2% quota share on the ProAg portfolio for the 2015 crop year.

So expectation should be that our gross written premium will be down approximately 80% on a gross basis and 70% on a net written premium basis in 2015. We’ve enjoyed the partnership with ProAg; HCC has acquired a very good team.

As we feel we have learned a lot about the Ag’s space over the last several years, we will plan to continue to look for other opportunities in the space. I’ll turn it back over to Aaron..

Thanks Craig. Operator, we can now open the call up for questions..

Thank you, sir. (Operator Instructions). Our first question today comes from Arash Soleimani with KBW Investments..

Hi thank you. Just a couple of quick questions.

First, given the increased competition that you're noting, that you're seeing, is it fair to say or are you seeing specialty risk return to standard market again? Or has that not played out?.

This is Mike Stone. Yes, we’re seeing a little bit of that. I mean there is a considerable competition to surplus line space and at this stage in the cycle we start to see a little bit of the standard lines companies that come in.

I mean they are in their -- it’s just probably a little bit of increase in this space at this time, particularly in the property area..

Okay, great. And can you just -- in terms of the ProAg, I think you said it was at year-end 2015, the relationship ends.

Can you just quantify that one more time, in terms of the impact to your gross written?.

We would expect the gross written premium and net written premium to be $8 million to $10 million next year..

$8 million to $10 million down?.

No, 8 million to 10 million gross and that to us, so that’s about 80% down on a gross basis and about 70% down on a net basis..

Okay, perfect, thank you. .

Our next question comes from Randy Binner with FBR..

Good morning, thank you. I think these questions are for Mike, but the first one is just in the excess of surplus lines area. You mentioned that you were up, I think, 2% on net, but the rates are flat. I guess, I mean, I assume competition is pretty stiff.

But where are you seeing kind of the macro economy for that segment? Meaning we see E&S kind of more usually impacted by a better economy, more small business formation, hiring, et cetera.

What's your feel, kind of broadly, in that segment, how that's driving premium in addition to the impact of competition from other insurers?.

Well, I think we said that it’s basically flat and our net basis up a little bit for the E&S space. Certainly as the economy improves and we see more economic activity and we are seeing that in the construction space where we have quite a bit of our business through general liability and commercial umbrella.

We see some improvement there, no question about that. The problem is that we see the standard lines companies packaging up business and increase the competition from other surplus lines players.

So, net-net we’re still holding our own, it’s still a pretty good marketplace but it feels a little worse than it did a quarter ago and a little worse than two quarters ago.

So, trend is not in the right direction but it’s still, I can say still pretty good, we’ve got rate for the last couple of years so if it stays flat for a while that would be a good thing..

Great. And on the energy piece of it in particular -- so energy prices are dropping the price of oil, I guess, most notably.

I mean, do you see an immediate impact in that when you're talking about -- and I'm sorry, this is over to energy surety but is that something that comes through immediately? Does that affect kind of the demand for surety on new projects? Or is that more of a lagging impact?.

Well, yes this is -- it is in the surety arena we’re not in the energy property or energy liability business directly. So, in the surety side, yes, it has an impact.

It certainly has an impact on one of the underwriting aspects of this is the assets, so that’s the oil in the ground as that gets less valuable, we have less effective collateral and you’ll see less drilling activity which drives this business as well.

So, yes it has an impact and our premiums are down there, that’s one of the reasons, but a bigger reason is we see more competition in that space..

Okay. And just one other just detailed question on the recreational vehicle property damage claims.

Is that an issue of kind of normal loss trend or typical loss trend versus too soft a price or was there particular events that caused that?.

Well let me say both. Certainly we believe in retrospect the pricing was inadequate. And we've actually already filed and obtained rate increases in almost all 50 states. So we actually started that process about three or four months ago to get those.

But as you know admitted business that takes a little while to go through the regulatory process so we have approval in those space. And it has been more of an increased frequency. We have had a few severe losses one-off type things, not necessarily weather related but arson related that were unusual.

And we have kind of appointed out a certain distribution channel that’s been a problem for us. So we are trying to address that by shutting off that volume. .

Okay.

And would the increased frequency just be attributed to like a better economy and more baby boomers out on the road with their RVs? Is it just kind of more use in targets out there? What do you think drove the frequency?.

Yes, also during the summer months you always get an increase in frequency. But yes we will attribute to that. .

And also Randy it’s a fairly small book in our overall property segment. We just wanted to point out the fact that that was one of the reasons that maybe our combined ratio was a little bit higher than you would expect given what’s happened in the catastrophe arena this year. .

Understood. It wasn't an area that I maybe -- I've been missing any RV stuff. I just hadn't seen it. Obviously RVs drive more in the summer, but even on a seasonally adjusted basis, your frequency was higher, just to be clear on that.

Right?.

Yes..

Our next question comes from the Ken Billingsley with Compass Point. .

I wanted to ask two questions. One, where you gave us the confirmation. When you talked about the ceded reinsurance business, I believe you gave a number that pricing within reinsurance costs had declined 10% to 20%.

Was that correct?.

This is Craig. Yes that’s correct..

And when I look at the retention ratio in general, it’s the highest it's been in the last two, three years but you said that you didn’t have any new renewal -- treaties renewed this quarter.

So could you maybe just walk through why you are benefiting and seeing a bigger benefit now than you have maybe in the prior quarters?.

If you think about that, if your retentions remains stable and the amount of premium you see drops by 10% to 20% that’s going to lead to obviously a higher retention ratio. And then as I have mentioned products life Mike mentioned our professional liability business which is more transactional. We just don’t need the capacity.

We are only putting out $1 million $2 million limits. So we don’t buy as much reinsurance there. Those products are actually growing. Some of our other products where we utilize reinsurance a little more heavily our D&O, our umbrella business, they are more flat for the year.

So you are getting a mix kind of an underlying mix issues that’s being driven by our product that use reinsurance less expensively. .

So there is 10% to 20% decline that was still in place for the last two quarters then as well. It just didn’t have as big an impact. .

Yes, well, some of our treaties were placed during the second quarter, so you wouldn’t start to come through till the end of the second quarter or maybe third quarter. .

Okay. So it was a second-quarter event, okay. The other question I have, just last one was on pricing. Your premium on that basis obviously is growing.

How is that growing in relation to rate versus expanded customers? And then from a customer base, is it new or existing customers that are increasing exposure?.

Ken this is Craig again. On the net basis overall the pricing is slightly up as Mike said say 0% to plus 3% on average across our portfolio. So it's less than it used to be so we are seeing some increase there.

As far as new customer or expanding our share of wallet kind of concept with selling more to this existing product base, that’s happening as well obviously because a lot of our growth is coming in the profession liability segment where we are trying to offer a property and casualty package at the same time we offer professional package.

So we are seeing an increased take-up rate on existing customers and of course there are some new customers in there too. But it's probably half and half, I would say across our portfolio. .

And I have one more question, if you don't mind. I just want to talk about I believe Mike had mentioned the benign cat season so far, which maybe it just reflects on you. But we've already seen two companies today or yesterday report surprising higher major and non-major cat losses.

Can you talk about maybe why -- what you're seeing? Maybe it's a little different than maybe what's being experienced to say, Allstate or Platinum?.

Hi this is Mike Stone again Ken. I didn’t listen to their calls, I didn’t read their results. So I don’t know what drove that. But certainly we had next to nothing when it comes to the, call it the American Canoyn earthquake that thing in Nappa. And we have a business in Hawaii; there was very little loss from that hurricane.

And we haven’t any other events since last quarter. It's been from our perspective nearly non-existent. .

Okay.

And the current hurricane that's headed towards Hawaii, any cause for concern on your books?.

I mean it’s as just the hurricane that's headed to Hawaii, so we’ll pay attention to it, we’ll pay attention to it.

I mean our book in Hawaii is not that large but we’ll pay attention, we’re prepared, we’ve got our retention is such will be fine, it’s just Hawaii really hasn’t been hit very hard for some 30 years I think so it’s a little bitty speck on a very big ocean by the way. .

Sure.

And so -- but you have reinsurance coverage that would limit if it were to be impacted fully?.

Yes, we have reinsurance converge and we’ve got coverage that would be part of that. So I mean if it’s a large hurricane we’ll have loss but its well within our expectations, it's not a great big deal..

Our next question comes from Mark Dwelle with RBC Capital Markets..

Yes, good morning. A couple just kind of clarifications, really. In the Surety segment, if I'm understanding your comments, I mean, essentially, you described almost all of the lines being positive except for energy, which was negative.

Is that a fair characterization?.

Yes, from a premium standpoint yes..

Okay.

How is that different from last quarter where the tone of your comments seemed to be, I'll say, more generally negative across the entire book?.

Yes, last quarter -- well, this quarter we had a really good premium quarter for commercial umbrella for our account driven license and permit business and that can be a little variable, it's not that big. So if we hit on a few accounts where we get a few accounts that are actually using the capacity we provide our premium will jump up a bit.

Certainly the contract's been fairly flat and our miscellaneous businesses is fairly -- it’s just basically annuity just kind of up a little bit each quarter as we grow out that business.

So, the one that’s been under pressure has been the energy surety business over the last -- for the last nine months or the last -- for all of this year and it continues to be under a bit of pressure..

And there's not really a material -- a major rate impact to the growth in this period?.

No..

It's really just straight business?.

Yes, typically surety business the rates fairly steady and where you see the changes on terms and conditions around collateral and indemnities and that kind of stuff..

Same question on the crop business.

That's all recorded as premium within the property segment, is that correct?.

That’s correct..

Okay.

And then within the investment portfolio, any particular changes in where new money investment is heading there or continue to --?.

Mark, good morning it’s Tom Brown. It’s -- reinvestment is primarily going into fixed income during the quarter and the allocation to the fixed income and equities remains pretty consistent with the historic ratios of 80:20, 20% equities..

Any change in the mix heading towards municipals?.

Municipals are down slightly from the year end in the mix and we did and I think move a little bit into higher yield bank type loans, small portfolio about 40 plus million..

Okay..

Still within the fixed income complement..

Our next question comes from Jeff Schmidt with William Blair..

Hi, good morning.

Just on the investment yield, just a quick question on -- could you speak a little bit about the duration of the fixed income portfolio? And sort of how it's trending and where you see that going?.

Sure. Happy to, Jeff, it’s Tom Brown. The duration is still well within our historic ranges, it’s probably ticked down couple of percentage points from about 4.8 to 4.65 in the quarter and it’s really just -- we really find ourselves a little more neutral on the yield curve..

Okay.

And do you see that sort of maintaining that going forward? Is there thoughts of changing that?.

No again I think going back historically we stay pretty consistent somewhere 4 to 6 or 5 in that historic range and I don’t see it moving much..

If there are no further questions, I will now turn the conference back to Mr. Jonathan Michael..

Thank you all for attending another excellent quarter, low 80s combined ratio will take that any time, our net premiums were up 8%, good cash flow and 12% increase in book value per share so far this year. It’s attributed to our underwriters and all of our employees for delivering another great quarter like we’re seeing here.

Thank you and we’ll talk to you next quarter. .

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 7600500. This concludes our conference for today. Thank you all for participating. And have a nice day. All parties may now disconnect..