Aaron Jacoby - VP of Corporate Development Jon Michael - Chairman and CEO Craig Kliethermes - President and COO Todd Bryant - Vice President, Finance and Controller.
Randy Binner - FBR Capital Markets Arash Soleimani - KBW Jeff Schmidt - William Blair Mark Dwelle - RBC Capital Markets Ian Gutterman - Balyasny Ken Billingsley - Compass Point Kyle Kavanaugh - Palisade Capital.
Good morning, everyone, and welcome ladies and gentlemen to the RLI Corp 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 and Exchange Commission that contains the press release announcing first quarter results. RLI management may make references 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 that measure is useful in gauging core operating performance across reporting periods that may not be comparable to other companies' definitions of the 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..
Thank you. Good morning to everyone. Welcome to the RLI earnings call for the first quarter of 2017. Joining me on today's call are Jon Michael, Chairman and CEO; and Craig Kliethermes, President and Chief Operating Officer.
Tom Brown, our Chief Financial Officer is out sick today, so Todd Bryant, our Vice President, Finance and Controller, will join the Q&A session. I'll provide the usual opening financial commentary this quarter before turning the call over to Craig, who will discuss operations and market conditions.
Then we will open the call to questions, and Jon will finish up with some closing comments. Onto the quarter. Last evening, we reported $0.44 of operating earnings per share. The combined ratio driving this result was a 93, modestly impacted by favorable net reserve raises of $5 million.
Results varied across our three segments, and quarter-to-quarter variability was largely driven by reserve changes. Starting with Casualty, we reported 106 combined ratio, that included $3 million of net adverse development.
The primary driver of this result was a continuation of adverse loss experience in our transportation business, which experienced $9 million of prior year development in the quarter. This development was offset by about $6 million of favorable development in other casualty lines, most notably in general liability and executive products.
The impact within transportation is mostly severity driven and we are addressing it through both rate and underwriting actions, as Craig will discuss in more detail shortly. From an underwriting profit perspective, our Property and Surety performance was outstanding this quarter. Property turned in at 76 combined ratio, and Surety a 64 combined ratio.
The result for both segments was driven by strong underlying fundamentals and favorable reserve adjustments. Surety had net favorable development of $6 million, while Property had favorable development of $2 million, entirely driven by our marine line. Overall, our product portfolio continues to exhibit resilience and the benefits of diversification.
Turning to premium trends. Gross written premiums were down about 1% in the quarter, reflecting a challenging market and our previous announcement to curtail a rating of property treaty reinsurance and recreational vehicle businesses.
Our property segment hold the brunt of this impact with premiums down 11%, although a decline of 2% exclusive of these two lines as growth in marine of 13% helped to offset the continued soft pricing in the cat exposed coverages.
Casualty premium was up 2% over the various results by product and tempered a bit by a decline in transportation of 6% as we pushed rate in this product. Surety premium was up 1%. Turning to investments. It was an excellent quarter with a 1.8% total return on the portfolio with both stocks and bonds contributing positive results.
While there were not any significant rotations in the portfolio during the quarter, we continued to see a smaller gap between investible yields and current book yield, which should slow the trajectory of investment income declines moving forward.
From a comprehensive perspective, underwriting and investments combined to advance book value per share by 4% in just the first quarter inclusive of dividends. And with that, I'll turn the call over to Craig..
Thanks Aaron. Good morning everyone. As Aaron mentioned, we posted a combined ratio of 92.9 for the quarter, while top line dropped a little less than 1%. We faced some top line headwinds as we repositioned our portfolio to deliver underwriting margins in all phases of the market.
We believe we've entered the softest part of the cycle and we are still generating an underwriting profit for our shareholders. The market continues to be very challenging. We don't believe that the current loss costs and undisciplined underwriting environment in sustainable for the long-term. However we cannot control the market.
We can only control our response to the conditions by picking and choosing where to play. Our patience, discipline, strong balance sheet and well diversified mix of products will continue to serve us well. Let me provide a little more detail by segment. In Casualty, the top line was up 2% while reporting a combined ratio of 106.
The growth is coming from our management liability business, small commercial package business and some niche products and classes we added in the surplus line space. The Casualty segment did report an underwriting loss for the quarter on a calendar year basis. We think loss cost inflation has picked up and can no longer be classified as benign.
We have begun to see severity trends nearing 7% for most products that touch wheels-based exposures. The good news is that we never gave up much rate in this space. Our transportation product is our largest wheel-based business and the most challenged by the current loss cost environment.
This product has achieved rate increases every year since 2011 and we were able to achieve an 11% rate increase this past quarter. At the same, time top line was down about 6%. This is a good example of our low tolerance for our margin slippage and willingness to address issues aggressively and with that concern for top line.
What we can't accomplish through rate, we will address through underwriting selection. We have been targeting problematic venues in the non-emergency medical class for the nine months and are making good progress.
Although our calendar year results reflect some adverse development in wheels-related businesses, we believe that our book has and will perform better than the industry.
As a testament to this in our diversified product portfolio, we continue to see very solid underwriting results coming out of our general liability, commercial and personal excess liability, as well as our management liability products. The Property segment was down 11% for the quarter, while positive 76 combined ratio on a like cat quarter.
The combined ratio compares very favorably to recent first quarter results we have reported. This segment reflects a couple of underperforming businesses we began exiting late last year, including recreational vehicles and treaty catastrophe. This hurt our top line but it was expected to help our bottom line results.
Excluding the discontinued businesses, premium was only down 2% in this segment. Our marine business is off to a good start in 2017 with 13% top line growth while recording an underwriting profit. The catastrophe-related businesses continued to be under rate pressure, albeit slightly smaller decreases than we experienced for the last several years.
We exited several businesses plus continued rate pressure on catastrophe related business is exerting expense ratio pressures on this segment. We are addressing this through efforts to increase productivity where possible.
The Surety segment was up 1% on the top line, while reporting a 64 combined ratio for the quarter, one of our best in recent history. We achieved good top line growth in half of the four major products in this segment and ran the table on an underwriting basis.
We continued to look and find opportunities while exiting accounts and programs where the risk has outgrown the reward. The competitive landscape is very challenging in Surety. That feedback loop is too infrequent and has led to easy credit and a number of carriers expanding appetites.
Consisting appetite and discipline will continue to differentiate us in this segment, meanwhile we continue to invest in technology and implement operational efficiencies to support the top and bottom line, widening our mode where possible. Overall, the quarter's calendar year results are not where we would like to see them.
We do not believe the current market conditions are sustainable for the long-term but regardless of market conditions we will continue to do the things that allows to outperform.
We are relentlessly focused on underwriting profit, growing those products that makes sense, getting rate where we can, turning back where the market will not allow us to either price or select risk appropriately and achieving better claim outcomes than our competitors.
We do have the benefit of a very broad and diverse portfolio of products that are not highly correlated. This enables us to address the underperformers while harvesting the results with outperformers and picking our spots to take measured risk.
Our diversification will make us even more resilient to market adversity, and most importantly, every RLI associate is aligned with shareholders because every one of them is an owner. I want to thank all the RLI owners for their hard work and challenge them to continue to lay the groundwork for our future success.
I'll turn it back to Aaron to open it up for questions..
Thanks Craig. We can now open the phone up for questions..
Thank you, sir. The question-and-answer session will begin at this time. [Operator Instructions]. Please standby for your first question. We'll go first to Randy Binner with FBR Capital Markets..
Good morning. Thank you. I just wanted to ask a clarification and then a couple of modeling questions. On Craig's commentary there, did you say that you're seeing loss cost inflation or severity in the 7% range, and anything on wheels-based and beyond that I think you said loss cost inflation is broadly increasing in casualty lines.
We've seen maybe a little bit more negative than the commentary we are hearing elsewhere. So if you had specific classes where you're seeing them particular, I'd be interested in hearing that..
Randy, this is Craig. I did say severity trends are nearing 7%. That's what we are seeing in our own data for wheels-based business. We haven't seen the pickup in our other casualty businesses as far as underlying loss cost trend, but obviously we are watching that closely.
Now we have been fortunate that at least for our book of business and I know this isn't what other people not still have reported but we've actually seen decreases in frequency. I think it's starting to stabilize but over the last three or four years offsetting part of that increase in severity was decreasing frequency.
I think we've seen frequency start to level off, so now you're starting to feel the impact of really just the severity. You don't have an offset against that severity trend..
Okay, thank you. But outside of wheels-based, you're still seeing fairly benign loss trends.
Is that correct?.
Well, I mean, I would say that - we said benign and I don't think we're there at zero. I think they are low-single-digit that's what we are assuming and what we are seeing..
So if I think about the top line in the casualties segment, the way you characterized the market as softening, would it be reasonable to expect that you might have to give us some share there, and then possibly be able to take more share look into 2018.
I know it's a little bit of a guidance question, but how painful is this maybe going to be on the top line versus other cycles do you think knowing what you know now?.
Well, Randy, I mean, our focus - I mean, the focus that we talked about here was really driven into our transportation and wheels-based business. Most of that happens to be in the transportation because we still are finding our spots and opportunities across other segments of our products in our casualty division.
I think I spoke to how diversified we are and how many products. We have over to 20 products in our casualty segments, so we are finding spots in there. I mentioned some new businesses we are starting. Certainly in our package business and our management liability business, we've seen opportunity and continue to grow those products.
So there is going to be some that shrink and some that grow. Right now I think the expectation is our transportation business, we are going to address the promise that allows us to grow. That's great but it will probably beat the rate. It won't beat the exposures..
Understood. And then just one on the general corporate expense line seemed a little bit elevated in the quarter.
Was there anything unusual there?.
Hi Randy, this is Todd. There were - we do have some normal quarter-to-quarter fluctuations but there was some non-recurring consulting expenses that is spiking up a bit in the first quarter..
Like $0.5 million?.
Probably a touch North of there, yes..
Okay. Thanks a lot..
We'll go next to Arash Soleimani with KBW..
Hi, good morning.
So on the adverse development we saw within casualties then, so was that exclusively from the New York non-emergency medical transit or were there any other classes of commercial auto that that came from as well?.
Arash, this is Craig. I think at least half of it, maybe a little more than half came from the New York, New Jersey area, not just exclusive to the non-emergency medical transit but in that New York, New Jersey jurisdiction venues..
Okay.
So half of it was from New York, New Jersey area but that was not just the - so were there new areas of auto where you saw adverse this quarter that you did not see, I guess, in 3Q when you took adverse than auto?.
Arash, as you know, we don't get quite that refined when we look at our reserve studies. We certainly don't have enough data to do that by jurisdiction. But I certainly think that we are watching carefully playing at friendly metro areas. I think that's an area that we are well watching very carefully.
We've seen some outside verdicts not just for us but for other people writing commercial auto in those spaces, so we are very careful. I'm going to be very cautious in big metro areas that are playing friendly..
Okay. And then it looks like the loss ratio in casualty excluding cat and releases was around 67.5 [ph] this quarter, which is about 150 bps higher than what we saw in the first quarter of last year and also we saw last quarter.
So is it fair to assume that you guys are just booking the current accident period loss picks higher going forward just to be conservative with the auto, or is that number just like a one-time number we are seeing in 1Q '17? I guess I'm just trying to see that is it fair to assume that you're just more conservatively booking that to avoid the development that we saw in 1Q?.
Arash, this is Todd. I think if you look back over the past several years, first quarter typically has been in that 67 to 68 range. It certainly moves a little bit based on mix. Last year, we closed closer to 64 certainly actuarials [ph] take rate and trend into consideration when they develop it.
So I don't think this quarter is on a current accident year basis is really that much different..
All right, well, I guess my question would be why wouldn't it be higher going forward for auto, the current loss picks if I guess the situation there is little worse maybe than initially assumed?.
It is. I mean there is an uptick on the auto side but there is, as Craig mentioned, there is about 20 different products within that casualty segment..
Okay. Can you talk about some of the other products where you're seeing the development besides? I know you said in New York and New Jersey is not is just the non-emergency medical.
Can you talk maybe what some of the other product side of that?.
Arash, it's Craig. I mean, we exited the RV [ph] business late last year because we were seeing similar trends in that space which was all wheels-based business. So we really aren't - we have to deal with the run-off of that business but that we were going to be through that through the rest of this year.
That's really the main focus that we've seen any kind of, I'll say, elevated level that's been obvious..
Okay. All right, well, thank you very much for the answers..
We'll go next to Jeff Schmidt with William Blair..
Good morning everyone. I just want to hit on the casualty accidental loss ratio again real quick. It was up 150 basis points year-over-year.
You're saying that's more of just a natural variability as opposed to - or is there some deterioration you're starting to see beyond commercial auto?.
This is Todd again. I think you will have a bit of a mix change again as the products move around. So it's exiting in relatively close to where it was to start last year but you will get bit of a mix change.
But I don't think beyond that and a little bit of an impact on the wheels-based business, we are seeing significant differences between current year this year and current year last year first quarter..
Okay. And then just on the tax rate, it looks to be 25% for the quarter. It has been 30% for the last several years.
What's driving that?.
It's Todd again. Really is decreasing in underwriting income, that's taxed to 35%. So the taxed preference items that make a bit more impact to that overall effective rate. There was a little bit of a benefit with the excess tax benefits on stock comp that was - that probably lowered it about 1.5 to 2. It would have been probably 26.5 without that..
Okay, thank you..
We'll go next to Mark Dwelle with RBC Capital Markets..
Yes, good morning. A number of my questions have been asked, but was there any notable cat losses in the quarter? I know a number of people have talked about some March development..
Mark, this is Craig. I think we had maybe a $1 million total or less from the small sporadic but nothing concentrated, nothing even worth mentioning..
Okay. And then not to pound the casualty line any further, but so the overall decline was only - the overall premium decline [indiscernible] is 2% increase with a 6% decrease in the transportation-related lines.
What proportion is transportation of the overall premium there, 20% to 25% if I remember right?.
Thanks correct one..
Okay.
So the rest of the lines must have done mid-single digit growth rates on average in order to make that math work, if I'm thinking that right?.
I mean, I think I mentioned the - we continue to see some improvement in the excess liability businesses. We've added a few products in our E&S space.
They are helping because we didn't even have any premium last year because we just started them middle of last year and then our package businesses continue to grow as well as our management liability businesses..
Okay. And then lastly on the property business. So you had said excluding the exit of ERV [ph] and other lines, the property was down 2% from a premium standpoint.
Was that mostly rate-driven, or is the rate was declining more than that and then there were some growth whether counter policy count that offset that?.
Well, on the cat side, certainly the rates continued to decline. I think last year, they were more in the double-digit decline. We've seen maybe high-single digits this year, so with so far I guess it's better and we need to go the other direction obviously we think.
And then we mentioned we grew a little bit of marine and I think that was more exposure based than rate driven..
Okay. Those are all my questions. Thank you..
We'll go next to Ian Gutterman with Balyasny..
Hi thank you. I had a few questions [indiscernible] as well. I guess first, surety, the $6 million release. It was bigger than normal.
Anything - was there any one thing driving that or just everything was a little bit better than normal?.
Ian, it's Craig Kliethermes. I mean basically there is virtually hardly any claim activity in the quarter, at least no large claims whatsoever. As a matter of fact we had a few takedowns, so that really drove it. Although you should understand I think I said in my remarks but surety to be a volatile business, when you have claim doesn't look as good.
We've restored that good results even when we had claims but you don't get it. And when you don't have claims, you're absent for claims, you get a really outstanding quarter like we had this quarter..
Perfect, great. But on the casualty slide, when I look back at just typical Q1 over the years, it seems somewhere close to $10 million, call it, high-single digits millions of releases in a typical Q1. So even if I take out the average, there is $3 million of favorable from the other lines you mentioned seems a little bit lower than normal.
Is that just releases were a little bit less than normal than the other lines or was there something else that went a little adverse?.
So Ian, I'll tie this into my comment about that we are being cautious that loss costs may not be benign, which I meant they are not going to be zero or we don't think they are zero anymore. I don't want to go into too much detail but our process has always been to assume long-term loss cost inflation is impacting our business.
We put that into our plan and into our quarters' loss ratio, certainly the current loss ratios. And obviously if the loss cost inflation is lower than our assumption, we see favorable development and we do also take a very conservative approach to that.
And we've seen a lot of favorable development in the past and we would say there might be an inkling of a hint that are not as benign and what that would mean is that you might not see as much favorable development as you had in the past and that might be the first indicator even though it's mainly not obvious in the rest of your data, it might be an indicator that they are not as benign as they have been in the past.
So that would be my answer to that question I think..
That makes a lot of sense. I suspect you won't be the only ones noticing that. And then just to come back on the wheels, I guess, just can you remind me a little bit of how process-wise you do things? I mean, there is a lot of companies who, I think, that are stereotypical things. You do a deeper dive at your end.
I think a lot of companies in Q1 is sort of you already took your deep dive so you kind of some analyzed there is some adverse cases, you wouldn't see a lot of movements.
Is that typically how you do things or do you tend to sort of take each quarter about the same and not do anything more special at your end than you would in Q1?.
Well, when you say deep dive, I'll tell you in ROI, we take a deep dive every quarter in regards to understanding our results and trying to figure out where we're at, where we stand. I guess that's the fortune of being a medium-sized company as there is nowhere to hide here and the guide is underperforming.
It's pretty obvious to everyone so they get a lot of attention. So certainly we've been very cautious and watchful of this because, as you guys know, third quarter we reported some challenges then.
So we've been watching very closely since then, so I wouldn't say we are doing any more deep dives than we typically do when we have a problem or when we have a challenge that we are trying to address and that's how we approach this quarter with that. And we are going to continue to be conservative and address the issues very aggressively.
And if [indiscernible] it comes with the cost to top line..
Absolutely. And then just switching caps real quick. Maui Jim, looked like you had a very strong quarter.
Anything one-time in that growth, or is that sort of just came better and hopefully the results continued better than prior year?.
Ian, this is Todd. They did start the year off pretty good, and so I don't think there is anything necessarily unique. We'll see how the rest of the year plays out..
Great. Thanks so much..
We'll go next to Ken Billingsley with Compass Point..
Hi good morning. Wanted to follow-up on Ian's surety questions.
Just from a project standpoint, are you seeing anything developing on entry control or national projects? Have they stalled? Is that one of the reasons you didn't see any claim activity this quarter and what are your expectations to next year [ph]?.
Ken, just to be clear on that. Infrastructure like roads, highways, bridges, we don't actually do a lot of that type of business. Ours is mostly private buildings, construction, and that really is more tied to whether we see opportunity or not in, let's say, the construction or in a contract surety space as well as the construction liability space.
But we have continued to see private investments in buildings go up. Government investments in building not so much. And I don't think we've seen any impact so far in push towards infrastructure. I don't know if they've actually gotten anything started yet on that front..
And on the private side, is most of that from like a residential, or is it more office space, retail?.
It's office commercial, things like that. Not very much residential..
Okay. And then on the statutory surplus, looks like you guys moved that back up to where you were in the first quarter of '16 already this year.
Can you just talk about where you guys feel comfortable taking the premiums to surplus ratio? What were the comfortable level given current market conditions and top line growth expectations?.
This is Craig. I think we are capitalized pretty well right now for the risk that we're taking. I think we are just going to continue to wait and see that how the year goes as far as there is some more opportunity obviously we look and find ways to use the capital by growing or even finding something to acquire.
But obviously it takes a lot of patience and especially in this market it's not as easy. But we feel pretty good about where we are at currently. We could obviously expand that a little bit as far as little more leverage..
Very good. Thank you for taking my questions..
[Operator Instructions]. We'll go next to Kyle Kavanaugh with Palisade Capital..
Hi, good morning.
Could you just explain the reasons for the increase in severity and what's driving that rate increase?.
Kyle, it's Craig Kliethermes. I'll give you my theory and from the collection of claims, people, underwriters that we've gotten together talk about it at least as it relates to auto.
Clearly in the commercial auto space and in particular [inaudible] we've had for a while an experienced driver of shortage and I think that you also have obviously heard increased traffic congestion as well as more distracted drivers, although I think it's more from our perspective we've seen more distracted pedestrian than distracted drivers, as we say our drivers are mostly distracted every day because they are driving people around and there is a lot of things going in there vehicle at the same time and they've got to be aware of the road but we think that and then we think that plaintiffs are....
Is it then related to more of a frequency than severity [ph]?.
Not want to plaintiff attorney is involved.
We also think there has been a willingness to get - I think the plaintiff become more much more aggressive in this space when they find an opportunity in a big truck, a big bus, those are easy targets especially if they get a pedestrian even if the pedestrian was looking at their phone while they were walking through crosswalk.
We've had several of those even though there is nothing our bus driver we thought that had done - that wasn't his fault a jury found otherwise. And I think that the plaintiff bar has become very aggressive particularly in certain metro areas where you have more congestion, you have more drivers, or more distracted pedestrians.
And we've certainly seen that.
That's what's driving the severity is and they are willing to roll the dice, go up to courthouse steps and before they used to be willing to settle on the courthouse steps, I think they are willing to roll the dice in front of the jury because they've gotten embolden by a few big verdicts, particularly in the commercial auto space.
So it's lot harder to get those cases settled before they go through the door, and then in certain jurisdictions you are rolling your dice with the jury that maybe has a little more willing to transfer wealth than they were in the past..
Okay. Do you think the they understood - how would you describe the industry not just yourselves in terms of adapting to these changes that you think that the industry is making appropriate strides and pricing correctly, or do you think it takes like several [indiscernible]..
Yes, obviously the industry is trying to address it through rate and they are getting a lot more rate as we as well. I don't think rate alone is going to do it unless people are prepared to pay 10% or 7% more every year for their insurance that's typically the case. So I think it's got to be addressed in certain ways.
I'm hopeful that someday we'll end up with some total format of this but I'm not hopeful that that's going to happen any time soon.
But we are trying to address it and combat it through some loss control measures, obviously refining our appetite in certain jurisdictions as I mentioned in venues and then we've got some things we're working on the claims side.
I don't want to talk too much detail but we are trying to do but trying to combat and get ahead of the game of some of these more aggressive plaintiff attorneys in these venues..
Okay. Thank you..
If there are no further questions, I will now turn the conference back to Mr. Jonathan Michael..
Thank you all for attending. We had a 92.9 combined ratio with one of our segments, Casualty, produced 106 combined. That's testament, as Craig said, to how our different portfolio helps to maintain positive underwriting results. Book value advanced 4% for the quarter.
I pledge that we'll continue to do our disciplined underwriting approach to produce continued and more positive results in the future. Thanks for attending. 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 1652577. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect..