Aaron Jacoby - VP, Corporate Development Jon Michael - Chairman and CEO Craig Kliethermes - President and COO Tom Brown - SVP and CFO.

Randy Binner - B. Riley FBR Christopher Campbell - KBW Jeff Schmidt - William Blair Mark Dwelle - RBC Capital Markets.

Good morning, and welcome, ladies and gentlemen, to the RLI Corp. 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 and 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 performance across reporting periods, but may not be comparable to other Company’s 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 would now like to 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 third quarter of 2018. Joining me on today’s call are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Tom Brown, Senior Vice President and Chief Financial Officer.

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

Tom?.

Thanks, Aaron, and good morning, everyone. Last night, we reported operating earnings of $0.46 per share. Other key figures were a top line growth of 8%, a combined ratio of 96, and investment income growth of 15%. I would like to highlight a few events and trends driving these numbers.

First, from a top line perspective, our growth was driven by products across our portfolio. Our casualty segment was up 9%, property was up 14%, and surety was roughly flat due to competitive pressures in energy and commercial. However, miscellaneous exhibited positive growth as a result of recent technology investments.

We believe that our broad-based growth is a testament to our diversified business model. Craig will go into further detail on some products trends in a minute. In the quarter, Hurricane Florence had $6 million net impact which is equipment of $0.11 per share or 3 combined ratio points on an overall basis.

Hurricane Michael is obviously a fourth quarter event and it’s too soon to discuss the financial impact. Also impacting the quarter was $10 million of net favorable reserve development on prior accident years with each of our segments benefiting.

Product contributions were fairly broad based with notable amounts from our umbrella products, general liability, professional liability, marine, as well as modest reductions to prior year catastrophe reserves.

While the net reserve benefit was down on quarter-only basis, from a year-to-date perspective, favorable development increased underwriting income by $35 million in 2018, compared to last year’s $32 million benefit. Despite the Florence impact, our property segment turned in at 93 combined ratio.

Surety continued to shine with a 76 combined ratio and our casualty segment reported a 101.5 combined ratio. We’ve spoken quite a bit in the past about the cautious approach we apply in our reserving practices when it comes to newer products as well as longer tail lines exhibiting sizable growth.

This is noticeable in the casualty segment where we realized double-digit growth during the past four quarters. Investment income remained a strong contributor to earnings in the quarter. It was up 15% in the quarter compared to the third quarter of 2017 on a pretax basis.

Our healthy operating cash flow, which stands at $163 million year-to-date and growing investment asset base allows us to continue putting new money to work in a higher yield environment without sacrificing credit quality.

Equity and earnings from Maui Jim and Prime were down modestly compared to the third quarter of 2017 but still a meaningful contributor to our overall operating earnings. Through three quarters this year, we stand at 93 combined ratio with 11% top-line growth. These are numbers to be proud of and the signals of strength of our franchise.

And with that I will turn it over to Craig. .

Thanks, Tom. Good morning, everyone. As Tom mentioned, we were able to report another quarter of profitable growth, despite the impact of Hurricane Florence. Overall, we grew the top line 8.5%, slightly off the pace of more recent quarters.

Growth continues to be driven by a combination of newer products gaining scale, underlying rate increases in select products and organic growth in exposures. We have invested in technology to improve ease of doing business and increased sales and marketing efforts to broaden relationships and awareness of our products.

This has paid off as we continue to see growth across most of the products in our portfolio. Our consistent underwriting appetite and deep knowledge in our chosen markets provide a safe harbor to our distribution partners and customers from the irrational behavior of many competitors in the marketplace. I will provide a little more detail by segment.

In casualty, we grew top line 9% for the quarter while reporting a small underwriting loss. The underwriting loss is largely driven by our prudent approach to booking faster growing, newer or long-tail products.

Many of the newer products that we have grown are in the casualty segment and include energy liability, small account binding authority, cyber liability and our reinsurance relationship with Prime. Reported losses from these newer products have been at or below our loss expectations, but it is still too early to definitively declare success.

These products make up about 15% of our casualty premium and about half of the growth year-to-date. Elsewhere in casually, both our commercial and personal umbrella businesses continued to grow at double-digit rates for the quarter and the year while generating underwriting profits.

We have achieved about 5% rate increase in these products for the year. Our professional liability unit, which focuses on design and miscellaneous professionals turned in very good underwriting results and continued to grow modestly, up 3% for the quarter.

Finally, top line for transportation, while up 8% year-to-date, was down 10% for the quarter, resulting from loss of a couple of large accounts. We are still upbeat about the opportunities, given our deep knowledge and long track record of success. We continue to achieve meaningful rate increases with rates up 8% in this business for the quarter.

Our underwriters will remain disciplined and be selective as opportunities arise. In property, we grew 14% for the quarter and reported a 93 combined ratio despite a 16-point impact from Hurricane Florence. Growth continues across all our major products in this segment.

New business submissions are up and that’s up 10% and the market continues to come to us as a reaction to more recent catastrophe activity, as well as the pain being felt in the London market. Our wind rates were up about 6% for the quarter while earthquake rates were closer to flat.

From a rate level perspective, we expect that the devastating impact of last week’s Hurricane Michael will keep a floor [ph] under the current pricing environment. From a focus perspective, our number one priority is to help our effective customers get back on their feet as quickly as possible, and those efforts are already underway.

Our surety segment was effectively flat on the top line while reporting a 76 combined ratio for the quarter. We are still achieving some growth in our transactional surety businesses while the larger account-driven business remains much more competitive.

The improved economy has moderately increased demand for bond, but we are still challenged by the excess capacity being put to work in this segment. We’re continuing to invest in technology, marketing and the customer experience as ways to widen our mode and add even more value to the deep customer and distribution relationships we have in surety.

Overall, a respectable quarter given a few headwinds, market conditions remain relatively stable, with a few pockets where we can get rate in excess of loss cost. On a year-to-date basis, premium was up 11% on a 93 combined ratio, a testament to our underwriting and strength and diversification of our product portfolio.

We will continue to stay focused on the things we can control and take advantage of the opportunities as they arise. Our standard for excellence is very high at RLI. Our associates embrace the challenges we face because we are different, because we’re discipline and because we are owners.

RLI will remain focused on our founding principles of acquiring great talent, sharing rewards, empowering an underwriting culture, and providing exceptional customer service. Results will follow. Thank you. I’ll now turn it back to Aaron to open up for question. .

Thanks, Craig. We can now open the call up for Q&A..

[Operator Instructions] Our first question will come from Randy Binner with B. Riley FBR..

I had a couple. The first is on casualty. So, Craig, you mentioned that you have some newer products in energy, some small account and cyber among others, and that was half the year-to-date growth, and so, you’re being prudent there.

Is that prudence what drove underlying loss ratio or the accident year lost higher in that segment and the casualty segment? Because it’s about -- on a linked quarter basis, it’s up about 2.5%, which probably stands out to people. It’s actually down year-over-year.

But, is it those activities that’s doing it or is it more on the transportation side?.

So, I mean, transportation, I don’t think we’ve changed our booking ratios for over about a year. So, it’s not necessarily transportation. But, yes, a lot of that growth is coming from those products that we tend to book a little higher, starting out. We don’t really have a track record in some of those.

We do the best we can, looking at industry results and people’s past track records to try to figure out where to set the initial booking ratio. And a lot of that growth -- as I mentioned, about half of our growth in casualty came out of those products..

Okay.

So, is that -- as you look forward, would you kind of expect similar levels of growth in those areas?.

Well, I can’t predict the future. They’re not at scale yet. So, I wouldn’t predict further growth. But, as with any growth trajectory, it’s in the -- these products have not been around like -- I mean, they’ve been around for a couple years. So, these aren’t like products we started this year.

So, you are going to see a typical growth trajectory over the first two or three years where you grow at a pretty rapid pace and then things start to plateau a bit, not flat, but the rate of growth starts to slow. So, we would expect the rates of growth on some of these products to start to slow over the next couple years, I would expect..

Okay. And then, jumping to -- just on transportation, you mentioned you’re getting 8% rate across the book.

Is there any way for you to characterize the rate difference that the two accounts you lost, got, at their renewal versus what you had wanted?.

I couldn’t tell you the specific of those. We would typically price every account at a level that we would be comfortable, and someone clearly came in underneath us. And usually, we don’t lose accounts, just so you know by a small amount.

I mean, our customer service and our knowledge in that space, our claims handling, I think people were willing to pay a difference in that space for us. So, people are not beating us by 5%, 10%, even 15%. A lot of times when we lose those accounts, we lose them by 20%, 25%. And it’s not one carrier, it’s multiple competition in that space..

We will now take our next question from Christopher Campbell with KBW..

I guess, my first question is kind of the premium growth mix.

How much of the property and casualty growth is rates versus exposure? And then, I guess, kind of where are you seeing the largest opportunities in casualty right now?.

Christopher, this is Craig. I mean, I would say, now this is overall, not just in casualty, but overall, probably about a quarter, 25% or so, 20% to 25% is from rate increases.

And then, overall, a third or so of this overall business is products, growth in new exposures and new products, and then the remaining part is growth in exposures of products we’ve been in for quite some time..

Got it. That’s very helpful. Second question is just kind of on the interplay between the whole loss ratio trends and reserve development year-over-year. If I look across this segment, core loss ratio is improving year-over-year, but then reserve releases are down. I mean, I get part of this can be mix.

But, I’m thinking if you’re having -- if reserve redundancies are getting thinner because, you’re increasing your loss mix, then, wouldn’t we see that in higher core loss ratio there, all else equal..

Chris, I will answer this question, and Tom might want to jump in. But, the -- our information will indicate, our releases are bigger than they have been year-to-date. Certainly for the quarter, it was a lower release than it was last year this quarter. But, in aggregate, I think we’re ahead of where we were last year..

Chris, yes, right. I think, Craig caught the tail on it. For the year-to-date, it is up, as I mentioned earlier, $35 million year-to-date in ‘18 compared to $32 million year-to-date last year.

And I do think, back to Craig’s point, we are cautious on some of those newer products, as well as the longer tail excess type products as well as they have shown some growth..

Got it.

And is that why we’re seeing the lower core loss ratios year-over-year is because you guys are like switching the book more to excess, like raising, like where you guys attach on the loss?.

Christopher, I don’t think that’s necessarily true. I mean, we have seen some growth in our commercial and personal umbrella products, as I mentioned before. But, I don’t think that growth is really necessarily outpacing our overall growth in casually.

So, I don’t think -- there is no conscious effort to try to move to a higher attachment point or anything like that for a book of business..

Okay, got it, very helpful.

And then, can we get some color on what’s driving the large tax benefit in this quarter, and how should we think about that going forward?.

Chris, it’s Tom Brown. The tax benefit is kind of obviously starts with the tax reform from last year, which was down to 21%. And then, as we have had little less underwriting -- that’s going to have little effect because some of the tax preferenced items.

And we did have on tax preferenced items, as you get a benefit from some of the exercise of options has reduced it. So, really, comparatively speaking, we have about $0.01 impact in the third quarter on results of tax reform. And I think if I recall correctly, it’s about $0.13 for nine months year-to-date..

Okay, great. And then, just one final one, if I may.

So, as we go into the fourth quarter, how should we be thinking about the special dividend, especially given how strong you guys have been growing in property and casualty line? And will the dividend be lower year-over-year because you guys are going to need more capital to capitalize on the opportunities that you’re seeing in the market?.

Like before, our preference is to use our capital. But, if we have excess capital that we can’t deploy, we’ll pay a special dividend. And that’s all we’re going to say about that at this time. .

Okay. Got it. And is there like an underwriting leverage that you’re targeting, like specifically, I guess just as you mentioned….

It depends on the mix and what our expectations are. So, no, the answer is no..

We will now take questions from Jeff Schmidt with William Blair..

Question on the commercial casualty, underlying loss ratio looks to be about 70%. And other than last year, if you go historically, it looks to be under 65%. That just seems like a big increase just for what’s going on with some of the newer products and the conservative approach there.

Is there -- now, I know you’ve spoken in the past about some negative legal transit.

Is there any more you can say about that or anything you’re seeing on that front?.

Jeff, this is Craig. Again, we are still seeing growth in aggregate or year-to-date in transportation, which is when we did obviously have few challenges couple of years back. We continue to be cautious there in light of what we saw couple years ago. We think we’re out in front of it.

We’ve gotten a lot of rates since then; we’ve done a lot of underwriting. Trends have been good so far. But we’re more of a wait-and-see attitude in regards to that. The other product that I mentioned I think we grew is our commercial umbrella and our personal umbrella. Those are excess businesses that I think someone asked previously about.

And those have longer tails. And although early returns have been very favorable, given some of the trends we saw in transportation, not that we’ve seen those come to light in any of other liability lines, but we’re going to be little cautious there. And we typically book those fairly conservative or at a higher booking ratio, so..

Okay. And then, on the transportation book, I know you’d said, I think in past quarter too that it was pretty close to profitability.

Is it -- rate increases continue at a pretty high rate, is it achieved profitability yet, or what is your outlook for that?.

Right now, we believe making it small underwriting profit. I mean, we’re hopeful -- I think our underwriters believe it’s better than. But like I said, we’re going to take a wait-and-see attitude. So, if our underwriters didn’t think they were making money, they have zero incentive to grow it, and they wouldn’t.

So, I think we have pretty good checks amount there. And I think, we feel pretty good about where we’re headed there. Certainly, the rate of 8%, we think that’s ahead of lost cost trends. So, regardless of where the starting point is, there should be some improvement in whatever margin we have there..

[Operator Instructions] We will go next to Mark Dwelle with RBC Capital Markets..

My esteemed colleagues have taken several pounds of this, but I’m going to ask a couple more on commercial casualty.

Can you just clarify the loss ratio in the quarter? Was there anything in the quarter that was sort of maybe top up of prior quarter, loss picks of prior quarter reserving, or is it all confined to the loss picks you thinking just through this quarter?.

Mark, this is Craig. There’s been no material change to any of the loss ratios over the quarter, even -- I don’t even think for the whole year. There’s been some mix changes obviously because the products people grow or they see the opportunity and those vary quarter to quarter and account by account.

But, we have not made any substantial change to any of those ratios. So, a lot of that has to be explained by mix..

Okay. I appreciate that. And then, second question related to the reserve releases in the quarter, obviously they are favorable for all the lines on an aggregate basis.

But, were there any meaningful reserve additions embedded within any of those net releases?.

Mark, it’s Tom Brown. Every quarter, every year, we’re going to have some ups and some downs. But, nothing of a meaningful nature that was unfavorable..

Thanks. Then, I guess two other questions that are kind of catastropheish related. First, I guess on Florence. How did the losses that you experienced there, compared to maybe what you would have expected for a loss of that magnitude or nature? Were you a little better or little worse? I thought like it was a little better.

But, certainly interested in your view..

Well, Mark, storm by storm changes a lot there, each one is unique. We kind of view that one as more of a rain and water event. But, the construction in North Carolina and South Carolina, as we knew was not nearly the same construction as you get in Florida.

So, you had some roof spill back and then the water get in and had some water damage to the properties. But, the losses overall, I think they were where we thought and about of the size that we would expect, given the size of that storm, and how long it stalled out over the area, so..

And then, obviously, it’s early on Michael. But, I guess, I would be interested in your impression. We’ve seen a range of industry losses put out from $4 billion to $10 billion. Give any sense sort of across that sort of range.

Whether it’s a little on the lower end or a little on the higher end, at least from your perspective?.

Mark, it’s very difficult for us to estimate an industry event. We’re such a small player relative to the whole industry. So, I would hesitate to guess. I mean, we had had over 35 claims come in so far, but they are where we would expect; there’s not really been any surprises. I mean, it was a very strong storm.

I think some people view that as a remote area, but I think that on the west side of the storm, there was probably more damage than you would typically think because that’s supposed to be the weaker side of the storm but that’s where Panama City and Panama City Beach are, and there’s a lot of resorts and hotels, condos and things like that there.

So, I think there is certainly some damage there..

Among the claims you’ve seen so far, are most of them primarily in Coastalish areas, or are you getting much in the way that claims further inland up in Georgia, the Carolinas, Virginia?.

I will tell you, we had one in Georgia; that’s as far north as one’s been reported yet. That doesn’t mean, you’re not going to have no. It’s still early. It’s only been eight days..

I get it. I’m just trying to get a sense of kind of what you’ve seen so far. I appreciate it. It would be too early for anybody to know..

Most of them coastal in the Panama City and Panama City Beach area so far. I mean, Mexico City beach was not a particularly large town commercially. .

And if there are no further questions, I’ll now turn the conference back to Mr. Jonathan Michael. .

Thank you again for joining us. Good quarter, 8.5% growth in the top line, combined ratio of 96, which included the effect of Florence. Florence and Michael are reminders of what we’re in this business for and demonstrates the value of the insurance industry and getting businesses back in business and homeowners back in their homes.

We’re proud of the part that we play in that supporting that effort for sure. We’ve got people on the ground there in both areas adjusting claims and getting people back in business and back in their homes. So, thank you. And we will talk to you again next quarter. .

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1888-203-1112, with an ID number of 9217140. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect..