Good day, and welcome ladies and gentlemen to the RLI Corp's First Quarter Earnings Teleconference. As a reminder, we will open up the conference 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 factors and uncertainties, which may cause actual results to differ materially.

Please refer to the risk factors described in the company's various SEC filings, including the annual report on Form 10-K as supplemented in the Form 10-Q for the quarterly period ending March 31, 2021, which should be reflected carefully.

The company has filed a Form 8-K [ph] with the Securities and Exchange Commission, that contains the press release announcing first quarter results. RLI management may make reference during the call to operating earnings and earnings per share from operations which are non-GAAP measures of financial results.

RLI's operating earnings and earnings per share from operations consist of net earnings after the elimination of after-tax realized gains or losses and after-tax unrealized gains or losses on equity securities.

RLI management believes these measures are useful in gauging core operations, performance across reporting periods and may not be comparable to other companies' definitions of operating earnings. The Form 8-K contains reconciliation between operations earnings and net earnings.

The Form 8-K and press release are available on the company's website at www.rlicorp.com. I will now turn the conference over to RLI's Vice President, Chief Investment Officer and Treasurer, Mr. Aaron Diefenthaler. Please go ahead, sir..

Thanks, Casey. Good morning, and welcome to RLI's first quarterly earnings call for 2021. Joining us today are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Todd Bryant, Chief Financial Officer. As usual, Todd will start off with financial details on the quarter.

Craig will follow with some color on the product portfolio and market conditions. We can then open the call to questions and Jon will close with some final thoughts.

Todd?.

Thanks, Aaron, and good morning, everyone. Yesterday, we reported first quarter operating earnings of $0.87 per share. The quarters' result reflects elevated winter storm losses, which were more than offset by favorable benefits on prior year's loss reserves, as well as improved current year casualty results.

We achieved 20% top-line growth or 10% growth when adjusting the comparable quarter last year for premium returned to transportation insurance. As a reminder, at the onset of the pandemic, we helped our public auto insurance by adjusting or returning premium, which resulted in a $23 million decrease in our transportation business.

We believe adding the premium back when comparing the last year provides a more accurate view on premium growth in the quarter. In total, we posted the 86.9 combined ratio. Investment income was down 7.6% reflective of the decline and reinvestment rates during 2020.

Unrealized gains on the equity portfolio were in stark contrast to unrealized losses experienced during the same period last year, and served the bolster net earnings this quarter. Additionally, invest the earnings advanced nicely to start the year which accrued in net earnings. Craig will talk more about market conditions in a minute.

But from a high level, all three segments experienced growth. Property led the way up 31% as rates and market disruption continued to support growth. Reported casualty growth was plus 19% compared to last year.

But as previously mentioned, we want to call out the comparative benefit from the $23 million public auto premium adjustment in the first quarter of last year. Adjusting last year's result for this amount, casualty growth was fairly modest, as was surety.

From an underwriting perspective, this quarter's combined ratio of 86.9 compared to 92.0, a year ago. Our loss ratio declined 5.6 points to 45.9, despite a seven point impact from winter storm Yuri, one of our largest winter or spring storm events experienced.

Of the $16 million in net storm loss, $15 million was in the property segment, and $1 million was in the casualty segment related to property exposure in certain package coverages. Favorable reserve development was up notably compared to last year, and was widespread across most products.

As a reminder in the first quarter of last year, uncertainty around COVID influenced our approach the indications we were seeing in prior year's reserves, as well as specific COVID reserves we established on the current accident year.

In the first quarter of 2020, we recorded $5 million in COVID specific reserves, $2 million a property and $3 million and casualty. On an underlying basis, if you exclude prior year reserve benefits, catastrophes and the aforementioned reserves established for COVID, our loss ratio is down in 2021.

The casualty segment is influenced in this result, and its underlying loss ratio is down about 3 points from the same period last year. An improving mix and modest reductions in loss booking ratios, similar to what we discussed on our fourth quarter call have driven the improvement.

From an overall COVID perspective, total reserves are largely unchanged from year-end. Moving to expenses, our quarterly expense ratio increased half a point to 41. In addition, general corporate expense was up $1.6 million. These increases are driven by amounts accrued for performance related incentive plans.

The combination of significantly higher operating and net earnings given the relative equity portfolio performance, plus an improved combined ratio drove these metrics higher. Excluding incentive amounts, other operating expenses were flat.

Turning to investments, risk assets continue to lead with positive returns in the quarter from both public equities and high yield credit. Traditional investment grade bonds couldn't overcome higher yields, and price declines offset the positive return from other assets. All in, our portfolio posted a 0.2% return for the first quarter.

And we are more than happy to trade a modest price decline in bonds for the opportunity to put operating cash flow to work at higher rates. Outside of the core portfolio, investee earnings were also a contributor in the quarter, with Maui Jim and Prime each adding $3.7 million to the quarter's results.

Prime continues to benefit from profitable growth. And Maui Jim has rebounded nicely from a more difficult period in mid-2020. All in a very good quarter, and solid start to the year. And with that, I'll turn the call over the Craig..

Thanks, Aaron and Todd. And good morning, everyone. As Todd mentioned, we're off to a running start to the year reporting an 87 combined ratio and 10% underlying growth in gross written premium, very solid underwriting results despite the impact of winter storm Yuri.

The sub-90 combined ratio we achieved is a testament to our well-diversified portfolio of specialty products, and the consistency of our disciplined underwriting approach. Top-line growth was realized across all segments, and in most of our products.

Our read achievement this quarter carried a lower beta, the highest were not quite as high, but the lows were not as low. I would say it is a little too early to say whether the rates are plateauing in the most fervent markets, but we continue to achieve rate increases at or above long-term loss costs across the majority of our portfolio.

Our underwriting diet is well-balanced and our palette remains refined as the competition is broadly moving toward acceptable rate levels in our chosen market. The most disruptive spaces for us remain catastrophe exposed property, excess casualty, executive products, commercial auto liability, and marine. Now on to some segment specific comments.

In casualty, we report an outstanding 83 combined ratio and grew gross premiums 19%, 4% adjusted for transportation. As you may recall, the comparable quarter last year required a significant premium adjustment for inactive vehicles in our transportation product line.

Also of note, our casualty segment has a significant exposure to the construction industry. And although this industry never completely shut down, we have observed some slowdown due to uncertainty related to both the pandemic and resulting supply chain issues.

We're still able to achieve 8% rate increase in this segment overall, while account retentions are holding well. The casualty segment was led on the top-line by our personal excess liability, executive products and transportation businesses, which rebounded nicely.

Underwriting profitability was led by our primary liability, personal access liability, transportation, professional services liability and small package businesses.

As mentioned earlier, we did see some moderating of rate increases for public directors and officers product, but the rate increases were more widespread across the dozen or so products within our executive products portfolio.

This business along with transportation and commercial excess liability, we're still able to achieve double digit rate increases for the quarter. Property segments top-line grew 31% on a small underwriting loss as a result of the widespread winter storm Yuri. We achieved 10% rate for the segment overall.

We continue to observe opportunities across all products in this segment. Our catastrophe businesses grew premium and rate at a double-digit pace. The size of the rate increases was a little off its peak of the last couple quarters, but still above acceptable levels to assume the risk.

Earthquake still seems a little more competitive than wind, mainly the result of demand versus excess supply. Since significant earthquakes occur infrequently, and coverage is seldom required for financing prices above a certain threshold or decline and property owners elect to self-insure.

We have room to grow our catastrophe exposures if the market continues to cooperate. Our Marine business also continues to see profitable opportunities to grow, because of the disruption at Lloyd's and elsewhere. The missions continue to increase significantly and we experienced top-line growth of more than 25% on a very good underwriting results.

I don't want to move on without giving a big mahalo to our Hawaii homeowners business, which continues to grow at a double digit pace and produces great results for our company.

In Surety, we grew top-line 5% and achieved a 79 combined ratio, another great underwriting result and hopefully some signs that the market is finally starting to come back to us. Larger losses have hit the industry causing competitors retrenchment, and reinsurance capacity seems to be tightening for the first time in many years.

We will continue to capitalize on the disruption we are starting to observe. Most of our growth this quarter came from our commercial account driven business, which saw both new business opportunities as well as expansion with existing accounts. All products in this segment were profitable.

We will continue to focus on building relationships, consistent underwriting, servicing our distribution partners and customers and investing in technology to make it easier for our customers to work with us.

Overall, the solid start to 2021, we remain well-positioned for the future, and we'll focus on what we do well, adapt to our environment, stay true to what makes us different, and execute. We create our own opportunities with our investment in people, service, and technology.

And we will take advantage of new opportunities, when our competitors retrench, and market disruption occurs. We are constantly looking for ways to provide profitable solutions to meet the needs of our customers and distribution partners. This is what we do. It is what owners do.

Our success can be attributed directly to the quality of associate owners we hire and the service they provide and the relationships they build with our customers. Our differentiated approach delivered again this quarter. Thank you. And I'll turn it back to the moderator to open up the questions..

Thank you, sir. [Operator Instructions] And we'll take our first question from Randy Binner. Please go ahead, sir..

Good morning. Thanks. I have a couple quantification questions. I guess the first is on the commentary around adding back in transportation book premiums.

I apologize if I missed it, but was there a quantification of that so we can get a more normalized growth rate in casualty?.

Randy, this is Todd. There was. It's $23 million. If you look to adding that back to where the negative premium, we produced in the first quarter of last year for transportation was $23 million..

Okay.

Compared to 1Q '20?.

Correct. Yeah. Add that amount back to where we ended either in transportation really in casualty in total. If you add that back to last year, then that'll get to that 10% overall growth versus 20%..

Got it. And then on Craig's comment that your rate increase was lower beta.

I guess, did you provide actually a number that kind of an absolute number of what the blended or overall rate increase was?.

Well, I'm sure we disclosed last quarter what the increase was by segment and I suppose this quarter. So I mean, I'm happy to say that, I guess last quarter for casualty overall, I think we had 11% in the quarter. I think we said we had 8% this quarter.

I mean, I wouldn't get too caught up, because there's obviously, we're a relatively small or medium sized player. So we're not necessarily a bellwether for the whole industry, so that's why I want to caution against, and then we have a little bit of volatility as numbers bounce around. So I'm not sure that the trend or not.

On the property side, we reported 10% rate increase this quarter, and I believe we reported 11% last quarter. So I mean, you could say it's down, but it's one point. I don't know if that could be within the next..

Yeah. I think, that some of the data earlier this earnings season was maybe past peak, but kind of too early to tell. But it's still very good rate versus last casualty trend.

And I guess, if you could just expand a little bit on what made it lower beta, I think that would be helpful?.

Sure. I mean, I did talk a little bit in the casualty segment. For example, the public DNO business, I mean, it's on like its third straight year of double digit rate increases that almost they soften that's too strong word. I mean, we still got double digit rate increases, they just weren't quite the size that they were before.

So then when they weigh in the average, it takes down the overall average for that business. But we did get more widespread rate increases in the executive price group, like within cyber, some of the private DNO, EPOI that's in there that those rates actually increased, that didn't quite offset the public DNO funded decrease, but less of an increase.

So there's an area. Transportation was relatively flat. And so that was probably the biggest driver in the casualty part of that. And then on the property, I think, I mean, some of the cat business, again, was getting was off about it. This was, I think, the third straight year roughly that we are getting double digit increases.

So the increases aren't quite as large, but they're still double digit increases in both wind and quake. So that brought that on down..

Got it. Okay. I'll leave it there. Thank you..

Thanks, Randy..

Thank you. And we will take our next question from Derek Kane. [ph].

Good morning. Thanks for taking my question. Couple of quick ones.

How are you thinking about the short-term loss trends during the unprecedented economic recovery? And on a related note, aside from monitoring actuarial claims, what are some of the data points or metrics that you look to, to kind of determine whether the impressive top-line growth that you've had is sustainable?.

Derek, this is, Todd, I'll start out. I mean, as far as your first part of the question there on the short-term trends, I guess I would just in how we considered, I would just say we don't. On the actuarial side, and Craig can certainly comment further, but on the actuarial view of the reserving view, and we talked about this often.

We are taking a longer-term loss costs trend approach, because I think we talked about it last year too, whether it was frequency down or whatever it may be, we discount that.

I think we think it's prudent to take a long-term loss cost trend approach, and to the extent that the rate that we're getting is above long-term loss cost trend, you would expect to see some modest benefit in the loss ratio. But we really discount those shorter-term trends..

I guess, I mean, on top of that, and as Todd said, those longer-term trends, the way we book things is certainly the way we've always approached things and we continue to approach those. And I think I made a comment that we believe our rate was an excess of the long-term trends that we see both in the property and casualty business.

I mean, as far as long-term growth or intermediate term growth, I mean, we insure the economy. I mean, if the economy reboots, and there's a lot of good signs that it's coming back, I think that's a positive sign. Those the pie gets bigger. And there's more opportunities to insure so you don't end up fighting with each other over stuff.

You've seen, I think there's some opportunity just with existing clients, as the exposure basis start to increase. We've had several of our clients become more cautious and reserved in regards to their estimates, and kind of infer that from one of my comments about the construction industry.

We're definitely seeing much more caution around their estimates of revenue, because of the pandemic. I mean, those are auditable policies for the most part. So if they end up, the economy comes in better, we'll end up getting some audit premium and may not come till next year. But we will realize that audit premiums, so that's a very positive.

Obviously, if there's an infrastructure bill, I think it will help give them a third of our businesses in the construction industry. We don't do a lot of roads and bridges across the whole portfolio, but we do a lot of other public construction. So that could be helpful.

And any disruption in the market, we constantly continue to monitor disruption and the tightening of capacity, tightening of the reinsurance capacity, especially amongst our competitors, or I'll say the less disciplined underwriters, that gives us an opportunity as the rates come to our acceptable levels to see more opportunities.

So, I mean, we look at submission flow, which continues to be good, but it's not up everywhere. But we do see good submission flow, very good retention of our accounts, is something we're watching.

And if we retain accounts who have lowered their exposure base, and then obviously the economy comes back, there's going to be opportunity for growth with existing clients, which we like the best, because those are clients we already know, typically produce positive results for us, and value us..

That's very helpful.

And my second question is, you have some large reserve releases in the casualty segment, what accident years drove that?.

Derek, it's Todd. It's fairly widespread. I mean, I think you'll look you know, 17 to 20, you're going to have some a little bit earlier than that in spots. But, 18 to 20 on several, [ph] some 17, so it's fairly widespread. GL was a product that was fairly large in the quarter. It was probably more 17, 18. Transportation was larger.

Small commercial was larger. Puf [ph] was larger on a relative basis. It was pretty widespread..

Okay. Thank you for all the answers..

Thanks, Derek..

Thank you. [Operator Instructions] We'll take our next question for Mark Dwelle. Please go ahead, sir..

Yeah, good morning. I'm glad to see RLI continues to set a high standard. You're the first insurance company to ever use the word mahalo one on earnings calls. So kudos for that. On to my questions. First of all, it's just a numbers question. I just, maybe I've even asked this before.

But in your press release, at the top of the press release, you say catastrophe losses were 30 - your reserve releases were $31 million. And then on the table down below, if you sum all the buy lines, that totals up to $37 million.

What's the difference between those?.

Mark, it's Todd. If you look at in that table it was a new addition, although those would have been in our queue, you would have the similar type thing. We're showing the net in the bullet, right. It's the net increase, total increase to underwriting income. So there will be expense impact, those types of things that will offset the total release.

So we're trying to give you both pictures, one is a pure, EPS if you will net underwriting impact, and then the table breaks up the pure loss impact..

Got it. That makes sense. Okay, because you reconciled that in the past that there's been expense aspects to it. And so this kind of clear isolates the loss ratio impact, from the total EPS intact effectively..

Yeah, something we have done. We've broken those out in the queue, but there's been some requests to have this broken out in the release. And so we added that table..

Got it. Okay. Thank you. The second question that I had on really just, I guess it relates to maybe some of the comments, the operating comments. I think it's correct, whether it's unclear whether pricing is peaked or is near peak or whatever.

I guess the question I would like to ask is, are you seeing any change in competitive behavior? Are there people that seemed to be moving from, I'm going to say a more price first and growth second approach to maybe a more broader interest in growth, maybe more competitive quotes, fewer changes in terms and conditions what have you.

Just trying to kind of drill down on to maybe some of the competitive dynamics..

Yeah, Mark, this is Craig. I mean, it's very difficult for us to see through to I mean, obviously, we have much deeper knowledge of our own business than our competitors.

So, it is well harder for us because in every one of our businesses speak our diversification, but almost every one of our businesses, I list, their top five competitors are different. So, I mean, all I can say is there's still some capacity for MGAs.

We don't do really that business, but that we still see from time-to-time people giving the pen the MGAs, which we still like confounders a bit in this marketplace. But I mean, obviously, we would rather bet on our own people own experienced talent.

I mean, from a terms and conditions standpoint, I mean, we are seeing some, I think I'll say some hardening in the property side. We're not really seeing in the casualty side, but we've always felt like we've had the tightest terms in the casualty side in the market anyway. So, people are coming a little bit closer to our standards in regards to that.

But certainly on property, we're seeing some stuff, deductibles going up, minimum premium going up. People insisting on ACV versus replacement costs, coinsurance requirements.

I mean, a general acceptance from the brokers that we're going to get better valuations on the properties that we write, which I mean, that bleeds into maybe something you were talking about is where you actually get acceptance from brokers to get more information. That's a good sign. I mean, normally, they take the path of least resistance.

So asking for that almost puts you on the list over there, as you know, last resort, I'm only going to you unless if I can't find placements elsewhere. So, I don't know, if I've answered your question effectively. But I mean, I certainly see movement from folks, people that I'll say get burned or whatever, don't have good results.

They always tighten, but it's a little different by every product line. I mean, I'm not going to say we have people that are super aggressive anymore in most of our spaces, that's good. I mean, we always like competing with responsible competition. I mean, we invite responsible competition.

So we live in a cap, someone that likes a certain class of business better than us and will price it better. They probably understand it better enough know how to handle claims better, so be it, we'd rather focus on the things we understand, we know. We think we can deliver a mutual beneficiary relationship.

So, again, hopefully I answered your question..

That covers it quite thoroughly. That's all my questions. Mahalo..

Mahalo..

Thank you. And we will take our next question from Matt Carletti..

Hoping you could just peel back the onion a little bit on the winter storm Yuri losses.

I mean, it was a modest number for obviously, a very big industry event, but just curious if there's lessons learned from even just kind of, I assume a lot of that's Texas, but even kind of geography within Texas? Or if anything, COVID-related might have exacerbated that loss.

And I'm thinking there is, you know, kind of empty properties that, takes a little longer to find out the pipes froze things like that?.

You know, the most interesting thing I found out is, you know, in Texas, they don't have shut off valves, as many of them in buildings as we do, where we were. So I think that was. I mean, I don't think there was anything COVID-related that we had challenges with. I mean, we've dealt with Hurricane since COVID.

We've done an exceptional job or playing people have been willing to get out and service our customers and get them back and going. We did the same thing here. I think the biggest challenge is it was widespread, in a hurricane, even in a hurricane, which is more broad, then something than a tornado.

The area is somewhat contained, but this cover multiple states, six or seven states. I believe it was a little more challenging. And it varied a lot by class of business. But we did find the shutoff valves were not as prevalent in Texas as they are in other places..

Interesting. Things we take for granted..

Yeah. So Matt, just one other to Craig's point, that was very widespread. I mean, what to me is interesting is really outside a Yuri we didn't have any other winter storm losses. So property really had a great quarter kind of ex-Yuri from that standpoint..

No, good point. Great. Well, thank you for the color and nice quarter. Best of luck going forward..

Thanks, Matt..

And we currently have no further questions. So I'll be turning the conference back over to Jonathan Michael..

Thank you. Very satisfying started for the year. Premiums were up. We're getting rates sub 87 combined ratio. We produced $0.87 per share operating earnings. That's a significant beat over consensus estimates. And I'll just use the words thank you, and we'll talk to you next quarter..

Mahalo..

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-888-203-1112, with ID of 9180220. This concludes today's teleconference. Thank you for participating. Have a wonderful day. All parties may now disconnect..