Good day and welcome to the RLI Third Quarter Earnings Teleconference. This call is being recorded. It is now my pleasure to turn the conference over to Mr. Aaron Diefenthaler. Sir, please begin..

Thank you, Chelsea. Good morning and welcome to RLI's third quarter 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 kick things off by walking through the financials.

Craig will follow with additional comments on current market conditions and our product - portfolio. We'll then open the call to questions and Jon will close with some final thoughts.

Todd?.

Thanks, Aaron and good morning, everyone. Yesterday we reported third quarter operating earnings of $0.65 per share. The quarter's results were negatively impacted by hurricanes, most notably Hurricane Ida, but solid underwriting results, excluding catastrophes as well as favorable benefits from prior year's loss reserves positively impacted earnings.

All in, we experienced 18% top line growth and posted the 94.6% combined ratio for the quarter, year-to-date, our combined ratio stands at 88.9%. From investments, income advanced 8% in the quarter has continued strong operating cash flow, $116 million in the quarter and $280 million for the year have been additive to our invested asset base.

Earnings for Maui, Jim and Prime were up 3% in the quarter, and while not core continue to be a benefit to earnings. Realized gains were relatively flat in the quarter while changes in unrealized gains and losses on equity securities were impacted by varying amounts of market volatility on a quarterly and year-to-date basis.

As mentioned in prior calls, large movements in equity prices in comparable periods could have a significant impact on net earnings, which you can see in both the quarterly and year-to-date comparisons to 2020. Aggregate underwriting and investment results pushed book value per share to $27.63, up 13% from year end, inclusive of dividends.

Craig will talk more about premium in a minute, but at a high level, all three segments experienced growth as we continue to take advantage of favorable market conditions in most areas of our business.

From an underwriting income perspective, this quarter's combined ratio was 94.6% compared to 99.5% a year ago, both periods were impacted by elevated hurricane losses. Hurricane losses in the quarter within our preannounced range and totaled $34 million net of reinsurance.

$33 million of that is from our property segment and $1 million impact of Casualty were a number of our package policies are reported. Net of bonus related impacts the events totaled $28.9 million or $0.50 per share net of tax and added 11 points to the quarter's combined ratio.

From a prior year's reserves perspective, all three segments experienced favorable development. Casualty led the way with $26 million of favorable loss emergency spread across the majority of product lines. Moving to expenses, our quarterly expense ratio decreased by 2.7 points to 37.9% as did general corporate expenses.

The declines are due in part to reductions in certain bonus measures, but are also reflective of the increase in net earned premium and improve leverage on certain expenses. Turning to investments, it was a flat total return quarter with income offsetting modest price declines in the portfolio.

Overall market yields remained subdued, but we have seen a little uplift recently as 10-year yields inched back toward the highs we saw in late March. Operating cash flow remains the primary support for growth and investment income, which turned positive in the quarter.

There have been a few shift - there have been few shifts in the allocation over the course of the year, but our strategy continues to focus on putting money to work in nearly all environments.

Apart from the capital markets' exposure, invest the earnings were up slightly from the comparable period in 2020, but Maui, Jim and Prime contributing $5.4 million and $4.4 million respectively. All in all, a very good quarter and strong first nine months of the year. And with that, I'll turn the call over to Craig..

And before I start, I want to try to ask Chelsea maybe if she would go back and maybe read the forward-looking statements that I think we - we maybe forgot to do at the beginning..

I didn't do any forward-look, Craig. So as long as you don't either, we're going to be okay..

I'll make my comments assuming that those have been implied and read..

Yeah -.

So. Thank you, Aaron and Todd and good morning, everyone. As Todd mentioned a very good quarter in light of Hurricane Ida and smaller catastrophes that impacted our customers and our result. After factoring in these events, we were still able to report a sub 95% combined ratio for the quarter and more than 10 points of underwriting profit year-to-date.

At the same time, we are growing our portfolio through rate and exposure, reporting - 18% top line growth for the quarter and 21% year-to-date. We continue to see rate increases across most of the portfolio although there is some tapering in spots. We are maintaining a good flow of business that meets our - discerning appetite.

The business we're underwriting is generally stickier, with higher renewal retention and new business at ratios. We are monitoring impacts from the supply chain and labor shortages as well as derived inflation.

Our talented underwriting and claim teams are working diligently to mitigate any resulting increase in loss costs by identifying risks, sharing information across our businesses, adequately pricing the tailored coverage we provide and taking advantage of any market disruption. Now to some more specific comments at the segment level.

In Casualty, we reported an 86% combined ratio for the quarter and 84% year-to-date. We were able to achieve an overall Casualty rate increase from 9% for the quarter, which feel a good portion of our 14% growth in this segment.

Growth is widespread across all major products in our portfolio and much of the rate continues to be driven by excess liability products, particularly commercial and management liability coverages. Our Transportation business continues to bounce back with increased bookings in public auto, but it's still challenged by driver shortages.

Overall, wheels' base rates continue to be up but rate increases are more moderate in size. Despite the overall growth in the Transportation space, we still find the trucking class to be increasingly competitive as top line and rates decreased for the quarter. Claim counts continue to climb to previous levels and more jury trials are being scheduled.

We will remain vigilant for social inflation and work to mitigate it through our investment in superior talent, training and triaging of claims. In property, we reported a combined ratio of 127% for the quarter and a 105% year-to-date, the excess in surplus lines wind product is the driver of the unprofitable results.

Hurricane Ida was one of the most intense and damaging hurricanes that strike the United States and recorded history. From day one, we have had our teams on the ground, assessing losses and helping our customers get back into business.

About 90% of our claims reported have been in the State of Louisiana as the New Orleans' Metro area is one of our peak zones for wind exposure. The event along with general market conditions and expected inflation have kept cat rates up double-digits for the eighth consecutive quarter.

Overall top line growth was 32% for the property segment in the quarter driven by exposures and a 7% segment rate increase. All products in this segment realized growth. In surety, we reported 75% combined ratio for the quarter. All three of our major products in this segment have grown profitably. Overall our top line grew 10% in the quarter.

Despite economic challenges both the commercial and contract, Surety markets remained very competitive. We are back visiting producers in person and continue to invest in capabilities that make it easy to do business and help our producers grow with us.

There are more construction opportunities in the market and we are supporting our contractors as they win this business. We will continue to expand our writings with existing clients and producers and invest in technology where it is a differentiator. We had a quiet quarter on the claim front despite the added risk from supply chain and labor issues.

Overall, another profitable quarter with solid growth. Our underwriting experts are ready to participate where disruption and market pricing permit us to flex our underwriting prowess at rates that are commensurate with the risk. As always, we are alert to the uncertainty associated with inflation and supply chain disruption.

We will continue to do what we do best, focus on the basics. We will diligently underwrite quality accounts, assess evolving exposures, require adequate valuation of insured property and walk away from underpriced business. We are good stewards of our capital, but also of our insured's risk and reputation.

I want to thank our RLI associates for delivering great results and value to all of our stakeholders and for helping our customers especially in times of need. I'd now like to open it up for questions..

Thank you, sir. And before we get started with the Q&A session, please 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 could cause actual results to differ materially.

Please refer to the Risk Factors described in the company's various SEC filings, including in the annual report on Form 10-K as supplemented in the Form 10-Q for the quarterly period ending June 30th, 2021, 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 second quarter results. RLI management may make reference during the call to operating earnings and earnings per share from operations which are non-GAAP measures of financial results.

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

RLI's management beliefs these measures are useful in gauging core operating performance across reporting periods, but may not be comparable to other companies as definitions of operating earnings. The question-and-answer session will begin now at this time. [Operator Instructions] Our first question will come from Cullen Johnson..

Hey, good morning. Thanks for taking my question. It looks like a relatively large quarter-over-quarter jump in earnings of Prime Holdings this quarter.

Is there anything in particular that drove that acceleration?.

Cullen this is Todd. I would say not outside of just continued revenue growth. I mean, they've grown quite a bit and just like us with our growth, you're seeing more being realized through earned premium, through revenue. So outside of that growth, no, there really isn't anything..

Okay, thanks. That's helpful. And then as you kind of continue to grow the balance sheet, you know, leverage ratios have gradually declined. You know, not that leverage I think is a huge consideration or part of the story here. But as we approach the 2023 maturity of the $150 million senior notes.

I'm just curious could you share how you all think about your capital structure going forward?.

Cullen, it's Todd. Certainly something - you're right from a leverage standpoint we're low from that perspective, because we have grown capital as much as we have. So it's something we talk about we - we've tended to be conservative there.

There certainly is room to increase the leverage and something we still have been talking about and we'll look to, you know, make some decisions as we move through to 2023..

Great, thank you. Those are all my questions..

Thank you. Our next question comes from Jeff Schmitt..

Hi, good morning. Could you discuss how much of your growth in the Casualty books is coming from E&S lines? I guess that would mainly be general liability and excess liability.

But are you seeing standard riders for kick more business into that market or what are you seeing there?.

Well Jeff, this is Craig. I - E&S business is growing at about the pace that the rest of our Casualty portfolio is growing maybe a little faster, but not a lot faster.

I mean, all the products in there are specialty products, even though they aren't maybe not E&S products, they're a little less regulated than other products so, but the formal definition of E&S I guess, it's growing about the same pace. Casualty probably a little less at a little slower paced than the property business there.

I mean, the property rates obviously continue to climb at a little bit faster rate than the Casualty rate. So, our underwriters have taking it - trying to take advantage of that you know so..

Yep, okay. And then just looking at the acquisition expense ratio. You know if you go back, I think it was you know, 34% historically, 33% last year or year-to-date, it's 33%.

Is that really just kind of a changing business mix that's driving that? I mean, how should we think about that run rate going forward? Is 32% the right level?.

Well, yes some of it is changing in the next year, you're right about that. If you think in terms of if our divisional side of the house is and home office too, but that's not in the acquisition as half of our overall operation - operating expenses and a lot of that is people as you can imagine.

So we're going to leverage people a bit better or should as we continue to grow earned premium, you've seen that a bit.

I think if you look in the totality right at the expense ratio, we were down a couple points full year, which I think is a better way of looking at it you know from a full year basis last year you've seen some improvement and roughly another point this year.

So there are some things that we can leverage a bit better, but you're right, it's reflective a bit of mix of products as well and that's you know, where the opportunity is..

Right, right. Okay, thank you..

Thank you. Our next question will come from Meyer Shields..

Thanks.

On the Construction Surety side, if we have a combination of a worker shortage and rising material's inflation, does that have any impact for Surety losses?.

Meyer, this is Craig. Yeah I mean, potentially yes. Obviously any delay in the construction of the project can cause at least the principal - to put the principal in claim. However, they - we typically have opportunity to work our way out of that. The other thing that offsets that it's also very difficult to find a replacement contractor to do the work.

So a lot of times they just want to continue with the contractor they had, it's just the matter of a little bit of delay. There is some understanding I think of the fact that there is a labor shortage, I think a lot of more construction to be done correctly, well done as opposed doing a shorty way.

So they would gather us so finish the project with skilled workers as opposed to unskilled workers. So there's a lot of working things out like that and a lot of the contracts do have ways to pass on the extra cost associated with completing the project.

So the increased cost of materials a lot of times is passed on to the person that's paying for the project..

I think, Meyer, if you look to -.

Yeah -.

We're probably a little bit elevated, again if you go back and look from an underlying standpoint over the past year and a half or so from a loss booking ratio on the Surety side. So I think that uncertainty whether you call it COVID last year and some of the things Craig was referring to this year there's - there's recognition of that..

Okay. Yeah, perfect. That's what I was looking for. And then I think, Craig in your comments you mentioned I guess a shortage of drivers in Transportation.

Is there a way of assessing how good drivers are now compared to let's say 2019? So more apples-to-apples excluding COVID?.

How - how much shorter they are? To say how much more of a shortage.

Is that what you're asking?.

Really driver's quality in other words, is the -.

Yeah -.

Used to be a group of overall drivers, I mean, worse than they -.

Yeah that's I don't think we're probably in a good position to be able to assess I mean, the general population of drivers. I mean obviously we're going to continue to be very picky.

I mean, we're looking for professional drivers to get into the public automobiles, the buses and the trucks that we ensure that doesn't mean that the general population isn't involving. I did see an article the other day about letting an 18-year-olds behind the wheel of a big truck. I don't know that's the target market for us.

So, but I certainly would expect given the shortage overall and the fact that this - there's fewer people wanting to go back to work for various reasons and people choosing to retire a little earlier than maybe they would just because of lifestyle choices has created you know, certainly more risk on the road I would say in regards to the large vehicles..

Okay, perfect. That's what I need to know..

Right, thank you. Our next question will come from Scott Heleniak..

Hi, good morning. Just wanted to first touch on the property premium growth which you know pretty significant and you talked about your rate increases are pretty good 7% or so.

But just want to if you could touch more on the opportunity you're seeing there just by counter geography you see that growth continuing to 2022? You think this is more short-term? And then also is there any kind of change in mix you know in terms of more or less cat exposed property you know, business written recently just any detail there would be helpful..

Scott, this is Craig. I mean we're seeing growth across the portfolio, a double-digit growth rates.

So I mean we are seeing probably more opportunity and that on our E&S side of the house particularly on the hurricane side in the southeast, where the - where you've seen the catastrophes hit as well as you know there's the inflationary impact that I think everybody starting to realize it's costing more to replace these buildings, particularly in the southeast is where it's being felt.

We're not seeing it as much like on the quake side of the house, I mean, we are getting raid on the quake side of the house, but certainly the trails what we're getting on the hurricane side. You know that's what people are familiar with and they remember that we've had big hurricane, so it's easier to get the rate on that side.

I would expect, you know, that we're going to continue to see rate and probably some both exposure and rate growth in the hurricane books. But we are seeing growth just to be clear you know the Hawaii Homeowners book is still growing at double-digit rates. I mean, there is some hurricane exposure there.

But most of that is higher exposure on the island - islands. And, and our marine businesses within that grew too and it's maybe not as cat exposed as our E&S business, although it is cat exposed, but not as cat exposed. So I think we're expecting to see continued growth across the property portfolio because of the -.

Sure.

And so the southeast hurricane, is that something that you're - you feel like there's a little more opportunity than normal like given where rates are or is that just something you don't want to take on the cat exposure or just doing it at kind of a measured pace?.

Yeah, Scott I mean, if we can get - if we can grow at adequate premiums, which we think currently we're there, but if we can continue to get rate and continue to get rate adequately there. You know, obviously, that's evolving given, you know, given the cost of reconstruction down there, so that the bar has gone up - down there in regards to price.

But fortunately, we're able to get more price certainly we think that's an opportunity and when I say, the southeast probably I mean, the opportunity is more non-Florida down there right now than it is in Florida. But I mean we have room in Florida if we'd like to grow if the rates allow us to..

Okay, yeah that's helpful. And then you Craig you mentioned in your comments some tapering of rates in a few areas.

Is there any specific lines that you could call out on that? And is there any specific lines that are holding up better than you thought?.

Yeah, I mean mostly excess Casualty stuff, which I mentioned would have been like commercial access in the E&S space, which is a lot of excess of contractors by the way. And then our D&O business or management liability business, the rates at least for this quarter seem to hold up more than I thought they were going to start to fall.

In the wheels based businesses, you're starting to see a little I mean still increases, but you know, we were getting double-digit increases and they're now mid - you know, mid single digit increases. So that's where really where I've seen it falls.

Some of the other places and where we write, which is smaller Casualty business with lower limits, you know, the rates never went up that much. They were going up 3%, 4% maybe 5% and maybe there a point or so lower than that right now. So that's what we're talking about in regards to moderation..

Okay. Yeah and then lastly I was wondering, Todd, you mentioned you know a little bit of incremental yield potential. I mean obviously that's you know, 10-year treasuries going up a little bit.

It's not where it was two, three years ago, but what is your new money yield now? What are you seeing in the marketplace versus existing portfolio yield? What's the spread I don't know if you have that handy?.

Yeah, Scott it's Aaron. We're probably in the low - in the low 2s versus the up - upper 2s for what's in the portfolio today..

Okay, still - still ways to go right to narrow the gap. So, okay..

Yeah we'd like to close the gap with a rise in - continued rise in yields. So we'll take that trade as we mentioned before in terms of bond prices going down, but being able to invest at higher rates..

Craig has asked the underwriters to keep throwing operating cash flow. Aaron and wait for the portfolio..

It's been a help. It's been a big help..

Yeah I hope you keep doing that. All right, thanks a lot..

Thank you..

Thank you..

Thank you. Our next question comes from Jamie Inglis..

Hey, good morning, folks. Craig I've got a query about your thoughts and views about you know, climate change, something everyone's been talking about.

What is RLI's view about climate change impact on your book of business? And what have you - what does that led you to do over the last you know, three, four, five years? And what do you think it will lead you to do going forward? I think it's from an [technical difficulty] your lines of business geography whatever -.

So I've been dying to wait for that question. But no, I mean, our policies - obviously our policies are renewable every year, obviously, we're very watchful of the impact of climate change I mean it's very difficult for us to measure the impact.

Fortunately we are in a situation where you know, we get to reprice our accounts you know every year and you know, I'm not a scientist, so I can't really comment on like quantify the impact but certainly we are watchful.

And if you know, continue to have severe hurricanes and storms and events as a result of climate change, I mean, obviously that's got to be factored into what it costs to ensure those location..

Okay, thanks. That's all I have..

Thank you. There are no further questions. So I would like to turn the conference back to Mr. Jon Michael..

Thank you. What a great business we are in. We're able to help our customers get back in business from these - the hurricanes and other catastrophes like this, and yet still are able to post a very satisfactory quarter, mid 90s combined ratio, we had excellent growth during the quarter and an excellent beat of the analysts' expectations.

So with that, we'll talk to you again next quarter. Some of us will and we'll leave it at that. Thank you all for joining..

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 988-4611. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect..