Good morning and welcome to the RLI Corp. Third Quarter Earnings Teleconference. After management’s prepared remarks, we will open the conference up for questions-and-answers. Before we get started, let me remind everyone that through the course of the teleconference, RLI management may make comments -- 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 Forms 10-Q, all of 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. During the call RLI management may refer 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.

Additionally, operating earnings and operating EPS exclude equity and earnings of Maui Jim and related tax issued to sale of RLI's investments, RLI's management believes that measures are useful in gauging core operating performance across reporting periods, but may not be comparable to other companies' definitions of operating earnings.

The Form 8-K contains a reconciliation between operating 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 Chief Investment Officer and Treasurer, Mr. Aaron Diefenthaler. Please, go ahead..

Thank you, Victoria. Good morning everyone. Welcome to RLI's third quarter earnings call for 2022. Joining us today are Craig Kliethermes, President and CEO; Jen Klobnak, Chief Operating Officer; and Todd Bryant, Chief Financial Officer. Per our usual process, Todd will lead off and walk through financial results for the quarter.

Craig and Jen will offer commentary on our product portfolio and current market condition. We will then take your questions, then Craig will close with some final thoughts.

Todd?.

Thanks Aaron. Good morning everyone. Yesterday, we reported third quarter operating earnings of $0.50 per share, which were negatively impacted by losses from Hurricane Ian. Apart from Ian, underwriting results on the current year remained strong and benefits from prior year's reserve releases were accretive to earnings.

All-in, we experienced 13% topline growth and close to the combined ratio of 97% for the quarter. Combined with a very strong first half of the year, our year-to-date combined ratio was 85.3%.

Investment income advanced 19% in the quarter as reinvestment rates continue to move higher and operating cash flow remains strong and supportive of incremental investments in the portfolio. I'll talk more about Maui Jim in a minute, with net realized gains of $573 million for the quarter, reflects the sales of its minority investment.

From the net unrealized loss perspective, equity securities declined $26 million during the quarter as market volatility continued. Craig and Jen will give some color on the market landscape in a minute, but at a high level, all three segments experienced growth as we continue to benefit from favorable conditions in most areas of our business.

From an underwriting income perspective, the quarter's combined ratio was 97% compared to 94.6% a year ago. Both periods were impacted by elevated hurricane losses. Hurricane Ian losses in the quarter are within our pre-announced range and totaled $40 million net of reinsurance.

$33 million of that is from our property segment and $7 million impact of casualty where a number of our package policies are reported. Net of bonus related impacts, the event totaled $34.8 million or $0.60 per share net of tax and added 12 points to the quarter's combined ratio.

From a loss perspective, all three segments experienced favorable prior year's reserve development. Casualty experienced $28 million in favorable development, with notable contributions from general liability, commercial access, Executive Products, small commercial, and miscellaneous professional liability.

Property posted $3 million in favorable emergence with the largest benefit from our Marine business. In surety, commercial and miscellaneous were responsible for the bulk of that segment's $2 million in positive development during the quarter. Moving to expenses, compared to last year, our quarterly expense ratio increased 2.5 points to 40.4%.

This result was impacted by an increased bonus and incentive-related accruals. On year-to-date basis, our expense ratio was 39.2%. Turning to investments, total written performance was minus 3.4% during the quarter and minus 13.5% on a year-to-date basis.

Balance portfolios continue to be challenged by the current environment as well as stocks and bonds traded lower in price. As we discussed in our second quarter call, the majority of these decline remain unrealized without the need to sell significant portions of the portfolio.

Strong operating cash flow and increase in fixed income yields have offered --- welcomed opportunity to purchase high quality assets that underpin investment income. Today, new money yields are achievable in the 4.5% range, without having the need to reach down to the credit spectrum or for longer maturities.

Moving to other investments, we recorded an $18 million loss in the quarter from our equity and earnings of Maui Jim. This result was driven largely by transaction related expenses incurred by Maui Jim from the company's sale. As previous previously announced, we received $686.6 million in exchange for our shares in Maui Jim.

Final proceeds remain subject to customary post-closing working capital and other adjustments, which could modestly increase this amount. Prior to sale, our carrying value of Maui Jim was $108.4 million, inclusive of the quarter's loss.

Our net earnings, with realized gain, loss in the quarter, taxes, and other sales related amounts reflect $437.7 million or $9.56 per share from the sale of this minority investment. Lastly, book value per share was $30.72 to end the quarter, up 60% from year end inclusive [Indiscernible], and was heavily influenced by the realized gain of Maui Jim.

Obviously, this transaction generated a significant amount of capital. As always, our first preference is to deploy capital in support of our business, which we have been doing. We regularly evaluate our capital position relative to the opportunities we've seen as we look forward.

This is the timing here we have historically evaluated any excess capital position and we expect to follow the same approach in the fourth quarter of this year. 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.

Craig Kliethermes Thank you, Todd, and Aaron and good morning, everyone. A good quarter all things considered. First and foremost, our hearts are with our policyholders and their families who've been affected by Hurricane Ian. Our talented claim team is on the ground and helping them as I speak.

We never lose sight of our purpose or our promise to pay for covered fortuitous losses in exchange for a fair premium. This is our time to fulfill our obligations and help insurers recover and restore their businesses as quickly as possible. This is what we're focused on delivering.

Stepping up and paying for what we owe helps customers regain their livelihood and eliminate the needless involvement of public adjusters, litigation costs, and reputational damage frequently cast upon our industry after such an event. We are doing our part to help our customers and hope the rest of the industry is focused on the same.

Despite this very large event, we were able to report an underwriting profit in the quarter. It's a testament to our diverse product portfolio at both the business unit level and overall.

For the product experience profitability challenges, we can typically count on several other uncorrelated products that are performing well, to counterbalance the underperforming one. This quarter our E&S Casualty, Executive Products, and Surety were some of our largest contributors and helping us maintain underwriting profitability.

At the same time, we were able to grow across all segments which resulted in total growth of 13% for the quarter and 17% year-to-date. All segments remain profitable year-to-date. We continue to see opportunities to grow what we know profitably.

Industry losses from Ian may lead to an even harder catastrophe exposed property market with tight capacity going forward. This may spill over into some casualty lines. Our strong balance sheet, high performing businesses, and broad portfolio of specialty products positions us well to take advantage of any disruption that may occur.

I'll now turn it over to Jen for his color by segment..

Thanks Craig. I'll start with the property segments. Premium grew 40% and the property segments, including 8% positive rate change this quarter. The segment is led by E&S property, which is also the largest contributor to our catastrophe portfolio in terms of premium and exposure.

Hurricane rates were up 25% in the quarter and we continue to push on terms and conditions such as deductible. To offer some perspective, we started achieving rate increases on hurricane business in 2018. Since January 1st, 2019, the cumulative rate increase on our hurricane book is 110% and new business pricing is higher than renewal.

Additionally, we have been steadily improving terms and conditions. Currently, we can write as much business as we want, but we manage exposure growth by continuing to focus on our geographical spread of risk and providing lower limits on new business than on renewal accounts.

The majority of our Hurricane Ian loss occurred in the E&S Property division. The loss estimate accounts for inflation and potential litigation, and is based on observations and discussions with our insurers and our producers through site visits over the last couple of weeks.

We have been able to visit most of the sites with larger limits exposed and have advanced money to help with mitigation to respond to our insurers' immediately. The storm made landfall in one of the industry's peak catastrophe zones, which is also one of our highest exposed geographies.

Despite the estimated Ian loss, the E&S Property division by itself still posted an underwriting profits through the first nine months of 2022. It should be noted that due to the storm, there are non-cancellation rules in place in Florida through the end of November.

Our underwriters have leaned in to the Florida property market opportunity this year and recognize that direct terms will likely improve given the posturing of the reinsurance market. Our property reinsurance coverage comes up for renewal at 1/1, and we are expecting some rate increases.

We manage our business to ensure we can entertain new opportunities with our producer partners through all cycles. We will adjust our appetite based on the availability and cost of capacity and are prepared and willing to walk away from business if the market becomes irrational.

We have additional businesses in this segment that are achieving profitability and worth mentioning. The Marine Division grew 25%, while producing an underwriting profit. We've been obtaining notable rate increases for four years. In the third quarter rates increased 6%.

We're seeing more opportunities by expanding our team and staying in front of our brokers. That same customer service spills over into our Hawaii Homeowners' book where we grew by 17%. We celebrated our 25th year serving the Hawaii Homeowners market with an appreciation event in Honolulu for over 160 of our partner agencies in September.

Our local Hawaii presence and underwriting and claims service continue to translate as a positive result for us and for our customers.

Although the property segment reported a 110% combined ratio in quarter, it was an improvement from last year's third quarter and the segment is on pace to outperform last year's results was an excellent 82% combined ratio year-to-date. Turning to our Surety segment, premium was up 12% in the quarter with all products contributing.

We continue to see the impact of inflation on project values, which drives some of the growth in our contract surety premium. We have added to staff in the segment and are seeing more opportunities through cross marketing initiatives.

We continue to monitor this segment closely given ongoing shortages and the construction labor market, increasing interest rates that can impact project funding and time, and overall economic conditions.

Although this market continues to be highly competitive, we achieved an 81% combined ratio, and will continue to selectively find opportunities in surety. Finally, Casualty premium grew 3% of the quarter, led by E&S general liability which was up 25%.

This construction-focused business is truly competitive, especially in the Northeast, where several carriers offer broader terms and conditions. Our growth has been driven by opportunities outside of the Northeast.

Our Transportation Group experienced 10% growth in the quarter, which was driven by the public auto product, which continues to see more buses in service compared to last year's third quarter. Both the public auto and specialty commercial auto markets are stable, and we're able to find opportunities to obtain appropriate terms and conditions.

The Truck portion of our transportation book is still very competitive with multiple sources of new capacity that have emerged in the last 18 months. Finally, our personal umbrella product has grown 19% in the quarter as we continue to strengthen relationships with all of our distribution channels.

We are watching growth closely given severity trends and the lag and state insurance department rate approval. We work with our producers to navigate the opportunities in states where it takes longer to adjust our pricing terms and conditions.

Casualty segment's growth was offset by our Executive Products group from cyber and transactional liability has almost run its course. We are also experiencing strong headwinds from brokers on public D&O and side business where they have obtained access to more than a dozen new markets, including many MGAs [Ph] over the last 12 months.

We have adjusted our underwriting in this changing market resulting in a 3% rate decrease for the quarter. Moving to another layer within the insurance tower for some accounts, and even walking away from -- when the terms become unsustainable.

Excluding the impact from this business unit, the Casualty segment's premium would have grown 10% in the quarter. Overall, Casualty segment rates increased 3% for the quarter. The Casualty loss ratio was elevated as Hurricane Ian losses and our general binding authority book are included in the segment.

The disruption in this space is allowing us to implement some notable changes. We continue to raise rates and tighten terms and conditions for all coverages for our GBA product as we work towards underwriting profitability. Overall, the Casualty segment finished with a 93.7% combined ratio for the quarter.

And now I'll turn the call back over to Craig for some further comments..

Thank you, Jen. We continue to benefit for very good underlying results for a company, we're poised to take advantage of tighter capacity, and harder market. We believe there will be a flight to quality affecting relationships ranging from reinsurers, distribution partners, insurers, and underwriters.

We have the financial strength, reputation, and underwriting expertise to benefit from any resulting market displacement. ROI is a great home for future employee owners who share our values and discipline, accountability and ownership. I would be remiss if I didn't mention the large gain on the sale of Maui Jim this quarter.

Maui has been a great investment for our company and we will continue to remember the deep shared history of our two companies. Mahalo to the entire Maui Jim team. I also want to thank all of our associate owners for delivering again this quarter responsiveness following to catastrophic events is where reputations are earned or forfeited.

When we can't stop natural catastrophes from occurring, as owners, we realized that if we continue to take care of our customers, we will take care of our future. Thank you. Now, I'll turn it back to the moderator who will open up for questions..

Thank you. The question-and-answer session will begin at this time. [Operator Instructions] Our first question comes from Matt Carletti at JPMorgan, please go ahead. Your line is open..

Hey, thanks. Matt Carletti at JMP. Good morning. Couple of questions. One Jen you, kind of -- good morning. First on the accident loss ratio, I wanted to follow-up on Jen's comments there. I think you mentioned that there was some impact from Hurricane Ian losses as well as one other item I didn't catch. It looks like it went up.

If we look at kind of nine months versus six months run rate, two to three points, is it? If we were to strip that out, would it be relatively unchanged kind of sticking at that 64, so that was on the first half?.

Hey, Matt, it's Todd, I'll take that. I think the bigger driver is what you're seeing from a casualty -- the catastrophe impact, that's really what's driving it, you can get a little bit of movement between quarters.

And I would look more to the year-to-date on that and I think it were 65 from the Casualty underlying which is about a point better than what we were last year. So, I really would, kind of, focus on the year-to-date when you take a look at that.

You can get a little bit of movement between quarters, but the large impacts is that -- is those cat losses..

Okay, great. That's helpful. And then just one other one if I could. Net investment income, took a nice step-up in the quarter.

Is that largely, kind of just rates earning in related and therefore largely sustainable or was there any kind of one-time there that might have given us a little benefit this quarter that we shouldn't repeat going forward?.

Hey Mike, its Aaron. Thanks for the question. Yes, it's really just us putting money to work pretty consistently operating cash flow last year was very strong. And we've seen investment income off now, going back over the last four, four quarters on a comparative basis.

So, it's really both the combination of new money yields being up pretty consistently here in 2022, plus larger amounts of cash flow just being put to work really in fixed income more so than anywhere else..

Awesome. Great. Well, thank you for the thank you for the caller. Appreciate it..

Thanks Matt..

Thank you very much for your question. Our next question comes from Greg Peters as Raymond James. Please go ahead..

Hey, good morning. This is actually Sid on for Greg. Just looking at the southeast property market and the current state of it and the outlook for reinsurance pricing and tightening capacity, possibly.

Could you guys just give an updated outlook for growth in the property and business there, and if there's been any change on the outlook for that business?.

Sid, this is Jen. So, the southeast property market and in particular, Florida, remains a very open space to do business. There's a lack of capacity and I think we're going to see more of that as we move towards 1/1 and through the reinsurance renewal process.

There's a number of MGAs in that space that are currently looking to negotiate their capacity for next year, and I think are going to struggle through that process.

This is the season of meeting with reinsurers, so we went to a number of meetings, we've been doing some traveling, and the reinsurance market is looking to take some action here from a rate standpoint, and also push on other terms and conditions such as retention by that pitch, because we would like to continue to take advantage of this market, I think you can see from our results in 2022, that, despite we had a lot of growth, we had a large event, but we were still able to make an underwriting profit year-to-date in our E&S division.

So, we'd like to continue doing that. But it will be dependent on what we can obtain here on 1/1 and that's still in process. So it's yet to be determined..

Okay. Got it. Thank you..

Thank you very much for your question, Greg. Our next question comes from Mark Dwelle at RBC Capital Markets. Please go ahead. Your line is open.

Yes, good morning. Couple of questions. First with respect to, you talked in pretty good detail about how the property market has tightened up and so forth. And I think that's pretty well expected and understood.

Is there any signs yet as to whether any other EN [ph] losses and resulting hardening of the reinsurance market is spreading over to casualty lines at all? Or is it maybe too soon to tell?.

Hey, Mark, this is Jen. I think it’s too soon to tell as we listen to the re-insurers, talk about what they want to accomplish, they would like to spillover. But we don't know that's going to happen. Well, let's see.

From a primary standpoint, I think the issues that have being going on for years in terms of loss trends, frequency, severity, et cetera are kind of just continuing in that market. So nothing bleeding over that we can see from the end at this point of time..

Second question, kind of just staying in that same general vein on casualty. You had commented in terms of the DNO market that some of the pricing there had been softening and you mentioned some new markets.

Can you give any, just maybe additional color on what you think is maybe causing that market to soften? I guess, I would have thought DNO is a kind of a textbook example of a social inflation type market that would be depressed in a period where markets are been negative and adverse economic conditions.

But seemingly that's not the case from a pricing standpoint?.

Sure Mark. I think the issue here is, we had three years of very significant rate increases, all over 20%. And the market and so a lot of people, you saw that and thought, well, maybe I should get in and get some of that rate. And so, we have had people enter. The other part of it is just the number of deals available.

If you think about how many IPOs are not occurring these days that used to be. There are less deals to get on. So there's a little bit less, less insurance being procured. And so, everybody's fighting for those accounts. So I think the combination of those factors is causing the market to soften. And so, that's what we're seeing..

Okay. That's helpful. Thank you. And I guess my third question, Todd, I guess alluded to the disposition or the utilization of the Maui Jim proceeds a little bit in his prepared remarks. I'm not real optimistic, I'm going to get a lot more insight.

But I -- one question I wanted to ask is, as you and your board consider dividends, special dividends or any other potential use.

Are you thinking about that, from a net income perspective, a comprehensive income expense perspective, or an operating earnings perspective?.

This is Todd, Mark. I think we think about all those, right? I mean, I think you're looking at all factors, you're looking forward on what you think growth might be, you're going to consider what the reinsurance market may be like. So, we do take a rating agency view of some of this, right, some of that GAAP base, some of that stat base.

We have internal models that we do ourselves, so it's really an all in view on all of those aspects..

Maybe if I asked it differently. If somebody's thinking that there was a nearly $10 Gain on Maui Jim, and accordingly there would be a $10 special dividend associated with that.

That would probably be too expensive of a way to think about it, right, in view of the way comprehensive income and operating income has behaved?.

Hey, Mark. This is Craig. I mean, it was very much like Todd said, we're going to look at all the opportunities in front of us, obviously, your preferences to put our capital to use, you've seen we've grown a bit and we're going to have to do all that as Todd talked about the modeling.

I want to look at all that and then move forward and see what we think the market's opportunities are going to be out there and then we'll have to make a decision. So hopefully that's help..

Okay. I took my best shot. I took my best shot. I've been trying this for three quarters now. I've had equal success in all three. Thanks for the color..

Thank you very much for your question, Mark. Our next question comes from Meyer Shields at KBW. Please go ahead..

Perfect, thanks. I want to go back to the casualty segment. I completely understand that it was Todd's comments about looking at year to date numbers. But there wasn't an increase in the year to date from call it 64 in the first half to 65 now.

Something you could talk us through what's changing the company view?.

I don't think our view is changing. Meyer. I mean, I think from an underlying from a core loss ratio standpoint, we don't have a different view. Again, I mentioned a little bit of noise you may get between quarters. I don't want to go down a rabbit hole on how unallocated loss adjustment expense may be attributed between current and prior years.

But it really is our view has not changed. So, from a 60, is it a point higher than what you saw through the second quarter? It is. But the underlying view has not changed on our part..

Okay. That's how I mean, I'm happy to go to into the rabbit hole. But I see what you're saying. The same question, though, if I can on the expense ratio for casualty that seemed high. And that surprised me, given both the cat losses and the underlying.

I was hoping you could explain if anything unusual is going on there?.

This is not that unusual. I mean, we did and this crosses across all segments. We did have a onetime bonus that was related. I mentioned that there was some impact there related to the transaction. You're seeing that through policy acquisition, I read additional expense, some home office expense. So nothing unusual. As mix changes, I guess I will mention.

Mix changes a little bit, right? Some of our small commercial, our personal umbrella. A few of those products as they grow, they may have a marginally higher commission rate with that account for maybe half a point or less on the expense ratio. It could, but nothing material at all, Meyer..

Okay, fantastic. Thank you so much..

Thank you very much for your question. At this time, there are no further questions. I'll now turn the conference over to Mr. Craig Kliethermes for some closing remarks..

Well, thank you. Thank you all for joining us. Pretty good quarter overall, I want to thank the entire RLI's ownership team. Hopefully to finish strong and we'll see you next year I guess. Thank you..

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