Q4 2020 Rli Corp Earnings Call
Okay.
Good morning, and welcome ladies and gentlemen.
And our ally Corp, fourth quarter earnings teleconference.
As a reminder, we will open the conference up for question and answers after the presentation.
Before we get started let me remind everyone that through the course of the teleconference RLI management.
And you made 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 from the Companys, various SEC filings, including and the annual report on form 10-K, and supplemented and the form 10-Q for the quarterly period ended December 31st 'twenty, and 'twenty, 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 fourth quarter results.
Alright.
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 on.
L. Ice management believes these measures are useful engage and core operating performances.
Cross reported curious, but may not be comparable to other companies' definitions of operating earnings the.
And the form 8-K contains a reconciliation between operating earnings and net earnings. That's on 8-K and press release are available at the company's website at Www Dot R. L. I Corp dotcom.
I'll now turn the conference over to Rli's, Vice President and Chief Investment Officer, and Treasurer, Mr and decent dollar. Please go ahead Sir.
Thank you Madison.
Good morning, Thanks for joining us on <unk> fourth quarter earnings call as usual, we have Jon Michael Chairman and CEO, Craig Kliethermes, President and CLO and <unk>.
Hi, Bryan CFO.
John is going to begin with some opening comments John.
Yes.
Thank you Eric and welcome to the final earnings call to close out 2020 and.
And in many respects.
We're ready to launch <unk>, 'twenty, 'twenty, one and I would be remiss if I.
You didn't mention that ROI well, we're getting many challenges during the last 12 months and deliver strong results. There is much to be proud.
Oh.
For 2020 gross premiums were up 7%.
Our GAAP equity grew to 1.1 billion after returning more than 87 billion to shareholders during the year.
And we achieved a 92 combined ratio that 92 combined marks the 25th.
Consecutive year of underwriting profit for RLI.
These results could not have been possible without the hard work of art channel does associates.
Persevere through tremendous uncertainty and change to keep our business and more importantly, our customers business moving forward and I'm proud of our entire team.
Or their outstanding efforts this year.
And as you all and you'll get more details from Todd and right on our fourth quarter and year on performance and will.
I'd be glad we will be glad to answer your questions at the end of the call.
And before we move on and I want to take a moment to congratulate Craig and December I announced my plans to retire at the end of this year.
And then Craig will be assuming the CEO role.
At the end of or at the beginning of 'twenty 'twenty two Greg is a proven executive and I have complete confidence.
His ability to continue leading RLI to achieve success congratulations Craig.
And now I'll turn it all works.
To provide some financial highlights thanks, John and good morning, everyone, Congratulations and Craig as well.
Last night, we reported fourth quarter operating earnings of 75 cents per share the.
The quarter's result reflects elevated catastrophe losses, which were offset by favorable benefits on prior years loss reserves as well as improving current year casualty results.
10% top line growth and posted an 88 combined ratio and investment income declined modestly from unrealized returns on the investment portfolio continued to rebound from adverse trends earlier and the year.
Overall strong net and comprehensive earnings drove book value per share up 22% for the year income.
And so the dividends too and the year at $25.16.
Pricing momentum continued and the number of our products and the pandemic influence was muted in the quarter.
Casually posting 9% topline growth.
Property, and surety were up 15% and 2% respectively.
Craig will talk more about individual products and market conditions, and a minute and overall growth and gross premiums written was driven largely by rate increases and expanded distribution.
From an underwriting perspective, we posted a fourth quarter combined ratio of 88.0 compared to $92 four a year ago.
Our loss ratio declined three five points to 45, eight and reserve benefits offset six five points of hurricane losses posted in the quarter and and.
Addition to catastrophe losses, we maintained the elevated current year loss booking ratios and discuss the last few quarters on certain financial related products or heightened exposure to the pandemic related losses exists.
And this resulted in recording another three and a half million and COVID-19 related pre tax losses, two and a half late in casualty and $1 million.
And and surety and year to date.
Serves established for COVID-19, total 18 million by segment announced recorded total 2 million per property $3 million for surety and 13 million for casualty.
We have paid less than 10000, and actual indemnity losses on what we deem as COVID-19 related.
Over 90% of claims received had been closed without payment, but we continue to investigate and it'll be you all claims submitted.
Offsetting reserve additions and the quarter were approximately $25 million and net benefits from prior year's reserve releases largely within cash within the casualty segment, where a majority of products posted favorable experience.
Moving to expenses on a quarterly expense ratio remained below last year.
0.9 points to 42.2.
Relative to last quarter. However, this ratio moves higher as metrics that drive various incentive plans and combined ratio operating return on equity and book value growth all improved significantly during the fourth quarter.
I would note however on a year to date basis, our expense ratio was 48 down one eight points compared to last year.
Decline was aided by growth and revenue modestly lower amounts earned under incentive plans as well as targeted expense reduction and deferral initiatives that began at the onset of the pandemic.
As mentioned last quarter, we continue do about evaluate areas of opportunity for efficiency gains and expense savings, while increasing our investment and technology, particularly those related to customer experience and ease of doing business.
Turning to investments capital markets made up lost ground and the quarter with robust returns and the last two months of the year public.
Public equities were responsible for most of the quarters three 2% return however bonds put in a positive result, even with higher risk free rates. While total return was a significant contributor to the increase and shareholders' equity investment income remains under some pressure from the current rate environment.
It is not our preference to reach for risk and to make up for lower rates.
Keep putting money to work letting portfolio growth stemmed the tide and the.
Majority of operating cash flow was being invested in high quality fixed income securities.
Outside of the core portfolio, our share and investing earnings was down on the quarter.
Maui, Jim results were influenced by normal seasonality as well as certain mark to market adjustments on our long live assets.
Prime investing earnings continued to advance reflective of growth and revenue and earnings they are experiencing.
All in on a very good quarter and solid year. We ended the year with $1 1 billion and shareholders' equity our combined ratio was 92.0 for 'twenty and 'twenty, which as John mentioned and represent represents our 25th consecutive year of reporting an underwriting profit.
Once again on.
Operating income and solid investment performance resulted in capital generation and excess of current needs, which was returned to shareholders and the form of a $1 special dividend in December.
And 2020, we marked our 45th consecutive year of paying or increasing our quarterly dividend.
Special dividends, we have returned over $1 1 billion and dividends to our shareholders over the last decade and.
And with that I'll turn the call over to Craig.
Thank you, John and Todd and good morning, everyone. Given all the challenges faced in 2020, we're proud of our success.
We reported our 27th consecutive year of underwriting profit and grew top line by 7%.
Great quarter overall, with an 88 combined ratio on 10% top line growth.
Large parts of the market appear to be shifting in our favor with retrenchment of some competitors' rates, increasing and terms tightening.
We still see some uneven sees ahead, but are confident that with our diverse portfolio of products and underwriting discipline, and we're well positioned to take advantage of opportunities presented now.
Now I'd like to go into a little more detail by segment.
And our casualty segment, we saw 9% topline growth for the quarter and we ended the year up 6%.
<unk> able to achieve a very good underwriting results for the quarter and the year with and 85 and 92 combined ratio respectively.
Growth has been fairly widespread across the segment with our excess liability businesses, leading the way.
We continue to see opportunities and both our personal and commercial umbrella businesses, where we focus on the first excess layer.
Our executive products group is also growing at a relatively good clip, but mostly from needed rate increases.
Our transportation Insureds are still struggling and as a result.
Realized a 25% revenue decline for the quarter and 40% for the year.
Overall, and the CASM segment rates were up 11% for the quarter and 10% year to date, which is outpacing our expectations for loss cost inflation.
We believe double digit rate increases are still achievable and auto liability excess liability and the directors and officers product line, which for us make up about half of the net premiums in this segment.
The market remains very competitive and primary limit liability and packaged businesses, where we target small and medium sized professionals and contractors.
And property, we grew 15% and the quarter and 11% year to date.
And we achieved an underwriting profit and the quarter, but did it end up and the loss position and this segment for the year.
Obviously, a tough year with a dozen named storms, making landfall and U S.
Property business is where the market is hardening most broadly with rates up 11% across the segment for the quarter and the year.
Our catastrophe focused wind and quake businesses led the way and year to date rates were up 35% and 18% respectively.
Our marine business continues to find opportunities from disruption at Lloyd's with rates up 9% for the quarter and year to date.
And our Hawaii homeowners book also continues to grow profitably.
Surety remains the most competitive segment for US we were able to grow the top line, 2% this quarter, but did end up from here down 1%.
The combined ratio continues to outperform it and 85 for the quarter and <unk> 75 year to date.
Given some of the headwinds. This segment has faced both from the fallout of the pandemic and intense competition and the surety markets we serve.
And drives they've done a great job staying disciplined and working with our producers to manage risk and produce great results.
Our focus on customers with strong balance sheets, and good management had been beneficial during the financial stress and economic uncertainty, resulting from the pandemic.
We believe that keeping the powder dry will serve us well as we are optimistic this market will eventually swing in our favor.
Overall, a great quarter and a very good year.
And I think about everything that's happened over 'twenty and 'twenty. It reminds me of stories and my grandmother used to tell me when I was young.
And I remember she would tell antidotes about growing up poor and rural Missouri.
During her first 25 years on Earth. She grew up with the Spanish flu the first World War, the spread of polio and the great Depression.
It was unimaginable to me at the time, but it now seems like we have all with a quarter century and the past year.
Like my grandmother, who lived to the age of 92.
I've also been resilient and we will persevere.
Our company has overcome many extraordinary challenges over the last 25 years of its existence, but still delivered underwriting profit every year.
To get where we are today, we have adapted adding many diverse products building out our surety business, which and sizing our catastrophe business based on market conditions. What has not changed is our focus on hiring narrow and deep talent, who are champions of our ownership culture empowering them to serve our customers.
And reinforcing disciplined underwriting through a compensation structure that rewards underwriting profit and it's paid out on real results over time.
We feel good about where we are and where we are gross growing we will focus on our customers look outward adapt to the change around us and continues to deliver value to our shareholders.
We are comfortable being different because being different has worked for RLI and all stakeholders.
I want to thank our RLI owner associates for their contribution and willingness to face the challenges of 2020 head on our company has a rich history of success because of the quality people who work here.
Thank you and I'll turn it back to the moderator to open it up for questions.
Okay.
Alright, Thank you Sir.
A question and answer session will begin at this time, if you are using a speakerphone. Please pick up the handset before pressing any number.
Did you have a question. Please press star one on your telephone if you wish to withdraw your question. Please press star two.
And will be taken and the order that is received please standby for your first question.
Our first question comes from Colin Johnson with B Riley Securities.
Please go ahead.
Hey, this is coming down from from B Riley and I'm on for Randy Binner today. Thanks for taking my question.
You bet first I guess.
And just looking at the accident year loss ratio on specifically on casualty doing pretty well on the quarter and we were just curious you know what what's kind of driving that and maybe how sustainable that might be.
Yeah call and get its a good question and I and I think it's probably a little more pronounced in the quarter than on a year to date basis. It comparatively we did have a bit of adverse current accident year and fourth quarter of last year that did not occur this year on a couple of run off products.
And so that makes it a bit more pronounced there, but I think as you look at even on a full year basis.
And I hate to use mix, but that's part of it I think our mix is improving too.
Some lower loss ratio products on the on the casualty side and a little bit on the current accident year, two and I think it's not real pronounced from a loss ratio standpoint.
And it changes the actuaries have made they've got probably about a point there I think as we move forward certainly they're looking at all inputs.
From a from a loss trend standpoint from a rate standpoint, and I think as we go into 2021 and all those things are being being factored in.
Okay. Great. Thanks, that's helpful. And then on just kind of looking at the surety segment.
The expense ratio or the higher on the quarter, they're kind of and I apologize I missed that and instead certainly on the call, but was there anything driving that.
Yeah.
Largely it was the incentive.
Related comp I think if you look at you know from a book value growth and just take comprehensive earnings.
And just kind of a proxy for that.
It was up considerably and.
And the fourth quarter, so across the board probably on an incremental basis, it's probably around three points increase net expense ratio on incentive comp base comparatively well when you look at the earned premium.
Being a bit less on surety and property, it's going to be more more noticeable there I think.
And for that I think the expense ratios would have been there very similar to where they were and the third quarter.
Great. Thank you I'll leave it at that.
Okay. Thanks.
Alright, we can go ahead and take our next question from Jeff Schmidt with William Blair.
Go ahead.
Hi, good morning.
You've talked in the past about how the market sort of and coming to you from a from a pricing perspective.
And where do we stand with that dynamic can be rates continue to move up.
Casualty a little bit more this quarter are we at a point, where I guess you could really see.
See a lot more write a lot more new business from premium growth moves on.
Above rate level by a greater amount or is there from kind of repositioning and I guess going on it and maybe offset that a bit.
Jeff This is Craig I mean, obviously, we're always looking for opportunities to grow, particularly and the market.
And our direction.
And we do consider and continue to see the market coming.
To us and regards to particularly in regards to like policy conditions and things like that they're becoming more strict not necessarily ours, but we're seeing competitors, which makes us more competitive obviously our policy form is more competitive and then.
Rates continue and those product lines that I talked about earlier and if they can continue to stay about the same pace. They have the last couple of quarters. So we haven't seen any.
Falloff and the rate increases, maybe a little bit maybe a little more and momentum on the property side than we had seen in the past.
We still see some I'm on this.
And say headwinds, but it certainly isn't as broad and some of those primary liability small accounts small customer areas I think that it's still a fairly competitive marketplace. There are you know, we're still able to get some rate increase but it is very moderate two or three 4%.
So and frankly, some of the customers can't afford to pay more.
Exposure basis are shrinking.
But our retentions are holding up well so we feel good about that.
The number of insurance, we have and exposures. We have I think we feel really good about where we're at and.
And the opportunity that's in front of us.
Okay.
And then you touched on terms and conditions, there I guess, how widespread and more focused on on the tougher accounts or is it more widespread and defense threat.
Just wondering how much of a headwind on.
On premium growth, presumably if you're.
And your offering lower and limit suite, you're charging glass. So what type of headwind is that on premium growth.
Well actually and.
Some of those businesses and frankly, the market and assume that you could actually cut the capacity and still get the same premium and you got last year, we particularly see that and the D&O space not just for us, but for our competitors they've been able to cut the limits.
Rather learn and half or by a substantial amount and still get close or the same premium and they got last yourself and absolutely see that as headwind actually it's an opportunity to you know I.
And that's a good story right and you get as much premiums, but you get half the exposure that's a great story.
And so you know I don't see it as a headwind.
And I think there's still more opportunities we like the shorter limits. So actually that's it gives us more opportunity to play there and you know these bigger limits that were out there that we would never play and before you know and when they need and $25 million and chunks, we would not play and that spot. So now that they're interested and fives or even tens.
And could create some more opportunity for us I think.
Okay, Okay, and just one.
And last one on loss cost I mean, we've heard competitors say, they're seeing it and the 5% to 6% range for casualty I guess is that in line with what you see is is that taking into account.
Some of the lower court activity, we saw this year just because of that.
And then Mike.
Yeah. It's a good it's a good great question. So I mean, we look at long term trends. So I mean, I think and when you look at it over a longer period of time I think we would think as the trends for the businesses, we write which is a small niches within the industry.
Probably more on that 4% to 6% range at least that's what we typically are using on average.
And based on our product.
And.
So certainly rates, where the rates, we're getting are in excess of that so we feel good about that I do think you've seen a bit of a pause.
We've certainly seen claim count reductions on both new opening new and open claims.
Across our portfolio, even when you account and the additional Covid claims.
Them out and it's more like a double digit reduction and its across most of the liability and a lot of the auto products and but I do expect that to bounce back very quickly once activity picks up because a lot of it is just people not leaving their homes.
You know, we write a personal umbrella product that really cater to and older population and that's probably even more disproportionately affected the older population of personal umbrella.
Insurance.
So we do expect that activity to pick back up.
Okay. That's great. Thank you.
Okay. We'll go ahead and take our next question from Matt <unk>.
And <unk> with JMP.
Please go ahead and thanks good morning.
Craig I wanted to circle back I think you made a comment when you talk about the casualty market about commercial auto and famous for.
Struggling I think you quoted on down about 25% volume in the quarter and 40% for the year can you unpack that a little bit how should we think about that how much of that volume and the resulting and kind of pandemic forces that debt yeah. They may come back to the market as things reopen and how.
How much of that is.
Volume and that's probably born called from the underwriting basis are you guys assessing risk and not wanting to write it and and how far through that downturn do you think we are we kind of through the reductions.
Good morning, guys.
Okay.
Slow so you have to last question dosing and that was true.
I'll take the question.
Right.
No I mean I think.
Most of the reduction we've seen over the last year and over the last quarter still reduction and exposure basis actually on Retentions and felt pretty good but small and only a small number of our insureds to date, they've actually gone out of business. So we feel good about that I mean, these guys are struggling and it's tough on that and met with somebody and customers is not easy they're not getting the help and nobody is getting on these.
Charter buses right so.
Now that's not all of our transportation business right, we do trucking and we do some ambulances and some other specialty auto so some of that business is obviously still there.
But maybe slowed a little bit maybe miles driven to off a little bit, but we do expect that to come back.
You know how far along we are you know for the for the charter bus business, which also caters to an older population.
I think you're going to need a vaccination and youre going to need you and again and.
He'd time right for people to get comfortable because we build habits and habits are hard to change and getting people back and a bus with a large number of people even if they kind of feel safe are they're gonna want and feel more safe. So that's going to take time to build back that busy.
And this but we're hopeful I think the trucking business will come back faster on commercial specialty auto business is going to come back faster and already I think is starting to come back.
So it really is mixed.
The public and antibody like we also like school buses and there too so and the public.
Bus stuff, that's not just charter buses just to be clear.
School buses will start to come back with schools and more and more schools come back online, which I think a lot of parents are hoping for what I see on.
On the news.
You know.
So I think youre going to see it come back in and segments of the public transportation space.
And that's really helpful. Thank you for the color and congrats.
Thanks, Matt.
Alright, and you can go ahead and take our next question from Meyer Shields with <unk>.
Please go ahead.
Sorry, I think I guess on the question on you're talking about Tibet.
And exposure to construction and I was hoping you could.
Lay out your expectations, both in terms of hopefully and economic recovery may be and the second half of the year.
And it's the book significantly exposed to the risk on increasing remote work.
Yeah.
No.
And there you don't mean that in context of construction and I assume or are you is that what you mean.
And it just hasn't been.
And whether.
How much of that is commercial construction and that's going to be less necessary going forward.
Oh, Okay. There's there's a good so just to be clear there's a good mix I mean, we have actually a broad mix of construction.
Construction.
And the customers some focus on and we don't do any track homes and that's really the one thing that we don't like to do right. So, but we will do like custom residential but we'll also do you know.
We'll be commercial high rises and although we only will do interior work and on exterior work on those.
And we do some roads and bridges, but not I mean certain areas, we don't catch roads and bridges and other areas like roku versus kind of maturity or if it's construction equipment.
So I mean, what we've seen so far is as our contractors have had enough work to.
And to sustain you know.
And been able to work.
And sustain their business. So we haven't been impacted nearly to anywhere close to what we talked about and the public space and.
And the question really is is that pipeline that Qs and get refilled and I think it depends on the depth of the economic downturn.
But as of right now we feel good.
What we are seeing though is a lot of the customers there they're re badge.
Balancing as far as you know what the estimate and the exposures are going to need to go.
Go forward year, there'd be and they're gonna be a little more conservative than they have and the path.
And obviously a lot of policies are audible auditable. So if they actually ended up bringing on more revenues that will actually benefit us do audit premiums.
But youll see you may see some of those numbers come through our numbers, but our numbers over the next year, but I think we'll be able to overcome that I think we typically focus on stronger contractors.
And I feel pretty good about where we're going there and as far as remote work.
So we only do like custom homes, I mean, and I, certainly I have seen claims and the pass where contractor or someone or someone that was in their home, but that's a very rare thing most of ours are actually on on job sites.
Commercial construction sites from a Geo perspective, and then a lot of our other stuff and we're moving equipment and surety you don't have to bond a lot of home.
Work.
For residential and stuff most of that stuff isn't bond and so that's really not impacted.
I think you know.
I don't think we see a lot of increased activity, resulting from more work at home.
And less unless theres less of demand to build and stay safe.
Megan is old.
Well see okay. So that was very.
Zero.
And just a little bit is there anyway, and breaking down and the casualty reserve releases are those that the frequency of claims that were not even on Orange County and severity from it.
And there is Todd and I think.
It's a mix and if you think in terms of.
And Craig's talked about this before that we're taking a longer term.
Probes to loss cost trend right. So from that standpoint to the extent that we don't see that and we can be a little slower at times on the actuarial side to recognize it it's going to come through.
And that's it.
And it's multiple years I mean, I think it's it's cup and G. L. Both are decent amounts there and that's you know 13 to 2018 on on some of that will probably be a little heavier to the to the more recent accident years Transportation's.
And then more favorable on the on the 18 year I think some of it too and this is only about $3 million of it but if you look at the two.
Products, we exited about now two years ago, the health care liability and medical professional.
And two years post that there was a couple million dollars. There. So I don't know if there's a theme to it.
And just you know what I mean.
I think that loss cost trends have just been.
Below the expectations that were built on.
Okay.
Uh huh.
Okay, we'll take our next question from Casey Alexander with Compass point. Please.
Please go ahead and good morning and good.
And thank you for taking my question.
I was just wondering we've been hearing empirically about.
And Oh upwards of 100% premium increases on D&O renewals and a real shortage of D&O and <unk>.
<unk> availability out there in the market and so I was just wondering what your temperature is in terms and of course, and obviously those types of rate increases or loss driven but what's your temper towards growing that business, what's your posture towards retaining.
The business that you do and just some color around around how hard that market has become.
Okay.
Sure Casey and I. Appreciate the question. So I mean, obviously any rate increase has to be cast and the context of where your starting point is right. So we don't feel like we are hopefully didn't under price too many products by a 100% but.
We still are seeing fairly significant rate increases and we're gonna take what the market can give us there.
I think this is one of the price, where we put out and bigger limits relative to the rest of the company.
And and other and it's also the place where we can only really get reinsurance capacity support through a quota share arrangement. So you know.
I think our interest and growing this product we're always interested what price. We're getting rate. This is getting a lot of rate, we'd like to see most of it.
And this product come from rate, but that still gives us a huge opportunity to grow this business, while keeping and exposure is relatively stable.
I think last year, we grew close to 40% and.
I think they got over a 40% rate increase so we think we should focus on that.
Alright, great. That's that's my only question. Thank you.
Thank you.
And if there are no further questions I will now turn the conference back to Mr. John Michael.
Thank you all for attending.
I'm glad we're into 'twenty 'twenty one of my colleague Greg is looking forward to the Super Bowl.
It's a day he's wearing Patrick mahomes Socs and so thank you all and we'll talk to you at the end of the next quarter.
Okay.
Ladies and gentlemen, if you wish to access the replay for this call.
They do so by dialing 188 820.
Zero three.
1112, with an idea number of three seven and 59198. This concludes our conference for today. Thank you all for participating and have a nice day all parties may now disconnect.
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