Q2 2021 Rli Corp Earnings Call
[music].
Yes.
Good morning, ladies and gentlemen, welcome to the R. L. I Corp, second quarter earnings teleconference, and the 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 may make comments that reflect their inter.
And beliefs and expectations for the future.
And 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 including in the annual report on form 10-K, and supplemented in the form 10-Q for the quarterly period ended.
June 30th and 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 for operations.
Our non-GAAP measures.
<unk> financial results, our allies 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 are all lies management believes these measures are useful engage and core operating performance across reporting periods.
But may not be comparable to other companies' definition of operating earnings.
8-K contains a reconciliation between operating earnings and net earnings the form 8-K and press release are available at the company's website at Www Dot RLI Corp, Dot Com and will now turn the conference over to Rli's, Vice President and Chief investment Officer, and Treasurer, Mr. Aron even taller. Please go ahead Sir.
Thank you Travis.
Good morning, everyone and welcome to RLI second quarter earnings call for 2020, 1 joining us today are Jon Michael Chairman and CEO correctly, Thermos, President and Chief operating Officer, and Todd Bryant Chief Financial Officer.
Pretty standard structure for today's call with Todd running down net financial resort results for the quarter ended June 30th Gregg will add some commentary on current market conditions and our product portfolio. We will then open the call to questions and Jon will close with some final thoughts Todd.
Thanks, Aaron and good morning, everyone.
Yesterday, we reported second quarter operating earnings of 1 dollar and.
And <unk> per share results reflect positive current year underwriting profit supplemented by favorable benefits from prior year's loss reserves, all in we experienced 25% topline growth and.
And posted and $84.8 combined ratio.
Additionally, our core business was complemented by a strong quarter for Maui, Jim and Prime.
While investment income was down modestly in the quarter.
Year to date operating cash flow of $165 million has supported growth in our net invested asset base.
Realized gains for the quarter were elevated as we rebalanced, our equity position, leaving a modest 4 million change and unrealized gains on equity securities.
As you know large movements in equity prices and comparable periods can have a significant impact on net earnings, which you can see and both the quarterly and year to date comparisons to 2020.
Aggregate underwriting and investment results push book value per share to $27.46 up 11% from year end inclusive of dividends.
Craig will talk more about market conditions, and a minute, but from a high level all 3 segments experienced grill prop.
Property led the way up 33% as rates and market disruption continued to support growth.
Casualty gross writings improved 24% with all major product lines contributing for surety premium was up 11% as our contract and transactional business grew nicely in the quarter.
From an underwriting income perspective, the quarters combined ratio was 84.8 compared to $88.4 a year ago.
Our loss ratio declined 4.1 points to 44.4.
Storm losses booked in the quarter totaled $8 million with 7 million impacting the property segment and 1 million the casualty segment.
On an overall basis prior year's reserves continue to develop favorably enhancing both the casualty and property loss ratios.
Surety, however experienced adverse loss development in the quarter as we further strengthen incurred but not reported reserves on the 'twenty 'twenty accident year for the energy portion of our commercial surety business.
Lastly on the loss front, our current accident year loss ratio for casualty continued to improve on.
On an underlying basis, if you exclude prior year's reserve benefits and catastrophes, our casualty loss ratio was down 7 points Colby.
Covid related impacts in 2020 accounts account for about 4 points of that decline excluding that however, the loss ratio was still down 3 points.
And improving mix and modest reductions and loss booking ratios similar similar to what we discussed on the last few calls had driven the positive results.
With respect to Covid specific reserves amounts are largely unchanged from year end.
Moving to expenses, our quarterly expense ratio increased a half a point to 40 point Fork.
Similar to last quarter, and the increase and and the increase and general corporate expenses are largely driven by amounts accrued for performance related incentive plans and the.
Combination of significantly higher operating earnings.
And improved combined ratio and growth and book value drove these metrics higher.
Apart from elevated incentive amounts and continued technology related investments.
Other operating expenses were relatively flat.
On the asset side of the balance sheet, our investment portfolio had the major components pulling the same direction with positive results from equities and fixed income and.
Higher bond returns have come alongside lower reinvestment rates as treasury yields have declined from the highs we saw earlier and the year.
And despite the return of lower yields and strong operating cash flow was accruing to the benefit of total invested assets.
Our growing portfolio help to flatten the curve and investment income, which was down just over 1% and the quarter.
Total return was 2.8 per cent for the quarter and we continue to put money to work and nearly all environments to stay fully invested.
Apart from the capital markets exposure investing earnings were significant compared to 2020.
Maui, Jim and Prime contributed $10.6 million and $3.6 million, respectively, both benefiting from robust markets and an improving macro economic environment.
And all a very good quarter and a strong first half of the year.
And with that I'll turn the call over to Craig.
Thank you Todd and Aaron and good morning, everyone, a very good quarter as Todd mentioned with 25 per cent topline growth and an outstanding 85 combined ratio.
We are very pleased with our results and our position and the marketplace.
We're seeing widespread growth across almost every product and our portfolio as a result of an improving economy higher retention rates on renewal business increased submission flow on new business and rising rate levels.
And although frequency of claims slowed during the pandemic they have begun climbing back to previous levels and we remain watchful of the long term impacts of social inflation.
We also continue to keep an eye on loss cost inflation associated with rising building material and labor costs.
And could prove challenging as we entered the hurricane season, which will likely increase the cost of rebuilding but also links and related business interruption claims.
We think there's more opportunity to get right is the industry is still underperforming overall the industry must more broadly recognize the rising risk levels associated with inflation.
The uncertain impact of the pandemic the possibility of a rising number of severe weather catastrophes and more unique exposures like the recent building collapse.
We anticipate that these factors will drive and sustain current rate levels and momentum.
We have the benefit of underwriting discipline and price diversification. This permits permits us to navigate all market conditions pushing for rate adequacy, where needed shrinking our position if necessary to maintain underwriting margins, while growing shareholder value.
Now for some more detail by segment.
And casualty, we grew topline 24 per cent and reported and 83 combined ratio as we benefited from significant favorable reserve development.
Rates overall are at or above loss cost as we achieved 6% per the quarter and 7% year to date.
Rates are still up significantly and excess liability products and select auto markets, where we compete.
Rates remained relatively flat and primary liability small package business and even and so several auto niches where competition remains fierce.
We achieved growth and underwriting profit across all major products and our casualty portfolio.
We have benefited from a quicker recovery and the public auto space as buses are coming back online faster and we're also realizing goodwill earned with our customers and our producers last year, when we reduced premiums and recognition of exposure changes during the pandemic.
Casualty growth, excluding our transportation unit was still up 18% for the quarter and 12% year to date.
And property, we achieved top line growth of 33%, while reporting and 84 combined ratio all of our major products and this segment grew top line and reported underwriting profits.
The pace of rate change is flattening, but still positive across the board.
Overall rates were up and property 8 per cent for the quarter and 9% year to date with catastrophe wind continued to lead the way at plus 17% for the quarter and plus 21% year to date.
<unk> for wind or up about 15% for the year, but are still well contained at the 250 year level with reinsurance protection.
I don't want to move on from this segment without commenting on the recent collapse, the Champlain and tower and Surfside, Florida was a very tragic event and our thoughts continue to be with the families of all of those impacted.
We do write contractors architects and engineers and properties and the area, but we do not target multi well multi unit high rises or condo associations and any of our businesses.
Although our loss exposures appear minimal at this time, we will continue to do our part by tightening our underwriting guidelines and as a result improved the risk management posture of contractors and those responsible for building maintenance and our chosen markets.
And surety, we reported 11% top line growth and a 96 combined ratio.
We were able to achieve and underwriting profit and this segment. Despite an elevated risk environment related to the number of bankruptcy filings and the energy sector of our commercial surety business.
We maintained significant reinsurance protection against large losses, we also have strong partners, who value our underwriting discipline and have mutually benefited from our relationship for over 2 decades.
Our underwriting team remained disciplined and continues to underwrite for profit and this space.
We have further tightened our restricted standards targeting the highest credit quality principles insisted on more structured protection and collateral.
Raise rate levels and lower tolerances for any delayed commissioning work by the principal.
Our commercial contract and most of the linear surety markets are growing and remain profitable year to date with and 87 combined ratio.
Overall, an excellent quarter and a very nice first half of the year, our disciplined underwriting diversified portfolio of niche products talent and talented team have delivered once again.
They enable us to provide a consistent underwriting appetite to our customers and producers and strong stable returns to our shareholders.
I want to thank all of our associate owners for all of their hard work over the last quarter and throughout the last year.
We recently welcomed them back to our offices this week and look forward to continuing to foster the close community strong culture and collaborative learning that makes the RLI difference work even better.
Now I'll turn it back to the moderator to open the call up for questions.
Yeah.
Thank you Sir a question and answer session will begin at this time, if you are using a speaker phone. Please pick up the handset before pressing any numbers.
Should you have a question. Please press star 1 on your telephone if you wish to withdraw your question. Please press star 2 again to ask a question. Please press star 1.
Our first question comes from Colin Johnson BRAF Securities.
Yeah.
Hey, Thanks, good morning, Thanks for taking my questions.
Good morning, just looking at margin and I, just looking at their reserves and charity I always thought you now flip to unfavorable development. This quarter I think he mentioned and it was some I b and our and <unk> and energy policies and I was just wondering if you could provide a little more color on to the change in the quarter.
Yeah. This is Todd Colin and I can we did talk about that and in my open are really the 2020 accident year, certainly on the energy side, there's the influence there.
And we strengthen both direct and ceded reserves from that standpoint is as our actuaries took a look at things. So you know some of it there there is the.
On an elevated level of risk, possibly there there's elevated bankruptcy.
And so I think as we look at that.
Similar to what we do all the time.
We took some action there I think if you go back to a you know I think the fourth quarter of 2018.
<unk> was probably the most recent time, we had adverse development and the and the casualty segment I'm, sorry, and the surety segment and so it's not you know it's not a it doesn't happen very often but.
But we certainly have had that before.
Okay, great. Thanks.
And then just kind of looking Maui, Jim results are pretty strong on a quarter relative to past results even prior to Covid. So just curious if there's anything that stood out to you all their and maybe some pent up demand or some new sales initiatives and eat them.
Possibly something else good share of that kind of growth and the quarter.
Yes, it's Jon Michael Collins.
The demand for our Maui, Jim has rebounded nicely.
Our sales were fairly comparable to the.
And the 2019 levels the.
During the pandemic are the management team and at Maui, Jim and manage their way through that that.
And very nicely.
They reduced operating expenses during during that time and those are a lot of those operating expenses have not come back.
And so margin and they saw margin improvement.
And I think we're seeing some of that come through.
We fully expect some of those expenses to come back.
You know like travel and and <unk>.
And marketing for.
For example, those things come to mind.
But we're really pleased with what they've what they've been able to do and managing their way through that I I don't know about pent up demand may be.
But.
I think it's just they're getting back to the level they were in 2019.
Okay got it that's helpful.
And so all my questions. Thank you.
Our next question comes from Jeff Schmitt William Blair.
Hi, good morning, everyone.
I believe you mentioned casualty rates average, 6% and I guess, there were 8% last quarter, maybe Tim and last year.
Not surprising to see some deceleration I mean, they've been compounding now for a couple of years, but.
You know CPI inflation moving up social inflation is still on the background, maybe that moves out this court's reopen more.
You mentioned.
Maybe that provides some support for rates at current levels or do you or could that potentially put some upward pressure on on rates are you seeing that at all.
Jeff This is Craig.
Well, obviously the things you just mentioned are compound every year so.
And my comments were aimed at the I mean, the industry has done a good job staying and I had at least and our target niches.
And with loss cost inflation, but I mean, you on loss cost inflation is going to come and another 5 or 6% next year or 2 so we have to continue to get rate.
And to stay ahead of that or at least to stay at the same margin.
And that's our perspective so.
And how much placed how are you seeing like on a per.
Medical costs, you know instead of just CPI inflation, but.
Okay.
I don't know that we actually haven't broken down and at that level I mean, I think we've talked in the past and casualty.
Using our loss cost trends, and let's say, 4% to 5% that's net of any exposure trend.
So we would view as you know you need that kind of rate increase otherwise. Your your current accident year loss ratio was gonna have to start going up.
Right right and.
And then you know.
I think you mentioned in the past a lot of the E&S book is in construction could you discuss what type of rate and exposure growth and now you're seeing and that book is as the economy picks back up.
Yeah sure I mean, we I mean, we are seeing growth and contractors or their jobs are certainly has picked up.
You know it really it really didn't slow down as much as you might think during during the pandemic. Many of them are still working there were some select places that were ordered and not to work anymore.
And then these guys are picking up a lot of that backlog right now so.
I mean, we still feel like the demand is strong and there's still a lot of competition, though we would say and the type of contractors. We write we typically write like middle market and smaller artisan contractors and that's still a pretty competitive space. So it's not like that.
And that's very difficult to achieve a double digit rate increase and net.
And that market because there's just more competition there.
Got it okay. Thank you.
Okay.
Yes.
Our next question comes from Meyer Shields, K B W.
Thanks, I guess this is for Craig can you give us a sense in terms of how widespread the.
And sort of under maintenance of large buildings is in Florida, and bringing different things and I just don't know how it looks on the inside.
And that's a good and it's a good question. We don't you know I think I've mentioned, we don't write a lot of high rise buildings, but we do typically insist on inspections through our underwriting guidelines and and and also look at the funds that some of these buildings have set aside for capital improvements because obviously they don't have any money set aside.
They may run into a similar situation you know where you you know where you need to do repairs, but nobody wants to pay for the repairs.
Colombia, and he club you kind of see how that works.
And nobody wants to pay for it but it needs to be done and that's always a.
Stress or I guess.
And so we don't really write a lot of buildings and I don't know that I can really comment specifically on any we typically write like 2 or 3 storey buildings and.
Don't don't focus on that area. So I don't think we'd be.
Very helpful.
Okay, No. That's I mean looking force that's helpful within transportation.
I'm trying to get on.
On the underwriting side, whether the fact that people haven't been driving these vehicles for a year or so was that.
Impact and claim frequency.
Yeah.
Well, so in our space and realized transportation for the most part and that business unit is really 3 pieces, it's public auto, which yes definitely frequency was down but so has exposure base was down significantly. We I think we gave back at 1 point and time, almost 80% of our premium and maybe 60% of our premiums so they weren't driving at all.
So if you relate to the exposure base actually I don't know frequency was down that much relative to the adjusted exposure base trucks really you know on and our trucking space long haul trucking. It didn't really stop I mean, we we kept the drivers kept driving and delivering goods. So we saw maybe a slight reduction because you were less and less people on the road.
Hello, and offsetting that people are driving a little faster to them so but.
But I think overall frequency was probably down because of the congestion and then we write a lot of especially on those which really are only going from point a to point b a lot of times other than the emergency medical vehicles that we write like a ambulances those are probably a lot of constantly are more and more frequently and use a lot of them are.
Factors driving from 1 job to the other or from their base to the job. So.
But I would say.
Similar and probably more pronounced and auto than it was overall because of the frequency was down even more and auto.
We don't rely on personal auto book.
But it's certainly bounce back.
I will not say its back to the previous levels of frequency relative to exposure base.
But you know I would anticipate based on the trend, it's going to probably continue to get back there.
Okay Perfect and then 1 last question on I guess for Todd when we look and reinsurance recoverable and if there was a pretty big jump on a sequential basis was that the surety issue, we're talking about or is there something else driving that as well.
Yeah Meyer that that's certainly a large part of it I mean, I think we are seeing growth. So youre going to get some seeded IV and art. If you will just from a from a from a normal growth and reserve standpoint.
But but definitely the surety side had a a big part of it.
Okay perfect. Thank you so much.
[laughter].
Our next question comes from Mark Dwelle, RBC capital markets.
Yes, good morning.
On our took on several of my questions, but I got a couple of others. Craig you had mentioned on our renewal retention rates.
Rates are being being higher.
Could you just elaborate on that a little bit I want and you're you're referring to the proportion of it.
And policies that renew with you just to make sure I'm.
On the right page and you were saying that's correct that is correct.
And if you want me to provide more color I mean, all I can tell you is both year to date and a quarter.
Our retention rates are up I'll say on average a couple of points from where they have been and the path I'm going to attribute that to the to the service level that we provide to customers and our producers, particularly through the pandemic I mean, I think we did an exceptional job reaching out to people or loss control people were still willing to go on site.
And our underwriters still have very good relationships with the producers.
And we know each other cell phone numbers things like that are still reached out to them. During the pandemic I think that has that has paid some dividends here and the fact that you know business has not been shop now business wasn't that shop that it was harder for a producer and fairness and its harder for producer during the pandemic to shop business anyway.
Or 2 are to basically write new business, because it's building relationships at a distance is much harder and so they so retention rates overall I would expect for most of the industry should be up a bit.
Cause of that.
But that being said once people start traveling a little bit more and be able to build those relationships and try to steal business and and.
And the away from incumbent markets I mean that may change, but we have been the beneficiary of that across almost every property or every 1 of our products a little bit higher net written.
And Jim.
And that's definitely helpful are you seeing any signs of a more aggressive on.
Behaviors and you know beyond what you normally see.
And it was fairly robust on any given day.
I mean, it depends on the space, but I mean overall off and say, it's probably about the same you know theres always markets that are entering and exiting.
You know depending on their loss experience a lot of times at least and our niches I mean, we find new entrants.
And depending on the product line you know it takes a while to learn your lesson and some places it takes longer than that.
And then others and and you come in with broader forms and same rates or lower rates and broader forms and the same form and you end up you know over time, losing money and the casualty line, but it does take time for.
For that to manifest and happen. So we constantly see new markets that think that they are smarter than everybody else that come in and a lot of times and they get burned sometimes they make it and they're long term competitor.
But a lot of them will exit 2 so I don't think that we've seen any more or less necessarily across and I was gonna common across our entire portfolio.
And surety and general people will probably have become a little more.
You know and reserved I guess it used to be a feeding frenzy, there for a while as far as how many new market we had.
And 1 point and hanging on it about 25 markets made up a big part of the market share and that's probably doubled over the last and I'll say 5 years, and then read and more recently I think people and being a little more cautious there.
And because of the potential economic downturn from.
And to make it.
And that's helpful color and I appreciate that.
1.1 last question and this is this is just my own non adopted knowledge.
Have any particular exposure to sort of cyber liability cyberterrorism some of the things that we've been seeing and the news lately is that on a common coverage that you could be exposed to.
Yeah, Mark I mean, I think I've talked about the cyber before and our previous call and we don't really I mean, we write a little bit of it you know I think that's the biggest exposure was in our larger.
Our accounts and are already.
Our management liability business, we've since really downsize that substantially.
Because of what Youre, saying and I think the worry about you know how do you manage the aggregation of exposures and we just can't get our arms around it and a lot of people like that business.
And just it's very difficult to figure out you know what your aggregate exposures and how you protect your and your balance sheet. We believe a from you know that kind of.
Mass event.
Okay. Thanks, very much those are all my questions.
Our next question comes from Jamie Inglis.
Fifth.
Okay.
Hey, good morning, guys nice quarter.
And.
I've got 2 questions first maybe and.
Casualty area.
In the and the environment, we're in right now where courts are opening.
And do you see any changes I mean, it seems to me plaintiffs attorneys must have been taken and things to do for last year.
[laughter] and.
And is it too early to tell whether there's going to be any change have you seen anything sort of paid when incurred changer, when and how might that happened.
Yeah, Jamie this is Craig I.
Uh huh.
I mean, obviously, we're a relatively small player and a lot of the niches or will not be a big player, but we're in very small niches. So.
Sometimes it's difficult to just look at the data and determined.
I don't think we've seen anything that we would point out significantly and certainly we would agree that the court system was closed for the most part and it was you know, but realize the only probably less than 2% of our claims ever go to court and to be decided we'd besides those outside court hopefully don't even have to have an attorney involved for most of them.
But we don't let it gave a lot of claims and so we haven't seen it took them out and you know the war opportunities to settle claims during that time, because you know people didn't have the leverage to that they were going to take it to corp. They want and money before you know they didn't want to wait long enough to take effect and that was the standard so they're willing to take the cash.
Cash upfront.
To get a fair settlement as opposed to try and roll the dice with the jewelry or whatever.
So we saw some of that.
I don't think we've seen any material changes I mean, certainly we believe that social inflation.
And which was prevalent before.
The pandemic before the courts for clothes, and I think that's still alive and well I don't know if anything happened during.
And the last year year, and a half that would have a pain that I think and.
What's happened over that 18 months is probably only and made it worse.
And the long term, but.
I think that's yet to be determined that's why I think we take a more cautious view on more long term view to inflationary trends loss cost trends and don't want to react like we didn't react a lot last year to the fact that you know frequency was down because we were expecting to come back up.
And just because of the severity may have and flattened a little over the pandemic I don't think we thought that the trends we're now zero.
Right Okay. Good.
And and <unk>.
Just sticking with the property area.
Have you guys have had great.
And we start to go on line over time, so and the way. This is somewhat of an unfair question, but I'm trying to get a sense of what your thoughts are and.
And it just seems and the Wolverine and you've got frequency that may or may change severity changes and variability about those things change and as you know.
Kevin what people believe is happening and the climate right.
So.
Can you give us sort of a quick history lessons have you thought process.
Of what how you were setting reserves do you anticipate any changes going forward based on the environment, we appear to be and.
Yeah.
And Jamie this is Todd and.
I think from a let's talk just from an underwriting standpoint, and I didn't mean those are those are shorter term right. They were new obviously every year. So you can make decisions annually on on what you determine you Wanna right from an underwriting perspective.
So that will influence things from an overall risk standpoint, you can make determinations, there and you're going to know and in pretty short order. If you have a loss.
And what the impact of that will be.
So.
And certainly inflation from our more recently from a cost and good standpoint, theres and influence of that.
We use models you know on the development of things and I know Craig talk you know from a from a P&L standpoint, but we're also looking.
Beyond just the modeling aspect and looking at concentration so I think you're going to look at all of those things you can make changes.
From that I think on the modeling side, you'll you'll see some changes from a climate perspective, you can take a longer term or shorter term view when you run all that so that that's all influencing and and helps you make some decisions from from that standpoint.
And as far as the reserves.
And any process goes.
And that's all.
That's all looking backwards and so it really has no impact on reserving right the impact on reserving and property would be and increased cost of materials and labor and construction.
Right and then.
Our our claims people factor that and when they come out with their estimate for a catastrophe, particularly in this environment right now with the rising cost of the.
Building materials and labor.
So when we come up with and estimate if we have a hurricane which I assume we will this year next quarter.
Oh.
I'll take that bet, if anybody would like but it [laughter] oh that it's probably going to cost more to fix the building and replace stuff.
Right right. Okay. So I guess, the takeaway and you sort of continue to tweak the process, but fundamentally you're not taking any different.
Okay. That's all I had good luck on forward guidance. Thanks.
Thanks, Jamie.
Our next question comes from Meyer Shields, K B W.
Hi, Thanks, I just had 1 quick follow up if you could walk us through the change and surety segments expense ratio and even your basis.
Yeah.
Yeah, and this is Todd mirror eye there.
It is it is influenced.
And part by the overall corporate expenses right I mean, I think if you look at that and we'll talk about this on the Q a little bit you may expect we I talked about the influence of the overall incentive with their cash.
And bind ratio losses, being up you might expect that to be down versus up but there there are overall corporate.
Expenses that would influence everyone from our retirement and that standpoint. So it's really really that's more of the influence from the increase than what you would see beyond that yeah.
Okay.
And that seems to have outweighed whatever off that would be from the reserve charge.
Right Okay perfect. Thank you.
Yeah.
Okay.
And there are no further questions I will now turn the conference back to Mr. Jonathan Michael.
Thank you all for joining us.
We did have a good quarter a very satisfying.
Just below 85 combined gross premiums were up 25% during the quarter I'm just like to thank all of our associates for and.
Continuing to help our customers are.
Through the pandemic and and beyond and we look forward to talking to you next quarter. Thank you.
Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 1888.
2031112, with and I D number of 6 to 8 to 5 non 1. This concludes our conference for today. Thank you all for participating and have a nice day all parties may now disconnect.