RLI Corp. Q1 2023 Earnings Call
Speaker 1: Good morning and welcome to the RLI Corp first quarter earnings teleconference. After management's prepared remarks we will open the conference up for questions and answers.
Speaker 1: Before we get started, let me remind everyone that through the course of the teleconference, RLI management may make comments that reflect their intentions, beliefs, and expectations for the future. As always, these forward-looking statements are subject to certain factors and uncertainties which could-
Speaker 1: all of which should be reviewed carefully.
Speaker 1: The company has filed a Form 8K with the Securities and Exchange Commission that contains the press release announcing third quarter results.
Speaker 1: During the call, RLI management may refer to operating earnings and earnings per share from operations, which are non-GAAP measures of financial results.
Speaker 1: RLIs 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.
Speaker 1: Additionally, equity and earnings of Maui GEM and the related taxes are excluded from the operating earnings and operating EPS for 2022 due to the sale of ROI's investment in the third quarter of 2022.
Speaker 1: RLIs management beliefs, these measures are useful in gauging core operating performances across reporting periods, but may not be comparable to other companies' definitions of operating earnings. The Form 8K contains...
Speaker 1: website at www.RLIcorp.com
Speaker 1: I will now turn the conference over to RLI's Chief Investment Officer and Treasurer, Mr. Aaron Dieffenthaler. Please go ahead.
Speaker 2: Thank you, Meghan. Good morning and welcome to our first quarter earnings call for 2023.
Speaker 2: Joining us today are Craig Clethermus, President and CEO , Jen Klobnak, Chief Operating Officer, and Todd Bryant, Chief Financial Officer.
Speaker 2: As usual, Todd will lead off with a summary of our financial performance in the quarter. Craig and Jen will offer detail on current market conditions related to our product portfolio. We will then take your questions and Craig will close with some final thoughts. Todd? Thanks, Aaron. Good morning, everyone. The whole world is format-Sharendix option that David's talking about.
Speaker 2: Yesterday we reported first quarter operating earnings of $1.63 per share. The quarter's results reflect strong underwriting performance and continued growth and investment income.
Speaker 2: All in, we posted a combined ratio of 77.9 for the quarter and experienced continued top line growth, which was up 16% as property and surety led the way.
Speaker 2: Investment income advanced 51% as we realized elevated income on improved reinvestment rates and a larger invested asset.
Speaker 2: operating cash flow with $69 million, up nicely for the quarter, and is supportive of asset growth.
Speaker 2: Realized gains were $15 million in the quarter. The majority of these gains were from a payout of the working capital escrow from the Maui Jim sale and represent substantially all of the escrow amounts from this transaction.
Speaker 2: Also in the quarter, the equity portfolio posted 15 million of unrealized gains.
Speaker 2: I've mentioned on numerous occasions large movements in equity prices between periods can have a significant impact on that earnings, which you can again see in the comparative results history.
Speaker 2: From an underwriting income perspective, the quarters combined ratio was 77.9 and was in line with last year's results.
Speaker 2: A loss ratio declined two points as the underlying results improved for both property and casualty.
Speaker 2: While storm losses added 4 points to the property savings loss ratio versus 3 points last year, the traditional losses remained low and were spread across a much higher revenue base.
Speaker 2: added four points to the property savings loss ratio versus three points last year, nutritional losses remained low and were spread across a much higher revenue base. For casualties, it's a different measure than most other costs or....
Speaker 2: The underlying loss ratio improved by half a point.
Speaker 2: due largely to mix shifts as initial current accident year loss ratios are not materially different from year to year.
Speaker 2: From a prior year's reserves perspective,
Speaker 2: All three segments benefited from favorable development.
Speaker 2: Kaz with me posted 36 million of favorable loss emergence.
Speaker 2: across the majority product lines and over multiple accident years.
Speaker 2: Property experienced $13 million in favorable development as NREEM, E&S, and admitted property lines posted loss reductions. For surety, favorable reserve development was $3 million.
Speaker 2: modestly below last year's level, which explained the majority of the increase in the segments loss ratio between periods.
Speaker 2: Our approach to reserving remains the same, and the quarter's results are reflective of a consistent process. Moving to expenses, compared to last year, our quarterly expense ratio increased two points.
Speaker 2: to 40.7. Elevated and incentive related amounts account for nearly 1.5 points of this increase.
Speaker 2: Most notably, amounts influenced by operating return on equity and growth in book value were up significantly compared to the first quarter of last year.
Speaker 2: In addition, we have increased investments in both our people and technology to support growth, improve customer experience, and to drive efficiency. Despite submarket volatility, quarterly investment returns were positive at 2.8%, with both stocks and bonds contributing to comprehensive earnings of $137 million.
Speaker 2: Although the retreat in bond yields was significant in March, we still found a creative opportunity with fixed income and purchase yields averaged more than 4.5% for the quarter. There has been little change to our investment strategy over the last year.
Speaker 2: with a focus on putting meaningful amounts of cash flow to work.
Speaker 2: on putting meaningful amounts of cash flow to work in high quality bonds.
Speaker 2: incorporating comprehensive earnings and adjusting for dividends.
Speaker 2: Vote value per share increased 12% in the quarter to $28.62 per share.
Speaker 2: Away from the traditional investment portfolio, invest hearings were down, but that comparison is largely influenced by our sale of Maui Gem, which contributed over $6 million to last year's results. I've noted last year and highlighted in the press release for comparative purposes,
Speaker 2: We have excluded earnings from Maui Gym and our calculation of operating earnings for 2022. We have removed earnings from Maui Gym and our calculation of operating earnings for
Speaker 2: All in all, a very good operating quarter and strong start to the year. And with that, I'll turn the call over to Craig.
Speaker 2: Thank you, Todd and Aaron, and good morning everyone. I'm very pleased with our start to 2023 with continued double-digit top-line growth and a sub-80 combined ratio, very similar to last year.
Speaker 2: Our continued ability to deliver is a testament to the quality of our people, the diversity of our product portfolio, and our disciplined underwriting culture. These attributes allow our associate owners to make the best long-term decisions for the benefit of our customers and shareholders.
Speaker 2: ROI believes in the marshmallow test.
Speaker 2: We have the resolve to be a stable market with a consistent risk appetite through all market cycles.
Speaker 2: There remains a fair amount of dislocation, economic uncertainty, and capital shortfalls in much of the industry, particularly in wheels and catastrophically exposed lines of businesses. But continue to be up with even greater momentum for wind and earthquake exposures.
Speaker 2: We are finding that although competition is tougher in many of our liability and surety businesses.
Speaker 2: There seems to be some reluctance for the markets to behave too irrationally, as reinsurers are doing a better job of passing along their costs to the primary market and creating general concern over the availability and price tag of their capacity. We appreciate smart competitors and discerning capacity.
Speaker 2: We prefer to compete in markets where measured risk-taking and discipline are more pervasive.
Speaker 2: We think our portfolio is very healthy and our talented underwriters are poised to grow where rates adequately cover the risk. I'm going to turn it over to Jen who can provide a lot more color on our portfolio and talk about where we're seeing the best opportunities. Jen? Thank you, Craig. The property segment once again draws the top line results.
Speaker 1: and produced a 68 combined ratio for the quarter. Rate change for the segment was positive 24% while planned activity was fairly quiet.
Speaker 1: The headline continues to be the Southeast Property Market.
Speaker 1: Hurricane rates dropped 47% for the quarter, which continues a string of quarterly double-digit rate increases, going back to the fourth quarter of 2019.
Speaker 1: With rate at primary driver of premium, exposure growth has been limited.
Speaker 1: We have not seen new capacity in the Florida market in quite some time, and competitors continue to manage their limits closely, which creates space for multiple carriers to participate on a risk, including our allies.
Speaker 1: Submission counts have remained strong as property risk shifts from the admitted to the E&S market.
Speaker 3: At the end of the day, we are in the claim resolution business.
Speaker 3: and are happy to report that two-thirds of our hurricane-in claims are now closed.
Speaker 3: Our claim examiner continues to visit our insurers in Florida to re-inspect locations and address any issues. While ENS Property grabbed the headline again, Marine and our Hawaii homeowners books are quietly thriving as well. We successfully grew Marine by 16% and Hawaii by 18%.
Speaker 3: by being responsive to our producers and providing superior service and tailored solutions.
Speaker 3: Mermaids continues to deliver steady rate increases.
Speaker 3: to deliver steady rate increases totaling 7% for the quarter.
Speaker 3: With their solid results, Marine is proving to be a go-to partner in a dynamic market.
Speaker 3: Our Hawaii Homeowners product experienced some losses during the quarter but continues to perform well overall.
Speaker 3: We believe our property segment is healthy and we expect to see continued growth opportunities going forward.
Speaker 3: The casualty segments pre- and grew 1% while it produced an 83 combined ratio.
Speaker 3: Growth was flat as we continue to demonstrate underwriting disciplines in several areas of this portfolio.
Speaker 3: Effective January 1st, we exited the energy excess liability market and reduced our participation on PRIMES Core-to-Share Reinsurance Treaty.
Speaker 3: The combined impact of these changes was a valid $10 million decrease to premium in the first quarter. Producing consistent, profitable results stems from a willingness to tear back underperforming portions of our portfolio when needed, or rebalance products to better align with our appetite.
Speaker 3: Conversely, disrupted markets are ripe with opportunities to grow, as demonstrated by personal umbrella.
Speaker 3: Here, we have refreshed our policy form, target regular rate increases, and we have also changed
Speaker 3: and work with our producer partners to manage growth by region.
Speaker 3: PUP Premium was up 23% and we are monitoring this growth closely. Steady growth was also achieved by our Professional Services Group, which focuses on architects and engineers' professional liability and package coverages, as well as small commercial packages for contractors. This group ramped up marketing efforts in the first quarter.
Speaker 3: and produce 8% growth in growth streams written. Our executive products group is in a tougher market, where the public DNO sector remains under pressure.
Speaker 3: One of our brokers said that 20 new competitors have entered this market in the last 18 months.
Speaker 3: We believe these new entrants are linked to the parties and are providing brokers with more mouths to feed.
Speaker 3: Our EPG premium was down 14% in the quarter. We experienced 5% rate decreases, but were able to achieve growth outside of public D&O. Finally, we saw delays in the start of private construction projects in our E&S casualty for primary and excess liability business in the first quarter.
Speaker 3: Project owners are having to reserve more effort to obtain financing, permits, and needed project supplies.
Speaker 3: These issues vary by geographic region, with the Northeast being the most impacted.
Speaker 3: New competition, who generally provides broader coverage, has entered the space as well.
Speaker 3: Pre-min for the group was down 9%, although we were able to obtain 5% rate increases on primary business and 6% on the excess.
Speaker 3: The room border is too early to call it a trend, but we are monitoring construction industry information closely and continuing to work with our producers to monitor submission as well.
Speaker 3: The shirting segment grew premium by 14% and produced a 77 combined ratio.
Speaker 3: While building materials inflation continues to support growth and contract surety, we are also winning new accounts in our contracts and commercial surety businesses through increased marketing efforts and a focus on excellent service.
Speaker 3: While we are off to a solid start for 2023, we are watching economic conditions and the financial health of our principals closely, and have gotten off several accounts whose financial results deteriorated.
Speaker 3: With robust competition in the market, we believe growth opportunities within this segment may be more moderate in the year ahead.
Speaker 2: And now I'll turn the call back over to Craig. Thanks, Jen. A very good start to the year, giving us good momentum going into the more catastrophe exposed spring and fall quarters.
Speaker 2: We will continue to remain vigilant around opportunities and risks as we navigate the uncertainty and disruptions in the market. We can be patient when required, but like the boxer Archie Moore, we also have the proven ability to adapt and counterpunch with speed and skill.
Speaker 2: The speed is derived from our consistent underwriting approach and strong balance sheet, which gives us the confidence to execute amid market uncertainty.
Speaker 2: The skill comes from our associates narrow and deep knowledge that bring added value to our customer
Speaker 2: associates narrow and deep knowledge that bring added value to our customer and better risk selection.
Speaker 2: ROI will continue to invest in its people, customer relationships, and technology to grow underwriting profits over time.
Speaker 2: I want to thank all our ROI associate owners for the results they generated this quarter. Keep up the great work. At ROI, it is okay to be different because different works. I'll now turn the call back over to the operator for any questions.
Speaker 1: Thank you. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers.
Speaker 1: Should you have a question, please press star one on your telephone. If you wish to withdraw your question, please press star two.
Speaker 1: Your question will be taken in the order that it is received. Please stand by for your first question.
Speaker 2: Our first question comes from Greg Peters. Hey, good morning. This is Sid on for Greg. Just wanted to talk about the casualty segment. You provided great detail there on the growth. And we're just trying to get a sense, I guess, on where we are in the timing with the COVID-19 pandemic.
Speaker 4: previously exited lines and then it sounds like there's additional lines have been exited. So just I guess trying to set our outlook for growth in the casualty segment. Yeah, thanks for the question. So in terms of the excess energy liability business, that's not a bond that was a liability product and that we exited last year, we still write primary business.
Speaker 3: So we have to do this effective January 1st. I think last year we wrote between 15 and 20 million of excess liability premium. So About five million that was in the first quarter roughly and so you'll see the rest of that throughout the year It did slow down towards the end of last year. So it's probably weighted towards the first three quarters of the year And another part was just our prime
reinsurance that we assumed and so we took half of our participation that we used to do in 2022 so that impacted our premium as well and we would see that throughout the year, the more evenly spread.
All right, got it. Thanks.
All right, got it. Thanks.
Thank you. Our next question comes from the line. You want to use your shutter and your FTE data.
Great, I'm sorry, am I coming through?
Fantastic, thank you. Sorry about that. Jen, you mentioned 20 carriers entering the space and up until now we've heard that their focus has been fairly limited to public company D&O. I'm wondering, does that match what you're seeing or are they now looking for other lines of business to attack or to soften?
Yeah, thanks for the question mayor. I think we are seeing them mostly participate in public DNO. So the 20 new competitors are a mix of carriers and a lot of MGAs. Some of those folks also play in other parts of that general space such as the rest and working business, which we're no longer in. I think this is where the big name Armando who
They haven't been focused as much on the private yet, but we're ready for competition to come anywhere, so But for now you're right. It's been mostly focused on the public, you know.
Okay, that's helpful and I know we talked about this in the past, but how are you thinking about. Lost trends in property as that book grows and I'm wondering specifically, is there an annual increase that we should expect from. Climate change in addition to the impact of.
inflation.
Well, I would say that, you know, in terms of climate change, we have seen some increased activity in the last few years, which we've been adjusting for over time through rate increases and form changes. We don't provide a lot of coverage for some of the perils that are connected to climate change such as floods, so we don't have a lot of that in our portfolio.
Wildfire would be another example where we do have fire risk, but we are very aware of wildfire and so we try to really underwrite to that risk and charge for that. I would say now I've forgotten your question.
I'm about to win. I'm not going to be associated with that.
Oh yeah, thank you. So in terms of loss trends, you know, this is impossible to measure. We have put in some loads for various perils and other factors within our benchmark pricing tool, but there's no precision or a lot of calculations around that because, as you know, that's a topic that is evolving. So I'm going to give you a large, kind of a high-level answer on that one.
The only thing I'd add there is we do spend a lot of time on the front end making sure we get the correct valuations. There's been an increase that we've always had a focus on that but really an increased effort recently because of material costs and things like that. So we've kind of reevaluated our entire portfolio at Renewal and look at accounts and have conversations with the industry.
Yeah, good morning. I'm going to kind of build on what Mayor just asked about. So with all the additional property that you've been writing, is it safe to say that the southeast now would be your kind of peak risk zone for property exposures or would it?
still be, I don't know, Hawaii or California quake or whatever it might have been previously? Well that's a good question. It depends on how you measure it. As you know, when it comes to catastrophe risk, there's a lot of ways to measure it, whether you're using a model or using exposed limits. And so you can answer that question in a lot of ways. I would overall say that
exposure has flowed tremendously as we manage all of these various metrics that we use.
To the extent you're writing where you've been adding property exposures, what sort of limits are you typically writing or maybe there's not a typical? Well, there can be a typical. We look at five million or even down to two and a half million in the highest concentrated areas like Florida and the East.
as a primary writer or are you part of an excess tower?
Historically, we've been very focused on the primary. The access portion of our portfolio has grown a bit just with the change in other carriers' limits where they're providing less and so a lot more of that business is in towers now with a lot of carriers participating. So we've seen that area of our growth grow as far as access, but we still prefer and...
as being the areas where there's the most dislocation. I've just quizzed you extensively on the cat portion, I suppose. So could you share any thoughts you might have on what you're seeing in the wheels business collectively, kind of where the dislocations are most acute and...
Maybe some sense of what the rate increase environments are like in some of those areas. Yeah, I'll actually jump in. If you look at our auto exposure, you know, the main business unit that writes that is our transportation division.
And I would say the auto space is pretty diverse there are parts of it that are still very healthy and other parts when there's A lot of competition so the most challenging section of that market is actually the trucking Market both on an admitted and a non-admitted basis. I don't understand why but people don't appreciate that 2020 was a low
And so, you know losses were down for insured that year But they incorporate that into the pricing and assume that losses will be down going forward But in reality there are accidents every day. And so there are more markets entering trucking we heard about a new one yesterday and it's frustrating because
You need to charge enough to cover, you're going to have claims, and you need to charge enough to cover that. And then a market is experiencing some issues. I'd say the other areas of the market are a little healthier. We have a public portfolio, we have some specialty commercial auto, and those are a little bit healthier from that standpoint. Overall, in the first quarter, we were able to achieve an 8% rate change.
On the transportation portfolio the other area where we have some auto exposure would be in our personal umbrella Products and we're primary focus You know in there we fight with the various State Insurance Department to get a little more rate on the portfolio and again with losses being down a couple years ago
People are trying to assume that losses aren't happening, but they are. And so we do see other carriers, competitors struggling in that market, again with the social inflation and other factors that we've talked about previously. So that's a disruptive market. We've been growing for a bit and we continue to see opportunity. But with new growth at our line, we always watch it very closely.
give us an overview of what you're seeing in reinsurance markets relative to the increase in your property exposure, and how you're managing the obvious change in in prices in reinsurance markets, just kind of an overview of how you're dealing with the whole situation.
Sure, thank you. Obviously January 1st was challenging for us. We were able to renew our reinsurance and we did get coverage, but it was at a higher cost. We were able to cover that cost by passing that along to some extent with our rate change. We feel that the reinsurance market is continuing to be firm.
You know the rate change was pretty manageable there But we know from talking to our brokers and from hearing about what's going on the market that Property will continue to be a challenging area and so as we move throughout the year We are contemplating that as we think about our exposure because you put it you put a risk on the books today It's going to be
In force for 12 months, which means it will be subject to next year's cat treaty And so just like last year in 2022 we knew that rates were going to be going up And we started around April many time frames increasing our benchmark pricing to consider that you know the next year We will be paying more for that exposure And so we do the similar process this year as we try to forecast which forecasting is kind of possible
But we think there's the potential for rates to go up again to some extent. I'm hoping it's a lot more manageable and An organized process this time, but we stay in touch with our reinsurers We have some visits coming up in fact in fact we have a team actually right now meeting with the reinsurers so we say contact to monitor what's going on and We'll accommodate that as we go forward
as we can. All right, great. Thank you for taking my question.
All right, great. Thank you for taking my question. Thank you.
Thank you. Our next question comes from Jamie Inglis. Good morning, guys.
I don't want to swim back to the property area. Other companies have reported and or signaled big capacity loss. The industry has as well. I'm guessing part of this geographic focus.
But...
You guys have in the past talked about changing terms and conditions, and I'm wondering is there a way to quantify
What changes you've made and what would your loss rate have been if you hadn't made those changes? Is there some way to get a sense of what's changed in your book or how you structured the book?
Yeah, that's a good question. I asked that question myself in the last week because I keep seeing these pre-announcements and I'm saying, what is our impact? I would say that a couple of things go into play there. About 10 years ago or so, we were a little larger in the habitation space in our E&S property portfolio. We experienced a fair amount of tornado losses back in the day, hail losses. Kindness Pi cane whipping
If you look back at our history, we have some losses from that, but we reduced our participation there because frankly we couldn't get the terms and conditions we needed and so we have a lot less exposure to that, to those perils. I would say our books concentration really is in Florida, Texas, California, those kind of areas.
And so, and it's really peril specific in a lot of ways. And so when you see these different events come through, depending on the region, depending on the coverage, we just don't have concentrations. Now when events like this happen, we expect runoff losses to occur. We have received a few claims, hail damage, some roof issues, but nothing that is, you know, headline. We still don't have an online simple comparison bass head WWE Q A P L W T incomplete in Our
Yeah.
Okay, that's all I had. Great results guys. Thanks.
Thank you. Thank you. Thank you. If there are no further questions, I will now turn the conference over to Mr. Craig Fermi. Mr. Fermi, please stand by.
Cleve Thurms for closing remarks. Well, thank you all for joining us. We're glad we could continue to deliver. Look forward to talking with you all again.
firms for closing remarks. Well thank you all for joining us and we're glad we could continue to deliver and look forward to talking with you all again. Thanks.
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This concludes our conference today. Thank you for all your participation, and have a nice day. All parties may now disconnect.