Q2 2023 RLI Corp Earnings Call
Good morning, and welcome to the ally Al.
Second quarter earnings teleconference. After management's prepared remarks, we will open the conference up for questions and answers.
Before we get started let me remind everyone. That's good at cost at the Tech conference.
Management may take 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 that tests, describing the companys various SEC filings, including India.
We will report on Form 10-K as supplemented in forms 10-Q, all of which should be reviewed carefully.
The company has filed a form 8-K with the Securities and Exchange Commission that contains the press release announcing third quarter results.
During the call all L. I management may refer to operating earnings and earnings per share from operations, which are non-GAAP measures of financial results.
<unk> operating.
Earnings and earnings per share from operation like consist of net earnings after the integration of <unk>.
After tax realized gain all Lucius and after tax unrealized gains or loses on equity securities.
Additionally, equity in earnings of Maui, Jim and the related tax.
Were excluded from operating earnings and operating EPS for 2022 due to the sales of our eye.
Investment in the first quarter of 2020.
L. Ice management believes these measures are useful in gauging core operating performance across reporting periods, but may not be comparable to the to other companies' definitions of operating earnings.
The form 8-K contains a would constellation between operating earnings and net earnings.
<unk> 8-K and press release.
Variable at the company's website at Ww thought I caught dotcom.
I will now turn the conference over to Ali I, Chief Investment Officer, and Treasurer, Mr. Aaron Devin Taylor. Please go ahead.
Good morning, Thank you for joining us to review our L eyes.
<unk> for the second quarter and first half of 2023 as usual, we are joined by Craig Kliethermes, President and CEO .
Bob <unk>, Chief operating Officer, and Todd Bryant, Chief Financial Officer, Greg is going to start us off with some introductory remarks, Todd will offer a play by play of the financial results. John will then comment on market conditions and further details on our product portfolio. We can then open things up for questions.
Craig will close with some final thoughts Greg thank.
Thank you Erin and good morning, everyone I'm very proud of the efforts of all of our associate owners as they delivered again with significant top line growth and outstanding combined ratio across all segments and overall book value growth for the quarter.
I'm very pleased with where we stand at midyear.
And Roy we come to work each day, knowing that we can and must be better than the day before perfect. She may not be attainable, but we're striving for and we are successful because we focus on making decisions that will best serve our customers and our shareholders over the long term.
The good decisions, we make today may not be realized in the next quarter, but will benefit us over the next decade.
We have no control over the competitive landscape, but we can decide when and how we grow we have a broad and diversified portfolio with underwriting expertise that know where the opportunities exist and the willingness encouraged to let our portfolio evolve with current market conditions to optimize profitable growth.
We have the confidence to execute because we don't look problems go unintended and instead exert more effort on the products and services, where we can be most successful in providing differentiated services to our customers.
That is what we have done to create a solid track record of success and is what we continue to do this past quarter.
Todd and John go into more detail on the financials and the market in general Todd take it away. Thanks, Greg Good morning, everyone.
Yesterday, we reported second quarter operating earnings of $1 16 per share.
The quarters result reflect solid underwriting performance and continued growth and investment.
All in we posted a combined ratio of 87 two for the quarter.
Now.
Seven.
We experienced continued topline growth, which was up 21%.
Investment income advanced.
Yes.
Reinvestment rates and a larger asset.
Okay.
Operating cash flow of $174 million was up nicely for the quarter.
You need to support.
Yes.
Also and importantly equity close to $25 million unrealized gains.
101 million of net realized losses.
<unk> equity price movement between periods.
The biggest impact on that.
Comparative results this quarter.
Realized gains were $6 million quarter pumping modest portfolio rebalancing.
From an underwriting income perspective, the quarter's combined ratio was $87 two compared to 82.
Ago.
Larger catastrophe losses, coupled with a reduced benefit from prior year's reserve releases within the chasm.
Increased the loss ratio by six points.
Storm losses totaled $18 million in the quarter and $17 million impacting property and $1 million.
Spring storm activity in Texas.
Enrollment in Florida.
Compared to last year and impacted our results.
In addition, several of these losses on the property side grew in excess of $1 million and remain within the higher retention on our property per risk Treaty, which was two.
$2 million.
Right.
I'll certainly a notable impact on our property segments loss ratio.
<unk> growth from rates achieved over the trailing four quarters.
Moderate the overall impact of the segments.
Casualty the underlying loss ratio was impacted by modest additions to the current accident year.
Energy.
In total, though the segment's current accident year loss ratio is similar to the first quarter's results.
Prior year's reserves perspective, all three segments benefited from favorable development.
Inclusive of $2 million in cash and faster.
<unk> casualty posted $11 million favorable emergence across a number of product lines.
While down well down.
In second quarter last year on a year to date basis. Prior year emergence was similar to last year.
As mentioned previously reserve movements movements in an isolated period can vary and evaluating trends over a longer timeframe is typically more important.
Property experienced 4 million in favorable development as marine E&S and admitted property lines posted loss reductions.
Sheridan favorable reserve development was also $4 million.
Our approach to reserving remains the same in the quarters results are reflective of a consistent process for evaluating loss reserve study one quarter in arrears.
Considering actual versus expected losses.
Okay.
Moving to expenses compared to last year, our quarterly expense ratio increased one point to $39 four.
Elevated incentive related amounts accounted for nearly all of this increase.
Most notably announced influenced by growth in book value.
You can use comprehensive earnings as a proxy.
Significantly compared to the second quarter of last year.
We also continue to increase investments in people and technology to support growth.
Customer experience and drive efficiencies.
Turning to investments the portfolio offering a one 1% total return in the second quarter.
A significant contribution from equities.
These were modestly offset by declining fixed income prices.
Measuring yields increase and maintenance.
Similar to prior quarters, we continue to find attractive opportunities to put operating cash flow to work in high quality bonds and purchase yields averaged approximately four 6% during the quarter.
Additionally, the money market funds offered yields above 5% or.
A higher than average cash and short term investments balance.
For the quarter.
Overall, we were pleased with the portfolios increasing support of operating earnings through investment income and had been layering in some intermediate maturities to ensure the support is sustainable.
Cooperating comprehensive earnings and adjusting for dividends book value per share increased by 17% from year end 2022 to $29 65.
Wait from traditional investment portfolio investment earnings were down but that comparison was largely influenced by our sales now Jim which contributed $9 million for last year's result.
<unk> noted last year and highlighted in our press release for comparative purposes, we have excluded earnings from Maui, Jim in our calculation of operating earnings for 2022.
All in all a very good operating quarter and a strong first half.
With that I'll turn the call over to Jim. Thank you Todd.
We are pleased with our product portfolio and the second quarter's result, we continue to lean into opportunities in several areas of our property and casualty segment, producing double digit growth for the quarter and almost 20% growth year to date.
Much of that growth is coming through rate increases.
We are experiencing broad profitability across our product portfolio and feel good about the small adjustments, we are making based on customer needs and claim outcomes.
We expect the impact of Florida tort reform to be a long term benefit to the industry and hope that other states will follow.
As Todd outlined this quarter saw some higher loss ratios than last year's second quarter, and the casualty and property segments.
We are beginning to observe the court's opening back up and litigation discovery, becoming more active however, our new claim counts are up only slightly a much smaller increase in premium growth.
I'll give you a little color on the quarter's results by segment.
Premium in the property segment grew 63% as we posted a 75 combined ratio. This market remains highly attractive and we are continuing to take advantage of it.
E&S property premium was up 86% with hurricane rates, increasing 49% and earthquake rates up 14% in the quarter.
Significant portion of the industry's reinsurance capacity supporting the MGA market renewed in the second quarter with less limit at a higher cost typically is the catastrophe market facing reduced capacity, including both hurricane and earthquake risks submissions.
Submissions increased over 20% again this quarter continuing the elevated state of activity that has existed since 2022.
This has been a traditional hard market, where brokers are challenge to place full limits and we are able to work with them and reduced commissions a bit to get the coverage place.
Because we want to continue entertaining new business, we have reduced the limits we offer an individual risks increasing the number of customers. We can serve we remain disciplined around due diligence deductibles and policy terms for certain occupancies and building characteristics.
Our hurricane exposure as measured by exposed policy limits, it's relatively flat year to date.
Modeled exposure has grown commensurate with our growth and capital.
We purchased an additional $150 million of catastrophe reinsurance limit effective June 1st.
Additional limit is supporting our evolving view of risk and successfully models are being updated this is consistent with our well established approach to managing our risk tolerance.
The Marine Division also had a successful quarter growing premium, 15% and increasing rates by 8%. Our submissions are growing considerably as we are viewed as a problem solver for our brokers.
Responsive to their needs and tailoring coverage as necessary.
While other carriers look to automate all interactions we still believe there is great value in personal relationships and individual underwriting as we demonstrate what it means to be a specialist.
Spring storm activity was notable in the quarter. The storms were strong in the southeast, including Texas, and Florida areas, where we have been Opportunistically grilling.
Fight the severe storm activity higher retention and growth in these affected geographies, we were able to post a 75 combined ratio.
Our surety segment also posted a 75 combined ratio and grew up premium by 1%.
Contract surety led the way with a 10% premium increase.
While previous periods growth was driven by inflation the cost of construction materials is stabilizing and more comparable to prior periods. This quarter's growth is primarily driven by new construction projects.
Commercial surety and particularly our large account business had a slower quarter and premium was down 5%.
This business is very competitive and quarterly results can be heavily influenced by only a couple of bonds.
<unk> trends follow economic activity. So we are very closely monitoring leading indicators and the construction market as well as the general economy to evaluate the business opportunities in this space.
We remain disciplined in surety as we know the economic slowdowns raised the likelihood of play.
We've been in the surety business for over 30 years, and our experienced at navigating through all market conditions.
The casualty segment also grew by 1% and posted a 96 combined ratio.
Our topline growth reflects our consistent underwriting discipline.
In response to competitive pressures, we have been reducing our market participation and several products. These are all areas that I've talked about previously, but I'll outline them again.
The public D&O market continues to be highly competitive.
To navigate the changing conditions, we have become more selective on both new and renewal business. So our renewal retention has decreased several points.
Rate change for the quarter is down 9% and premium is down 10%.
Claim counts are down this year, we saw some unusual severity in a couple of older claims in the quarter we.
We remain profitable year to date, but these claims serve as a reminder, that this is a volatile business.
Our team underwrites for the long term and with great care maintain.
Maintaining discipline and soft markets is critical to long term success.
Another market, where we've experienced topline challenges as transportation what are the trucking portion of the market continues to be highly competitive and trucking companies revenues and miles driven are generally down a bit compared to last year.
And this business, there's plenty of claim activity and the potential for nuclear verdicts should remind underwriters to stay disciplined.
Quite the difficulty of the trucking market, we are still finding opportunity within our specialty commercial auto and newly formed moving and storage niche.
Premium for our transportation book overall was down 6% in the quarter, but we achieved 4% rate increases and the book remains profitable.
The last market I would highlight is the energy casualty space, you'll recall that we exited the excess portion of this business effective January 1st.
That decision affected our ability to offer primary only policies and we did not believe the business model with viable long term. So we made the tough decision to exit the primary energy casualty space as well in July of this year.
In calendar year 2022, we wrote a total of $24 million of premium and energy casualty, we're already down $15 million year to date in 2023, including an $8 million decrease in premium in the second quarter.
So you will see the remaining $90 million of premium runoff, mostly in the second half of 2023 with a small amount rolling over in the first half of 2024.
We believe our willingness to make the hard decisions to slow growth or exit underperforming businesses before they become too big to fail as a differentiator and largely responsible for our long term consistent underwriting success.
On a more positive note there has been opportunity in the casualty market and we continue to take advantage of it.
The personal umbrella space has been disrupted for some time.
As you read in the news there are personal lines companies, reducing their participation in both California, and Florida and this trend may continue and less carriers are permitted to achieve rate adequacy.
Primary carriers change the appetite in the homeowners are auto markets the opportunity for our Standalone personal umbrella policy increases.
Our focus is to grow proportionately across the country and we are working with our producers to ensure we're not overweight in any problematic states.
We are also restricting underwriting eligibility of the more marginal risks in several states in order to maintain underwriting profitability.
We continue to achieve an underwriting profit and this long time business and are monitoring and managing our growth closely.
The other notable area of growth is in our E&S primary liability book premium grew 10% in the quarter driven by construction outside of New York City the.
Construction space is highly competitive.
Private construction market is slowing a bit as evidenced by contractors slightly reduced projected revenues are.
Our approach is to stay in front of our producers.
So active in pursuing new business opportunities and provide tailored solutions to their problems.
This quarter demonstrates our commitment to underwriting discipline and our property segment, we are leaning into the market opportunity by meeting the needs of our producers and insurance, while focusing on refining our appetite rate adequacy tightening terms and conditions and proactive claim handling.
And surety were being cautious about growth as economic conditions have affected a handful of our insureds our principles.
In casualty, we exited the energy casualty space and are managing through a few challenging markets, while growing in areas, where our capacity and expertise are needed and where we can achieve adequate rate. This is what we do.
We believe our diversified product portfolio is healthy and well positioned to navigate this evolving marketplace.
I'll turn the call over to the moderator to open it up for some questions.
Thank you the question and answer session will begin at this time, if youre using a speakerphone. Please pick up the handset before pressing any numbers.
We have a question please press star one.
If you wish to withdraw your question. Please press star two.
We have our first question comes from Greg Peters.
From Raymond James Your line is now open.
Great.
Everyone.
<unk>.
Yes.
And I recognize you've provided a lot of comments on the property business, but I wanted to ask a couple more questions.
In the context of the growth can you provide some perspective on how much that growth is just pure rate versus exposure versus new business and I guess exposure new business can sometimes mean, the same thing but.
Just to provide some balance of whats rate versus what's new business would be helpful.
[laughter].
Sure. So if we focus on kind of the hurricane side of the house as I mentioned, we had 49% positive rate change in the quarter.
And so we are if you look at our retention for that business, it's down slightly from historical levels. So we always are in the range of 70% to 80% really in retention and today were probably probably in the middle of that of that range, though there is a fair amount of new business that comes on.
That business is.
It's under the.
The guys have our new guidelines that have been in place for a bit where we are offering just $2 5 million of limit.
The rate on that business is actually priced higher than our renewal business by just a bit in terms of how we measure. It. So we feel good about taking on that new business. So in terms of overall growth.
A lot of it is rate a little bit of a new book is new business, but its really replacing the renewals that we're losing.
And in terms of exposure, we're fairly flat from an exposure limits perspective.
When you model. The exposure you know there are different changes based on the nuances of the model in terms of the Occupancies are where the location is specifically the roof characteristics et cetera, So it's hard to identify.
Identify exactly what the growth is there.
So those are kind of a lot of the moving parts within the changing property portfolio.
Perfect and you also commented on quakes can you provide some perspective on that too.
Sure so well all the spotlight it seems to be on Hurricane. These days the quake market is actually changing as well and that's really driven by capacity.
The MGA is in that space are subject to the same situation that they've they're feeling on the hurricane side, where.
Yeah, the renewals aren't quite as easy as they were with their with their supporters and so there are some reduced limits available by the MGA.
Areas are also managing the limits that they are providing in both in both of the catastrophe areas. So we're seeing more of the risks that we look at the more layered where theres more carriers needed to fill out the tower of the insurance coverage and.
And that provides a little bit more opportunity.
Managing our limits as well and we're getting good rate on that business again, new business price, a little bit higher than our renewable book.
So I think that's a fairly attractive market at this point as well.
Great. Thank you for the colors.
Color.
Some other questions I can take offline I guess from a big picture perspective, you talked about the energy and your discipline around energy.
I'm just.
<unk>.
When you make a decision to withdraw market what happens to your energy underwriting team do you do they are they on standby waiting for market conditions to change or how do you. How do you manage that cause I recognize you have a long term orientation.
This is Craig so.
It really depends on the product and it depends on first of all the people are that we have obviously, we tend to hire specialists in each area. So.
I would say it is a little different when we decide and our participation in the marketplace versus when we decided to like shrink when we decided to shrink in a long time business.
We typically redeploy our underwriters to do other things as well as claim people.
Can work on other products.
Or work on initiatives for long term growth when the market comes back, but when we do decide to in the market.
And our participation in the market.
I mean, those underwriters tend to find other opportunities outside the organization.
Yeah.
Got it.
Makes sense, thanks for hanging around for a while.
Yeah got it thanks for your answers.
Yeah.
Thank you.
With our next question comes from MS shoots of Stifel. Your line is now open.
Great. Thanks, one numbers question, Todd I apologize I, just couldnt make out your comment.
You said that if I heard correctly 17 million 18 million of cat losses in the quarter were in property.
Yes.
Okay and did you break out the yes go ahead and some of the package side.
$1 million in size.
Some of that that package business that we've got with us.
So some of the GBA general binding.
Thank you.
Does that impact.
Okay perfect I understand did you break out that the $3 million for prior periods.
That adjustment as well.
Yes that was.
<unk> a little bit different if you will I mean that was too.
$2 million reduction to the casualty segment.
$1 million reduction to the problems.
But some of that narrow or estimating what what.
The cat impact in any given quarter and making some decisions will have to make some decisions with the information we have between segments.
And that volume.
Let's take it on on volumes was also binding largely related in that segment.
Okay. That's very helpful. Thank you I'm sorry, I missed this the first time.
Bigger picture question, I guess, maybe for Jen.
I'm sorry.
Alright, okay.
Yes.
Talked about being more cautious on.
On underwriting 30, because of economic uncertainty are you seeing signs of economic uncertainty in terms of how your insureds are acting whether its exposure units or growth plans or anything like that.
Did you say surety, specifically or more broadly.
So the question was more broadly because you commented specifically on underwriting caution in surety.
Oh yeah.
So if.
If you think about our portfolio, we've got a fair amount of business in the construction space as an example, so.
And it's a very diverse participation in that space and so you look at public construction projects. For example, that's fairly healthy space. So surety is pretty healthy in that area, there's plenty of business there.
Look at private construction, that's a little bit slower.
And so our admitted and non admitted businesses see a little bit of a reduction in revenue there, but not substantially it's just flat to down slightly and so.
People are I think.
Participating pretty responsibly there are architects revenue is up a little bit so.
So we're seeing kind of a fairly stable environment actually than.
The news would indicate maybe there's a sign of a recession coming in we keep asking people every day are you seeing within the data and we really aren't at this point I mean, it's not like it's growing tremendously, but it seems fairly stable at this point in time I don't know if that answered your question.
Exactly I was looking for thank you so much.
Thank you.
We have our next question comes from Scott <unk> from RBC Scott. Your line is now open.
Yeah.
Oh, yes. Good morning first question was this umbrella it sounds like you. It sounds like business is doing well. There you are seeing some opportunities others are pulling back and that's been well documented others have had trouble with outlined so.
Over the past year I'm wondering if you could just give an update there I know you mentioned some comments, but some additional color on why rois.
Doing so much better than others on that and have been over the past year as it is at rate risk selection terms and conditions I'm just curious if you can.
Touch on why why are you able to do that so much.
Better than the competition and it seems like.
Are you interested in the personal space or the commercial space.
Either one.
Or both.
Okay, well there too yeah, they're there they're acting in two different ways I would say so in personal lines. We are a standalone for sun umbrella operation, which means we don't require the underlying homeowners. The fact, we don't really want the underlying homeowners or auto coverages, whereas most people who participate in personal umbrella require both coverages.
To be in place as well so.
You see different companies pulling out of different states.
For either auto or homeowners or both that just creates a larger market opportunity in general for a standalone product.
And then it's a matter of how do we approach that market to make sure that we're doing it in the right way to be helpful, but yet profitable as well.
So we have our own underwriting box that's been in place for quite a while we tweak it a little bit over time based on claims we have a pretty robust feedback loop between people, who are marketing that product to the underwriters to the claims after the actuary to all.
We participate in a lot of our reporting and discussions around trends and things that they are hearing out in the market and claim outcomes. So all of that happens on a very regular basis.
We have dedicated claim staff to that our focus on our personal umbrella claims so they're used to participating on an excess basis and working with our underlying carriers to get access to the information we need to determine if were going to be affected by the claim and how we need to approach our participation in that process. So I think it's a matter of focus kind of.
That narrow and deep underwriting as well as claim handling that we do across the board that we apply to the person umbrella space that has allowed us to be in this business for over 30 years as well.
And to do it pretty profitably, having said that you know there there are stories of other carriers, who have trouble and so we're very.
Close to the growth in terms of monitoring it and having discussions.
Very regularly to make sure that we're on top of anything that we see coming down the pipeline.
On the excess space, it's a little different story.
Excess piece I don't understand why it seems to be a lot more or the commercial stage I should say, there's a lot more.
Competitive and I think the barrier to entry is lower in the commercial space. So people can get in and get started writing business.
You know everyone's talking about social inflation and severity.
Yet new carriers come in and they.
They don't do very well and so they get out and we try to be consistent and just navigate that market as people are going in and out with a fairly consistent appetite and approach, though in that market. We also apply.
The feedback loop between underwriting claims actuarial support to understand what's going on.
We've dedicated claim staff and so it's the same playbook to supply to a different space, but that market seems to be a lot more competitive than on the personal line side.
Okay sounds like the opportunities a little more on the personal line side for you guys compared to compared to commercial at this point, but Tom.
Yeah, just just moving on next to.
Retentions you said you guys saw higher retention. This year then the net to gross and you mentioned you purchased.
$150 million of additional cat limit.
Could you just give us some updated thoughts on your reinsurance strategy, there and thoughts on how you expect to manage that.
That part of the business with reinsurance pricing higher, particularly as we go into 2024, and how youre thinking about that.
<unk>.
Sure.
If you look at our strategy, we've been pretty committed to the traditional reinsurance space. So we've had some long term partnerships since really the late seventies and reinsurance and so we are we do tend to favor that that approach.
We have grown we continue to monitor where the number of tolerances.
That model just policy limits in our region as well as modeled metrics that we monitor on a monthly basis.
We want to stay in a relative to our surplus growth we want to stay in a reasonable range there and so it's important for us as an E&S business to take advantage of market opportunities and that's exactly what we've done but there's also a limit to what we can do relative to the size of our company and so that's why we've continued to buy reinsurance.
I think that the market opportunity at some point it will slow down I think the second half of the year. We may see the early signs of that given this has been going on for a while if you think about the second half of last year, we were already taking pretty good rate increases we were already managing limits, we were already paying attention to deductibles and all those things and so if you look at.
The change that we would expect for the second half it's on top of already a lot of actions that were taken.
So you know.
This opportunity will slow down at some point, it's hard to say when I think as we approach one one we will look at you know where that sits it's very hard to talk about it now because we're in the middle of hurricane season, where not a lot happens once you're in the season, you don't have a lot of new markets entering mid season, you do have some people who fill up their buckets of exposure and so you'll see a little bit of change.
And appetite, but not much so we really have to wait and see how the season plays out and kind of where we're at in the fourth quarter. So determined what that opportunity looks like for next year. So that's kind of a thought process. We go through.
Okay. That's helpful and the 150 million in Cat limit did you give any additional detail. If if you did I didn't catch it on is that.
Is there a specific region thats four or is that just.
One program or is that hurricane.
Exposure the additional cat limit that you bought for all payroll yep.
Okay. That's fair apparel. So it just goes as an additional layer on top of all of our coverages that we purchased previously.
Got it okay. Thanks, a lot for the answers.
Sure.
Thank you Scott.
As a reminder, ladies and gentlemen, if you have any further question. Please press star followed by one on telephone keypad now.
We have no further questions on line I would now turn the conference back to Mr. Craig clear for me for some closing remarks.
Thank you everyone for joining today.
The results we report today, a more reflection of the body of work put in over the last decade than the last quarter.
Some ask how we have been able to deliver consistent results each year. It isn't magic, but also is it easy.
Our very talented individuals with deep expertise expertise who share our values.
We make them owners through shared rewards and aesop and reimburse them in a culture that reinforce all of that is good and.
Then we look to build and continuously improve our business to best serve our customer.
The market. We currently face includes assortments of natural catastrophe capacity and active plaintiff bar loss cost inflation and uneven economic growth. Among these challenges and disruption lies opportunity we.
We will continue to adapt to these market forces as well as others that emerge.
To serve the best interest of our customers and shareholders as we have for nearly 60 years.
I'm a proud of our associate owners efforts and the unique culture of ownership and shared success. We have maintained I have one more favor to ask them keep being different because it works look forward to talking with you all next quarter.
Okay.
Thank you.
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This concludes our conference for today. Thank you all for participating and have a good have a nice day.
All parties may be now disconnect.
[music].
Yeah.
Okay.