Q4 2024 RLI Corp Earnings Call
Thank you for joining us for this week's SSEC filings, including in the annual report on Form 10-K, as supplemented in Forms 10-Q, all of which should be reviewed carefully. The company has filed a Form 8-K with the Securities and Exchange Commission that contains the press relief announcing fourth quarter results.
During the call, RLI management may refer to operating earnings and earnings per share from operations, which are non-GAAP measures of financial results.
Our realized 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.
RLR's management believes these measures are useful in gauging core operating performance across reporting periods, but may not be comparable to other companies' definitions of operating earnings.
Speaker Change: I will now turn the conference over to IRLI's Chief Investment Officer and Treasurer, Mr. Aaron Diefenthaler. Please go ahead.
Speaker Change: Thank you, Adam. And good morning, everyone. Welcome to our Alliance Fourth Quarter Earnings Call to close out 2024.
Joining us today are Craig Kliethermes, President and CEO.
Jen Klobnak, Chief Operating Officer, and Todd Bryant, Chief Financial Officer.
Speaker Change: We have a typical agenda today as Craig will kick things off with some preliminary highlights.
Speaker Change: Todd will run down the financials, and Jen will offer more detailed commentary on current market conditions in our product portfolio. The operator will then open the line for questions, and Craig will close with some final thoughts. Craig?
Speaker Change: Well, thank you, Aaron, and good morning, everyone. I'm happy to report that 2024 resulted in ROI's 29th consecutive year of underwriting profit.
Speaker Change: We achieved well-balanced growth and underwriting profitability across all of our reporting segments, with 12% growth in net written premium and 22% growth in underwriting profits for the year.
Speaker Change: Our continued growth and financial consistency are a testament to the great service we provide to our customers, our underwriting discipline, and our focus on making the best long-term decisions to the benefit of all of our stakeholders.
Speaker Change: As Todd and Jen will go into in a minute, we remain focused on opportunities where we have the expertise to differentiate ourselves.
and the market permits adequate returns.
Speaker Change: Legal system abuse, particularly in real estate businesses, is a frequent topic of discussion within our strong collaborative underwriting and claim feedback loops, and we fine-tune our underwriting approach where needed.
Speaker Change: Motor vehicle exposures still require measurable ongoing rain increases to address lost cost inflation.
Speaker Change: We have the underwriting and financial discipline to walk away from underpriced accounts if necessary, but have achieved double-digit increases on auto risk this year.
with more increases expected through 2025.
Speaker Change: I will let Todd and Jen share more detail on the financials and the marketing in general.
Speaker Change: Good morning everyone. Yesterday we reported 4 quarter operating earnings of 41 cents per share. As a reminder, on January 15th, we split our stock 2 for 1, and all share and per share data is reflective of that change.
Speaker Change: Positive underwriting performance and a 19% rise in investment income contributed to operating earnings.
Speaker Change: Our combined ratio for the quarter was 94.4, influenced by hurricane losses, and select additions to current accident or casualty reserves.
Speaker Change: Full year results include a combined ratio of 86.2, following an 86.6 for 2023, resulting in our 29th consecutive year of underwriting profitability.
Speaker Change: Top-line growth continued, with growth premiums advancing 90% in the fourth quarter and 11% on a year-to-date basis.
Speaker Change: Jim will offer some additional details on products driving premium growth.
Speaker Change: On a gap basis, net earnings per share were $0.44 per quarter and $3.74 for the year.
Speaker Change: Full year results topped last year by 13% as both underwriting and investment results improved.
Speaker Change: Although we are largely focused on 2024 results in this discussion today, I do want to take a moment to discuss the Southern California wildfires, an unfortunate event that has impacted many.
Speaker Change: It is difficult to comment in detail on an event that is still active, but to date we have received a limited number of claims associated with our commercial fire and marine books.
Speaker Change: As a reminder, we do not write residential homeowners in California. From a law standpoint, industry estimates are varied and evolving.
Speaker Change: While it is too early to speculate on any final impacts, we do expect losses from these events to be very manageable.
Speaker Change: As is typical in catastrophe scenarios, we will continue to be proactive, reaching out to insurers that we believe may have been impacted.
Speaker Change: Diving a bit deeper into segment level results, casualty groups top line 18% in the quarter with the majority of products posting growth.
Speaker Change: The bottom line for casualty benefited from $11 million of favorable prior years loss development, modestly above the same period last year.
Speaker Change: Offsetting this, however, we did add reserves to the current acts that you use during the fourth quarter. Products of note include transportation and personal umbrella, which are driven largely by auto-related exposures.
Speaker Change: While loss frequency has remained relatively flat, concerns over increased auto severity prompted us to add reserves to the current accident year.
Speaker Change: You may recall we took actions on transportation and personal umbrella current accident years in the fourth quarter last year. Concerns at the time were similar. Adverse indications on law severity.
Speaker Change: Auto severity has been an ongoing challenge for the industry, and we are not immune.
Speaker Change: We believe our actions are consistent with our approach in addressing concerns as they arise.
Speaker Change: These current year reserve additions had a notable impact on casualties quarterly results and served to increase the full year loss ratio by two points compared to the trend at September 30.
Speaker Change: Overall, however, casualty remains profitable, posting a 97.9% combined ratio for the calendar year.
Speaker Change: surety was flat in the quarter but up 9% on a year-to-date basis
Speaker Change: Prior years reserved were modestly adverse in the quarter, but were redundant for all of 2024 and at a level similar to last year.
Speaker Change: Acquisition costs have moved higher, influenced in part by mix of business, as well as our continued investments in people and technology to support surety's growth.
Speaker Change: With a combined ratio in the low 80s year to date, we remain very positive on this segment.
Speaker Change: For property, gross premiums were down 3% in the quarter, driven largely by E&S property.
Speaker Change: Although we are still finding rate adequacy, competition has increased and rates have softened, most notably on wind business.
Speaker Change: In contrast, marine and Hawaiian homeowners continue to grow as we take advantage of opportunities there.
You're today, the Segment Group Top Line 7%.
Speaker Change: We recorded 48 million in net losses from Hurricane Milton during the quarter, while reducing our Haleen estimate by 9 million.
Speaker Change: For the lean, we have been successful in closing a number of claims, while certain excess policies and other flood coverages did not trigger losses, as was originally estimated.
Speaker Change: On an overall basis, prior year's reserves were unchanged in the quarter, underlying results for the segment are comparable to last year, and the segment's 81 combined ratio for the quarter and 68 for the year highlight the influence of growth and earned premium.
Speaker Change: On the investment front, yields increased throughout the quarter and were well above the year-to-date lows we saw in mid-September.
Speaker Change: This offered additional opportunities to add high-quality bonds above the portfolio's current book yield.
Speaker Change: Purchase yields at an average 5% per quarter and strong operating cash flow continues to accrue to a larger invested asset base.
Speaker Change: The portfolio's average duration is extended slightly to 4.9 years as intermediate maturities remain in focus.
Speaker Change: Total return for the quarter was a negative 1.1% as the decline in bond prices was slightly offset by a positive result in equities.
Speaker Change: Beyond the core portfolio, our investment in prime is detracted from earnings in the quarter.
Speaker Change: We recorded a loss of $12.5 million from our share of Prime's earnings.
Speaker Change: as prime strength and reserve on a number of prior accident years.
Speaker Change: While no notable impact to the quarter, our investment in prime remains very positive on an inception-to-date basis.
Speaker Change: Putting it all together, Comprehensive Earnings were $3.66 per share and pushed book value per share to $16.59, an increase of 24% from year 2023 inclusive of dividends.
Speaker Change: Our capital management strategy again included a special dividend of $2 per share, split adjusted, which was paid in addition to our four-quarter ordinary dividend.
Speaker Change: Consistent financial performance and conservative capital stewardship has allowed ROI to return nearly 1.5 billion dollars to shareholders in the last 10 years.
Speaker Change: All in all, a good quarter and a very solid year. And now, I'll turn the call over to Jen. Jen? Hey, thank you, Todd.
Jen: Let me dive into the segments to provide some insight into our insurance operations.
Jen: The cashier segment's premiums grew by 18% during the fourth quarter. This included a positive 10% rate change driven by auto coverages, which achieved an even larger increase.
Jen: Growth accelerated in the fourth quarter for our casualty brokerage business, which includes E&F, primary, and excess liability coverages.
Jen: Premium was up 22% in the quarter. Submissions grew almost 20%, consistent with the increase in flow that we've seen all year.
Jen: We are seeing more business opportunities by staying in front of our producers. We continue to offer coverages that are tailored to our insurers' needs and use specialized claim examiners to achieve the best possible claim outcome.
This results in consistent underwriting profits throughout the insurance cycle.
Jen: As mentioned before, in the businesses that provide auto coverage, including Personal Umbrella, Transportation, and some of our packaged businesses, we achieved sizable rate increases. Personal Umbrella continued to grow with premium of 37% in the quarter, which includes a 22% rate increase.
Jen: Despite these rate increases, new business and renewal retention are holding steady.
Jen: Transportation premiums was up 22% and rates increased 13% in the quarter.
Jen: Submissions increased more than 8% this quarter as our competitors are pushing rate as well.
Jen: In our package business, which supports small contractors and professionals like architects and engineers, our auto rate change is a minimum of 15% and increases from there, depending on the class of business and the venue.
Jen: In each of these lines of business, we have seen increased severity and are taking steps to address loss activity beyond just rates.
Jen: In Personal Umbrella, we work with our producers to balance growth by state and modify rates to address geographies or coverages that are driving loss severity.
Jen: In transportation, severity is notable on larger accounts that are more of a target for plaintiff's attorneys. We have not renewed or pushed for a significant rate on these accounts. Our in-house loss control team visits each of our insurers to identify ways to improve their safety, often before binding the risk.
Jen: These visits allow us to assess our insured's buy-in to safety practices and are a valuable input into risk selection and accident prevention.
Jen: In the package businesses, we have reduced commissions, exited select classes of business, and retracted in certain venues with difficult litigation environments. We connect our underwriters, claims, and analytical teams to provide continuous feedback on the health of our businesses and identify actions to improve results.
Jen: Without top-line targets, our narrow and deep underwriters know they have our support to address loss activity that threatens our focus on profitable growth.
and we have the confidence in their ability to execute.
Jen: In our executive products group, which provides directors and officers and other management liability coverages, rate change was negative 3% in the quarter.
Jen: Our team is working even harder in this challenging market with a focus on smaller private insurance. They continue to demonstrate our commitment to the bottom line by walking away from business that has been under too much competitive pressure or moving up in coverage towers as the risk evolves over time.
Jen: In our casualty segment, we grow in those lines where we see market opportunities, and shrink as those opportunities fade. Our rate change of positive 10% for the quarter is an increase from positive 9% in the third quarter, and it is targeted at those lines where we see loss activity. In this quarter, that was our auto coverages.
Jen: With our diverse cabinet of books, we are cautious considering law severity, but we will seize on the opportunities that it creates in the new year.
Jen: Surety's top line was flat, but we achieved an 87% combined ratio in the quarter. Contract Surety led the way with 12% growth, driven by continued elevated construction costs and consistent marketing efforts.
Jen: The contrast rate in industry has been growing rapidly, but so has the industry loss ratio.
Jen: Our contractuary underwriters constantly monitor and collaborate with producers and principals to support projects that make financial sense and are achievable. This approach has resulted in no material loss activities within our contractuary books this year.
Jen: We saw fewer opportunities in the commercial space this quarter, but experienced a fair amount of growth in both small and large commercials for the year. The margin was healthy again this quarter, with several small losses, but overall a good result.
Jen: Property segment premium was down 3% in the quarter after 28 straight quarters of top line growth.
Jen: The segment produced an 81 combined ratio despite notable catastrophe activity.
Jen: The decrease in premiums was driven by E&S properties where undisciplined competitors are impacting market conditions. MDAs in particular are increasing limits offered, reducing rates and deductibles, and starting to erode other terms and conditions.
Jen: History has shown that rapidly backtracking on terminal individuals does not turn out well, and generally results in capital withdrawing their support.
Jen: We continue to see an increasing flow of business, with submissions up 13% in the quarter. This marks three straight years of double-digit submission increases.
Jen: In our book of business, hurricane rates were down 12% in the quarter. While rates are down, they are coming off a generational high, and our portfolio remains well-priced.
Jen: Where terms and conditions are deteriorating beyond our appetite, we have walked away from a handful of accounts.
Jen: We were able to respond to our insurance during Hurricane Milton by sending our in-house law suggesters to Florida to work collaboratively to address their needs and resolve their claims as quickly as possible. This is our typical event response after property losses occur.
Jen: Our timely response results in positive outcomes, as evidenced by the 60% closure rate on Hurricane Helene sites and the reserve takedown this quarter as we near more certainty in the ultimate outcome.
Jen: Architects' exposure as measured by total policy limits written in a given area is down for both hurricane and earthquake perils compared to the end of the third quarter and the end of 2023. The earthquake market is also under pressure.
Jen: competition with MGA's, other carriers, and from insurance declining coverage altogether have all contributed to a decrease in submission and premium during the quarter.
Jen: Despite these challenges, the EMS property market is well priced and growing overall. We believe there is opportunity to write profitable business and we will continue to execute in this space.
Jen: Marine growth slowed a bit in the fourth quarter to seven percent. Submissions continue to increase as we stay in front of producers and provide responsive service.
Jen: Competition always increases at the end of the year as other companies underwriters stretch to meet their top-line bonus targets. We can be patient and make the right underwriting decision given our bottom line focus.
Jen: This group produced a sizable underwriting project for the quarter and the year, with manageable lost activity and a steadily decreasing expense ratio as they earn more per unit. They continue to maintain a strong feedback loop between our underwriting, planning, and analytical support teams.
Jen: Finally, Hawaii homeowners grew premiums 49% in the quarter. Rates were up 18% as our latest rates filing became effective during the quarter.
Jen: We continue to provide exceptional service to our agents as they deal with several carriers who have exited or reduced their participation in the market.
Jen: Consistent with our business model, we take advantage of market opportunities when they arise and support our underwriters to pull back when it makes sense.
Jen: We have leaned into the E&S property market for several years, and we knew a day would come when market conditions became more challenging. Our talented team will continue to find opportunities in all of our property businesses to grow profitably over the long term.
Jen: We completed our largest re-entrance placement on January 1, including our property and working matter coverage, catastrophe tower, and casualty and package placement.
Jen: We added back pre-paid reinstatements to the bottom half of the catastrophe tower. Capacity was plentiful on our treaty as reinsurers are supportive of our business model.
Jen: Our casualty reinsurance rate change was minus 5% to plus 5% depending on the line of business.
Jen: We placed the same structure and maintained the same retention as expiring. Auto coverages were targeted for rate increases, while we achieved some relief on our other liability coverages.
We closed out our 29th consecutive year of underwriting process.
Jen: This long-term track record of success stands out in the industry.
Jen: And as an achievement, our associate owners should be very proud of it.
Jen: It takes all of our employees to show up every day and be engaged in our business, consistently building relationships with our producer partners, providing exceptional service to our customers, and visiting claimants to determine how we can help resolve their claims.
Jen: processing all of the transactions that come with a book of business of over a million policies and bonds and providing support to our employees so they have the resources to excel at what they do.
Jen: Our associate owners will continue to serve our customers well and look for ways we can improve our products, processes, and services into this new year. They deserve a big shout out for their efforts, and I want to personally thank them and congratulate them on our shared success.
Jen: And now I'll turn the call over to the moderator to open it up for some questions.
Speaker Change: Thank you. The question and answer session will begin at this time. If you're using a speakerphone, please pick up the handset while pressing any numbers. Should you have a question today, please press star followed by one on your telephone keypad. If you wish to withdraw your question, please press star followed by two.
Jen: Your question will be taken in the order that it is received.
Please stand by for your first question.
Speaker Change: And our first question today comes from Michael Phillips at Oppenheimer. Michael, please go ahead, your line is open.
Michael Phillips: Thank you. Good morning. First off on the on the casualty reserves for the current accident or addition, it sounds like that's from transportation and personal umbrella, but can you give some kind of relative split between the two of which one drove most of that? It sounds like to me it was more up transportation, but I want to make sure I'm right on that.
Thank you. Thank you.
Michael Phillips: Hey Michael, it's Todd. It was split really. I mean about half of that would be umbrella related and then the other part would be transportation.
So it's fairly evenly split.
Michael Phillips: Thanks, Todd. On the transportation, you talked about severity. Can you say what severity you're seeing between those two pieces separately?
Michael Phillips: I don't know from a between the two from from a severity difference I think if you look at I mean what we're assuming when we look at the the loss trend on an overall basis on on auto related exposures which both of those would be that
We're assuming loss trend of that 10 to 11 points.
Michael Phillips: So again, there's some severity there. I think if you look back to last year, in the fourth quarter,
Michael Phillips: We added about six million, so this is obviously about three times that.
That was, I think, four to pop.
Michael Phillips: and two to transportation on the 2023 accident year. Those have turned out to be, you know, more than adequate.
from that standpoint. We're going to react to negative indications.
Michael Phillips: from a consistent basis there, but I also think you want to take a bit of a longer-term view on that casualty loss ratio and combined ratio, certainly the combined ratio year-to-date with the action we took in the fourth quarter, moved up about two points.
Michael Phillips: But if you view it a bit longer, I mean, that reaction is consistent with how we have been in the past. If you look over the last decade, I think our casualty combined ratio underlying for that current accident year has been in that 102 range. I think there's only been two years.
Michael Phillips: So we booked it initially below $100,000, and that was not by very much.
Michael Phillips: And then if you fast forward to 2024, take a look back, those years have developed from a law standpoint about 10 points better.
Michael Phillips: in the initial indication. So they're now in the low 90s. But we're going to react. We've been fairly consistent there.
Michael Phillips: and trying to react to adverse indications. This quarter was another one of those. And we're willing to wait and see ultimately what transpires over time.
Speaker Change: Okay, no, thank you, Todd. That's helpful. Um, Jen mentioned the transportation of large accounts also driving the severity and non-renewing some business there. Can you say what person in your book you're referring to there?
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Phenomenal!
Speaker Change: Yeah, it's pretty diverse between, you know, long-haul trucking, public buses, and especially commercial auto along with a couple of
Ching-He Huang Thank you for joining us this evening.
Hello.
and Jason
Speaker Change: as well. And so our largest accounts, we have large accounts in each of those. We've walked away from many of our large accounts over the course of the year. As far as this quarter, you know, we shared a couple of them. So premium-wise, it would probably be a much larger percentage than policy account-wise, but I don't have a number specific to them.
and the first one.
Speaker Change: Okay, thanks. And just last one. On Prime, I guess the strategic view of Prime for you guys, is it to continue to own kind of about a quarter percent that you own, 25 percent that you own somewhere in that ballpark range? Do you still have the participation in the quota share? What is that? Will that remain over the coming years or will that shift away downward? And then, yeah, let me stop there. So on the Prime, continue to own around 25 percent or kind of what's the long-term outlook for that?
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Todd Bryant: Craig Kliethermes, Todd Bryant, Jennifer Klobnak, Todd Bryant, Jennifer Klobnak, Todd Bryant,
Speaker Change: To date, as Todd mentioned, I think we've received dividends in excess of what our original investment was. So we still view that as a very positive experience so far.
Speaker Change: And I think you also asked about the treaty going forward. We did reduce our participation from two and a half, I think, to one on a go-forward basis.
Speaker Change: as a result of the terms and conditions that were put forward.
Speaker Change: Okay, no, thank you. Just last one quickly on Prime. So you mentioned your pretty minimal exposure to California. Did that also include any exposure from Prime? I know they write a bunch of fire and homeowners, but maybe not in California.
Speaker Change: I don't believe that they do write some homeowners out there that is not subject to our treaty So we're not we're a little operating a little blind there in regards to what their actual exposures might be They don't run their homeowners business that they might write out there through their through our participation in the treaty
OK.
All right. Thank you very much.
Speaker Change: The next question comes from Gregory Peters at Raymond James. Gregory, your line is open, please go ahead.
Please see the complete disclaimer at https://sites.google.com or at https://sites.google.com.
Yeah, good morning, everyone.
Speaker Change: Hey, I'll go back to the higher picks that you mentioned, Jen, in your comments.
on Transportation, Umbrella, and Package.
Speaker Change: And maybe just, you know, when I hear about the 22% rate increase in your personal umbrella,
Speaker Change: Due to loss severity. I'm just curious, are you changing like your gross limit profile, your net limit profile if you're being affected by severity? And I guess
Speaker Change: When I hear about the substantial rate increase, it leads me to wonder whether you had the right pricing on the product in the previous accident years. So maybe you could give us some color on that.
Thank you.
Speaker Change: Sure, so our PLUS portfolio, as you know, has grown significantly over the last few years.
Speaker Change: We identified some new sources of production and just focused on getting the word out that everybody, by the way, should have a personal umbrella policy. We did take some significant rate over the last couple of years and have some data findings that have been recently approved that will continue to go into effective issue in 2025, so we should see that rate continue.
Speaker Change: I would say our limit profile has not changed. We primarily put out a $1 million limit. That's more than half the book. We go up to $5 million in limits.
Speaker Change: We do issue some 2s and some 3s, for example. Our appetite has not changed in that respect in terms of avoiding, I'll say, celebrities or people that are, you know, targeted in terms of government figures, things of that nature. So we do underwrite around the type of person that we're willing to cover, which is your average person.
Thank you. Thank you. Thank you.
Speaker Change: We do have our largest states remain the same, which are those states where the underlying property and liability coverages tend to be separated, so tend to be similar to our ENS states, California, Florida, for example, and so that has not changed.
Speaker Change: But what we have done, given the growth and the losses that have come in, is to really emphasize and work with our producers to try to grow those states that are not.
Speaker Change: which is a little bit more difficult given the underlying coverages aren't necessarily separated as often. I think the emergence of.
Speaker Change: You know, whether it's insure-tech auto companies or other online instances of coverage, I've opened up that a bit in the Midwest, for example, where typically the coverages tend to be together.
Speaker Change: But in terms of the profile of the book and the insurance, it hasn't changed significantly. We've watched that very carefully both by...
by S.T.A.Y. by...
Speaker Change: production source pretty much by any way besides the book. So we're closely monitoring that and as we come up with rate indications by state as we prepare for filing.
Speaker Change: All of that information is our input into what the rating is going to be. So we think we're in pretty good shape as far as the future filings that we have to make. But we think that the book at this point, we're happy with.
Speaker Change: I'll have Greg out and put Greg on ... And I'll transfer to ...
I'm just at great pleasure.
We've been in this business for over 30 years.
Speaker Change: It's been historically a very profitable business, 40 years, Jim just corrected me. It's been a very profitable business. Sometimes rates are a reflection of opportunities, not just always rate need. I mean, I noticed no one asked us the question why we're getting 40% rate increase on hurricanes last year, but
There was no implication that rates were inadequate before, but...
Speaker Change: But we will continue to look at the level of competition that we have and the rate trend Then we will pack the rates as we need. There are also some states with amended products, so
Speaker Change: Some of those rate increases are delayed over time and have resulted in us having greater need. I don't need to name the states, but you're probably pretty familiar with which states are very difficult to get.
Craig Diefenthaler, Craig Kliethermes, Todd Bryant, Jennifer Klobnak
Speaker Change: Yeah, I can pretty much guarantee I wasn't thinking about your umbrella policies 40 years ago. On the limit question... They're still for sale today.
Speaker Change: If you're eligible. If I'm eligible? Well, I'm probably not. But hey, on the transportation piece, any change in your limit profile there because of severity or is it just same limit profile?
Speaker Change: just being very restrictive about new business, or give us some perspective there.
Yeah, the lipid profile transformation also remains the same.
Speaker Change: For most of our business, it's a $1 million limit. Sometimes we put out two and a lot of times we'll buy faculty to re-insurance in that. With the exception of our public buses where it's required to have $5 million limits in most places. So again, we buy re-insurance that attaches at a million there as well. So no change in limit profile in transportation.
Congratulations on the special dividend and the capital returns.
Can you just remind me, is there...
Speaker Change: Is there some magical formula that you guys are using around the Special Dividend, you know, where we should think about it on a go-forward basis, or any parameters that you can help us, you know, use for future expectations would be appreciated.
Speaker Change: Unfortunately, I'm probably not going to give you any insight here, but it's the same as it's been before. We kind of evaluate, at least historically, we've kind of evaluated in the third quarter, late third quarter after we're looking at
Speaker Change: you know, get through the hurricane season. It's always earthquake season, as you know.
We're looking at where we kind of...
Speaker Change: where we end up relative to, you know, the AFS benchmarks and not a rating is important. We value the A-plus rating that we get from.
from that rating agency.
Speaker Change: We look at what's required to hold there. We also look at our own opportunities. We have some of our own internal metrics in regards to events and try to make sure we have enough capital to sustain that event and still keep an A-plus rating.
Speaker Change: And then we're looking at opportunities on a go forward basis, both the opportunities that are organic or inorganic opportunities.
Speaker Change: and what kind of capital is required to support those businesses. Now, a lot of those, frankly,
Speaker Change: Incremental growth does not require a lot of additional capital provided you remain profitable. That doesn't drive a lot of capital needs unless for some reason we decided we were going to take a much larger retention on a catastrophe business or something that was more volatile.
Speaker Change: which probably isn't in our DNA or nature. So that's our approach. It's been our approach for as long as I think we've been doing special dividends, and it'll remain our approach for the foreseeable future.
Okay, got it. Thanks for the answers.
Speaker Change: The next question comes from Andrew Anderson from Jeffreys. Andrew, your line is open, please go ahead.
Andrew Anderson: Hey, good morning. On property, reported margins have been strong and absolute rate level is probably still very favorable, so just trying to better understand how you think about maintaining margins or if you'd rather see the total property line grow as you're okay giving back a little bit of margin.
Andrew Anderson: So, as I look at the property segment, you know, we've got three parts to that. I'd say the part that's most pressured is our E&S property part.
Andrew Anderson: When we think about it, I mean, we're doing battle every day in the trenches, I'd say, where
We're looking at what...
Andrew Anderson: opportunities presented to us and how it compares to what we used to. So in our renewal book, we try to hold on to our renewals. Obviously, we have a lot of information about them and we know the starting point.
Andrew Anderson: And so we are willing to give some on those, and we will give some on those in terms of rates. We tend to favor keeping our policy forms intact, so we give slower on terms and conditions, because those matter in the event of an actual claim.
Andrew Anderson: And I think that's underappreciated by some folks in the industry. So that's how we look at renewals for new business. That's where it's a little bit more competitive, in particular with people putting out larger limits.
Andrew Anderson: That's eliminating whole layers that were available before. So, while the opportunity still remains, and our submission count is up, and we're seeing a lot of business,
Andrew Anderson: It's a little more difficult because as people put out, they're back to $50 million of limit when just a couple years ago people were putting out $2.5 to $5 million. You can see that takes a lot less players to get involved to finish that tower's coverage.
Andrew Anderson: And so some opportunities are leaving that space. And so if we think about a new business, we want to compete with it, but if the pricing is well below what we think we need to achieve a proper return, then we can't do it. We're very bottom line focused there, and our team has the support to look at it in that fashion.
Andrew Anderson: I just add our underwriters have benchmark pricing available to them as they price every account. They're looking at that even though the market generally is still above that benchmark. It's dropping relatively fast, faster on some accounts than others, but we don't tend to lose business by 10 or 15 percent.
Andrew Anderson: you know, the underwriters walking away from business when someone's undercutting the price by 30 or 40 percent? And our underwriters are not willing to kind of go there. They're constantly evaluating the trade-off between margins.
Andrew Anderson: and growth in underwriting profit dollars. I mean, that's how they're compensated at the end of the day anyway. So they're always looking at that trade-off. I can tell you very rarely have we ever seen that that trade-off works.
Andrew Anderson: that you can trade margin and you can run a lot more business.
Andrew Anderson: then the 5 or 10% that causes your margin just to slip a little bit. The amounts that we would hear back from our underwriters is...
Andrew Anderson: You've got to cut rates 25% to 40% to start to grow or to start really growing again, and then you get below benchmark pricing and things like that, so it doesn't make a lot of sense.
Okay.
Speaker Change: And on casually, Jen, I think you mentioned last quarter rate is keeping up with loss trend. Is that still the case at 10% and reflective of a higher severity estimate within personnel umbrella and transportation? And then just maybe on top of that as well as 67 and a half, a good kicking off point for 25 underlying in casualty.
Speaker Change: Yeah, I'm not sure about the kicking off point for casualty, but I'll say that lost train, as Todd mentioned, is between 10 and 11% for auto. I tend to look at it by coverage.
Speaker Change: And if you roll up our rate change for all of our auto coverages in our book, it was 15% for the quarter.
Speaker Change: We have a strong feedback loop where we tell, our actuaries are talking to our underwriters all the time and saying here's the trend, we have to get over this, and our underwriters say yes, we will get over that, so it's on the top of mind for everybody who writes that type of coverage. Same process occurs in our other liability coverages.
Speaker Change: that same feedback and knowledge of what we need to get. So that should continue.
Speaker Change: Yeah, I agree with Todd. I mean, I think that will continue. It is going on, certainly right now, as we look and have some discussions next week with the actuaries and other folk on where we're going to book the start of 2025.
Speaker Change: accent here. So we're certainly baking in what's going on from a trend standpoint, those assumptions. Jen mentioned what we're getting rate-wise.
Speaker Change: Overall, we have tended to, on the reserving side, probably be a little higher in the pricing range, the estimates there, and I think that'll be consistent, but we haven't got together with them yet on 2025.
Thank you.
Thank you for watching!
Speaker Change: The next question comes from Bill Karkash from Wolf Research. Bill, your line is open, please go ahead.
Speaker Change: Thank you. Good morning. Following up on your cautiousness and casualty
Speaker Change: How significantly has your appetite for growth been tempered given the severity trends that you're seeing? Your premium growth in the segment remained quite strong. You know, even though your loss rate came in at the highest level we've seen since 2017, it would just be helpful to hear more about what's changed.
Speaker Change: The way we think about growth is that we really trust our product leaders who are closest to the market and closest to what's going on with our producers and what's available to tell us where the opportunity is and that's worked for us over the long term.
Speaker Change: We are in touch with where the market is, and if someone says this is a great opportunity, then we want to support them to lean in if we can. And we surround them with input from their claim folks and their analytical support to make sure that
Speaker Change: The opportunity they're seeing is real, in terms of the data, so as an example, in our transportation division, our leader would tell you that that space is hardening, and it's the time to.
Speaker Change: to lean into that. And so we want to support that by providing him insight into our loss ratio pricing expectation, where we think he's at from a loss ratio standpoint. He's actually meeting with claim people this week, which he does very regularly to see what kind of claims are coming in. Is there anything notable from a risk selection or coverage standpoint that he should be tweaking?
Speaker Change: and then of course the actuary is providing him data around rate change and things. So, you know, there are opportunities, a lot of opportunities in casualty, I think, on liability coverages, on excess coverage, on transfer to auto-related coverages, and I think the opportunity is really across the board.
Speaker Change: How does that play out over the year, and how can we navigate versus our competitors? And so, we don't pay attention to our competitors much. We play our games. We know, based on our pricing benchmarks and tools, what we think that risk is worth. And so, that's what we're going to put out there, and we'll have to see what binds.
Speaker Change: So I would just add that, you know, just a reminder that we have no incentives for our
Speaker Change: product folks to grow other than to grow profitably. There's no top-line targets for them.
Speaker Change: And when you asked about tempering, I mean, there's always some tempering. I think that, you know, when we lean into markets, even when we have the expertise and track record, you know, we're adding risk to the system.
or in our underwriting approach to that market.
Speaker Change: But as long as the growth is through rate increases, generally we've been very supportive of those type of growth opportunities where we're growing, but it's largely or almost all attributed to rate increases.
Speaker Change: These are markets we've all been in now. Most of the markets we're talking about right now we've been in for 20 years, so these are not new markets for us.
Speaker Change: That's really helpful. Thank you for the color and a bit more of a philosophical question, kind of coming back to Prime, if I may. Despite the stock reaction this quarter, your overall underwriting performance was solid, but you're dealing with a significant headwind from equity and equity investment, non-consolidated sub, which many of you is non-core and that's preventing you from
Speaker Change: controlling your own destiny. One could say you exited Maui gym, would you ever consider exiting your remaining equity method investments or at least reduce the size of your stakes so you know equity method is no longer applicable?
Speaker Change: Well, I mean, I, you know, if there was obviously a buyer that was willing to offer us a fair price for our investment, which we think has been a very good investment to date. I mean, we're, you know, we're always entertaining.
Bye.
Speaker Change: that or would we entertain that? Just a reminder with Maui Jim, I mean we were tag-along, we didn't really...
Speaker Change: We didn't sell our share, you know, separate from the total company. The new owner wanted to own all of the company. So, certainly in that situation, we would sell our shares of Prime with a new complete owner. But I don't think Prime in aggregate is for sale as far as I understand it at this point in time.
Thank you for watching. I'm Todd Bryant.
I would get that too, I think it's important.
I'm sorry, Bill, but if you look...
Speaker Change: back over time. This is one quarter. Again, caution on on evaluating anything in a one-quarter, although, you know, we weren't pleased about it. But this is one quarter of many that in the first time primed out of some certainly some noise to the quarter. So if you go back,
Speaker Change: It's been additive, but not in a big way, but a growing way from that standpoint.
Speaker Change: And I think our return on our investment in prime, Craig mentioned that the dividends have been paid to us in excess of our original investment, which is great.
Speaker Change: from an average annual return standpoint, it's been a very good investment. I mean, you're in the 20% plus range. So it's been good this quarter, and certainly added noise to the fourth quarter.
Speaker Change: you know, essentially gains going back to like June have kind of, you know, been wiped out. And so I think there's some frustration out there, given that that's a portion of your business that, you know, you don't control. But I appreciate the perspective and that sort of that, all the commentary. Thank you for taking my questions.
Thank you. Bye.
Speaker Change: The next question comes from Scott Heleniak from RBC. Scott, your line is open, please go ahead.
Scott Heleniak: We're down a little bit. They've kind of been growing, I guess, all year long. So just wondering if you can kind of talk or anything you can add about 2025, what you see there.
Speaker Change: In terms of the competitive environment, I don't recall hearing anything on what rates were. Maybe I missed that. But if you could just give some detail on the overall business, the competitive environment rates, just how you're feeling about that business.
Thank you.
Speaker Change: Sure, thanks Scott. Yeah, I would say it sure is a highly competitive business. The business is fairly concentrated, but it's a business that inherently has a fairly good track record, and so people do look at it and say, yeah, I want to have some of that business. We've been in that business since 1992, so we're well versed in how it works.
Speaker Change: I would say our contract surety has grown over the last few years.
Speaker Change: continuously and notably and that's driven by a couple things. One would be the increased cost of construction which feeds into the rating of a contract bond. The other being just getting in front of our producers and making more of an emphasis on asking for the business and having just great underwriters who get out there and do a good job building those relationships.
Speaker Change: So we also obviously see them on the contract surety world. We think that the construction market is pretty healthy. We have pretty good
Speaker Change: market info on that by region and so I think there'll be a fair amount of opportunities in that space.
Speaker Change: On the commercial side, we've had really good growth, actually, over the last few years in commercial as well. And I would point to the year-to-date, we did have good growth this year as well. That portfolio has had a lot of opportunities through again.
Speaker Change: increased marketing efforts and just quality underwriters getting out there building solid relationships with folks that produce that business.
Speaker Change: Also, we rotated away a bit from our oil and gas plugging and abandonment business, which we used to be a bigger portion of that segment. Now it's a smaller portion as the industry has changed a bit.
Speaker Change: And so that has probably tempered the top line in that part of the segment.
Speaker Change: But we think that was a good decision as well. So I think the opportunities will remain. The question is, what will the competition be in 2025?
Speaker Change: I think it'll be constant, and it'll be just as tough as this year. But we have the team that knows how to navigate that, and we'll continue to get in front of our producers. And that's really what we've been emphasizing, because...
Speaker Change: Great, thanks, that's really helpful. And then I just want to go back to your comment, Craig, when you...
Speaker Change: You're getting asked about capital return, and I think you said the word inorganic, which I haven't heard in a while from you, and just wondering, can you talk about, you haven't done M&A in a while, is that something that...
Speaker Change: has moved up the list in terms of capital return as a possibility, and what kind of things might you look at?
Speaker Change: I mean, we're always re-entertained, looking at opportunities all the time. You know, we have a phone number and we also talk to bankers.
you know, that have new opportunities all the time, obviously.
The bar is pretty high, you know, we're looking for...
Speaker Change: We have to have alignment there, that's by far the most important thing.
Speaker Change: We look for track records in the space, and then the niche business. So, you know, the bar is really high. We look at a lot of things. We say no quite a bit.
Speaker Change: We get down the path quite a bit, and then someone may be willing to offer or buy something for a lot higher value or more dollars than what we're willing to, what we think something's worth strategically to us.
Speaker Change: So, you know, we run into a lot of challenges when it comes to that. Meanwhile, we've been able to grow.
pretty significantly through
Speaker Change: organic growth as well as focused on adjacency. So we are doing new things. I think Jen talked about a few of them.
Speaker Change: within the businesses. I guess a lower risk proposition is also a less expensive risk. It's also with people that have already bought into our culture.
Speaker Change: So we've, you know, we've been able to grow quite a bit in that way, and not, it's not always product. Sometimes it is a...
Speaker Change: a different way to distribute our product that we found ways to grow so it's both the distribution as well as adding
Speaker Change: So adding new ways to distribute, but also adding new classes or new new products within within our existing space. So that way we can leverage our claim expertise, we can leverage our underwriting expertise, we can leverage systems and other fixed investments.
and that's worked pretty well for us.
Thank you for watching!
but not understood. Appreciate all the answers.
Speaker Change: Bring us ideas. Not me, but somebody else. Different department, thank you.
Speaker Change: The next question comes from Maya Shields from KBW. Maya, your line is open, please go ahead.
Maya Shields: Great, thanks so much. I've just got a couple of sort of rapid-fire modeling questions. First, Todd, can we get the breakdown of cat losses by segment?
Maya Shields: If you look at, Mayor, there was about a million and a half incurred in the casualty segment in the fourth quarter. The rest of it was property. I forgot to mention that.
Speaker Change: No, no problem at all. Within casualty was there also a prior quarter adjustment for the loss pick on the quota share with prime or do you simply use prime numbers?
Speaker Change: We do use their numbers when it comes to the investment. They did, from their standpoint,
Speaker Change: increased I think on the 19 through 23 prior years and also increased the 24 accident year pick a bit as well.
Speaker Change: But Mayor, I think your question was also about the reinsurance and we have historically chosen to book that number at a higher, or their loss ratio at a higher number than what they are, than what they've booked on their own financials.
Speaker Change: Which is similar to what other re-insurers have done, not just with Prime, but it's done all the time with re-insurers deciding they have a different viewpoint than the underlying carrier in regards to stuff.
For more information visit www.FEMA.gov
Speaker Change: Yeah, no, and I completely get the difference between, you know, where on the income statement stuff shows up. When you look at the property CAT rate decreases and the primary rate decreases staying on property, net-net, how does that shake out in terms of expected profitability in 25 versus 24?
Thank you for watching!
Speaker Change: Well, Mayor, I would say, you know, it's always contingent on what kind of cats actually happen. So, you know, I would see rate decreases probably continuing a bit given the competitive environment in the cat space of property.
Speaker Change: And so as we try to hang on to our renewals, you know, we'll see, we'll see that happen.
Speaker Change: And then that could be affected by spring storms or, you know, hurricanes or earthquakes or whatever may come to fruition. I don't know how these wildfires are going to impact the cat market. It's way too early to tell. Obviously, it's a separate peril. Sometimes, you know, it's human behavior. Sometimes those perils seem to bleed over into why people want to buy or what they think, and then sometimes it seems like they don't. So it's ...
Speaker Change: It's very hard to predict, and we'll see how that plays out.
Speaker Change: From a non-CAT perspective, we have seen more opportunities from different regions where people have pulled back from tornado and other types of activities.
Speaker Change: So I think the opportunity away from cat business will remain healthy, especially probably given these wildfires, where there might be more behavioral change even elsewhere. So we'll have to see. I don't have a number to give you, but I think we still have a lot of opportunity in that space.
Speaker Change: Okay, fantastic. And one final question that I hope we can answer. Do we expect a meaningful refund of earthquake premiums on structures that just don't exist anymore because of the California wildfires? Is that something that's going to impact the first quarter property segment?
Speaker Change: I think if you look at our portfolio, you know, since the events have been primarily residential related, I mean, there are some commercial buildings that have been impacted.
Speaker Change: But it's mostly residential, so that kind of excludes us from that issue. We could probably have a handful of commercial where they don't exist anymore, but, you know, we do get a shot a lot of times at both the fire and the earthquake, so we'll just have to see how that plays out. I don't have a specific number for you there. I don't think it'll be material.
my estimate.
That's perfect. That's all I needed. Thanks so much.
Speaker Change: The next question comes from Casey Alexander from Compass Point. Casey, your line is open, please go ahead.
OK.
Casey Alexander: Yeah, thank you. And not to beat a dead horse on Grime.
Casey Alexander: But I noticed that your basis in the business declined quarter over quarter on the balance sheet. Is that simply a reflection of prime book value or is that an accounting driven impairment of the business?
For more information, visit www.FEMA.gov
Casey Alexander: We have not impaired crime. So I mean, if you think about it, we're carrying it fairly close to book value.
Casey Alexander: from that standpoint. They did pay a dividend to us, so I mean that is, that would have caused the carrying basis to go down a little bit. We also pick up a share of their OCI, so to the extent that they had any declines.
Casey Alexander: On the fixed income side, if you look quarter to quarter, that would influence it with where rates went.
Speaker Change: Craig Kliethermes, Todd Bryant, Jennifer Klobnak, Todd Bryant, Jennifer Klobnak, Todd Bryant,
Speaker Change: That reminds me of my second question, which is the equity portfolio kind of underperformed the general market. Is that because of elevated preferred stock exposure, which is more interest rate sensitive?
Speaker Change: Thank you. This is Aaron. We do have a portion of the...
of the equity allocation that's managed.
Speaker Change: with a value orientation and and that part of the allocation which is a minority did underperform the broader market so you're seeing that play through if you're if you're getting down to the components of the overall total return between stocks and bonds.
Thank you for taking my questions.
Good night.
Speaker Change: The next question comes from Jamie Inglis from Philosmith. Jamie, your line is open, please go ahead.
Jamie Inglis: Hey, hi, good morning guys. I sort of have an odd question, but can you...
Jamie Inglis: speak to what is sort of the called the elasticity of the expense ratio relative to premium. They're looking at the property segment and your expense ratio improved but obviously that can't continue with your premiums.
Don't.
Jamie Inglis: you know keep going. Can you can you touch on that a little bit?
Speaker Change: From the standpoint of that ratio, I mean, you're correct with the growth.
We are leveraging.
that some of the fixed nature.
Speaker Change: of the expense base. So some of that too, where we need to add people either to support that growth, that model will flex from that standpoint. And that if we were to have a decline in the future, that can solve itself, you know, fairly quickly from that standpoint.
Speaker Change: But, you know, I think, you know, the growth in property certainly has benefited the expense ratio, not only for property, but overall has benefited from that standpoint.
https://www.kenhub.com
Speaker Change: Has that happened historically when premiums in a particular segment have gone down as the expense ratio, or the expenses I should say, have they been adjusted in line? How has that happened historically?
Speaker Change: I think if you look historically at times when we've had
larger ENS growth
Speaker Change: I think you have seen probably lower expense ratios there if you try to isolate on periods of time, but there's a lot of things that are that are going into it. Certainly.
Even though expense ratio is down, our overall performance...
Speaker Change: I'll mention the 86.2 combined ratio again, that does drive increased incentives, you know, whether it's retirement, profit sharing, both in terms of bonus as well, that drives, those drive higher.
from that perspective, so that'll move accordingly.
Speaker Change: I think things are pretty well aligned with what shareholders, because we are shareholders, would want from an expense standpoint or a combined ratio standpoint or a growth standpoint.
We're in this together.
Okay, good deal. Thanks a lot.
Thanks, Ben.
Speaker Change: The next question comes from Heather Takahashi from Thrive Vent. Heather, your line is open, please go ahead.
Heather Takahashi: Hi guys, a couple of questions. One is on the surety adverse development. Could you just go over what caused that?
Speaker Change: in the quarter, and then if you've taken any actions to address whatever caused that.
Speaker Change: And then another question, the California wildfires, do you think there could be any opportunity going forward in the market, you know, outside of California homeowners?
for either increased submissions growth in ENS or higher rates.
Thank you. Thank you. Thank you.
Todd Bryant: Hi Heather, this is Todd. I'll take the first question there. The adverse was on our contract book. It was about a million dollars. I mean, there isn't anything real. There's no trend there or anything to really point to I would say that we're concerned about.
Todd Bryant: And on a year-to-date basis, it's pretty, you know, pretty comparable to last year. That was, I think that the accident year, there was maybe 21 and 22 on contract, but not a, it's not a, not a big item.
Speaker Change: I'll jump in, Heather. Thanks for your question. I would say that on contractuaries...
Speaker Change: You know, we have recognized that the last few years, economic conditions, everybody kept predicting they're going to get a lot worse, and they were, they were volatile. Smaller contractors struggled, larger contractors did better, but it was a mixed bag, it was a very individual basis, and so our underwriters do consider what happens in these claims and think about how they're analyzing the contractor to see are they financially secure and is the...
Speaker Change: The construction projects that they're taking on, are they able to financially support it and also get it done from an execution standpoint? So it does feed into how we underwrite risk.
Speaker Change: We do a post-mortem on every claim and surety to understand what happened and how we should look at all of our contractors going forward if there's any changes in how we underwrite. So out of these claims, there wasn't any, it's like two claims, you know, so you're talking about a very small sample size here.
Speaker Change: We did do an analysis that didn't significantly change what we were thinking. We actually, as an industry, contract surety has had more frequency going on because of the economic conditions. We have not seen that frequency. We just have a couple of things. So that's kind of your answer on surety.
Speaker Change: You also asked about California wildfire, Heather, and I would say that
Speaker Change: I mean, will it create other U.S. opportunities? I mean, I think certainly maybe in the homeowner space, there might be an opportunity. I don't know that we'll participate in that. We kind of shied away from that.
Speaker Change: personal homeowner's space, even on an E&S basis. I think some of that depends on, you know, the what comes out of the fare plan assessments and things like that. I think I heard a carrier yesterday talk about their future depends on what's going to happen.
Speaker Change: you know, on a go forward basis there, you know, that they're going to assess the admitted companies, it's certainly an underfunded plan.
Speaker Change: based on the exposures they've taken on. So there's potential assessment out there.
for carriers, at least on the intended side.
Speaker Change: Will it force other people to get into the UNS space? I think there's certainly going to be an opportunity in the UNS space, whether it's in our space or not, because I still think it's been a relatively small event for commercial relative to the residential space. And as you know, our focus is all commercial there.
Got it. Thank you.
Thank you. Thank you.
Speaker Change: If there are no further questions, I will now turn the conference over to Mr Craig Kliethermes for some closing remarks.
Thank you for watching!
Speaker Change: Well, thank you all for joining today and we appreciate all of your questions and your interest in our company.
Speaker Change: A solid quarter to end another profitable year, we believe our hallmark underwriting discipline and diversified portfolio of specialty products translate into consistent financial outcomes over time.
Speaker Change: and allow us to serve as a stable market for our customers.
Speaker Change: Our results would not be possible without our entire team of dedicated associate owners who understand their customer, who care for them and each other, and who are competitive and strive to make us better each day.
Speaker Change: Our talented workforce and unique culture are what have enabled us to be named one of Glassdoor's top 10 companies to be part of in 2025. We will never lose sight of who we are and what makes us successful.
Speaker Change: I would like to thank all of our RLI Associate Owners for their contribution to our shared success and encourage them to keep delivering on the difference that works. Thank you all again for participating today and we'll visit again next quarter.
Speaker Change: Ladies and gentlemen, if you wish to access the replay for this call, you may do so on the RLI homepage at www.rlicorp.com. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.