Good morning and welcome, ladies and gentlemen, to the RLI Corp. third quarter earnings teleconference. At the request of the company, we will open the conference up for questions and answers after the presentation. Before we get started, let me remind everyone that through the course of the teleconference, RLI management may make comments that reflect their intentions, beliefs, and expectations for the future. As always, these forward-looking statements are subject to certain risk factors, which could cause actual results to differ materially. These risk factors are listed in the company's various SEC filings, including the annual report on Form 10-K, which should be reviewed carefully. The company has filed a Form 8-K with the Securities and Exchange Commission that contain the press release announcing third quarter results.
RLI management may make reference during the call to operating earnings and earnings per share from operations, which are non-GAAP measures of the financial results. RLI's operating earnings and earnings per share from operations consist of net earnings after the elimination of after-tax realized gains or losses and after-tax unrealized gains or losses on equity securities. RLI's management believes these measures are useful in gauging core operating performance across reporting periods but may not be comparable to another company's definition of operating earnings. The Form 8-K contains a reconciliation between operating earnings and net earnings. The Form 8-K and press release are available at the company's website, www.rlicorp.com. That's www.rlicorp.com. I would now like to turn the conference over to RLI's Chairman and CEO, Mr. Jonathan Michael. Please go ahead, sir.
Thank you, and good morning. Before we get started, I want to introduce you to Aaron Diefenthaler, our Chief Investment Officer. Aaron's recently taken over investor relations, and he maintains responsibility for our invested asset portfolio. Many of you already know AD, and he's been a core member of the team for nearly 8 years. Aaron will get us started, and we'll be glad to answer your questions at the end of our prepared remarks. Aaron?
Thanks, John. Welcome to RLI's third quarter earnings call for 2019. Apart from John, we are joined by Craig Kliethermes, President and Chief Operating Officer, and Todd Bryant, Chief Financial Officer. First, Todd will give some brief opening comments on the quarter's financial results. Next, Craig will talk about operations and market conditions. As John referenced, we will then open the call to questions, and he will close with some final thoughts. Todd?
Thanks, Aaron, and good morning, everyone. Last night, we reported third quarter operating earnings of $0.57 per share, up 24% from the same period last year. Notable improvements in both underwriting and investment income were accompanied by increased momentum on the production side, as gross premiums written advanced 16% in the quarter. Cash flow from operations remained strong at $81 million for the quarter and $187 million on a year-to-date basis. At $22.30 per share, book value has grown 27% since year-end, inclusive of dividends. From a top-line standpoint, as mentioned, gross premiums written were up 16% in the quarter. The growth we've experienced over eight quarters has accelerated recently. The majority of products in our diversified portfolio participated in this trend, excluding previously announced exits and repositioning. By segment, casualty was up 16% and property advanced 24% as the rate environment improved and submission counts increased in both.
Surety premium declined 2% in the quarter, modestly improved from the prior two quarters' trend. Craig will talk more about our products and market conditions in a minute. From an underwriting perspective, we posted a combined ratio of 93.5 compared to 96.1 a year ago. Our loss ratio declined 3.3 points as benefits from prior year's reserve development increased and casualty losses declined. Net of expenses, prior year's reserve benefits totaled $12 million, while catastrophe losses from Hurricane Dorian and Tropical Storm Imelda totaled $3 million. From a segment perspective, the majority of favorable reserve development was in casualty, with notable amounts from general liability, excess liability, which we often refer to as umbrella, professional services, and transportation. For more recent years, we remain cautious in our approach to reserving, particularly on auto-related exposures, newer product initiatives, and those with outsized growth relative to prior periods.
From an expense standpoint on a comparative basis, drivers of performance-based compensation have improved, adding one point to the expense ratio in the quarter and one and a half points on a year-to-date basis. In addition, we continue to invest in technology, including within our surety segment, which also has an impact on the expense ratio. Overall, we are pleased with the underwriting performance of each of our segments. For the first three quarters of the year, our diversified portfolio continues to deliver solid results. On to investments, which again contributed to book value growth. Both stocks and bonds offered positive results, and total return came in at 1.9% for the third quarter. Investment income was up 7% in the quarter, despite some dividends being recognized in the second quarter, as mentioned on our last call.
Portfolio growth will be the primary support for income going forward, with lower reinvestment rates now well-established. All in all, a solid quarter. Operating income and investment performance drove book value to near $1 billion, or $22.30 per share, up 27% from year-end, adjusted for dividends. With that, I'll turn the call over to Craig. Craig?
Thanks, Todd, Good morning, everyone. A pretty good quarter by all accounts, with top-line premiums up 16% and a 93.5 combined ratio. Year to date, we reported 9% growth with a 92 combined. We are beneficiaries of disruption that has been broadly observed in automobile liability, excess casualty, management liability, marine, and many catastrophe-exposed product lines. Pain is being felt from underpricing for loss cost inflation and by many who have painted with a broad brush for too long. At RLI, we value the old masters who use a fine-tipped sable hair brush to color our canvas. With an improving rate environment, the market continues to come back to the disciplined underwriter, creating significant top-line momentum. We pride ourselves in stability and consistency of appetite, which is enhanced by our underwriting and claim teams with deep knowledge and a long presence in our chosen markets.
Let me provide a little more detail by segment. In casualty, we grew 16% while reporting a 98 combined ratio. Rates across casualty increased 9% for the quarter, more than 300 basis points better than last quarter. The largest rate increases were felt in our management liability, transportation, and excess liability businesses, where our larger casualty limits are deployed. Growth was widespread in our casualty portfolio, but to a greater extent where we have observed significant market retrenchment. Increasing rates, shortening of limits, and higher attachment points have become more commonplace. We also see a few competitors throwing in the towel in select classes and geographies. We are not immune from the impact of social inflation, so we welcome the opportunity to take rate wherever available.
We remain cautious in this environment, We have experienced underwriters and claim staff who share information regularly and who have navigated these waters before. Despite the claim environment, we still find that primary liability coverages with lower limits and workers' compensation remain very competitive. Casualty submission flows are generally up, which creates more opportunity, There's still a lot of underpriced business looking for a home. Opportunities exist for underwriting companies that know how to select risks that are appropriately priced. Overall, for casualty, we are pleased that we are realizing a lot of growth from improving rate levels, That growth is coming in established products with experienced teams that have a long track record of success. In property, we grew 24% for the quarter and reported an 85 combined ratio. A few wind-related events resulted in a moderate amount of catastrophe losses for the quarter.
Overall, rates were up 6% across the portfolio, with slightly larger increases in our ocean marine and catastrophe wind products. Albeit relatively moderate, our earthquake business realized its first quarterly rate increase in six years. We continue to see increased submission flow across all property products in this segment. In surety, we were down 2% on the top line while reporting an 82 combined ratio. This remains our most consistently profitable segment, Also the most challenged by market conditions. Growth has also been hindered a bit by our decision to exit a program for underwriting reasons. All of our major surety products groups remain profitable. We continue to see some pretty aggressive competition in this space We feel the prudent approach is to mine our existing accounts and relationships, widen our moat, and opportunistically write new business. Overall, a good quarter for us.
Underwriting profit and growth is represented across most of our diversified portfolio of products. We continue to stick to the basics of skillful underwriting and claim resolution and let the market come to us, where our disciplined approach can carry the day. At RLI, we focus on the fundamentals and what we know works. Sometimes being different means having the courage of your convictions and forging your own path. Avoiding big bets and forgoing the glitter is boring to some, but to others, boring can be beautiful. I want to thank all of our RLI owner associates for the hard work and commitment they put in to deliver another good result for our shareholders, who never get bored of differentiating performance. I'll now turn it back to Aaron, who will open it up to questions.
Thanks, Craig. Operator, we can now take some questions.
Thank you. The question and answer session will now begin. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your telephone keypad. If you wish to withdraw your question, please press star two. Your questions will be taken in the order they are received. Please stand by for your first question. We'll now take our first question from Christopher Campbell. Please go ahead, sir. Mr. Campbell, your line is now open. Please go ahead with your question.
Hello?
Hello. We can hear you.
Okay, great. Yeah, just a few. Sorry, the headset wasn't working. I guess you had talked a little bit about the rates. If we're looking at, just commercial auto, what were your rates there this quarter?
For transportation business, in general, we were able to achieve the double-digit rate increase again this quarter, which is about the pace we've achieved the last three years.
Okay, great. I was looking back at your slide deck, at kind of the overview deck, and you know how you guys have that pie chart that shows the breakdown of product lines within each segment? I was just curious, is there anything in that pie that isn't profitable right now on a calendar year or an accident year basis, where you would need more rate?
Well, Chris, this is Craig. I don't have the pie chart in front of me, we always have products that we'd like to be performing a little bit better. Obviously, we'd like to get rate in every product if it's available. I would say what I've said before is eight or nine out of 10 of those products are performing very well. There's always a product that we're always working on. Sometimes it changes from quarter to quarter. I think we're pretty good about addressing the problems and for sure, our underwriters are aware of who that one or two out of 10 is not performing. They know who they are.
Got it. Obviously the rates and production, new submissions have benefited from increased competitor discipline. I guess, how sustainable should we be thinking about that discipline? Because I was reading a few days ago about Lloyd's going back to a growth mode in 2020. How would that impact some of the lines where you've been able to benefit from higher submissions and higher rates this year?
Well, Chris, this is Craig. I wish I could predict the future, but I can't. Obviously, we'd like to take advantage of the market when it presents itself, and the opportunities present themselves. I think there's some pain out there. I've attended a lot of the conferences. I've seen people write about some of these conferences. There's widespread talk about inflation and excess liability, some bigger claims in that space, that I think has some people concerned. Obviously, anytime you're dealing with long-tail liabilities, which may or may not reveal themselves in reserves yet, I think there's always a little bit of fear or concern in people. We're hoping that it's a little longer lasting.
Okay. Got it. Have you guys started to see any social inflation kind of creeping into any of your own losses?
Well, I would say from a data standpoint, I don't think we've seen that yet. Although I'll tell you anecdotally, that our claim department has expressed some concern about that. We are watching closely, and we'll continue to try to take rate and be somewhat cautious in regards to our booking ratios and casualty, as long as we have that concern.
Okay. Got it. Just one last one. Just curious, since you guys have done stock splits in the past, last one was around like $97 a share, and you guys are getting close now. How should we think about a potential stock split?
Don't. That really doesn't mean a whole lot to me. This is John Michael. We're not thinking about a stock split.
Okay. All right, great. Thanks for all the questions. Best of luck in the fourth quarter.
Appreciate it, Chris. Thanks, Chris.
Thank you. Ladies and gentlemen, as a reminder, it is star one to ask a question, and if you wish to withdraw your question, it is star two. We'll now proceed with our next question with Randy Binner. Please go ahead.
Hey, good morning. Thanks. I have a follow-up on Chris' social inflation question, and I guess specifically it's about the trial bar. I've always considered the trial bar to be a pretty significant risk factor for casualty claims. From all the anecdotal things we read, I guess it's worse now or is it the same as it was before, or is trial bar involvement and success in prosecuting casualty claims getting more significant? The rate of change is interesting to me because it's certainly talked about more. It's just hard for me to tell if it's really changed that much.
Randy, this is Craig. I could share with you anecdotal stories that I've heard from our claim department, again, I don't see it necessarily in our results yet, but we're watching for it. I think they would comment that the plaintiff bar, there's a small but growing number of skilled plaintiff bar attorneys that are fairly narrowly focused. They do a good job communicating and sharing their strategies, better than they have in the past, whether that be through conferences or Court TV or there's a lot of other ways to get your strategies out there than maybe what you had before.
I think when they run across the right set of circumstances, when they have the right defendant, the right plaintiff, a good set of facts with big limits and maybe in a high exposure jurisdiction, I think they've done a particularly good job of extracting some pain. I think there's also been a change in mentality, just in people in general, in regards to what the value of a dollar is or what the value of a million-dollar settlement is. I think that you hear more every day, about we've got a lot of billionaires in this country, and I think people become immune to what a million dollars is worth. You put that in front of a jury, I think they do a good job anchoring people.
I think they've done a good job with setting the jury's psychology, and generally desensitizing people to the value of money. So I think the willingness of juries to hand out bigger, I'll say seven-digit, eight-digit verdicts is probably on the rise. We're fortunate we don't put out very big limits, so we haven't felt that like probably some other people have. Certainly it's an area of concern and an area that we want to watch.
All right. I appreciate the color. I have two quantification questions to follow up. One is, did you quantify how much excess in surplus line submission activity is higher? If, just looking like that flow of submission activity this quarter or year to date versus the year ago period.
Yeah. Randy, I do have that. I think we've seen high single digit increases in submissions in the E&S space. Frankly, we've actually seen increase in submissions in other spaces, actually, at a higher rate than E&S. I just want to make sure that we put a little placeholder here. Only a third of our business is in the E&S space, so I just want to make sure that people understand that. Two thirds of our business is in the admitted specialty space or surety. Certainly, we've seen an increase in submissions in the casualty side, and the property side for that matter, more recently.
Is it a similar level of growth? Is it high single digit?
Yeah. Yes.
Okay. Did you quote an overall casualty rate increase? You said 6% for property overall. Was there an overall casualty number?
I did, Randy. It was 9%.
All right, super. Thanks a lot.
Thank you. We'll now take our next question from Ronald Bobman. Please go ahead.
Hi. Thanks a lot. Congrats on the results. Again, could you profile the management liability book and where you're sort of seeing opportunity there? Thanks.
Ron, this is Craig Kliethermes. You said medical?
Management liability.
Management liability. I'm sorry. Yeah. Sometimes we refer to that as our executive products group, I didn't want to confuse anybody. That's pretty broad felt. Obviously that includes public D&O as well as Side A, private, fiduciary employment practices, liability, fidelity products. It's a pretty diverse portfolio of products there, and we're seeing increased submission flow, increased rates across the board pretty much in that product line.
Where do you play primary only, and what are your limits profile? That's it for me. Thank you.
Well, typically we would have put out $10 million limits, although, for public ABC. Side A and public ABC are probably our two biggest products in that group. They probably make up a little less than half of the portfolio. Those would typically be $10 million on ABC, and we could go as high as $25 million on Side A, but it's fairly rare, and we significantly reinsure that book of business through a quota share. That's excess, by the way. Pretty much Side A, we will play primary, but public ABC is only on an excess basis and typically a little higher attachment points.
Thanks for all that. What does the reinsurance bring you down to on a net basis? I'm truly done.
I believe we place
We place 70%, yeah.
70% of that on a quota share basis.
Great. Thanks, gentlemen. Continued good luck and success.
Thank you.
Thank you. Ladies and gentlemen, once again, to ask a question, it is star one. We'll now go to our next question from Jamie Inglis. Please go ahead, sir.
Good morning, guys. I've got a question about the, in the release, John Michael says, focused on using capital generated from our businesses to selectively expand our footprint. I don't want to mean to parse words here, but does that mean what I would think of sort of business as usual, grow where you can, where business might be profitable? Or does footprint refer to some geographic distribution or product line distribution?
No, it really means to grow what we know. That's what it was meant to be, that we're really focusing on what we have and expanding in certain lines of business out. Grow what we know is what it means, and we've used that quite a bit.
I might probably reference, too, we had some, maybe a little bit more growth in some of the newer initiatives.
Right
To John's point, if you go back, calls going back a year and a half. We're really seeing, to John's point, a lot of growth in those mature coverages today.
Got it. Okay, great. Thank you.
Thank you. We'll now take our next question from Mark Dwelle. Please go ahead.
Yeah, good morning. We'll give Aaron a question here since he hasn't had a chance to jump in yet.
All right.
Is there anything you're contemplating from an investment standpoint in view of lower interest rates? Any shifts in either class or duration or quality, whatever, anything you might be thinking about there?
That's really not the case for us at the present time, Mark. We are happy to have stronger operating cash flow to put to work in the portfolio. As Todd referenced, portfolio growth is a meaningful support to the income profile that we can provide. We are not making major shifts to try to reach for yield or maintain that in another way.
Okay. Thank you. Second question. This is kind of a numbersy question, the proportion of net written premiums to gross written premiums, in both the casualty and the property segment, was a little bit lower than the recent run rates. Is there any particular reason for that other than maybe some mix or something like that?
Yeah, that is nothing particular. There is, we'll get a shift in mix from time to time. We have had, on occasion, if you look over the different periods, Mark, small amounts of reinstatement premium at different points. Nothing material outside of some mix changes a bit.
Okay. A question for Craig. Just kind of characterizing the tone and feel of the market as you're looking at the pricing environment, the submission flow, et cetera. Everybody always uses baseball analogies, so I'm going to use a football analogy. Are we on the 20-yard line of this market environment? Are we on the 50-yard line? In the red zone? Where would you say we are right now?
Mark, before he answers that, this is Todd. He is a Kansas City Chiefs fan, so any of this could be colored by that.
Yeah, I don't know. This is Craig. I wish I had an answer to this question. It still feels early on. I hear a lot, certainly the reinsurers are talking up a lot about loss cost inflation and the need for rate. Of course, they've postured like this before, so I can't say that it feels a little different. Hopefully we're just getting started.
Just the start of a successful touchdown drive. We'll go with that.
We like to start on the 40-yard line, just to be clear, in Kansas City.
You probably are, actually.
I won't lie.
Relative to some of your peers, you certainly are already on the 40. I guess the last question that I have, this is one that I've been asking for a long time, it's for Jonathan. This is the time of the year where your board often considers the payment of a special dividend. Could you just kind of rehearse for us the things that they'll be thinking about and what might go into that decision? Should they make such a thing later this year?
Well, Mark, if we have a stock split, as suggested, that special dividend would be less than what it otherwise would be. No. We would rather use our capital, I've said this before to grow our existing business, A, use our capital to expand our business, that would be B. In the event that we cannot do those things, We would give it back to the shareholders. Those are the things that our board will be looking at. Those are the things that management's looking at. I flippantly spoke about a stock split because everybody in this room knows that I just kind of don't think much of splits. They'll consider that as well when the time comes. Thanks for the question.
Okay. Sure thing. Thanks. No more from me. Thanks.
Thank you. Ladies and gentlemen, if you would like to ask a question, once again, it is star one. I will now take the next question from Jeff Schmitt. Schmitt, please go ahead.
Hi. Good morning, everyone. Looking at the casualty premium growth, 16%, you said average rate there was 9%. What was that growth, I guess, if you exclude the recent exits of the healthcare facility, the GLP for REITs in, I think, lowering the primary quota share. What would that growth have been excluding that?
Jeff, in the quarter, it would've been 25%.
Okay. I guess with 9% rate, just looking at that underlying combined ratio is around 69%, it looks like, which is what it was last quarter, which is what it was last year. I guess surprised to not see that drop if you had 6% rate in casualty last quarter, 9% now. Why isn't that dropping more? I know there's some business mix shift, maybe a more conservative posture on new business. What's the loss cost trend there? It seems pretty high.
Jeff, this is Craig Kliethermes. Just to be clear, the rate increase for casualty year-to-date is about 6%. I think just to be a little more cautious, I think we've upped our severity or our severity assumptions in regards to loss cost inflation by about a point. I think we're up to about 5% or so for loss cost inflation on our casualty portfolio, is at least what we're assuming. Really, you're only about a point above what we are assuming is loss cost inflation. I don't know if Todd wants to add anything to that.
No, I think that's the bulk.
I kind of had that in my opener. We're going to continue to be cautious with growth and with the commercial auto side.
Okay. Just a question on the E&S business. We're hearing some people talk about how some of the standard business is sort of not being renewed and kicking over into E&S. Are you seeing any of that?
I'm sorry, that is not being kicked over, or it is being kicked over?
It was written by a standard insurer, and then they're not renewing it.
Yeah
Pushing it into the E&S market.
Jeff, I'm not sure we're a litmus test for the whole industry because our E&S business is so concentrated in the construction space. Certainly, I think in the habitational space, you're seeing probably even more disruption than we're seeing, and we don't really do much in that space. From our underwriters in the field, I still hear complaining about admitted carriers in our space. I can't really comment on them exiting our space.
Going somewhere else.
Mm-hmm. Okay. Thank you.
Thank you. Ladies and gentlemen, if there are no further questions, I would now like to turn the conference back to Mr. Jonathan Michael.
Well, thank you all for attending this quarter. It certainly was a satisfying quarter for us. Nice top-line growth, nice rate increases for the quarter and year-to-date. We do have some tailwind now. We like where we are. We're well-positioned to take advantage of things. Certainly got experienced underwriters. We've got our noses to the grindstone, so to speak, and we're just well-positioned for this. Thanks again for joining us this morning, and we'll talk to you next quarter. Thanks.
Thank you.
Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-888-203-1112 with an ID number of 1386542. Once again, the number is 1-888-203-1112, and the ID is 1386542. This concludes our conference for today. Thank you for your participation, and have a nice day. All parties may now disconnect.