Please stand by. Good morning, and welcome, ladies and gentlemen, to the RLI Corp. First Quarter Earnings Teleconference. Today's call is being recorded. 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 in 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 contains the press release announcing first 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 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 other company's definitions 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 at www.rlicorp.com. I will now turn the conference over to RLI's Vice President, Corporate Development, Mr. Aaron Jacoby. Please go ahead, sir.
Thank you. Good morning to everyone. Welcome to the RLI earnings call for the first quarter of 2019. A special thanks to everyone for tuning out the Mueller Report coverage for a few minutes to join us on the call. With me today are Jon Michael, Chairman and CEO, Craig Kliethermes, President and Chief Operating Officer, and Tom Brown, Senior Vice President and Chief Financial Officer. I'm going to turn the call over to Tom first to give some brief opening comments on the quarter's financial results. Craig will talk about operations and market conditions. Next, we'll open the call up to questions, and Jon will finish up with some closing comments. Tom?
Thanks, Aaron. Good morning, everyone. As reported last evening, first quarter 2019 operating earnings were $0.71 per share. We continued to experience top-line growth while recording a combined ratio below 90 and generating nearly $2 of growth in book value per share as solid operating earnings were bolstered by a very favorable investment market. From an underwriting perspective, we posted a combined ratio of 89. This result improved nearly two points from first quarter prior year as our loss ratio benefited from increased favorable reserve development. For the first quarter of 2019, we recorded net favorable prior year's reserve development of $17 million compared to $13 million last year. I'll also add from a storm perspective, there was a minimal amount of loss in the quarter, about $1 million, and loss estimates for both 2017 and 2018 hurricanes remained unchanged.
We were pleased with each of our segment's combined ratios, 96 in casualty, 79 in property, and a 70 in surety. Our casualty segment was favorably impacted by $11 million of net positive reserve development. Most casualty lines developed favorably, including transportation, which posted a modest amount of favorable development for a second consecutive quarter. Our property segment posted favorable development of $2 million, exclusively from our marine line. Finally, our surety segment had favorable development of $4 million. From a high level, it is worth pointing out that our expense ratio is up about a point in the quarter as our bonus and profit sharing accruals correlate with the strong growth in earnings and book value. Overall, very solid underwriting results across our diverse product portfolio. Turning to our top line, gross written premiums advanced 6% in the quarter.
Craig will provide more detailed discussion shortly. Growth was fairly broad-based and was achieved despite reductions from product exits and a property quota share reduction that were announced during our fourth quarter call. From a segment perspective, casualty grew top line 8%. Growth was achieved in a number of established products as well as newer initiatives, including energy casualty and general binding authority. We are pleased with this growth, but the segment is also the one most impacted by the recent product exits, and the comparison to prior year may get more challenging as the year progresses. Moving on to property, top line grew by 7%. This growth was driven largely by marine, but also included growth in our Hawaii homeowners group. Finally, surety posted a 2% decline in top line as we remain disciplined in a very competitive environment.
Complementing this underwriting performance, investment income continued to advance, up 16% compared to the first quarter of 2018. We have grown our invested asset base over the past year and continue to benefit from rotations in the portfolio and higher average yields. On a total return basis, our investment portfolio generated a 4.5% return in the quarter. This return, coupled with solid operating performance, resulted in $95 million in comprehensive earnings for the quarter, driving book value up $1.95 per share after paying a $0.22 per share in ordinary dividend during the first quarter. Our overall business fundamentals, underwriting, and investments results were very strong for the quarter. In conclusion, a very good start to the year. With that, I'll turn the call over to Craig.
Thanks, Tom. Good morning, everyone. A very good start to the year with 6% top-line growth and an 89 combined ratio. Premium growth was a bit slower than previous quarters, still a good result given the previously announced product exits.
We have had some recent success focusing on growing our more established and most profitable products. We have nicknamed this initiative Grow What We Know, and it has helped us create more balance between newer products that take time to season and those that deliver results today. Overall, rates moderately improved from prior quarters. Larger increases are still confined to spots where the pain is being felt most. Our discipline allows us to wait patiently for more widespread market opportunity. We are keeping an ear to the ground, alert for signs of disruption. It feels like the opportunity is not as distant as news of distress becomes more frequent. Let me provide a little more detail by segment. In casualty, we grew 8% while reporting a 96 combined ratio. Profitability was widespread, with six of our seven largest product lines reporting an underwriting profit for the quarter.
Overall, we achieved a 3% rate increase across casualty. We continue to get a good blend of growth from newer and more established products. Recall casualty is the segment most affected by some product exits and pruning announced last quarter. Underlying casualty growth, excluding this repositioning, was 14%. A couple of individual products in this segment are worth mentioning. The transportation business unit continues to focus on profitability improvement and opportunistic growth. Top line was off 4% for the quarter while achieving an overall 7% rate increase. We were able to recognize some favorable loss development and report an underwriting profit so far this year. Our professional services group that focus on architects, engineers, and miscellaneous professionals also recorded a nice underwriting profit based on positive claim trends. A large portion of the growth in casualty was realized in our commercial and Personal Umbrella products, which grew over 15%.
These are well-established and historically profitable products for us. We also continue to see growth opportunities in our professional liability and commercial package businesses, as well as in our energy casualty and general binding authority businesses that were both started in 2016. Our property segment grew 7% and delivered a 79 combined ratio. All three major product groups achieved underwriting profitability. Rate in our property segment increased 6% for the quarter, largely driven by wind-exposed accounts and marine. Marine continues to grow at a double-digit rate, benefiting from the disruption in the market. This is creating an opportunity to build needed scale while maintaining underwriting discipline and a good loss ratio. Our catastrophe business was down 5% on the top line for the quarter, while rates were up about 5% for wind and nearly flat for quake.
As you are aware, there were several significant catastrophe events that occurred over the last two years, including hurricanes, earthquakes, floods, wildfires, and even volcanic eruptions. Consistent with our track record, our original loss estimates continue to prove sufficient for these events. Our Hawaii homeowners group grew 16% for the quarter. As we continue to invest in relationships and distribution, we have capitalized on very positive feedback from customers and producers on our timely claim handling of last year's lava-related fire losses on the Big Island. Surety's top line was down 2% but achieved an outstanding 70 combined ratio for the quarter. All four major product groups reported an underwriting profit. Competition is quite challenging, particularly in the commercial and energy businesses, where underwriting appears to be undervalued by our competitors. Premiums are larger here, and a few bonds or accounts can swing the top line.
We continue to focus on widening our moat, investing in technology and the customer experience, supporting our contractors as they build their business, and better serving our producers by leveraging a broad set of surety offerings. Overall, the RLI team delivered again this quarter with solid top-line growth and a sub 90 combined ratio. At RLI, we understand our recipe for success and how to tip the playing field to our advantage. We get great talent, immerse them in our disciplined ownership culture, and align them with compensation based on profitability over the long term. We know what fits, what differentiates us, and understand the risk-reward trade-offs. Our feedback loops are strong, and results are very visible. The team learns and adjusts quickly, always keeping both oars in the water.
We know how to preserve and grow capital and focus resources on products where we can deliver differentiating service and exceptional financial results. At RLI, we will continue to be different because being different has proven to work. I want to thank all of our owner associates for the great start to 2019, and I'll turn it back to Aaron to take questions.
Good. Thanks, Craig. Operator, we can now open the call up for questions.
Thank you, sir. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your telephone. If you wish to withdraw your question, please press star two. Your question will be taken in the order that it is received. Please stand by for your first question. Our first question comes from Matthew Carletti with JMP Securities.
Hey, thanks. Good morning. Craig, maybe if I could go back to your casualty comments and just have you dig in a little deeper. I'm curious what you're seeing in the E&S environment for those lines where you're in the E&S business, in particular, pricing, submission flow, standard line markets behavior. Are things starting to perk up there, or is it largely unchanged?
Well, I think that if I go beyond just this quarter, if you look over last year, I think certainly submissions were up a little more. This quarter, I think they were a little flatter, which is a little counter to probably what I've been reading. For us at least, submissions were relatively flat for the quarter.
Okay, great. Just a casualty, kind of just broader, observing the accident and loss ratio, it improved a little bit in Q1 versus, say, full year last year. It was at the lower end of, if I look back a couple years, the lower end of the quarterly run rate. Is there anything particular going on there? Is it just varying mix by quarter, or is it a view that you're getting pricing that's meeting or exceeding loss trend? Is there anything to read into that, or is it just more kind of how the cards fell?
Matt, this is Craig again. I would say it's pretty much mix related. As you know, we've done a lot of repositioning, and particularly in the casualty portfolio, so I probably couldn't isolate on one single thing.
Okay, great. Thanks a lot, and congrats on the quarter.
Thanks.
We'll now take a question from Bijan Moazami from Compass Point Research.
Good morning, everyone. From your commentary, it's very clear you're getting rate increases across the board everywhere. What's driving that rate increase across the industry? I guess with the exception of commercial auto, it seems that a lot of the product lines doesn't appear to be showing adverse loss reserves in the industry. Just want to get a feeling of how sustainable those rate increases are. I have a follow-up question.
Well, Bijan, this is Craig again. I don't think I said it was across the portfolio, so just to clarify, but we have seen some selected spots continued in transportation, certainly in the umbrella space in certain geographies. In marine, we've seen more price than we've seen in the past. The other places kind of have remained pretty stable as far as the increases, but those are relatively low single digit rate increases that we're seeing, nothing really out of the ordinary or anything out of what we've seen in the past.
umbrella 15%, is it rate you mentioned or is it premium volume growth? If it's growing that fast, what's happening there?
We write both Personal Umbrella and commercial umbrella, they're probably two different stories. Personal Umbrella is more of an investment in technology distribution, finding new partners. Commercial is obviously more geographic focused. Certainly, there's some pain in certain areas that we are seeing increased submissions and increased opportunity. Some price.
Finally, just you mentioned binding authority business is growing for you guys. Just want to see what kind of business you're driving through MGAs.
The binding authority business, there would be some contractors, some rental dwelling exposures, some plaza shopping centers, things like that. That would be the predominant classes of business that we would be writing. These are smaller risks. These would not be obviously that are not individually risk underwritten, they're more in a box.
Thank you.
We'll now take a question from Christopher Campbell with KBW.
Hi, good morning, gentlemen.
Good morning.
Hey. I guess just following up on Matt's question on the casualty core loss ratio. I guess if you're growing umbrella as much as you are, should we expect to see that core loss ratio kind of decline over time?
Well, we have different loss ratios for different commercial umbrella products, I wouldn't say that's necessarily true. Our casualty portfolio is made up of, well, I said seven major products, but within that, there's probably another dozen or so other smaller products. It really depends on where we're seeing the growth and where we're shrinking, obviously. We exited some of those that had higher loss ratios anyway, it'd be very difficult for me, at least on this call, to pinpoint exactly what you're looking at and there.
Okay, got it. Yeah, because I'm just thinking if you're writing a lot more umbrella, that's probably a very low loss ratio business. If that becomes a bigger mix at 15% growth over time, if you're seeing technological opportunities on the personal side, geographic on the commercial side, I would just expect that if I back out the reserve development from your stated loss ratio on casualty, that that number would go down over time just as you grow umbrella. Is that a fair way to look at it?
No.
Is there a lot more to that?
Well, the only thing, Chris, I do want to clarify for you is we certainly would not be categorized as booking our commercial umbrella business to a low loss ratio necessarily. That would not be standard practice for us. We would look at longer term loss ratios and the pricing we're getting, and understand that's a little bit more volatile business, so there's probably larger risk factors that are being considered when we decide what we're going to book that loss ratio to.
Okay, got it. You have more volatility built into that loss pick, I guess, fair way to think of it?
Yeah. We don't see umbrella as a low loss ratio business at all. We differ with that. Okay?
Okay. Got it. Then you had mentioned, I think Craig mentioned in his speech, six out of the seven lines in casualty made an underwriting profit. I'm just going to nitpick, which was the one that didn't?
That would be management, our management liability group, which sells directors and officers coverages. It's a very volatile line of business, with a little bit bigger limits. We do utilize reinsurance a little bit more there. From quarter to quarter, you can have some volatile results. It is one we continue to watch closely.
Okay. Got it. There's nothing really concerning that you saw this quarter that would give you concern going forward?
It's not a line that you're going to see a lot of necessarily trends because it's not a frequency-driven line, it's a severity-driven line. It is one of those lines we are getting a substantial amount of rate this quarter as well. We're watching it closely.
Okay. Sounds good. You had mentioned a 3% rate increase in casualty, I guess overall. What's the all-in loss cost inflation? How do you view that? What's a longer-term average given all the mix that you have in there to give you an idea of the overall cost?
Sure. Again, this is Craig. At least for our actuarial analysis, I believe we are using somewhere between 4% and 5% across our casualty portfolio would be the average. There is going to be some that might be a little lower, some a little higher. That is very much part of the explanation of why maybe our current accident year might be up a little bit in casualty as well because it is a math problem, right? If you are getting 3% rate and 4% trend, 4% or 5% trend, that tells you your loss ratio should probably go up absent better underwriting.
Okay. Then just one last one, if I may. There was a new company that started trading recently that does California earthquake. I know that is your largest PML exposure. I guess just what are your thoughts on the growth potential of that market? Then just in terms of reinsurance, I know there has been some talk about the Florida mid-year renewals increasing and any issues with California wildfire. Could any of those higher reinsurance costs, are you guys expecting any of that to spill over potentially into quake as well?
Chris, I will answer part of it. I think Tom wants to answer part of it too. Well, I guess I am hoping it spills over into the primary pricing so that it creates an opportunity for us. Our renewal is relatively flat at one-one. Obviously, the cost of capital is higher for those guys to buy reinsurance, then hopefully that will put some pressure on them to raise rates.
This is Tom. Chris, I would just say too, I think we are speaking to the same company. It is a little heavier skewed to personal lines, which we are not in in the California quake area. I think as you probably all know, the take-up rate on quake is relatively low. Maybe there is a plan there to see if perhaps there is better uptake in that. I do not know.
I would just add that I could tell you our underwriters would report every quarter there's a new market that's open for quake in California. I don't know this particular one you're talking about here, but they would either tell you another MGA or another company has opened their doors in California quake market.
Okay, great. Well, thanks for all the colors. Best of luck the rest of the year.
Thanks.
Our next question will come from Jeff Schmitt with William Blair.
Hi. Good morning, everyone. Another question on the Umbrella business. Just hearing in the market that large losses there are ticking up, particularly on the commercial side, just due to the tough legal environment, higher jury awards, higher settlement amounts. Is that what's causing sort of the dislocation there? It seems like you may have avoided that but could be benefiting from a growth perspective.
Jeff Schmitt, this is Craig Kliethermes. I think there obviously must be some pain in the marketplace from some of the other carriers. We obviously wouldn't be growing if we didn't think that we had the confidence that our results were good. It's the same team we've had in place for, oh, I don't know, over 20 years, riding in the same locations with the same policy forms, just higher rates than they have in the past. I think they continue to see opportunity as people retrench.
Mm-hmm. Okay. The transportation book, what did you say top line growth was there? I think you'd said there was 7% rate. I'm just curious where you're at in terms of the repair process or profitability. You've obviously been taking rate for some time now.
Right. Obviously we're going to continue to take rate if the opportunity permits because we want to get a fair rate and fair return. The top line was down actually 4% for the quarter, and we had a 7% rate increase. We were just a little more selective this quarter in certain spots. We do think that is still a market in turmoil, transportation, auto-related exposures in general. We would expect that the opportunity's going to persist for a while.
As far as, I guess you asked about, you didn't say rehabilitating, but the relooking, re-underwriting. We've been through a re-underwriting process for, oh, I don't know, we're going on year three. We've looked at all the accounts we have. We like the book of business that we currently have. Obviously, we'd like it better if we can get more rate even. We're seeing a lot of new opportunities in that space from a lot of carriers have retrenched.
That is an area that I know a lot of people would like to see us write through wholesale or E&S, which is a hot spot on the E&S, and that's where a lot of those submissions are going that I think people are seeing as more flow in the E&S market for auto. That is not a market for us necessarily. We deal in specialty retailers for the most part.
In that.
Okay. Just on the E&S business, I guess surprised to see submissions were, I think you said flat. Just given some of the pullback by AIG, by Lloyd's, are they just different parts of the market, or how is that impacting your E&S business?
Again, this is Craig. Our E&S business is we're fairly narrow and deep in most of the places we play. AIG was not a market that we necessarily went head-to-head with in very many places. London wasn't necessarily a place there that we would go head to head. We ran into them occasionally, so certainly it creates some opportunity. I can't really tell you why necessarily our submission count was relatively flat for the quarter, but this quarter it was flat. We had seen an increase in submissions last year, I don't have any reason to believe that this might not be an aberration.
Okay. Thank you.
We'll now take a question from Mark Dwelle with RBC.
Yeah, good morning. I guess my first question is probably for Aaron. What do you think the Mueller Report is going to say about commercial auto pricing, and do you think the president will survive it?
Good question, Mark. Stay tuned for Mueller.
More specifically on commercial auto. You've obviously been getting rate there, yet, the premium growth is still negative. I guess that tells me that there's probably more business that you're net exiting than net winning in terms of the overall premium trend. We've been looking for rate in that sector for quite a while now. How much more rate would you say that the line generally needs before it would become what you'd call stable or maybe more attractive from a growth standpoint?
Well, Mark, obviously we'd like to grow it if we find the accounts that meet our pricing criteria. Giving you an answer for the rate for the industry is kind of difficult. I also want to clarify, I believe we grew last year in transportation. Even though we might be off a little bit this quarter, it's not like we've been retrenching all last year. We actually saw a lot of opportunities last year to grow. I do anticipate we'll probably see more opportunities in the upcoming quarters. We wouldn't be writing it if we didn't think that the current business on our books was priced to underwriting profit. There's zero incentive to do otherwise here.
Okay. I guess maybe to clarify better then, what were the drivers that resulted in the overall premium being lower despite a pretty hefty rate increase?
Mark, it's Tom Brown. To give it a little context, we wrote just a little short of $18 million transportation in the quarter. What we're really speaking to in terms of a 4% is about $700,000. That could be influenced. Some of these accounts are fairly significant in terms of their own premiums, so it could be influenced by one or two accounts as well.
Got it. That makes sense. More broadly, in terms of the overall casualty business, the growth in the quarter was pretty good. The average rate increases were a piece of that, but there was I guess on balance, a lot of net new business allowing for both the ins and the outs. I guess, again, I am sure it is different by line, but broadly, what do you see as creating the opportunity? Is this just the economy's stronger, the pricing is better, competitors are shying away? You guys have always been good at filling in the gaps in the market. Is there any theme related to some of the gaps that you are finding opportunity in?
Mark, this is Craig again. The answer is different by different products. Obviously we are seeing more shots on goal in some places, submission increases in select spots. We are getting more rate in certain spots. The economy is growing exposures in certain areas on the casualty side. It really depends product by product, what is creating the opportunity. The good thing is we have a diversified enough portfolio that we are getting to see a lot of different things in a lot of different spaces. We have our ear to the ground in a lot of different places, which helps us take advantage in the spots where they avail themselves.
Okay. That's help-
Also better marketing. We are doing a better job marketing some of our products. The customer experience is better, and I think that has led to some of the growth that we are seeing in products like Personal Umbrella.
Okay. That makes sense. Yeah, that's consistent with the technology rollout that you mentioned there. I guess just to finish on that exact point of Personal Umbrella, I know that was an area where a couple of years ago you had seen some adverse loss trend. I guess I take it from your prior remarks that that's not only died away, it's remaining at benign levels that you find it attractive to get growth there.
Mark, it happened to be the same quarter that we had some challenges in our transportation space. We had a hypothesis that that might, since they're both auto, Personal Umbrella is 80% auto-driven claims. We had a hypothesis there might be an upcoming trend. It looks like that was an aberration based on that because we haven't seen that kind of activity since. Never want to say never, but we haven't seen it other than that one quarter.
You have a good memory.
Somebody has to. You guys do too, really. You guys know where to go and where to leave. It's good. I think those are all my questions. Thanks for your help.
Thanks, Mark.
Once again, it is star one to ask a question. We'll go next to Randy Binner with B. Riley FBR.
Good morning, everyone. This is actually Ryan Aceto on for Randy this morning. I was hoping we could turn to the reserve development. I know it's a little lumpy quarter-to-quarter, but could you give a little color on what accident years or any line of business you're seeing that's coming through particularly favorable?
Sure, Ryan. It's Tom Brown. Pretty much across the board in terms of the lines, GL, we mentioned transportation, my comments was modestly favorable, but umbrella in our professional services group, and it's principally in the more recent accident years, 2016 through 2018. The bulk I would say is in, I'm talking casualty now, is between the 2016 and 2017 accident years. Property is primarily marine, and it's mostly in the more recent accident year, 2018.
Perfect. Thank you. I guess turning to some of the newer lines you guys are getting into, more so energy and cyber, could you just give a little color on what you're seeing in the marketplace there? Seems like a lot more people are coming into the cyber space specifically.
This is Craig. Ryan, we are continuing to see opportunities in cyber. People are building out their towers, so there's actually a need for capacity even though more people are buying, so it's creating more demand. There are also, obviously, there's a greater supply as well, but we're still seeing some opportunities. We write predominantly excess, fairly high excess cyber. It's one we're growing very slowly and cautiously. We do think it's actually a good diversifying play for our management liability group, which has about seven or eight products. I think it's another product in their quiver for them to compete with. I think last year, I think we finished about $8 million worth of premium, so it's not huge for us.
No, I appreciate that. I'll leave it there.
If there are no further questions, I will now turn the conference back to Mr. Jonathan Michael.
Well, thank you all. Nice quarter. A great start to the year. Volume was up 6% even with the product exits that we announced last quarter, the products that we're exiting, so we had a little bit of headwind there. Combined ratio 89. Great book value growth. I want to thank everyone for attending. Now you may return to the Mueller Report coverage.
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