To begin. Good morning, and welcome, ladies and gentlemen, to the RLI Corp.'s second quarter earnings teleconference. At this time, I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. 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 may cause actual results to differ materially. These risk factors are listed in the company's various SEC filings, including in the annual 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 second-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 investment gains or losses. RLI's management believes this measure is useful in gauging core operating performance across reporting periods but may not be comparable to other companies' definitions of operating earnings. The Form 8-K contains 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 of Corporate Development, Mr. Aaron Jacoby. Please go ahead, sir.
Thank you. Good morning to everyone. Welcome to the RLI earnings call for the second quarter of 2014. Joining me on today's call are John Michael , Chairman and CEO; Mike Stone, President and Chief Operating Officer; Tom Brown, Vice President and Chief Financial Officer; and Craig Kliethermes, Executive Vice President, Operations. I'm going to turn the call over to Tom first to give some brief opening comments on the quarter's financial results. Mike and Craig will talk about operations and market conditions. We'll open the call to questions, and John will finish up with some closing comments. Tom?
Thanks, Aaron. Good morning. Thank you for joining us today. We are pleased to announce another solid earnings quarter on the strength of both underwriting and investment results. Starting with our most important metric, we posted an 84 combined ratio in the quarter, which is consistent with what we achieved in the second quarter last year. Profits were strong across each segment, with Casualty at an 83, Property at a 95, and Surety at a 69 combined ratio. Reserve releases benefited both the Casualty and Surety segments. Property had $6.8 million of spring storm-related losses, lower than last year's second quarter, but in line with our expectations given the weather events during the quarter. Ultimately, this quarter was a testament to our underwriting discipline. On the premium side, gross premium was up 3%, and net premium was up 4%.
Our Casualty products continue to offer the best relative growth opportunities, a function of both market conditions and recent initiatives. Property and Surety were roughly flat in the quarter, which we consider a good result in light of continued challenging competitive conditions that Mike and Craig will elaborate on. Turning to investments, there were several positive trends in the quarter, including the 8.8% growth in investment income, our second consecutive quarter of such growth. In addition, both the fixed income and equity portfolios turned in positive total returns, enabling a combined portfolio total return of 3% for the quarter and 5.8% year-to-date. Not to be left out, Maui Jim also had excellent results in the quarter, contributing $5.7 million of investee earnings, up 24% from last year.
Ultimately, the combination of underwriting and investment results drove operating earnings per share of $0.66, up 5% from last year, and book value per share growth of 4.9% in the quarter, bringing year-to-date book value growth to 11%. I'll now turn over the discussion to Mike Stone. Mike?
Thanks, Tom. I'm going to talk a little bit about the insurance market and what we're seeing. First, another outstanding underwriting quarter with an 84 combined ratio. Gross written premium up 3%, net up 4%. You might think more of the same, boring, but I assure you this doesn't result without hard work, skillful underwriting, and superior claim handling. The market, it's tough out there, but we continue to find new opportunities and have been able to effectively manage our renewal books. Casualty, 82 combined ratio with gross written premium up 7% in the quarter, 8% year-to-date. Still some good pockets of opportunity. Our GL, our general liability, that's our primary liability surplus lines book, was up 2% as we are still getting a better rate in some subparts and are benefiting from increased construction activity.
Transportation is up 5% gross written premium as we continue to see more opportunities due to the exit by a number of our competitors late last year. Our professional services group of products, which basically are architects and engineers, gross written premium up about 15% as we build out our footprint in this space, and I might add that we eked out a small underwriting profit this quarter. The package business that we've been building to augment professional liability and contractors was up about 20% in the quarter. We expect that to continue to grow as we build out this business. All in all, Casualty is still a positive story. Property. A different matter. Can't read a trade publication without some mention of alternative capital and what it's doing in this space, especially the cat space.
We have an excellent reputation, deep relationships with producers, and most importantly, superior underwriting and claim talent. We will continue to perform well in this tough environment. Our DIC business, our gross written premium down 8%. We're still making our margins. We are well within our exposure tolerances. We have a long-term presence in this space. We will continue to maintain the business here, even as we reduce our exposures with the rates coming down and premium being tough. Our fire wind business, down 3% gross written premium, again, making our margins and well within our exposure tolerances. I won't say we're waiting for an event. We are well prepared to manage following one. In marine, gross written premium down 14% as we complete our re-underwriting of this book.
We believe we have this business on the right track and are prepared to grow it if the market will cooperate. Our Surety business. Competition intensifies. I'll say but again, we continue to perform very well with a 69 combined ratio with gross written premium being flat. We have a well-diversified product mix, good geographic spread with deep underwriting talent and producer relationships. We will continue to slug it out in this space. I'll say it again, as I have in the past, as new competitors enter the Surety space, it's really not that easy. We have deep underwriting skills, superior technology, and producer relationships built over the past quarter-century. We'll still be in this space thriving when others run away, not unlike the transportation business.
Overall, excellent underwriting quarter, a testament to all of our associates. I would like to thank each and every one of them for their effort and performance. This does not get ho-hum to me. Craig will talk about rates, Crop, that's with an O, and reinsurance.
Thank you, Mike. First on the pricing front, I think we would view pricing overall as we've seen some plateauing and an increasingly competitive market, driven mainly, we believe, by benign loss trends, lack of shock losses, and cheaper capital that's available to us and also competing with us. We kind of bucket our pricing into a couple groups. We still have some spots that are strong but slowing a bit. In our umbrella space, transportation, auto in general, the pricing is pretty good. In our marine business, we continue to get mid-single-digit price increases. In a more moderate group, our package businesses, our fire non-cat businesses, and our specialty personal line business is flat but at least covering loss trend. We're still pretty positive about those.
There's the group we call the weakening group, which is some of the E&S space on the Casualty, particularly the D&O space on an excess side. Our medical professionals, we're starting to feel that as we are running through renewals now. We're seeing some decreases run through that business that we bought. Particularly, as Mike mentioned, in the cat space, that is becoming increasingly competitive. The reinsurance front, which does tie in here, obviously, we placed 3 treaties during this quarter. That makes up about 25% of the placements from a premium perspective during the year. That covers our marine, our D&O, and our earthquake DIC treaties. We were fortunate to receive about a 15%-20% exposure-adjusted rate decrease on those treaties. We were the benefactor of that.
We are increasingly concerned about the spillover effect as our competitors seem to be willing to give back that fairly quickly, we'd rather hold onto that for as long as we could. We did receive better terms, we would say, across the board, in addition to the rate decreases in regards to we were able to buy down our retention on our marine business covering cat. We had a little more coverage for still less premium, we feel pretty good about that result. You can see in our numbers also, the net written premium continues to grow at a little bit faster pace than our gross written premium, mainly because of some of the restructuring we've done in our reinsurance treaties over the last couple of years, as well as the benefit of the rate decreases that we've received.
Mike had asked me to talk a little bit about Crop. There's not a lot to say at this point in the year. Premium is down a little bit in Crop, 4%-5% on a gross basis. That's mainly driven by Crop prices are down, as you probably have noticed. The government has decided to lower rates again. The rates the farmer pays, relative to that price, is down. Offsetting that somewhat is we've seen a trend that farmers are actually buying up more coverage since they're saving, much like you're seeing cedents do. The reinsurance side, they're spending about close to the same amount of money, but they're just buying down their deductibles some. Weather looks good so far. There has been a little bit of hail activity this year, but in line with past years on the hail.
Certainly, the weather looks good for the main MPCI business, and crops are growing well. Of course, we still need heat and rain. Finally, just on other new products, Mike mentioned that a bit. Our professional liability business, our CBIC acquisition and integration, the Prime business that we acquired, security guards, RV, environmental, all these things are businesses that we've invested in recently in the last 3 to 5 years. We're seeing very good traction in that business and seeing a lot of growth coming from that over time. I'll turn that over to Aaron.
Thanks, Craig. We can now open the call up for questions
Thank you. The question-and-answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your telephone. If you wish to withdraw your question, please press the pound key. Your question will be taken in the order that it is received. Please stand by for your first question. We will take the first question from Arash Soleimani. Please go ahead. Your line is open.
Hi. Thanks. Just had a couple quick questions. First, I know obviously reinsurance capacity has been impacting primary Property rates, you sort of touched on this, but to what extent do you expect it to spill over into Casualty and start impacting pricing there?
This is Mike Stone. I'll give it a try. I think it probably will at some point in time. I think it really depends on the performance in the Property side. A big event might slow things down quite a bit. I think it's a little early to make any accurate prediction in that space. I think it really will depend on how things perform over the next probably 18 months. If it performs well, I would suspect we'll see some entry there. It's a lot more difficult. It takes more than a model and somebody pushing a button to evaluate Casualty risks. It's long tail. They don't tend to be long tail from the standpoint of returns. It'll be a bit more difficult.
Like I said, I think if their performance turns out to be pretty good, we'll probably see some of them try it. It's a little early.
Okay, thanks. That's helpful. I know it's still early for this too, I just wanted to see if you had any preliminary thoughts on your willingness at year-end to continue your special dividends.
Yeah, we'll evaluate that. We continually evaluate that, we'll evaluate it before the end of the year.
Okay, great.
Thanks, Arash.
Thanks. Lastly, was there anything in particular that drove Maui Jim's strong performance or?
Maui Jim continues to perform well. Their sales are up nicely. Margins have improved for Maui Jim, and it's showing up in the earnings.
Perfect. All right. Well, thank you so much.
Thank you.
As a reminder, it is star and one on your touch-tone phone to ask a question. We'll go next to Scott Heleniak. Please go ahead. Your line is open.
Hi, good morning. Just had a couple of quick questions. First is on casualty. Just wondering how much more runway you think you have for growth there in some of the lines that you guys have been growing in nicely over the past couple of quarters. Do you kind of expect that to continue, or do you see some of the competition you're talking about kind of spilling over to casualty, in the second half of 2014 and into 2015?
This is Craig. Scott, I think we continue to expect to see momentum. We've seen momentum in that space for the last, at least over the last two years. That's where a lot of our smaller investments, I guess, have been in businesses. We tend to like to grow things a little slowly and make sure gain confidence over time that we're doing it, particularly in this market because it's challenging. I think we'll continue to see growth there because we're continuing to expand relationships with producers in geographic areas. I think you'll continue to see that.
As Mike Stone, I'll just augment that our package business that we spent a lot of time, made a lot of investment on, we finally got that completed in all 50 states, so we're up and running. We would expect some momentum there. Like Craig said, it's not going to be rapid growth. It's going to be moderate, controlled. We like those new businesses.
Okay. Just had a quick question too about the property premiums, which were pretty much flat to down a little bit in the quarter. I know they've been weaker over the past two or three quarters, and obviously pricing is under pressure there. Just wondering where you saw the opportunities or why we didn't see a bigger decline there, or if you can touch on the premium trends there.
Sure. Scott, this is Craig. Our RV business that we have invested in, the specialty personal space, that's really built momentum. Actually, we've taken even rate increases in that space recently. Almost all the property growth is coming out of that investment.
Offset some of the declines in some other spaces.
Okay. Just had one more question just on the investment income side. Investment income has been up sort of, I think first quarter was up 5%, this quarter up 9%. Is there anything that's driving that just beyond higher invested asset balances? Are you getting any benefit from any dividends in portfolio or anything else that we should be thinking of?
Maybe I'll touch on your last question first on the dividend. Nothing distinguished in the dividend space. I think the primary driver is we're up about $90 million since year end on the investment portfolio. We are seeing reinvestment rates approximating where we were on our book yield of a little over 3%. We're moderating there as I think the market cycle has stabilized a bit. We have made a little bit of a push into some maybe perhaps higher yield, but a very modest amount allocated to that.
Sector.
Okay. Thanks a lot.
We'll go next to Ken Billingsley. Please go ahead. Your line is open.
Thanks. Thanks for taking the call. I wanted to follow up on the Property business. The accident year loss ratio improved pretty dramatically year-over-year. Given where rates have been, is that all rate driven, or can you talk about maybe what's driving that big improvement?
This is Craig. Ken, I think most of that would be driven by mix.
The mix. Where are you seeing specifically more growth or where are you paring down versus another area?
On the Property side?
Yes.
Our RV business continues to grow, as I mentioned. Our marine space has continued to shrink, which has had a higher loss ratio historically. You've kind of got both those things moving in the opposite direction so that you can imagine how that mix might have pretty big impact.
Okay. On, it's kind of a follow-up on opportunities. I know there was a focus just on the Property side. We talked about RV in the last question. Given where rates are and where reinsurance is likely to be for the next 18 to 24 months, are there any lines of business either that you are currently active in or are looking at that you think might have an opportunity in general for the market given where pricing is and where reinsurance opportunities may exist?
Ken, it's Mike Stone. You're talking about in the Property space?
Anywhere. Just opportunities for RLI in general. Looking at your capital that you have to deploy that capital, where do you guys see yourself moving?
Again, I think the Casualty business continues to be a positive story. A lot of our new opportunities are in the Casualty space that we would expect to grow out over the next 12 to 24 months. Our E&S business continues to perform well. There's pockets of opportunities there that some underserved areas that we are, I don't like the word exploiting, we are thinking optimizing, if you will. We see other products. We've entered some healthcare space, and we would expect to grow that out over time. That's a Casualty product. We think Casualty will continue to perform and continue to provide opportunities. You never know in Property. Property is much more volatile, subject to much more volatility. An event, I don't think one relative event will change things markedly, but it might put a halt to the slide.
It might change the appetite of some alternative capital. 12 to 24 months, a lot of things can happen in that space. Same thing in Surety. All of a sudden you can see some Surety losses that will change the underwriting appetite and the ardor of some of these new entrants.
Just to clarify, I thought maybe I wrote this wrong down that Craig had said that one of the weakening groups was E&S space, but you're saying that you're seeing some opportunities.
Yeah, it is. Let me clarify so that Craig and I are saying the same thing. All I'm saying is there's pockets of opportunity. We're seeing opportunities in some areas where we are getting some rates. For example, the oil and gas space, commercial umbrella in certain areas. Overall, it's trending a little negative, but there's pockets of opportunity. If those opportunities expand, and we see some likelihood that they might, then things will look up. Again, the E&S space is also subject to a little bit more volatility, more new entrants, people exiting, people get in trouble. We saw that in 2013. I would suspect that you might see some more of that as time goes on.
Very good. Thank you for taking my question.
Once again, it's star one to ask a question. If there are no further questions, I'll now turn the conference back to Mr. Jonathan Michael.
Thank you. Thanks very much. Good quarter, good earnings. Premiums earned were up over 9% for the quarter, a little bit more than that year-to-date, nearly 10%. Revenue is up 13%. Our book value increase year-to-date, 11%. A very good first half for us. The market, as we mentioned, got new capital in the market, reflective of the reinsurance pricing decreases that we've seen the last 18 months, really, and that continues. On the positive side, we do have new products that are helping to offset some of the competition that we're seeing, especially in the E&S space and others. Thanks very much for attending, and we look forward to talking to you next quarter. Bye.
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