Stand by. Welcome, ladies and gentlemen, to the RLI Corp. fourth 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 for the conference 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 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 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 fourth 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 are earnings per share from operations consisting of net earnings after the elimination of after-tax realized investment gains or losses. RLI's management believes that this measure is useful in gauging core operating performances 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 Diefenthaler. Please go ahead, sir.
Thank you. Good morning to everyone. Welcome to the RLI earnings call for the fourth quarter of 2013. Joining me on today's call are Jonathan Michael, Chairman and CEO, Michael Stone, President and Chief Operating Officer, Thomas Brown, Vice President and Chief Financial Officer, and Craig Kliethermes, Executive Vice President, Operations. I'm going to turn the call over to Thomas first to give some brief opening comments on the quarter's financial results. Michael and Craig will talk about our operations and market conditions. We'll open the call to questions, and Jonathan will finish with some closing comments. Thomas?
Great. Thanks, Aaron, good morning, everyone. We are pleased to announce another solid quarter and an excellent finish to the year. Starting with our most important metric, the combined ratio, we posted an 82.4 in the quarter, which allowed us to finish the year with an excellent 83.1 combined ratio. This marks the 18th consecutive year of underwriting profit and, as Jonathan pointed out in the press release, the ninth straight year below 90. Continued favorable development contributed to this outstanding result, $15 million in the quarter and $70 million on the year, so too did our core underwriting discipline and benefits of prior rate increases, which led to improved current accident results, particularly in our casualty segment. Turning our attention to premiums, gross premium was up 5% in the quarter over last year and 15% on a net basis.
For the year, gross premium grew 7%, while net premium's faster growth rate of 12% was driven largely by our strategy to purchase less reinsurance, as well as some mix changes within our product portfolio. Digging into our three segments, casualty premium continued to lead the way, up 10% for the quarter on a gross basis and 24% on a net basis. The gross increase was driven by new product initiatives as well as certain products achieving both rate and exposure growth. The higher net premium growth was driven by less reliance on reinsurance, as previously mentioned. The impact of both increased prices as well as improved loss experience led to a decrease in our casualty booking ratio. Combined with the impact of favorable reserve development, casualty reported a very nice 82 combined ratio in the quarter and 83 for the year.
Our property and surety segments were also strong contributors. Surety's gross premium was relatively flat in the quarter, while property was down slightly. Both turned in excellent combined ratios, property at an 85 and surety at a 79, both in line with full-year results as well. Turning to investments, there were a few positive trends in the quarter. Although investment income was down due to continued low reinvestment rates, both the bond and equity portfolios turned in positive total returns for the quarter. In addition, our equity investment in Maui Jim continued to add favorably to earnings, contributing positively to earnings in a cyclically slow fourth quarter, while on a full-year basis, earnings were up a strong 23%. A combination of underwriting and investment results drove operating earnings per share of $0.72 per share, a figure which is adjusted for the two-for-one stock split last week.
For 2013, operating earnings per share was $2.57 per share, up 28%, which drove book value per share growth of 15%, inclusive of dividends for the year. With that, I will turn over the discussion to Mike Stone. Mike?
Thanks, Tom. Good morning, everybody. An excellent underwriting quarter, even by our standards, as we continue to grow our business. Our combined ratio was 82, as Tom said, for the quarter, and our gross written premium was up 5%. I'm going to talk a little bit about what we're seeing in the marketplace, then Craig Kliethermes will go into more detail on rates, reinsurance renewals, our growth initiatives. Craig is our Executive Vice President of Operations, a heavily credentialed actuary with encyclopedic knowledge of insurance and risk management, and he will provide some good insights as we talk further. In our casualty, as Tom talked about, our gross written premium was up some 10% in the quarter. Our commercial umbrella business continues to grow nicely in selected markets.
With gross written premium up some 16% in the quarter and 13% in the year. The rates are also up nicely as we continue to see opportunities for our buffer layer excess and first layer excess where traditional markets have exited. Our primary liability business, general liability, which is our largest product line, gross written premium was up 4% in the quarter, but down 11% in the year. Much for the deceleration. As we have managed to re-underwrite our habitational business, and yet continue to grow other, more attractive classes. Actually, last year at this time, our habitational business represented some 15% of our casualty business. It's only 7% this year, and it was about half of our general liability business, and it's only 25% this year. We're building a better book of business as we move forward.
Our transportation business flattened out a bit in the quarter, but its gross written premium was up some 55% for the year. We continue to grow our professional liability admitted package business with growth of some 35% for the year. Our nicely performing personal umbrella business grew a bit this year, up some 3% for the year and 2% for the quarter. Overall, casualty market's still in reasonably good times. Property, very light cat year, to state the obvious. Combined ratio was 85 for the quarter, 86 for the year, and it compares favorably to 2012, where they were at 99 and 94, respectively. Obviously, Sandy was in those numbers. Our gross written premium was down 5% for the quarter and 2.5% for the year.
Competition in the cat business continues, but we will compete, and we have a solid place in these markets, having been through many events, and continue to provide solid, reliable capacity to our brokers and customers. With reinsurance renewals positive for the markets, we would expect this segment to continue to be competitive. We have the underwriters, products, and relationships to continue to compete and to outperform in this segment. Surety, gross written premium, essentially flat for the year and the quarter. As I've talked in the last couple of quarterly teleconferences, this market segment is very competitive, and we have an increasing number of competitors in this space. As a result, some terms and conditions are under pressure. For example, personal indemnity being waived, some collateral requirements being waived, and underwriting discipline lacking in some areas. We've got the right products and people here.
We've been in this business for a long time. We'll be able to compete, but we will also continue to maintain our underwriting discipline here. Overall, a very good quarter, a testament to our underwriting teams and support. We go into 2014 well positioned to continue our outperformance as the market is still reasonably attractive for our products. Craig will add a little color.
Thank you, Mike, and good morning. I want to talk briefly about our ceded reinsurance placements on 1/1. As many of you know, we place about one half of the reinsurance we buy on 1/1, including our largest casualty treaty and our catastrophe treaty that we purchased. Last year, the theme was we decided to restructure our casualty reinsurance to maybe eat a little bit more of our own cooking, as Tom referred. That contributed to our net written premium growth in 2013. This year, we would say the theme was more around a buyer's market. I think I would describe it as pretty soft. Rates were down about 10%-15%, which translates into about $10 million savings that should drop directly to our 2014 bottom line. Our retentions and capacity purchase were essentially unchanged, with only small changes on the margins. With that.
Great. Thanks, Craig. 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 Randy Binner with FBR.
Good morning. This is Jason Aanning on for Randy this morning.
Good morning.
My first question, just to clarify on the retention that was mentioned towards the end of the commentary there. Just to be clear, should we assume that it's going to remain stable relative to 2013?
Relatively stable, yes. There were slightly bigger retentions in workers' comp, but we also bought more on the top, so effectively that was unchanged. Our risk profile across the risk curve is essentially unchanged across all of our products.
Okay, fair enough. I just wanted to make sure that I understood that. Turning to the property segment, the underlying loss ratio there was a bit higher than we had modeled, and I guess also a bit higher relative to the average of the first three quarters. I was just wondering if you could give a little bit more color there. Maybe if you could talk about the specific product lines within there as well. For example, are you seeing any improvement within the marine segment yet?
This is Michael Stone. The marine improvement, it seems like it improves for a bit, and then we have a few shock losses, and it goes back. I think the loss ratio issue is probably driven by a bit of marine and probably some crop increase in the fourth quarter.
Okay, that's helpful. Thank you. I guess lastly, could you just comment on the E&S pricing and overall competitive environment?
Yeah. This is Michael Stone again. E&S is competitive, but as I think we talked about a little bit about rates, our rates have continued to improve. We have been able to successfully re-underwrite our book of business and general liability without much deterioration in the top line. We see pockets of pretty strong opportunities as I talked about the commercial umbrella. There's other areas, transportation has been pretty good for most of the year. I think casualty E&S is still good. Not great, it's good. If we talk about property is, you talk about E&S, it's heavily capped, and capped under pressure. The good thing about our position, RLI's position, is we've been in these businesses for a long time with deep, experienced underwriters who know their products. They have great relationships with their brokers, and we're able to manage through this.
Obviously, if it continues to deteriorate as some people predict, I'm not sure if that's the case, by the way, we'll remain disciplined. We'll walk away from business as we have in the past, as we manage our exposures, and manage our underwriting profitability.
Okay, that's helpful. Really quick, given Berkshire's presence this year, are you starting to see any indirect impact on the smaller case market?
63, 42, 97, Omaha.
Go ahead, Mike. You can answer that.
I think I'm going to be Wes Welker here, I believe. We still haven't seen much of Berkshire, especially. They're still in higher premium items, larger accounts. It forces other people down into our space. We feel it indirectly, but thus far, they haven't been an impact here. I'm not going to say they haven't been an impact, but we really haven't felt them. I would expect as the year progresses, and they continue to add people and add product, that we'll encounter them. There's a lot of competition in our space. One new entrant, even though a big one with a very quality name, they don't have any pricing power either. It's another competitor. We really haven't encountered them in a significant way.
All right. Thank you. I had to ask on that one again. Thanks.
As a reminder, ladies and gentlemen, that is star one for questions. We'll go next to Meyer Shields with KBW.
Pardon me. Thank you. Good morning, all. I was hoping you could clarify your reinsurance plans because I think in the prepared remarks you said that there was a 10%-15% savings. You said that the retention is largely unchanged.
That's correct. Effectively, the rates were down 10%-15%, which should result in about $10 million-$11 million savings overall, with essentially the same retentions. The retention on workers' comp that I mentioned, workers' comp is a very small business for us, a couple million dollars. It really doesn't move the dial much.
Okay. The retention you're talking about is ratio of net to gross premiums .
I'm sorry. I was talking about the loss retention under the profile, under the reinsurance structure that we bought.
Oh, okay. I'm sorry.
Our net to gross number, I'm guessing, won't move much from this year.
Okay.
It may go down some because of the rate reduction, clearly, but not because of a change in our retention.
Right.
Our loss retention.
Our spend, our reinsurance spend, will be $10 million-$11 million less than last year because of the
Okay. Thank you for the clarification.
increased rates.
Is there any change in ceding commission levels?
I think it might've been a half a point on our umbrella business improvement.
Right. Okay. All right. Let me stop there. Thank you very much.
We'll go next to Mark Dwelle with RBC Capital Markets.
Yeah, good morning. Couple questions related to casualty business. The overall gross written premium was up about 10%. If you were to characterize that, what proportion of the growth was new business driven, and what proportion was really pricing driven on existing business?
Well, the price on our casualty portfolio overall was about 5% for the year. The balance would be changes in exposure or on existing businesses, then we have fairly significant investment in new products in our casualty business. Obviously those are new exposures. They're hard to measure year-over-year price since they're new to us.
Got it. Okay. Within the commercial umbrella line, you mentioned 16% growth in the quarter. Was that mostly new business driven, or is that exposure units?
For the quarter, it was basically all price.
All price? Okay. Lastly, on the reserve releases, obviously mostly casualty. In the past, you've kind of indicated what accident years were most involved. Could you provide that same detail?
Sure, Mark. It's Tom Brown. Glad to. In the casualty, it's largely GL umbrella and then some of the package businesses. The accident years are basically 2009 through 2012. Then, as you said, in property and surety, a little more modest by comparison. Property is marine, a little bit of a release on Sandy last year, and that's the 2010 and the 2012 accident year. The surety is almost exclusively 2011 and 2012.
Thank you very much. That's all my questions.
Thank you.
We'll take our next question from John Thomas with William Blair.
Hi. I was curious what you think about the transportation market, is the rate that you're getting making the business currently profitable, what do you see heading into next year?
This is Michael Stone. First, we think the business is profitable. Historically, our business has been profitable, we've been in this business for, oh, 15, 16, 17 years in long-haul trucking, buses, commercial auto. We have an excellent track record. We understand the business. We have experts that are underwriting it, focused solely on transportation, who've been in the business a lot longer than we've been in the business. It's been a good year for transportation. Obviously, you've seen the companies that have encountered difficulties. Most of them have had trouble, among other things, with their transportation book of business, where their business was underpriced, we knew it. Our prices typically don't vary as much. Our premium will vary. We'll lose business if we can't get the price, we'll gain business if we can.
We sell service, we sell expertise, we sell a solid, consistent market presence. We have good relationships with our brokers. We've had an advantage this year because we've been open for business. We've been able to increase rates on previously probably underpriced business coming from other companies. It's not a huge book of business. It's $65 million or so. Quarter to quarter, you might miss out on a large account, and therefore, your quarter-to-quarter comparison will be not favorable. The fourth quarter was flat, overall, we think it's a pretty good market for transportation. We've had a number of competitors that have exited, we're open for business, I think 2014 should be pretty good.
All right, thanks. The casualty accident year loss ratio ex cat. In the first half of 2013, it was materially higher than the second half. Why do you think the claim experience is much better than you initially expected in the beginning of the year?
John, this is Craig Kliethermes. We had talked about our habitational experience for quite some time, we've spent a lot of time rehabilitating that book of business. We saw significant improvement in our current accident year loss ratios from the businesses we exited, in addition to the price that we achieved on that portfolio. That portion of the overall portfolio for casualty has shrunk dramatically by a factor of half of what it was.
All right. Thank you.
We'll go next to Ken Billingsley with Compass Point.
Good morning. Just a question on the year investment portfolio with interest rate expectations. Are you guys making any changes in plans for 2014 and going into 2015?
Yeah, it's Tom Brown. Good morning. I think you'll see in the quarter itself, reinvestment yield is in the mid threes. That's largely driven. We pushed a little harder into munis in terms of an allocation. That would be on a tax-effective basis. I think your question then goes into 2014 and 2015, if I heard you correctly.
Yes.
We're staying pretty much, what I'd say, sticking to our knitting. We always look at and evaluate other opportunities out there. Duration is maintained pretty much in the five-year range. We're pretty consistent in that regard, and that's been a long-term investment strategy. I wouldn't anticipate anything too significant.
John, Mike. Our investment strategy is for the long haul. We've always, for a long time, have had an 80/20 allocation between fixed income and equities. I don't see that changing a whole lot. We'll make minor modifications around the edges. I won't see that. I don't see that changing too much. Our duration is, yeah, it's a little long right now at five, and we typically are in that four to five range to match our insurance portfolio. I don't see that changing too much.
Even if rates rise, you would not necessarily shorten the duration?
Well, I think that'll be a natural thing that'll occur.
I was just wondering if you would keep the same duration as rates rise, looking out over the next two years.
It's been historically, I think we've been between about a four- and six-year duration.
Okay.
Modestly, Ken, I think you could see it shorten a bit, but again, we've been in a pretty tight band for a number of years.
Last question I have is specifically on DIC business and the California earthquake. Is there an opportunity for sales growth there or from a diversification, are you guys where you want to be, or is there an opportunity to maybe push more sales? I've seen some articles where it seems like California's trying to encourage more buyers in that market.
Ken, it's Michael Stone. I think a lot of that's over personal lines. We don't write any personal lines. It's all commercial lines. We're basically happy with where we are relative to exposure. Obviously, we'd like to get more premium for the exposure. Premium is pretty flat to down just a little. I would suspect that you won't see much growth here unless something happens. That doesn't mean it has to be an earthquake, but something happens in the property space that would cause rates to move forward. Otherwise, I think you'll see us steady. We're about at the exposure level that we want to be given the price, and where we are in our accumulations.
You were correct, the article's mostly focused on the personal line side. The percentage of the coverage is really low. Is there a lot less opportunity for growth just in general on the commercial side for people that may or without coverage?
Well, certainly, Ken, there's a large percentage of commercial entities that don't buy earthquake as well, but not to the level that personal lines because banks will require commercial lines customers to buy, which is not the case in the mortgage space. Yeah, there's certainly opportunity. As you get farther and farther away from an earthquake, the thought of an earthquake gets dimmer and dimmer, and particularly dimmer and dimmer in people's minds that have to spend their own cash to pay the premium. I would suspect that you won't see a lot of demand-driven opportunities until there's some event, albeit small. I think until we see something like that, I doubt that you'll see without some other exogenous factor, which I don't know what that would be, to drive demand.
Well, thanks for taking my questions, congratulations on the quarter.
Thanks.
We'll go next to Kevin Shields with Pine River Capital.
Good morning. I have three questions for you this morning. On the first one, I wanted to come back to crop insurance. Could you give us the premiums earned and combined ratio for the quarter and for the full year?
Give us a minute to get that if you would, Kevin. Kevin, that was crop with an O, right?
For crop insurance?
Yes. Okay. All right. Kevin, for the full year it was lower, $53 million. For the quarter, very low because this is a very seasonal business. It's just slightly over almost $2 million, but very flat. Go ahead.
I'm sorry, that was 2 million for the quarter?
Yeah, combined ratio.
112.
Yeah. The combined ratio for.
Year
year was 112%.
I think so.
Correct? I think so.
112.
112. Yeah, we did have some development in the fourth quarter on that.
We'll take our next.
That was for the full year?
Yeah, 112 for the full year. We had development in the fourth quarter.
Okay. My second question was around paid losses, and it looks like they've been really well-behaved for the quarter and for the year. I was wondering if you could provide any color around paid loss activity, and if there's any unusual activity in the year, one way or the other.
Okay. I don't think there's anything unusual. In the fourth quarter last year, we did have Sandy, and as you know, cat losses, you tend to pay out fairly quickly. There's probably a little more activity into the 2012 fourth quarter than in comparison to the current fourth quarter. I'm not sure if I can think of anything more specific on that.
Okay. My last question would be if you could provide the year-end IBNR?
We may have to take that one offline. I don't know if we have that at our fingertips here. You're looking for the breakout of the IBNR and the total carried reserves?
For the net reserves, yeah.
Not sure. I think if memory serves me, it was 45%, but that's just totally off the top of my head without any numbers in front of me.
Thank you very much.
Feel free to call us offline.
Thank you.
We'll go next to Vincent Miskowicz with Evercore.
Hi, good morning. Just wanted to drill down a little bit more into market conditions. I believe you said that they were still pretty favorable. Curious, fourth quarter versus third quarter, has it now started to become more competitive given that we're in the third year of year-over-rate increases? The second question on that would be on the E&S market. Just curious whether the standard market is now beginning to pull back less given that most of their business is now being adequately priced.
It's Mike Stone. We think that the casualty market's still reasonably good. Is it as good as it was a year ago? It depends on the product. Overall, we think it's still pretty good. I think we said our rates are up some 5% for the year. We grew 10%. That's pretty good in these times. E&S standard lines, again, there's hardly a bright line that can be drawn. People are around the edges. I think the standard line guys are in our space. There's an awful lot of competition there. If Travelers takes an account as opposed to AXIS taking an account, it doesn't much matter to us. I think relatively, we don't feel the standard lines carriers are any deeper in our space today than they were a year ago.
Okay, that's helpful. The last point was on the casualty market. You mentioned that rates were down, I believe, about 10%-15% on the reinsurance side. Curious as to whether you think that will have an impact on pricing and the primary insurance in the future.
Undoubtedly. We're pretty. We're just not as pretty as we think we are.
All right. Thank you very much.
Thank you.
We'll take a follow-up from Meyer Shields with KBW.
Quick, if I can. One, Mike, I think you talked about terms and conditions changing in the surety market. Is that true for RLI, or is that just a market observation?
No, Meyer, I think I said we're going to remain disciplined. I won't say we never waive personal indemnity or we never ask for collateral when we ask for it a year ago. By and large, our underwriting discipline remains the same. We're not going to chase accounts that we think need personal indemnity, or we need some level of collateral or walk away from underwriting discipline just because the market's doing it. I think the story in surety is there's just an increasing number of entrants into the space. I think somebody has looked at some numbers and said it must be easy. I can just tell you that it's not, and these things usually end badly for those people that come in uninitiated and undisciplined. I don't wish bad on anybody, but I suspect that that's what will happen.
No, obviously, we see the competition. Another issue is commissions. What usually happens is commissions start moving up as well. In some areas, we'll move up commissions if need be for the right accounts, but we're not doing it across the board.
Okay. No, that makes perfect sense. I just wanted to make sure I got that right. Second question, if we look specifically at the other insurance expense ratio within the expense ratio, that seems to have ticked up compared to either year-to-date or third quarter numbers. Anything unusual in the quarter?
Meyer, hi, it's Tom Brown. Your observation's correct. Much of that is driven by profit-sharing bonuses at the year-end. As you know, the quarter was pretty strong, and particularly part of that is the equities. Equities had a good run in the fourth quarter. That's kind of the chief driver. There's just some various and sundry other noise in there, that you get some non-recurring expenses, but nothing of note.
Variable comp drove it, yeah, Meyer.
Okay, perfect. Thanks so much.
If there are no further questions, I will now turn the conference back to Mr. Jonathan Michael.
Well, thank you all for joining us once again. We're quite sanguine about the market. We did have an excellent quarter producing our ninth consecutive year of under 90 combined and our 18th consecutive year of profitable underwriting under 100. I think that is an unbelievable result. Speaks to our underwriters, speaks to our discipline. In fact, it's our discipline that differentiates us. Enjoy the Super Bowl. We'll talk to you next quarter. Thanks.
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