RLI Corp.

Good morning and welcome, ladies and gentlemen, to the RLI Corps' fourth quarter earnings teleconference. As a reminder, 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 factors and uncertainties. which could cause actual results to differ materially. Please refer to the risk factors described on the company's various SEC filings, including in the annual report on Form 10-K as supplemented in the Form 10-Q for the quarterly period ended December 31, 2020, 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-GEAP 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 performances across reporting periods, but may not be comparable to other companies' definitions of operating earnings. The Form 8 contains a reconciliation between operating earnings and net earnings. The Form 8 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, Chief Investment Officer, and Treasurer, Mr. Aaron Diefenthaler. Please go ahead, sir.

Thank you, Madison. Good morning. Thanks for joining us on RLI's fourth quarter earnings call. As usual, we have John Michael, Chairman and CEO, Craig Klythermus, President and COO, and Todd Bryant, CFO. John is going to begin with some opening comments. John? Thank you, Aaron, and welcome to the final earnings call to close out 2020. In many respects, We're ready to move on to 2021, but I would be remiss if I didn't mention that RLI overcame many challenges during the last 12 months and delivered strong results. There's much to be proud of for 2020. Our gross premiums were up 7%. Gap equity grew to $1.1 billion after returning more than $87 million. to shareholders during the year. And we achieved a 92 combined ratio. That 92 combined marks the 25th consecutive year of underwriting profit for RLI. These results could not have been possible without the hard work of our talented associates who persevered through tremendous uncertainty and change to keep our business and, more importantly, our customers' business moving forward. I'm proud of our entire team for their outstanding efforts. As usual, you'll get more details from Todd and Craig on our fourth quarter and year-end performance, and we will be glad to answer your questions at the end of the call. And before we move on, I want to take a moment to congratulate Craig. In December, I announced my plan to retire at the end of this year, and that Craig will be assuming the CEO role at the end of or at the beginning of 2022. Craig is a proven executive and I have complete confidence in his ability to continue leading RLI to achieve success. Congratulations, Craig. And now I'll turn it over to Todd to provide some financial highlights. Todd? Thanks, John. Good morning, everyone. Congratulations to Craig as well. Last night we reported fourth quarter operating earnings of 75 cents per share. The quarter's result reflects elevated catastrophe losses which were offset by favorable benefits on prior year's loss reserves as well as improving current year casualty results. We achieved 10% top line growth and posted an 88 combined ratio. Investment income declined modestly while unrealized returns on the investment portfolio continued the rebound from adverse trends earlier in the year. Strong net and comprehensive earnings drove book value per share up 22% for the year, inclusive of dividends, to end the year at $25.16. Pricing momentum continued in a number of our products, and the pandemic's influence was muted in the quarter, with casualty posting 9% shop line growth, while property and surety were up 15% and 2%, respectively. Craig will talk more about individual products and market conditions in a minute, But overall, growth in gross premiums was driven largely by rate increases and expanded distribution. From an underwriting perspective, we posted a fourth quarter combined ratio of 88.0 compared to 92.4 a year ago. Our loss ratio declined 3.5 points to 45.8 as reserve benefits offset 6.5 points of hurricane losses posted in the quarter. In addition to catastrophe losses, we maintained The elevated current year lost booking ratios discussed the last few quarters on certain financial-related products where heightened exposure to pandemic-related losses exists. This resulted in recording another $3.5 million in COVID-19-related pre-tax losses, $2.5 million in casualty, and $1 million in surety. Year-to-date, reserves established for COVID-19 total $18 million. By segment, amounts recorded total $2 million for property, $3 million for surety, and $13 million for casualty. To date, we have paid less than $10,000 in actual indemnity losses on what we deem as COVID-related. Over 90% of claims received have been closed without payment, but we continue to investigate and review all claims submitted. Offsetting reserve additions in the quarter were approximately $25 million in net benefits from prior year's reserve releases, largely within the casualty segment, where a majority of products posted favorable experience. Moving to expenses, our quarterly expense ratio remained below last year, down 0.9 points to 42.2. Relative to last quarter, however, this ratio moved higher as metrics that drive various incentive plans, combined ratio, operating return on equity, and book value growth all improved significantly during the fourth quarter. I would note, however, on a year-to-date basis, our expense ratio was 40.8, down 1.8 points compared to last year. Decline was aided by growth in revenue, modestly lower amounts earned under incentive plans, as well as targeted expense reduction and deferral initiatives that began at the onset of the pandemic. As mentioned last quarter, we continue to evaluate areas of opportunity for efficiency gains and expense savings while increasing our investment in technology, particularly those related to customer experience and ease of doing business. Turning to investments, capital markets made up lost ground in the quarter with robust returns in the last two months of the year. Public equities were responsible for most of the quarter's 3.2% return. However, bonds put in a positive result, even with higher risk-free rates. While total return was a significant contributor to the increase in shareholders' equity, investment income remains under some pressure from the current rate environment. It is not our preference to reach for risk to make up for lower rates, but to keep putting money to work, letting portfolio growth stem the tide. The majority of operating cash flow is being invested in high-quality, fixed-income securities. Outside of the core portfolio, our share in investee earnings is down in the quarter. Maui GEM results were influenced by normal seasonality, as well as certain mark-to-market adjustments on loan group assets. For prime, investing earnings continue to advance, reflective of growth in revenue and earnings they are experiencing. All in all, a very good quarter and solid year. We ended the year with $1.1 billion in shareholders' equity. Our combined ratio was 92.0 for 2020, which, as John mentioned, represents our 25th consecutive year of reporting an underwriting profit. Once again, operating income and solid investment performance resulted in capital generation in excess of current needs, which was returned to shareholders in the form of a $1 special dividend in December. In 2020, we marked our 45th consecutive year of paying or increasing our quarterly dividend. With special dividends, we have returned over $1.1 billion in dividends to our shareholders over the last decade. And with that, I'll turn the call over to Craig. Thank you, John and Todd, and good morning, everyone. Given all the challenges faced in 2020, we are proud of our success. We reported our 25th consecutive year of underwriting profit and grew top line by 7%, a great quarter overall with an 88 combined ratio on 10% top line growth. Large parts of the market appear to be shifting in our favor with retrenchment of some competitors, rates increasing, and terms tightening. We still see some uneven seas ahead, but are confident that with our diverse portfolio products and underwriting discipline, we are well positioned to take advantage of opportunities presented. Now I'd like to go into a little more detail by segment. In our casualty segment, we saw 9% top line growth for the quarter and end of the year up 6%. We were able to achieve a very good underwriting result for the quarter and the year with an 85 and 92 combined ratio respectively. Growth has been fairly widespread across the segment with our excess liability businesses leading the way. We continue to see opportunities in both our personal and commercial umbrella businesses where we focus on the first excess layer. Our executive products group is also growing at a relatively good clip, but mostly from needed rate increases. Our transportation insureds are still struggling, and as a result, we realized a 25% revenue decline for the quarter and 40% for the year. Overall, in the casualty segment, rates were up 11% for the quarter and 10% year-to-date, which is outpacing our expectations for lost cost inflation. We believe double-digit rate increases are still achievable in auto liability, excess liability, and the directors' and officers' product lines, which for us make up about half of the net premium in this segment. The market remains very competitive in primary limit liability and package businesses where we target small and medium-sized professionals and contractors. In property, we grew 15% in the quarter and 11% year-to-date. We achieved an underlying profit in the quarter but did end up in a loss position in this segment for the year. Obviously, a tough year with a dozen named storms making landfall in the U.S., Property business is where the market is hardening most broadly, with rates up 11% across the segments for the quarter and the year. Our catastrophe-focused wind and quake businesses led the way, and year-to-date rates were up 35% and 18% respectively. Our marine business continues to find opportunities from disruption at Lloyds, with rates up 9% for the quarter and year-to-date. Our Hawaii homeowners book also continues to grow profitably. Surety remains the most competitive segment for us. We were able to grow the top line 2% this quarter, but did end up the year down 1%. The combined ratio continues to outperform at an 85 for the quarter and 75 year to date. Given some of the headwinds this segment has faced, both from the fallout of the pandemic and intense competition in the surety markets we serve, our underwriters have done a great job staying disciplined and working with our producers to manage risk and produce great results. Our focus on customers with strong balance sheets and good management has been beneficial during the financial stress and economic uncertainty resulting from the pandemic. We believe that keeping the powder dry will serve us well as we are optimistic this market will eventually swing in our favor. Overall, a great quarter and a very good year. When I think about everything that has happened over 2020, it reminds me of stories my grandmother used to tell me when I was young. I remember she would tell antidotes about growing up poor in rural Missouri. During her first 25 years on Earth, she grew up with the Spanish flu, the First World War, the spread of polio, and the Great Depression. It was unimaginable to me at the time, but it now seems like we have all lived a quarter century in the past year. Like my grandmother, who lived to the age of 92, we have also been resilient and will persevere. Our company has overcome many extraordinary challenges over the last 25 years of its existence, but still delivered underlying profit every year. To get where we are today, we have adapted, adding many diverse products, building out our surety business, and sizing our catastrophe business based on market conditions. What has not changed is our focus on hiring narrow and deep talent who are champions of our ownership culture, empowering them to serve our customers and reinforcing discipline underwriting through a compensation structure that rewards underwriting profit and is paid out on real results over time. We feel good about where we are and where we are going. We will focus on our customers, look outward, adapt to the change around us, and continue to deliver value to our shareholders. We are comfortable being different because being different has worked for ROI and all stakeholders. I want to thank our ROI owner associates for their contribution and willingness to face the challenges of 2020 head on. Our company has a rich history of success because of the quality of people who work here. Thank you, and I'll turn it back to the moderator to open it up for questions.

All right, 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 prepping any numbers. Should you have a question, please press star 1 on your telephone. If you wish to withdraw your question, please press star 2. Your question will be taken in the order that it is received. Please stand by for the first question. Our first question comes from Colin Johnson with B. Reilly Securities. Please go ahead.