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RLI Corp (NYSE:RLI)
Q4 2019 Earnings Call
Jan 23, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome, ladies and gentlemen to the RLI Corp Fourth Quarter Earnings Teleconference. At the request of the Company, we will open the conference up for questions and answers after the presentation.

Before we get started, let me remind everyone that through the course of the teleconference, RLI management may make comments that reflect their tensions, beliefs and expectations for the future. As always, these forward-looking statements are subject to certain risk factors which could cause actual results to differ materially. These risk factors are listed in the Company's various SEC filings, including the Annual Report on Form 10-K which should be reviewed carefully. The Company has filed a Form 8-K with the Securities and Exchange Commission that 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 the financial results. RLI's operating earnings and earnings per share from operations consist of net earnings after the elimination of after-tax realized gains or losses and after-tax unrealized gains or losses on equity securities.

RLI's management believes these measures are useful in gauging core operating performance across reporting periods, but may not be comparable to another companies' 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 www.rlicorp.com.

I would now like to turn the conference over to RLI's Vice President, Chief Investment Officer and Treasurer, Aaron Diefenthaler. Sir, please go ahead.

Aaron P. Diefenthaler -- Vice President, Chief Investment Officer, and Treasurer

Thank you and good morning. Welcome to RLI's first earnings call of the new year, covering financial results through the fourth quarter of 2019. Joining us today are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Todd Bryant, Chief Financial Officer.

Todd will give some opening comments on the quarter's financial results, Craig will then discuss operations and market conditions. We will open the call to questions and Jon will close with some final thoughts. Todd?

Todd W. Bryant -- Vice President, Chief Financial Officer

Thanks, Aaron. Good morning, everyone. Last night, we reported fourth quarter operating earnings of $0.63 per share, up 58% from the same period last year. The result for 2019 reflects fairly benign loss activity from catastrophes and other storms, as well as increased favorable benefits from prior accident years reserves. Investment income continued to outpace prior years, driven largely by our increased asset base. Gross premiums written advanced 6% in the quarter and cash flow from operations remained strong at $90 million for the quarter and $277 million on a year-to-date basis. And the book value per share ended the year at $22.18, up 33%, inclusive of dividends.

Craig will talk more about products and market conditions in a minute, but from a top line standpoint, as mentioned, gross premiums written was up 6% in the quarter, ended the year up 8%. A majority of products in our diversified portfolio experienced growth. In both the quarter and on a full-year basis, excluding previously announced exits and repositioning. Net of these decisions, premium was up 14% in the quarter and 15% on a year-to-date basis.

From an underwriting perspective, we posted a fourth quarter combined ratio of 92.4 compared to 98.9 a year ago. Our loss ratio declined 11 points, as catastrophe losses declined and benefits from prior year's reserve development increased. You may recall that losses from Hurricane Michael added about 10 points to our combined ratio during the fourth quarter last year. This year, storm activity and modestly elevated property losses only added about 2 points to the quarter's combined ratio.

From a reserve perspective, net of expenses prior year's benefits were $16 million for the quarter and totaled $63 million on a full-year basis, up nearly $20 million from benefits recorded in 2018. From a segment perspective, the majority of favorable reserve development for both the quarter and the full year was in casualty, for a majority of products posted favorable experience. For more recent years, we continue to remain cautious in our approach to reserving, particularly on auto-related exposures, newer product initiatives, and those with outsized growth relative to prior periods.

Moving to expenses, metrics that drive performance-based compensation ratio, operating ROE and book value growth improved significantly during the quarter and on a full-year basis. Amounts accrued under bonus and incentive programs account for the majority of the increase in our expense ratio compared to the last year. In addition, these amounts represent the bulk of the increase in general corporate expense in 2019.

Overall, we are pleased with the underwriting performance of each of our segments. Our diversified portfolio continues to deliver solid results. On the investment front, December ended a very strong year for the capital markets. Fixed income and equities were positive contributors to book value growth and total return ended the year up 11.6%. We saw continued increase to the net investment income, up 5% in the fourth quarter and 11% for the year.

Yields have stabilized for now, and that puts portfolio growth at the center of what income will look like over the next 12 months. Upside of the core portfolio are share of earnings in Maui Jim and Prime was up on a quarter and a full-year basis, both investments continue to perform well. Maui Jim results for the quarter, while improved, reflect lower seasonal results, which is expected. Results for Prime are higher and reflective of the growth they have experience in both revenue and net profits.

All in all, a good quarter and solid year. We achieved a couple of milestones as we surpassed $1 billion in both top line premium and statutory surplus. Our combined ratio was 91.9 for 2019, which represents our 24th consecutive year of reporting an underwriting profit. Our operating ROE ended the year over 14%, operating income and strong investment performance resulted in capital generation in excess of current needs, which was return to our shareholders in the form of a $1 special dividend in December. In 2019. We marked our 44th consecutive year of paying or increasing our quarterly dividend. With the special dividend, we have returned over $1.2 billion in dividends to our shareholders over the last 10 years.

And with that, I'll turn the call over to Craig.

Craig W. Kliethermes -- President and Chief Operating Officer

Thank you, Todd, and good morning everyone. As Todd mentioned, we grew the top line 6% for the quarter and 8% year-to-date, while recording a 92 combined ratio for both periods. We did have a little more headwinds on the top line this quarter, as a result of previously announced reshaping of our portfolio. Growth was over 10% in the quarter for our ongoing businesses. Overall, our underwriters pulse on the market is cautiously optimistic as we move into 2020. We continue to see positive rate momentum across most of the property and casualty portfolio.

The increases are differentiated and the opportunities to get rate are greatest in the most distressed portions of the market. We caution and drawing conclusions about market conditions solely found in the size of the rate increases or submission counts. Large rate increases are often the result of significant underperformance. A disciplined underwriter doesn't anchor on the size of the increase, but whether the market rate is adequate for the risk. We are at a point in the cycle, we're having experienced underwriters with consistent appetite and confidence to execute our beneficial.

I'll offer a little more color by segment. In casualty, we grew the top line 1% for the quarter and 8% for the year. We reported a 96 combined ratio for both periods. Growth in ongoing business was 12% for the quarter. Both commercial and personal excess liability have grown over 15% for the quarter and year from a combination of rate increases and exposure, while generating good bottom line results. We are also seeing double-digit growth in our executive products group, where rates have been up nearly 30% for two consecutive quarters.

Small admitted contractors primary liability business is also growing at a rapid pace as a result of retrenchment in the market. Our transportation book struggled on the top line this quarter, but was able to achieve double-digit rate increases for the quarter and for the third consecutive year. We continue to see variation in the market, where rate is easier to achieve on business with a little blemish.

Overall, casualty rates were up 9% for the second quarter and 7% for the year, with rate realization varying significantly depending on loss activity and if bigger limits are required. We did place our largest casualty treaty on 1/1 and our reinsurance rates were up 3% to 4% overall, which is more than covered by our underlying rate increases.

In property, we grew 35% for the quarter and 19% for the year. This growth was across all of the underlying products in this segment. We achieved a 91 combined ratio for the quarter and 89 year-to-date. Rates are up mid-single digits for the portfolio for both the quarter and the year. We are seeing some hopeful signs of increasing price momentum in marine, wind and earthquake business. New business opportunities are much more plentiful at acceptable rate levels as the market is coming to us. We placed both our catastrophe reinsurance and property per risk treaties at 1/1. Cat reinsurance rates were up about 2% to 4%, while the per risk treaty, where we have ceded more loss activity in recent years, was up 7% to 10%. A fair outcome, given our loss experience and reflecting the underlying rate increases we were able to achieve.

In surety, top line was off [Phonetic] 7% for the quarter and 5% for the year. We were able to achieve an outstanding 78 combined ratio for the quarter and 75 for the year. Most of the top line challenge is attributed to our exiting of a couple of programs that no longer fit our appetite as well as decreasing offshore energy activity, which are typically larger accounts. We still see this as our most growth challenge segment, but we sense some disruption may be building with competitors taking losses on some larger accounts and capacity starting to level off. Our underwriters continue to be disciplined, looking for opportunities to broaden existing relationships.

Overall, we completed our 24th consecutive year of underwriting profit and topped $1 billion of gross written premium. We continue to build on a broad, diversified product portfolio and our narrow and deep talent base of underwriting and claim experts. We like established horses and experienced jockeys, who have been in this position before and have the confidence and steadiness to execute on a muddy track. We will continue to be prudent and purposeful. I want to thank all of our associate owners for delivering once again on differentiating performance this quarter and on another great year. Being different continues to work.

With that, operator, we can now open it up -- the call for questions.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] Our first question will come from Randy Binner with B. Riley FBR.

Randy Binner -- B. Riley FBR -- Analyst

Hey, good morning. Thanks. I wanted to ask about the bonus accrual that hit the corporate G&A line. If we were to expect a similar level of profitability in 2020, would we see a roughly similar level of accrual in the fourth quarter. I mean, is it driven by EPS or is there something else we should look at?

Todd W. Bryant -- Vice President, Chief Financial Officer

Hey, Randy, it's Todd. I think from the standpoint -- if you think in terms of -- if we were again at $6 roughly of comprehensive earnings, so if you think, where we're at from a combined ratio standpoint and those types of things, I think it's reasonable it'd be -- that it would be fairly similar. It's really -- it really is the larger driver of what's going on with those expenses.

Randy Binner -- B. Riley FBR -- Analyst

Okay. And then, continuing at the holding company level, what was the reason that the investment in Prime was higher on profitability this quarter?

Todd W. Bryant -- Vice President, Chief Financial Officer

Yeah. They -- Randy, Todd again. If you -- their growth has been significant. So, I mean, revenue is up considerably and net profits are nearly double what they were last year. That's what's going on there. Great year for Prime.

Randy Binner -- B. Riley FBR -- Analyst

Okay. And, I'm sorry, just what is it about their market that enabled them to double revs?

Todd W. Bryant -- Vice President, Chief Financial Officer

Yeah, I think there is a couple of things. I mean, I think they are seeing -- they are just seeing so much more opportunity from a rate standpoint and more distress business, I think, going their way.

Randy Binner -- B. Riley FBR -- Analyst

Okay.

Craig W. Kliethermes -- President and Chief Operating Officer

Yeah, this is -- Randy, this is Craig. I mean, their target is much more of a distressed business. I mean, we -- that's not something we necessarily target as ROI, but it is something that's a specific target of theirs, they are deemed to be the market of last resort.

Randy Binner -- B. Riley FBR -- Analyst

Okay. And then, speaking of markets of last resort or different markets, can you -- I missed it if you covered in your opening script, but can you discuss non-admitted submission activity and maybe quantify where that is relative to previous periods?

Craig W. Kliethermes -- President and Chief Operating Officer

Sure, Randy. This is Craig. I mean, we're seeing on our excess and surplus lines book of business which is about 30% of our overall portfolio, I mean, submissions are up, I'm going to say, 10% year-to-date and maybe a little more than that for the quarter, collectively, so that's what we're seeing in the E&S space. I mean, I actually, frankly, the -- our submissions are up even greater in some of our specialty admitted lines of business.

Randy Binner -- B. Riley FBR -- Analyst

And just -- I'll just do one more. With the executive products, is that a new category that you called out in casualty lines?

Craig W. Kliethermes -- President and Chief Operating Officer

I apologize. I know it's not very descriptive, but I mean, I think, that's how we define it in our K and Q, but it basically covers D&O and other management liability products, it could be fiduciary, fidelity, EPLI, some of our cyber is in there, but half of it is public and private D&O.

Randy Binner -- B. Riley FBR -- Analyst

Does that tend to focus on a smaller business like small and medium-size businesses or is it across the board?

Craig W. Kliethermes -- President and Chief Operating Officer

Well, it has both. Obviously, the public part of that is, obviously, bigger accounts. We, typically -- we play excess on most of those bigger accounts. That's I think where you're seeing the most disruption in the market right now is public D&O though.

Randy Binner -- B. Riley FBR -- Analyst

Okay, perfect. Thanks a lot.

Operator

Thank you. Our next question comes from Christopher Campbell with KBW.

Christopher Campbell -- KBW -- Analyst

Hi, good morning, gentlemen.

Craig W. Kliethermes -- President and Chief Operating Officer

Good morning.

Todd W. Bryant -- Vice President, Chief Financial Officer

Good morning.

Christopher Campbell -- KBW -- Analyst

I guess, first question is just in surety. It's like the second quarter we haven't seen any development. I guess, can you just give us color on what you're seeing in terms of the prior year loss activity in that line?

Todd W. Bryant -- Vice President, Chief Financial Officer

Hey, Chris. It's Todd. I mean, that can move up and down a little bit. I mean, I think full year, it's in the $7 million range. So, I don't know if there's anything particular to call out of. I mean, I think their current accident year loss ratio is very solid. So, I don't think there's anything particular or any conclusions to draw on a one or two-quarter basis, still very solid from a loss and combined ratio.

Christopher Campbell -- KBW -- Analyst

Okay, got it. Because I know -- I think, Craig had mentioned that you all were exiting some of the programs in there. And so, I didn't know if there was a potential that some of those could develop adversely.

Todd W. Bryant -- Vice President, Chief Financial Officer

No, I don't think the exited programs, we expect that at all.

Christopher Campbell -- KBW -- Analyst

Okay.

Todd W. Bryant -- Vice President, Chief Financial Officer

It wasn't due to loss performance.

Christopher Campbell -- KBW -- Analyst

Okay, got it. That's helpful. What was that due to, Todd?

Todd W. Bryant -- Vice President, Chief Financial Officer

Yeah, I don't know if there's anything specific that we would want to talk about. I mean, I think, it's an individual program with an individual relationship. I mean, it's a program actually that we feel pretty good about, so, from a product standpoint. So, we're working on some things in that area.

Christopher Campbell -- KBW -- Analyst

Okay. So, no broader trends that we would read through the rest of the book?

Todd W. Bryant -- Vice President, Chief Financial Officer

No, not at all.

Christopher Campbell -- KBW -- Analyst

Okay. Wonderful. And then, just one last one on the casualty reserves, which were obviously really strong this quarter. What accident years and lines are contributing the most to the strong releases in that segment?

Todd W. Bryant -- Vice President, Chief Financial Officer

Yeah. It is fairly widespread from a line standpoint. I mean, GL is certainly a decent amount. Transportation is more favorable [Indecipherable] the excess liability. I mean it is pretty broad, Randy, but -- and even from an accident year standpoint, I mean it's -- there is some in '13, '14, I mean, all the way through '17, a little bit in '18. It is for the shorter tail stuff, very broad.

Christopher Campbell -- KBW -- Analyst

Okay, great. Well, thanks for all the answers. Best of luck in 2020.

Todd W. Bryant -- Vice President, Chief Financial Officer

Thank you.

Craig W. Kliethermes -- President and Chief Operating Officer

Thanks, Chris.

Operator

Thank you. Our next question comes from Jeff Schmitt with William Blair.

Jeff Schmitt -- William Blair -- Analyst

Hi, good morning, everyone. Question on the construction book, which I think in the past you've said majority of the E&S book is in construction. Can you maybe discuss what you're seeing there, just in terms of loss activity and rate levels? I mean, how is that market looking?

Craig W. Kliethermes -- President and Chief Operating Officer

Sure, Jeff. This is Craig. I mean, construction -- we play in the construction space and the liability side, both on a admitted and the E&S basis, primary and excess. So, I mean, it does vary a little bit, and also geographically. I mean, on the primary business to start with, that's really a business that we acquired when we bought CBIC some years back and it's been more regionally focused and just happens to be that we've -- there's been some exits of some competitors in that space and it's created an opportunity for us within admitted, pretty much box underwritten product that we haven't loosened, same underwriter, same team. So, we feel like that's just an opportunity to take advantage of someone else's either misfortune or decision to exit.

As you move into the E&S space, I mean, primary construction business, it's still very, very competitive across the country, so on the E&S side, for the most part. And then excess, it really depends regionally. Some places, it's still competitive, although I think that we're able to get more rate then we have been in the past. Part of that, I think, is driven because excess, typically you're talking about $5 million limits, sometimes $10 million limits. So, what you're finding is any place where limits are required. Rate, you're getting -- people on the casualty space, they are having opportunities to raise rates, so that's where we're seeing our greatest opportunity for rate increases on excess business and the construction space.

Jeff Schmitt -- William Blair -- Analyst

Which regions is that more focused on?

Craig W. Kliethermes -- President and Chief Operating Officer

Well, I think it's -- I mean, I think we're seeing momentum broadly across the country, more recently, across the country. [Speech Overlap] metro areas are more difficult than then rural areas.

Jeff Schmitt -- William Blair -- Analyst

Okay. And then, just thinking about the books you moved out of, which were the healthcare facility and then I think some underperforming GL in REITs, have you completely exited there? I mean, should that not be a drag going forward or is there more to expect there?

Craig W. Kliethermes -- President and Chief Operating Officer

So, Jeff, we did have -- I mean, because we announced that we were exiting that business last year at the very beginning of the year, I think, it was during this call last year, but we were still in some of that for, I'll say, a couple of months, although it was declining fairly quickly. So, I mean, we might have a little bit of headwind, but it's not that big in next quarter, but after that, I think, it's pretty much gone.

Jeff Schmitt -- William Blair -- Analyst

Okay. And then, do you have much exposure in the habitational market?

Craig W. Kliethermes -- President and Chief Operating Officer

Jeff, we used to write a lot of habitational business and we couldn't figure out how to make money. So, we are not really a major player in habitational space, whether it be on admitted or excess or excess and surplus lines basis. Although, yeah, there's a big disruption there.

Jeff Schmitt -- William Blair -- Analyst

Yeah. Got it. Okay, thanks for the answers.

Craig W. Kliethermes -- President and Chief Operating Officer

Thank you.

Operator

Thank you. Our next question comes from Mark Dwelle with RBC Capital Markets. Mark. Your line is open, please make sure your phone is not on mute. Hearing no response, we'll move to the next. Our next question comes from Ron Bobman with Capital Returns.

Ron Bobman -- Capital Returns -- Analyst

Hi, good morning.

Craig W. Kliethermes -- President and Chief Operating Officer

Good morning.

Todd W. Bryant -- Vice President, Chief Financial Officer

Hey, Ron.

Ron Bobman -- Capital Returns -- Analyst

Could you expand on your comment about, I think, it was commercial auto struggled and I think you're referring to the top line in the quarter and what was the dynamic behind that?

Craig W. Kliethermes -- President and Chief Operating Officer

Ron, yeah, this is Craig. I mean, we write a little bigger accounts in that business. So, whether we write a few or we don't write a few, can move the top line a little bit. I mean, we're able to continue to get rate increases. I mean, we're in a fair number of broad, I'll say, classes of business there. So, we still see some competition from time to time, more than we want, or would like, but especially in the -- I'll say, in the truck space, it's still very, very competitive. And so, it could be a little lumpy, I guess, in that line. But I mean we feel good about the product line, bottom line was very good. The rate -- top line rate increases continue to be very good and I wouldn't necessarily read anything into a given quarter in that particular product.

Ron Bobman -- Capital Returns -- Analyst

Okay, thanks. Appreciate that.

Operator

Thank you. If there are no further questions, I will now turn the conference back to Mr. Jonathan Michael.

Jonathan E. Michael -- Chairman and Chief Executive Officer

Thank you and thanks for attending the call. It's a very satisfying year. Premiums advanced 8% to eclipse the $1 billion mark for the first time ever. So, 24th consecutive year of underwriting profitability. Combined ratio in the low-90s. 33% increase in book value per share to $1 billion [Phonetic] basically. I want to say a big thank you to all of our associates for delivering once again and a thank you to all of our stakeholders for continuing to hold us accountable and for having faith in our ability to deliver these results. Thanks again. We'll talk to you again after the first quarter.

Operator

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-888-203-1112 with an ID number of 5312523. [Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Aaron P. Diefenthaler -- Vice President, Chief Investment Officer, and Treasurer

Todd W. Bryant -- Vice President, Chief Financial Officer

Craig W. Kliethermes -- President and Chief Operating Officer

Jonathan E. Michael -- Chairman and Chief Executive Officer

Randy Binner -- B. Riley FBR -- Analyst

Christopher Campbell -- KBW -- Analyst

Jeff Schmitt -- William Blair -- Analyst

Ron Bobman -- Capital Returns -- Analyst

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