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RLI Corp (NYSE:RLI)
Q1 2021 Earnings Call
Apr 22, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to -- good day and welcome, ladies and gentlemen to the RLI Corporation's First Quarter Earnings Teleconference. [Operator Instructions]

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 in the Company's various SEC filings including the Annual Report on Form 10-K as supplemented in the Form 10-Q for quarterly period ending March 31, 2021, which should be reflected carefully.

The Company has filed a Form 8-K [Phonetic] 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 measured for financial results. RLI operations, 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 management believes these measures are useful engaging core operations, performance across reporting periods and may not be comparable to other company's definitions of operating earnings. The Form 8-K contains a reconciliation between operations 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, Chief Investment Officer and Treasurer, Mr. Aaron Diefenthaler. Please go ahead, sir.

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

Thanks, Casey. Good morning and welcome to RLI's first Quarter earnings call for 2021. Joining us today are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Todd Bryant, Chief Financial Officer.

As usual, Todd, will start off with financial details on the quarter. Craig will follow with some color on the product portfolio and market conditions. We can then open the call to questions, and Jon will close with some final thoughts. Todd?

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

Thanks, Aaron. And good morning, everyone. Yesterday, we reported first quarter operating earnings of $0.87 per share. The quarter's result reflects elevated winter storm losses which were more than offset by favorable benefits on prior year's loss reserves as well as improved current year casualty results. We achieved percent top line growth or 10% growth when adjusting the comparable quarter last year for premium returned to transportation insurers. As a reminder, at the onset of the pandemic, we helped our public auto insurers by adjusting or returning premium, which resulted in a $23 million decrease in our transportation business.

We believe adding the premium back when comparing to last year, provides a more accurate view on premium growth in the quarter. In total, we posted a 86.9 combined ratio. Investment income was down 7.6%, reflective of the decline in reinvestment rates during 2020. Unrealized gains on the equity portfolio are in stark contrast to unrealized losses experienced during the same period last year and serve the bolster net earnings this quarter. Additionally investee earnings advanced nicely to start the year which accrued to net earnings.

Craig will talk more about market conditions in a minute, but from a high level, all three segments experienced growth. Property led the way, up 31% as rates and market disruption continue to support growth. Reported casualty growth was plus 19% compared to last year. But as previously mentioned, we want to call out the comparative benefit from the $23 million public auto premium adjustment in the first quarter of last year. Adjusting last year's result for this amount casualty growth was fairly modest as was securities. From an underwriting perspective, this quarter's combined ratio of 86.9 compared to 92.0 a year ago.

Our loss ratio declined 5.6 points to 45.9 points despite a 7 point impact from winter storm, Uri, one of our largest winter or spring storm events experienced. Of the $16 million in net storm loss, $15 million was in the property segment and $1 million was in the casualty segment related to the property exposure in certain packaged coverages. Favorable reserve development was up notably compared to last year and was widespread across most products. As a reminder, in the first quarter of last year uncertainty around COVID influenced our approach the indications, we were seeing in prior year's reserves as well as specific COVID reserves we established on the current accident year.

In the first quarter of 2020, we recorded $5 million in COVID specific reserves, $2 million of property, and $3 million in casualty. On an underlying basis, if you exclude prior year reserve benefits, catastrophes and the aforementioned reserves established for COVID, our loss ratio is down in 2021. The casualty segment is influenced in this result and its underlying loss ratio was down about 3 points from the same period last year. An improving mix and modest reductions in loss booking ratios similar to what we discussed on our fourth quarter call have driven the improvement. From an overall COVID perspective, total reserves are largely unchanged from year end.

Moving to expenses. Our quarterly expense ratio increased 0.5 point to 41 [Phonetic]. In addition, general corporate expense was up $1.6 million. These increases are driven by amounts accrued for performance related incentive plans. The combination of significantly higher operating and net earnings given the relative equity portfolio performance, plus an improved combined ratio drove these metrics higher. Excluding incentive amounts, other operating expenses were flat.

Turning to investments. Risk assets continue to lead with positive returns in the quarter from both public equities and high yield credit. Additional investment grade bonds couldn't overcome higher yields and price declines offset the positive return from other assets. All in, our portfolio posted a 0.2% return for the first quarter and we are more than happy to trade a modest price decline in bonds for the opportunity to put operating cash flow to work at higher rates. Outside of the core portfolio, investee earnings were also a contributor in the quarter with Maui Jim and Prime each adding $3.7 million to the quarter's results. Prime continues to benefit from profitable growth and Maui Jim has rebounded nicely from a more difficult period in mid 2020. All in a very good quarter and solid start to the year.

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

Craig W. Kliethermes -- President and Chief Operating Officer

Thanks, Aaron and Todd, and good morning, everyone. As Todd mentioned, we're off to a running start to the year, reporting 87 combined ratio and 10% underlying growth in gross written premium. Very solid underwriting results despite the impact of winter storm Uri. The sub-90 combined ratio we achieved is a testament to our well-diversified portfolio of specialty products and the consistency of our disciplined underwriting approach. Top line growth was realized across all segments and in most of our products. Our rate achievement this quarter carried in lower beta, the highest were not quite as high, but the lows were not as low.

I would say it's a little too early to say whether the rates are plateauing in the most markets, but we continue to achieve rate increases at or above long-term loss costs across the majority of our portfolio. Our underwriting diet is well balanced in our palate remains refined as the competition is broadly moving toward acceptable rate levels in our chosen market. The most disrupted spaces for us remain catastrophe exposed property, excess casualty, executive products, commercial auto liability and marine.

Now onto some segment specific comments. In casualty, we report an outstanding 83 combined ratio and grew gross premiums 19%, 4% adjusted for transportation. As you may recall, the comparable quarter last year required a significant premium adjustment for inactive vehicles in our transportation product line. Also of note, our casualty segment as a significantly -- significant exposure to the construction industry and although this industry never completely shut down, we have observed some slowdown due to uncertainty related to both pandemic and resulting supply chain issues.

We were still able to achieve 8% rate increase in this segment overall, while account retentions are holding well. The casualty segment was led on the top line by our personal excess liability, executive products and transportation businesses which rebounded nicely. Underwriting profitability was led by our primary liability, personal excess liability, transportation, professional services liability and small package businesses. As mentioned earlier, we did see some moderating of rate increases for our public directors and officers product, but the rate increases were more widespread across the dozen or so products within our executive products portfolio. This business along with transportation and commercial excess liability, we're still able to achieve double-digit rate increases for the quarter.

Property segments top line grew 31% on a small underwriting loss as a result of the widespread winter storm, Uri. We achieved 10% rate for the segment overall. We continue to observe opportunities across all products in this segment. Our catastrophe businesses grew premium and rate at a double-digit pace. The size of the rate increases was a little off its peak in the last couple of quarters, but still above acceptable levels to assume the risk. Earthquake still seems a little more competitive than win mainly the result of demand versus excess supply, since significant earthquakes occur frequently and coverages sell them required for financing prices above a certain threshold or decline and property owners elect to self-insure.

We have room to grow our catastrophe exposures if the market continues to cooperate. Our marine business also continues to see profitable opportunities to grow because of the disruption at Lloyds and elsewhere. Emissions continue to increase significantly and we experienced top line growth of more than 25% on a very good underwriting results. I don't want to move on without giving a big mahalo to our Hawaii homeowners business which continues to grow at a double-digit pace and produces great results for our Company.

In surety, we grew top line 5% and achieved a 79 combined ratio. Another great underwriting results and hopefully some signs that the market is finally starting to come back to us. Larger losses have hit the industry causing competitors retrenchment and reinsurance capacity seems to be tightening for the first time in many years. We will continue to capitalize on the disruption, we are starting to observe. Most of our growth this quarter came from our commercial account driven business, which saw both new business opportunities as well as expansion with existing accounts. All products in this segment were profitable. We will continue to focus on building relationships, consistent underwriting servicing our distribution partners and customers and investing in technology to make it easier for our customers to work with us.

Overall, the solid start to 2021, we remain well positioned for the future and we'll focus on what we do well, adapt to our environment, stay true to what makes us different and execute. We create our own opportunities with our investment in people, service, and technology and we will take advantage of new opportunities when our competitors retrench and market disruption occurs. We are constantly looking for ways to provide profitable solutions to meet the needs of our customers and distribution partners. This is what we do. It is what owners do. Our success can be attributed directly to the quality of the associate owners we hire and the service they provide and the relationships they build with our customers. Our differentiated approach delivered again this quarter.

Thank you. And I'll turn it back to the moderator to open up for questions.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] And we'll take our first question from Randy Binner. Please go ahead, sir.

Randy Binner -- B. Riley FBR -- Analyst

Hi, good morning. Thanks. I have a couple quantification questions. I guess the first is on the commentary around adding back in transportation book premiums. I apologize if I missed it, was there -- was there a quantification of that. So we can get a more normalized growth rate in casualty?

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

Randy, this is Todd, there was, it's $23 million. If you look to the -- adding that back to where the negative premium we produced in the first quarter of last year for transportation was $23 million.

Randy Binner -- B. Riley FBR -- Analyst

Okay. And for 1 -- compared to 1Q '20.

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

Correct, yeah. Add that amount back to where we ended either in transportation, really in casualty in total, if you add that back to last year, then that will get to that 10% overall growth versus '20.

Randy Binner -- B. Riley FBR -- Analyst

Got it. And then -- on Craig's comment that your rate increase was lower, beta, I guess, did you -- did you provide actually a number that, kind of an absolute number of what blended overall rate increase was?

Craig W. Kliethermes -- President and Chief Operating Officer

Well, I'm sure we disclosed last quarter, what the rate increase was by segment in that -- so, I mean I'm happy to say that, I mean, I guess last quarter for casualty, overall, I think we had 11% in the quarter. I think, we had 8% this quarter. I mean I wouldn't get too caught up, because there's obviously -- we're relatively small or medium sized players. So, and we're not necessarily a bellwether for the whole industry. So that's why I want to caution against, and we have a little bit of volatility as numbers bounce around. I'm not sure that's a trend or not. On the property side, we reported 10% rate increase this quarter and I believe, for the 11% last quarter. So I mean you could say it's down but 1 point, I don't know, if that -- that could be within...

Randy Binner -- B. Riley FBR -- Analyst

No, I mean I think -- yeah, I think that some of the data earlier this earning season was maybe past peak, but kind of too early to tell, but it's still very good rate versus loss cost trend. And I guess if you could just expand a little bit on what made it lower beta. I think that would be helpful.

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

Sure. I mean I did talked a little bit in the casualty segment, for example, the public D&O business, I mean it's unlike it's third straight year of double-digit rate increases that up from, I won't soften that's too strong word. I mean that we still got a double-digit rate increase that they just weren't quite of the size, they were before. So that when they way in the average, it takes down the overall average for that business, but we did get more widespread rate increases in the executive products group like within cyber, some of the private D&O, EPLI that's in there. That -- those rates actually increase that didn't quite offset the public D&O, decrease but less of an increase. So there is an area, transportation was relatively flat. So that was probably the biggest driver in the casualty part of that. And then on the property, I think, I mean some of the cat business again was getting it was off about this. I think the third straight year roughly that we are getting double-digit increases. So the increase aren't quite as large, but there is still double-digit increases in both wind and quake. So that brought that.

Randy Binner -- B. Riley FBR -- Analyst

Got it, got it. Okay, I'll leave it there. Thank you.

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

Yeah. Thanks, Randy.

Operator

Thank you. And we will take our next question from Derek Hagen [Phonetic].

Derek Hagen -- Analyst

Good morning. Thanks for taking my question. Couple of quick ones. How are you thinking about the short-term loss trends during the unprecedented economic recovery? And on a related note, aside from monitoring actuarial claims, what are some of the data points or metrics that you look to, to kind of determine whether the impressive top line growth that you've had is sustainable?

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

Derek, this is, Todd, I'll start out. I mean, as far as your first part of the question there on the short-term trends, I guess I would just in how we considered, I would just say we don't. On the actuarial side, and Craig can certainly comment further, but on the actuarial view, the reserving view, and we talked about this often. We are taking a longer-term loss costs trend approach, because I think we talked about it last year too, whether it was frequency down or whatever it may be, we discount that.

I think we think it's prudent to take a long-term loss cost trend approach, and to the extent that the rate that we're getting is above long-term loss cost trend, you would expect to see some modest benefit in the loss ratio. But we really discount those shorter-term trends.

Craig W. Kliethermes -- President and Chief Operating Officer

I guess, I mean, on top of that, and as Todd said, those longer-term trends, the way we book things is certainly the way we've always approached things and we continue to approach those. And I think I made a comment that we believe our rate was an excess of the long-term trends that we see both in the property and casualty business.

I mean, as far as long-term growth or intermediate term growth, I mean, we insure the economy. I mean, if the economy reboots, and there's a lot of good signs that it's coming back, I think that's a positive sign. As the pie gets bigger, and there's more opportunities to insure so you don't end up fighting with each other over stuff. You've seen, I think there's some opportunity just with existing clients, as the exposure basis start to increase.

We've had several of our clients become more cautious and reserved in regards to their estimates, and kind of infer that from one of my comments about the construction industry. We're definitely seeing much more caution around their estimates of revenue, because of the pandemic. I mean, those are auditable policies for the most part. So if they end up, the economy comes in better, we'll end up getting some audit premium and may not come till next year. But we will realize that audit premiums, so that's a very positive.

Obviously, if there's an infrastructure bill, I think it will help give them a third of our businesses in the construction industry. We don't do a lot of roads and bridges across the whole portfolio, but we do a lot of other public construction. So that could be helpful.

And any disruption in the market, we constantly continue to monitor disruption and the tightening of capacity, tightening of the reinsurance capacity, especially among our competitors, or I'll say the less disciplined underwriters, that gives us an opportunity as the rates come to our acceptable levels to see more opportunities. So, I mean, we look at submission flow, which continues to be good, but it's not up everywhere. But we do see good submission flow, very good retention of our accounts, is something we're watching. And if we retain accounts who have lowered their exposure base, and then obviously the economy comes back, there's going to be opportunity for growth with existing clients, which we like the best, because those are clients we already know, typically produce positive results for us, and value us.

Derek Hagen -- Analyst

That's very helpful. And my second question is, you have some large reserve releases in the casualty segment, what accident years drove that?

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

Derek, it's Todd. It's fairly widespread. I mean, I think you'll look you know, 17 to 20, you're going to have some a little bit earlier than that in spots. But, 18 to 20 on several, some 17, so it's fairly widespread. GL was a product that was fairly large in the quarter. It was probably more 17, 18. Transportation was larger. Small commercial was larger. Puf [Phonetic] was larger on a relative basis. It was pretty widespread.

Derek Hagen -- Analyst

Okay. Thank you for all the answers.

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

Thanks, Derek.

Operator

Thank you. [Operator Instructions] We'll take our next question for Mark Dwelle. Please go ahead, sir.

Mark Dwelle -- RBC Capital Markets -- Analyst

Yeah, good morning. I'm glad to see RLI continues to set a high standard. You're the first insurance company to ever use the word mahalo on earnings calls. So kudos for that. On to my questions. First of all, it's just a numbers question. I just, maybe I've even asked this before. But in your press release, at the top of the press release, you say catastrophe losses were -- reserve releases were $31 million. And then on the table down below, if you sum all the buy lines, that totals up to $37 million. What's the difference between those?

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

Mark, it's Todd. If you look at in that table it was a new addition, although those would have been in our queue, you would have the similar type thing. We're showing the net in the bullet, right. It's the net increase, total increase to underwriting income. So there will be expense impact, those types of things that will offset the total release. So we're trying to give you both pictures, one is a pure, EPS if you will net underwriting impact, and then the table breaks up the pure loss impact.

Mark Dwelle -- RBC Capital Markets -- Analyst

Got it. That makes sense. Okay, because you reconciled that in the past that there's been expense aspects to it. And so this kind of clear isolates the loss ratio impact, from the total EPS intact effectively.

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

Yeah, something we had done. We've broken those out in the queue, but there's been some requests to have this broken out in the release. And so we added that table.

Mark Dwelle -- RBC Capital Markets -- Analyst

Got it. Okay. Thank you. The second question that I had on really just, I guess it relates to maybe some of the comments, the operating comments. I think it's correct, whether it's unclear whether pricing is peaked or is near peak or whatever. I guess the question I would like to ask is, are you seeing any change in competitive behavior? Are there people that seemed to be moving from, I'm going to say a more price first and growth second approach to maybe a more broader interest in growth, maybe more competitive quotes, fewer changes in terms and conditions what have you. Just trying to kind of drill down on to maybe some of the competitive dynamics.

Craig W. Kliethermes -- President and Chief Operating Officer

Yeah, Mark, this is Craig. I mean, it's very difficult for us to see through to I mean, obviously, we have much deeper knowledge of our own business than our competitors. And, it is well harder for us because in every one of our businesses speak our diversification, but almost every one of our businesses, if I list their top five competitors are different. So, I mean, all I can say is there's still some capacity for MGAs. We don't do really that business, but that we still see from time-to-time people giving the pen the MGAs, which we still like confounders a bit in this marketplace. But I mean, obviously, we would rather bet on our own people, own experienced talent.

I mean, from a terms and conditions standpoint, I mean, we are seeing some, I think I'll say some hardening in the property side. We're not really seeing in the casualty side, but we've always felt like we've had the tightest terms in the casualty side in the market anyway. So, people are coming a little bit closer to our standards in regards to that. But certainly on property, we're seeing some stuff, deductibles going up, minimum premium going up. People insisting on ACV versus replacement costs, coinsurance requirements. I mean, a general acceptance from the brokers that we're going to get better valuations on the properties that we write, which I mean, that bleeds into maybe something you were talking about is where you actually get acceptance from brokers to get more information. That's a good sign. I mean, normally, they take the path of least resistance. So asking for that almost puts you on the list over there, as you know, last resort, I'm only going to you unless if I can't find placements elsewhere.

So, I don't know, if I've answered your question effectively. But I mean, I certainly see movement from folks, people that I'll say get burned or whatever, don't have good results. They always tighten, but it's a little different by every product line. I mean, I'm not going to say we have people that are super aggressive anymore in most of our spaces, that's good. I mean, we always like competing with responsible competition. I mean, we invite responsible competition. So we live in a cap, someone that likes a certain class of business better than us and will price it better. They probably understand it better enough know how to handle claims better, so be it, we'd rather focus on the things we understand, we know. We think we can deliver a mutual beneficiary relationship. So, again, hopefully I answered your question.

Mark Dwelle -- RBC Capital Markets -- Analyst

That covers it quite thoroughly. That's all my questions. Mahalo.

Craig W. Kliethermes -- President and Chief Operating Officer

Mahalo.

Operator

Thank you. And we will take our next question from Matt Carletti.

Matt Carletti -- JMP Securities -- Analyst

Hey, good morning. Hoping you could just peel back the onion a little bit on the winter storm Uri losses. I mean, it was a modest number for obviously, a very big industry event, but just curious if there's lessons learned from even just kind of, I assume a lot of that's Texas, but even kind of geography within Texas? Or if anything, COVID-related might have exacerbated that loss. And I'm thinking there is, you know, kind of empty properties that, takes a little longer to find out the pipes froze things like that?

Craig W. Kliethermes -- President and Chief Operating Officer

You know, the most interesting thing I found out is, you know, in Texas, they don't have shut off valves, as many of them in buildings as we do, where we were. So I think that was. I mean, I don't think there was anything COVID-related that we had challenges with. I mean, we've dealt with Hurricane since COVID. We've done an exceptional job or playing people have been willing to get out and service our customers and get them back and going. We did the same thing here.

I think the biggest challenge is it was widespread, right, in a hurricane, even in a hurricane, which is more broad, then something than a tornado. The area is somewhat contained, but this cover multiple states, six or seven states. I believe it was a little more challenging. And it varied a lot by class of business. But we did find the shut-off valves were not as prevalent in Texas as they are in other places. So...

Matt Carletti -- JMP Securities -- Analyst

Interesting. Things we take for granted.

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

Yeah. Yeah. So Matt, just one other, to Craig's point, right, that was very widespread. I mean, what to me is interesting is really outside of Uri, but we didn't have any other winter storm losses. So property was -- really had a great quarter kind of ex-Uri from that standpoint.

Matt Carletti -- JMP Securities -- Analyst

No, good point. Great. Well, thank you for the color and nice quarter. Best of luck going forward.

Craig W. Kliethermes -- President and Chief Operating Officer

Thanks, Matt.

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

Thanks, Matt.

Operator

And we currently have no further questions. So I'll be turning the conference back over to Jonathan Michael.

Jonathan E. Michael -- Chairman and Chief Executive Officer

Thank you. Very satisfying start for the year. Premiums were up. We're getting rates, sub 87 combined ratio. We produced $0.87 per share operating earnings. That's a significant beat over consensus estimates. And I'll just use the words thank you, and we'll talk to you next quarter.

Craig W. Kliethermes -- President and Chief Operating Officer

Mahalo.

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 ID of 9180220. This concludes today's teleconference. Thank you for participating. Have a wonderful day. All parties may now disconnect.

Duration: 31 minutes

Call participants:

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

Todd W. Bryant -- Vice President and 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

Derek Hagen -- Analyst

Mark Dwelle -- RBC Capital Markets -- Analyst

Matt Carletti -- JMP Securities -- Analyst

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