RLI
#Thanks, <UNK>, and good morning everyone.
I feel a bit like a broken record with these opening comments, which speaks to our consistency.
But nonetheless, we are pleased to report a good start to the year with these first-quarter results.
Starting with a combined ratio, we achieved an 88 in the quarter, modestly better than last year.
Underwriting income was positively impacted from payroll loss reserve development.
In this case $11 million coming out of the Casualty segment.
As a reminder, during the first quarter we do not perform a full actuarial loss reserve study.
Total gross written premiums was up 3% in the quarter.
Casualty, our largest segment, turned in an impressive 9% growth rate on the strength of a number of different products, including some recent product launches.
Surety was up 7%, continued a very nice run of growth over the last several years.
Property, however was down 13%.
Excluding the discontinued crop and facultative reinsurance of business that we previously reported, the segment was down 7%.
Which is attributable mostly to continued soft market conditions in catastrophe exposed areas.
Each segment turned attractive combined ratios: casualty at a 92, property at an 84, and surety at an 80 combined ratio.
Again, pretty good result leading to the aforementioned 88 overall combined ratio.
Turning to investments.
The first quarter was a good one, with a 3.2% total return.
Our equity portfolio was a strong contributer.
It was up 5.7%, result helped by our overweight utility stocks.
The bond portfolio also posted a positive total return, up 2.6% in the quarter.
And although pretax investment income was down a slight 1%, it was actually up 0.6% on an after-tax basis.
As our allocation to municipal bonds increased compared to the same period last year.
With regard to our minority investments, Maui Jim turned in a slightly lower earnings while net sales continue to grow modestly.
Foreign exchange impacts and ramp up in marketing expenditures served to depress earnings slightly.
Our other minority investment Prime Insurance, was basically flat in the quarter, compared to first-quarter 2015.
All in all, with strong underwriting and investment performance driving our results, book value per share was up 7% in the first quarter inclusive of dividends.
And now with that, I'll turn the call over to <UNK> <UNK>.
<UNK>.
Thanks, <UNK>.
And good morning everyone.
As <UNK> mentioned, we're off to a very solid start to 2016.
Gross and net written premium growth both up 3%.
Removing the impact of crop and the facultative reinsurance business that we exited last year, we were up 5%.
So our core portfolio is on a good trajectory in a challenging market.
At the same time, we were able to deliver another sub 90 combined ratio quarter.
It is not getting easier, but there are still opportunities for the skilled fisherman who know where to cast their line.
Let me provide some more detail by segment.
In casualty, gross written premium was up 9% in the quarter and posted a 92 combined ratio.
We continue to find opportunities both in our established products and within many that we have started in the last several years.
Our excess liability, transportation, and package businesses continue to grow at a double-digit pace.
Transportation and excess liability continue to be a supply side phenomenon.
With many companies suffering very poor results in retrenching or [pulling] MGA contracts.
Most of our package growth has come from expansion of distribution and share of wallet initiatives.
The opportunities are not across the board.
There are differences both geographically and within sub class.
In this market, it takes seasoned underwriting and outstanding claim people to differentiate selection, pick the right spots, and weather the storm.
We continue to invest in new people and new products across our casualty segment.
And we are working hard to get more products online and to scale.
Rate increases are very difficult to come by.
We see casualty rates as flat overall.
But we continue to see positive rate on most wheels-based business, and in [smaller count] professional liability space.
However, we are having to give back a fair amount of rate in primary general liability and larger D&O risk to remain competitive.
Our property segment was down 13% while reporting an 84 combined ratio.
As <UNK> mentioned, after taking out the impact of exited products we were still down 7%.
A lot of this is price driven, as we see rates in cat exposed businesses continue to slide at a double-digit pace.
Rate levels are at about 60% of what they were in 2013 for cat business.
We have lost out on many accounts as rates we believe to be priced at or below expected loss cost.
So the margins in this business have gotten much thinner.
Declining reinsurance rates and a better spread of risk have helped us take some of the pressure off our returns in the bottom line.
But this is not a growth business for us until the underlying economics change.
Meanwhile, we will continue to provide capacity to our best accounts and brokers where we still have an opportunity to make a profit.
Also putting pressure on the top line for the quarter was Marine, and our recreational vehicle products.
We have been able to achieve some positive rate in both of these businesses, but the growth has been elusive as a result.
The declining top line in property has caused some deterioration in the margins.
And resulted in higher expense ratios for the segment.
Our Surety segment continues to grow profitably.
We were up 7% in premium and posted an 80 combined ratio.
Our long-term presence, relationships, and consistent predictable risk appetite are a big advantage for us in this segment.
Surety was led by our miscellaneous product, which grew at a double-digit pace.
These are typically very small bonds where ease of doing business is a critical differentiator.
On the larger surety risk, we see an abundance of less refined competition.
Although results have been good for the industry, we see storms on the horizon for those who view this as loss-free business.
Surety is very specialized.
Hope and luck are not a good long-term strategy.
The odds will eventually catch up with those offering up loose credit and other terms.
Our narrow and deep surety expertise and hallmark discipline should serve us well in the short and long term.
Overall, we had a very solid quarter.
I want to thank and congratulate the RLI Associates for being different.
Their drive, their discipline, and our diversified portfolio of products delivered again this quarter.
I'll turn it back to <UNK> to open it up for questions.
Thanks <UNK>.
We can now open the call for questions.
Yes, this is <UNK> <UNK>, <UNK>.
We've added about a half a dozen products or so that have generated premium to date.
And a few of those have been smaller teams or smaller, mostly individuals, as opposed to teams that have started up products, whether it be in healthcare, miscellaneous professional, in our D&O space.
We've added quite a view in our E&S space, but we really haven't gotten those products up online quite yet
I think it's both.
I think there are some places where we are getting rate where it is needed.
And I think that's probably true of a good part of the industry, because I know the commercial auto and personal auto space in particular.
You guys all have seen they both have not been that good.
So, some of that rate is needed and then I think we've also found some opportunity where rate is, I'll say just available or available to us in a specialized niche.
And today, that's probably more true of our transportation business for us in particular.
Thank you.
<UNK> this is <UNK> again.
I think that we would say, and our underwriters would say that during 2011, 2012, 2013 that may be a lot of our competitors lost their way in regards to price.
They dropped price to either maintain market share or to grow market share.
At that time, at least in the early part of those years we were pretty steadfast in regards to what we were willing to charge for given risk.
So we weren't growing much in the 2011, 2012 timeframe.
And we have been able to take the opportunity in 2013, 2014, 2015.
In regards to current price adequacy, I think it varies risk by risk.
And I'll say class by class.
In the classes that we particularly participate in, in transportation, we feel good about certainly the risks that are in our portfolio.
That they're priced well.
But there are still a lot more room we think out there for pricing action in that space.
It's definitely more rational because we have people either exiting, leaving, pulling [NGA] contracts, or getting substantial price.
I think the people in the transportation space ---+ particularly in public transportation space, a lot of people have their results of been very poor.
And I think they're not fooling themselves anymore.
And they're getting significant price, probably double-digit increases.
And they're willing to let the business walk away now they're letting the business walk away if they are not able to get the price.
Is difficult for us to say.
We hope it's going to continue for a while.
It'll create an opportunity for us.
A lot of it is the same competitors that we've had in the past.
It's just that they have backed it with alternative capital or they backed it with re-insurers who are [letting] it off to alternative capital who are willing to take a lower return.
The one thing we have seen more recently, which is even more concerning I think is we've even started seeing some packaging within the E&S space of the cat risk and liability.
We knew this was happening, and it happens quite frequently in the admitted space.
When we run into admitted competition, but now we've seen a few on the E&S side starting to package the liability and that cat risk with the package.
They are offering both coverages.
Well they're offering both coverage.
It's both are doing it through an MGA.
So the MGA might have admitted paper as well but they're selling both products to the same customer base.
Right.
We don't write a lot of that stuff so ours is very specialized.
We're seeing rate pretty much across the board in that space.
For transportation, typically we prefer to write the $1 million primary, but we write excess as well up to $5 million $6 million.
Most trucks buy $2 million worth of coverage.
There's both a primary policy and usually some type of umbrella or excess policy attached to it.
Apart from transportation.
Obviously, we're seeing growth in the excess liability for the transportation segment as well as the primary.
But we also saw an excess liability product in our E&S space that mostly for contractors that continues to find opportunity.
We always see competition, and new people that come in and think they can be smarter than the last guy, but lost money because they think the rates are a little better.
But, I think you need to be a specialist in that space to make money across all markets.
And we see a lot of people that can fool themselves.
I can not tell you why in wheels-based business because it's not a particularly long tail line for casualties.
So it comes back to bite people fairly quickly.
But, for some reason people continuously get burned, they get out for a brief period of time.
And then their MGA finds a new market, or we'll find a new entrant to compete with unfortunately.
<UNK>, good morning, it's <UNK> <UNK>.
Your memory is correct from last quarter.
We still do have a carryover effect of crop as we said earlier.
That was between crop in the factory that was about half of the decline in the premium for the quarter.
And obviously those had lower expense ratios.
The other, I think as we said last meeting was we've got entrenched.
We like the business, we like our underwriters and if and when that market turns as <UNK> was talking about, we would be in a vantage point where we can capitalize on that and maintain it.
Said differently you don't want to be the one hiring underwriters and miss the opportunity.
As we said before we thought we'd have $8 million to $10 million of crop and we're currently about $2 million into it.
So we'll see this running through the next couple of quarters.
And fact will trickle in a little more evenly over that timeframe.
Two things <UNK>.
You're right, equities had a pretty significant uptick.
Obviously, it was first two months of the quarter were not so good as we all know.
March turned around for the quarter.
As a component of that, the utility sector helped [form] that.
But the fixed income also had a pretty good run, with the decline of interest rates.
So, all in those are ---+ the two drivers would be the fixed income as well as the equity coupled with the earnings for the quarter.
<UNK>, we do.
As we said before it is relative book, like you said it's in the neighbor of about 50% of equity.
If you look at the overall allocation of the investment portfolio, historically it's been about 80% fixed income 20% equities.
And that will vary between mid-to upper teens to low 20% for the equities.
It is a very value oriented strategy with a leaning towards dividend paying positions.
And with the value of oriented strategies being a little more favorable in Q1, certainly benefited.
You're welcome.
Thank you all for joining us this quarter.
It was another good quarter for us.
88 combined ratio, 3% top line growth, in this market I'd call that good.
And our underwriters, as <UNK> said, they're good fisherman.
So we will expect to continue to be disciplined as we move forward in this market.
Thanks again and will talk to you again next quarter.
