Good morning and welcome, ladiesand gentlemen, to the RLI Corporation fourth quarter earnings teleconferencecall. (Operator Instructions). Before we get started, let meremind everyone that through the course of the teleconference RLI managementmay make comments that reflect their intentions, beliefs and expectations forthe future. As always, these forward-looking statements are subject to certainrisk factors, which could cause actual results to differ materially. These risk factors are listed inthe company's various SEC filings including in the Annual Form 10-K, whichshould be reviewed carefully. The company has filed a Form 8-K with theSecurities and Exchange Commission that contains the press release announcingthird quarter results. RLI's management may make referenceduring the call to operating earnings and earnings per share from operations,which are non-GAAP measures of financial results. RLI's operating earnings andearnings per share from operations consist of net earnings after theelimination of after-tax realized investment gains or losses. RLI's management believes thismeasure is useful in gauging core operating performance across reportingperiods, but may not be comparable to other company's definitions of operatingearnings. The Form 8-K contains reconciliation between operating earnings andnet earnings. The Form 8-K and press release are available at the company'swebsite at www.rlicorp.com. At the request of the company, wewill open the conference up for questions and answers following the presentation.I will now turn the conference over to RLI's Treasurer, Mr. John Robison.Please go ahead, sir.

Thank you. Good morning toeveryone. Welcome to the RLI earnings teleconference for the fourth quarter of2007. Joining me for today's call are Jon Michael, President and CEO of RLICorp.; Joe Dondanville, Senior Vice President and Chief Financial Officer; andMike Stone, President and Chief Operating Officer of RLI Insurance Company. We will conduct this call as wehave in the past quarters. I'll give a brief review of the financial highlights,and then Mike Stone will talk about the quarter's operations. We'll then openthe call up to questions, and Jon Michael will finish up with some closingcomments. I am pleased to report record annualoperating earnings of $157 million or $6.52 per share. The combined ratio for2007 was 71.4. Included in the results this year was favorable loss developmenton prior years' reserves of $89.5 million or $2.41 per share. In the fourth quarter, we've reported$28.3 million in operating earnings or $1.22 per share. The combined ratio forthe fourth quarter was 81.7. Included in these results was favorable lossdevelopment in the quarter of $7.7 million or $0.21 per share. Turning to investments, investmentincome grew 10.6% for the year to $78.9 million. Throughout the year, weallocated cash to our new asset class of preferred stocks, which enhanced ourinvestment income. Our fixed income portfolio has duration of approximately 4.2years and maintains a AAA overall rating. A timely topic in today'senvironment is subprime. We review our portfolio in two main areas to assess oursubprime investment exposure: bonds and equities. Our direct exposure tosubprime and mortgage products is less than $10 million. Of this $10 millionall are rated AAA, and have been paying as agreed. All of these are fixed rate instrumentswith no interest rate reset and were issued prior to 2005 and are not currentlyon watch from any rating agency. As a highly profitable insurance company,we have a fair amount allocated to municipal bond securities, 25% of ourportfolio or $473 million. Roughly 70% of these bonds are insured bytraditional monoline insurers. We would prefer buying municipal bonds withoutthis wrapped insurance, but in the marketplace dominated by insured issuancethis will be difficult to do. The underlying credit without thewrap insurance is A rated or better. We believe this portfolio is high quality anddo not believe the insurance is necessary to own these securities. From an insurance standpoint, wehave two product segments with subprime exposure: Surety and Executive productsor D&O. It should be noted that our exposure to subprime in these productsis minimal. Turning to our share repurchaseprogram. During the quarter, we repurchased approximately 1.2 million shares ofRLI stock at an average cost of $58.27. For the year, we repurchasedapproximately 2.3 million shares at an average cost of $58 for $133.3 million.We have $85.7 million remaining to purchase from the $200 million repurchaseprogram approved in 2007. For the operations highlight, Iwill now turn the call over to Mike Stone. Mike?

Thanks, Jon. Good morning,everybody. Another good underwriting quarter and another good underwriting yearcombined ratio of 82 and 72, respectively. Good news, the market is soft, butas I've said in the recent past, we're coming off very robust pricing, and alsowe have a very diverse product mix, number of products less susceptible to thesoftening, for example, our Personal Umbrella product, our Surety products. Really it's the E&S marketplace,excess and surplus lines marketplace where the real price declines lie, withstandard companies invading our space, this is like most cycles, we are there. Also,as you know, our model rewards profit, not volume. With prices under thispressure, selection becomes more important, and the quality of the underwritersis paramount. Now, let's talk a little bitabout our segments. In the Surety side, it is a really good story. Grosswritten premium is up 9% in the quarter, 6% for the year. Less price sensitive,as I mentioned earlier. Although some terms, conditions are under pressure, forexample; credit being branded a little more liberally by some. Less collateralrequired, some personal indemnity not being required. But overall, the Surety segmentis in good shape. Jon did mention the surety areas where you could have someexposure to subprime. We have very little exposure, we wrote small, a few smallbonds on some very small mortgage brokers. So far, we don't expect any loss outof that. In the Property segment, we wereup 4% in the quarter, down 8% for the year. While the gross written premium forthe quarter is driven in large part by our Marine growth. As we build out that Marineproduct, we would expect the comparisons quarter-over-quarter to be fairly goodas we build out that footprint. In the E&S Property side, thatwas where rates were under pressure. The fire business was off around 5% in thequarter. But that's been coming of less…

Thanks Mike. We'll now open thecall up to questions.

(Operator Instructions). And we goto Charlie Gates with Credit Suisse.

Hi, good morning.

Good morning.

My first question, could one of youelaborate on to what extent you see standard mortgage companies seeking towrite excess and surplus lines risks?

Well, Charlie, it's Mike Stone. Imentioned it briefly. What you start to see, if that cycle goes to thesoftening side is the standard line companies start to invade what's typicallyE&S space. As you know, Charlie, there is a grey area there that sort ofgoes back and forth, but the standard companies certainly are in our what wouldbe typical E&S space, both in our casualty products that are primaryliability commercial umbrella, and the property products, the cat-exposedbusiness, as well as, the surplus lines of our business. So they are there.

Would it be materially greaterthan say what occurred 12 months ago?

Charlie, it's a little difficultto explicitly quantify that, but I think our sense is the answer is it iscertainly greater than it was a year ago.

My second question. What givesyou confidence that pricing may begin to stabilize in 2008?

Well, it's Mike Stone again.Charlie, because I'm a confident guy, I've got a bit of optimism there. I thinkwe're coming off of some fairly steep declines. The fourth quarter tends to bethe worst. I think we'll see things, marginally improve, we are in a softmarket, it's not -- absent some event, or some pain, or some significantreduction of capacity. The rates are not going to firm at any point in time.But I think the decline will start to lessen as the year progresses.

And that would be because of themagnitude of underwriting losses that others would be shouldering?

Well, I think, a number ofthings. I think rates have declined fairly rapidly over the past 12 months. So,I don't expect that level of declination to continue, or yes, you're right. Wewill start seeing significant underwriting losses at some point. But rememberon the casualty business, it can be a while. Again I think information isbetter than it's been in the past. I think management has that information onpricing. They are seeing the price level declines, the trends, and I wouldexpect that unless they've got a different way of looking at things, that theyall see that these price declines can't continue.

Are your casualty policies claimsmade, or occurrence?

Well, Charlie, it sort ofdepends. Our E&S products, the general liability, the commercial umbrellaare occurrence as a rule. The executive products are claims made. So,significantly more occurrence than claims made.

My final question is anaccounting question. In the income statement for the company, it shows an othercomprehensive loss during the period, net of tax, of $5 million, what is thatfrom?

That's from the investmentportfolio.

What portion of the investmentportfolio would have driven that?

Could have been the equities.

Bonds rallied in the fourthquarter and equity sold off.

Right. So in comprehensiveearnings, it's the change in the unrealized portion of the investment portfoliothat does not run through realized gains and losses above, in the net earnings.

Thank you.

(Operator Instructions). MichaelGrasher with Piper Jaffray.

Thank you. Good morning,congratulations on a great year.

Thanks Michael.

You continue to generate excesscapital here. Can you talk about how you plan to deploy that excess capital aswe move forward here in '08?

Yes, Michael, Jon Michael here.We will continue to search for ways to deploy that capital and as we've said inthe past, if we find that we cannot deploy it, don't need it, we will returnit. That's been our policy in terms of managing our capital for years, and wehave proven it by having stock repurchases and continue to. But we areaggressively searching for ways to deploy capital.

Has there been any change in thatlandscape in terms -- I guess if you were talking about an acquisition in termsof the pricing, and then if you are looking for teams, are there more teamsfloating around now because we are in a softer end market environment?

We've seen more activity in termsof looking at different, say team opportunities. On the acquisition side, Ithink you all know that it appears that the pricing for, say an insurancecompany acquisition, that pricing has come down as there has been some erosionin the sector over the last 12 months in terms of price and so that's true. Andit's all relative when you are looking at these models and are trying todetermine what an entity would be worth and it's based upon obviously what youare paying for it and what kind of returns you are going to get. So, that'ssort of relative. But yeah, there has been some price reduction.

Okay

In other words, in a soft marketyou probably pay significantly less for a company than you're going to pay atthe beginning of a hard market, and we're in the throes of a soft market.

Okay thanks for that, and thenhow do we think about your business lines if the macro environment, the macroeconomic picture is one of the slowing economy for 2008? I recognize you'resuggesting and thinking that maybe rates are going to be finally flatteningyear-over-year. So that's rates, but what about business activity itself? Areyou budgeting or thinking that your lines of business actually may slow?

It's Mike Stone. Yes, we are.Certainly, in the Surety segment we will come under a bit of pressure there,though our Surety segment is fairly diverse, but certainly as the economy slowsthere is going to be less need for some of our products, but remember we'repretty small. We can make a bit of penetration and overcome that. Certainly inour primary liability, where we write quite a few contractors as the economyslows you'll see less development. So that will be under a bit of pressure aswell. So we would expect that that will certainly have an impact on us overallin '08. And again on the price declines, I think this the rate of decline thatI think is going to slow -- I am not going to predict if they are going toflatten, but…

Okay, that's fair. And then isthere any way to gauge, I mean, percent-wise as to what you are anticipatingfor each of your segments in terms of the new business production?

Yeah. Relative to the past, Iwould suspect that our new business production will be down a bit. Our retentionswill probably be down a bit on order of magnitude of about 5% on our casualtyproducts, probably a little bit more on the property side.

Okay. That's helpful. And thenone final question. I think Jon, mentioned earlier about the exposure in theportfolio on subprime less than $10 million. And you spoke for a brief bit onthe muni bond aspects or the insurance. How about CDOs, do you have anyexposure at all to CDOs in your portfolio?

The ones I talked about the sub,we have about that $10 million in CDOs that we would classify. But it's not --we have very little exposure in the asset-backed -- the entire asset-backedmarket.

Okay.

Again the majority of ourmortgages, the vast majority are Fannieand Freddie conforming loans.

Okay. So the subprimes portion iscollateralized into CDOs?

Correct.

Okay. I did -- I misunderstood that.Thank you.

(Operator Instructions). Andwe'll go to Ron Bobman with Capital Returns.

Hi. Congrats. You guys are trulygreat at what you do. I had two questions, one was could you enlighten me alittle bit into the -- maybe not necessarily just your book of surety, but sortof surety in general? Could you talk about how the Surety product can produce,how the subprime meltdown or turmoil can produce surety losses, and sort of thenature of the claims that come into a surety book in general again? And then Ihad sort of a general acquisition question.

It's Mike Stone, I will answerthe first one. Really in the surety side, it's really in the license. Ourmiscellaneous side or our commercial side, license and permit bonds, there arestatutory bonds that are required of mortgage brokers and they are fairly smalllimits of $10,000 to $25,000 that are required by statute and we have some ofthose in our portfolio, a very small percentage. But some companies could havea broader percentage of that.

Is that more of a fidelity bond?

No, somebody has to get a licenseand they have to bond themselves to get that license. That doesn't mean thatloss will necessarily flow from that, but certainly as that implodes therewould be people that say they didn't get to close their house, or they didn'tget their escrow money, or there could be any number of problems that couldarise that could affect that bond.

Okay. How about outside yourbooks, sort of other types of subprime generating surety losses?

Well, I think that's where Iwould see it in those sectors. Certainly there could be companies like in thepast, that wrote fairly exotic things and called them surety. If you can thinkof Enron, and if you can think of WorldCom, where companies' suretyunderwriters were extending credit that was called surety, but it was reallysome financial guarantee of some sort. I do believe the experience of that isstill fairly recent. It was fairly severe, so I have not heard of many suretiesthat were doing those things, but certainly it's possible.

Okay. Thanks a lot for thoseresponses. Then I have an acquisition question. Given where we are in theunderwriting cycle, I guess the pricing cycle and the sort of high levels ofprofitability with so many lines of business in the past, I don't know handfulof years, or a few years. When you look at, or you evaluate a possibleacquisition of an insurance company, where there is a balance sheet and a bookof business with a history to it, and you sort of assign a risk factor topotential prospect for adverse development on the in-force book. When you thinkabout that now and evaluating a deal, is that sort of discount, and speakinggenerally, is that discount factor, risk factor, a heck of a lot smaller thanthe risk factor you might have assigned at the last soft market cycle becauseof the relative recent years of underwriting profitability and adequacy ofmargins?

Ron, its Jon Michael. On a relative basis, that's correct. Theprofitability of the industry over the last – since the early 2001, we have hadseveral profitable underwriting years in a row or most companies have. Onewould expect, again all things being equal, that in periods of rising pricesthat companies tend to make their balance sheets or heal their balance sheets.I know from a generally accepted accounting principles booking basis that's notsupposed to occur, but it's a natural occurrence because I think companies tendto underestimate the effects of pricing changes from year-to-year either goingup or going down. And so, for that period where wehad multiple years going up, I think probably on a relative basis balance sheetis healed. Now we are entering a period or we have been in a period for perhaps18 months, where prices are going down, and my belief is that the oppositeoccurs during that period of time, and that companies tend to underestimateagain the effects of the reduced pricing. And so perhaps if you look at thislast accident year, you would maybe expect that a company might underestimatetheir loss ratio. Now, having said all that, we don'tbelieve that we do that ourselves. When you look at acquisitions, is there morerisk or less risk, and you are discounting or believing a current balance sheetsay in 2008, versus what that balance sheet would have been in say 2001. Yeah,but you still have to perform an exhaustive study of what they've done in thepast, I mean, what kind of business have they written. And there are relativerisks in the various lines of business that they've written. I mean, if theyhave exposures, asbestos environmental exposures and that sort of thing, thatprobably did not go away, or hasn't gone away just because, we've had goodunderwriting years here for a few years. But at the same time, you have to lookat other things that we know are out there, like construction defect and thatsort of thing so.

Okay. Any cash you -- I'm sorry-- can I ask another follow-up question?

Yes.

On acquisitions, I've gone ablank. I'm sorry. I'll circle back in the queue.

Thank you.

I think I dazzled you with myexplanation.

No, it was a great answer.

And we'll go next to CharlieGates with Credit Suisse.

Only one question this time. Whatarea of your business would you think most vulnerable or most exposed, theentry of the standard mortgage company?

Charlie, Mike Stone. It'sbasically two, it's our E&S casualty, which is basically our primaryliability/general liability product, the commercial umbrella product, and thencertainly the property fire business, E&S business, which I would includein that cat-exposed business, as well.

I fibbed on the question. Isthere any way you can go back in time and assess what other period from acompetitive standpoint more similar to the current one?

Charlie, we will take you back toone question, just kidding.

I don't mind, I deserved it.

I am just kidding. I think it's-- it's not the late 90's. Okay. It's certainly, if you look at it as a periodfrom a pricing perspective we are probably at 2001, 2002. But if you aretalking about from a cycle standpoint it's probably early 90's.

Just like '91, before Andrew.

Yeah.

Surely we just hypnotized Ron,and now you are asking us to look into our crystal ball. I think that's right.I think it's probably, prices are above where they were, just before '01 theyare above that, but we think they are rapidly deteriorating to a point wheresome of the business would be marginal.

So it likes the world beforeAndrew, which occurred in August of '92.

Yeah.

Charlie, I am not as old as theseguys, so I am not sure I can remember as well. But I think that's not, that'ssomewhere there about.

Thank you.

And we will go back to Ron Bobmanwith Capital Returns.

Charlie shouldn't be assessed forthat last question because he always asks it. You should just answer it in yourprepared remarks actually. I wrote you all my questions, so no more seniormoments. And I get mixed up with all the Mike and Michaels on the call, butsomebody said on the acquisition discussion, that of late or what have you -- acquisitionpricing, I think you said has come down, and I am wondering if you arecommenting about the public market trading levels of the stocks, and your peers,or about particular deals that have been announced, where you thought that wasan indicator of pricing coming down?

I was talking purely about theprice to book ratios for publicly traded stocks.

Okay. Yeah, considering there hadbeen too many data points indicating reflections.

That's what I was talking about.

Thanks guys. Best of luck forcontinued success.

Thank you, Ron.

We will go next to KennethBillingsley with Signal Hill.

Hi, good afternoon andcongratulations on the quarter.

Thanks, Ken.

I just have a quick question. Ibelieve in the past on the reserving -- this is a reserving question. In thepast you have said, in the last few quarters you've been reserving close moretowards your own experience, and not so much to industry. Is that still thecase?

This is Joe Dondanville. Yes itis. That's a lot of work we are seeing now in our book of business, that wegrew in the early 2000's is starting to mature, and our loss trends andpatterns are being substituted for more industry.

And so when I look at theaccident year loss ratio, we've been seeing some pretty good improvement over'06 to '07, but looking at this quarter here we've started to see the accidentyear loss ratio for the fourth quarter '07 being just slightly higher thanaccident year loss ratio for fourth quarter of '06. Is this a good startingpoint? Is this going to be a good base for us as we are looking forward off ofwhen there are rate changes in the marketplace? We now have a good base for theaccident year loss ratio or are we likely to continue to see some improvementsin 2008?

No I think this is a good base. Ithink our study -- the major study was completed in the third quarter and sothe fourth quarter is more of a clean quarter from that standpoint of less impactof the changes that we've made incorporating loss trends and pricing into ourown development factors.

Great, that was my only question.Thank you.

All right great.

Thank you

And we'll go next to Mark Dwellewith Ferris, Baker Watts.

Yeah, good morning. Just a quickquestion related to the Marine business. You had indicated you are booking thatin the property segment and that makes sense. Is there much difference in yourloss pick for that business as compared to say the rest of your property book?I said I kind of mindful for that typically when you guys have started newbusiness segments in the past, you've kind of chosen a higher loss pick in allthat business seasons?

On the property side, the losspicture a little less -- a point where you're projecting what losses might haveoccurred. The short-tailed nature of it causes us to look at what's actuallyhappening and predicting what some of the late reported loss activity or thedevelopment on reserve activity. So, it really does not lend itself as cleanlyas to a loss pick like on a casualty book, where you may have three, four yearsto know how good or bad that loss pick might be, and you just kind of stickwith it. So on the Marine side, it'sshorter and our experience on the Marine side has been improving. I think, asyou might recall right out of the gate that we got hit with Hurricane Katrinalosses that kind of [dampened]. But that's a kind of a short period sudden lossthat gets reflected right away and not through a loss pick.

Okay. Is the tail with respect tothe Marine any longer than the historical tail related to the rest of the bookor is it pretty consistent?

I think they have some incidentalcasualty type exposure, liability exposure that would elongate that tail. Butotherwise it's somewhat short tailed. They know when a cargo is lost; they knowwhen a haul is damaged pretty quick.

Okay. That's helpful. Thank you.

And there are no furtherquestions at this time. I will now turn the conference back to Mr. JonathanMichael.

Thank you. It was a very good yearfor RLI, certainly outstanding from an earnings standpoint. We had a recordoperating earnings. We had good cash flow. We had return on equity of over 22%and we returned over $150 million to the shareholders in terms of dividends andshare repurchases. As we mentioned multiple times during the call the insurancemarket continues to soften. RLI has been a company that haspersevered and thrived in hard markets and in soft markets and we will continueto maintain our disciplined underwriting approach, which could mean somereduced top line growth. We will however pursue other opportunities by eitherstartup. Lift out some teams of people, which we have been successful at in thepast. We talked about Marine for example and our transportation division was startedas a lift out or even possibly an acquisition, small acquisition. I want to thank all of ouremployees, I want to thank our shareholders, and I want to thank you forsupporting us for all these years. We look forward to talking to you nextquarter and reporting another good quarter. Thank you very much.

Ladies and gentlemen, if you wishto access the replay for this call you may do so by dialing 1-888-203-1112 withan ID number of 5043148. This concludes our conference for today. Thank you forparticipating and have a nice day. All parties may now disconnect.