Good morning and welcome ladies and gentlemen to the RLI Corp’s Second Quarter Earnings Teleconference. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. Before we get started, let me remind everyone that through the course of this 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 risk factor, which could cause actual results to differ materially. These risk factors are listed in the company’s various SEC filings, including in the Annual 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 the second quarter results. RLI management may make reference during the conference to operating earnings and earnings per share from operations, which are non-GAAP measures of financial results. RLI’s operating earnings and earnings per share from operations consist of net earnings after the elimination of after-tax realized investment gains or losses. RLI’s management believes this measure is useful in gauging core operating performance across reporting periods, but may not be comparable to other companies’ definitions of operating earnings. The Form 8-K contains reconciliation between operating earnings and net earnings. The Form 8-K and press release are available on the company’s website at www.rlicorp.com. I will now turn the conference over to RLI’s Vice President, Corporate Development, Mr. Aaron Jacoby. Please go ahead, sir.

Thank you. Good morning to everyone. Welcome to the RLI earnings call for the second quarter of 2016. Joining me on today’s call are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer and Tom Brown, Vice President and Chief Financial Officer. I’m going to turn the call over to Tom first to give some brief opening comments on the quarter’s financial results. Then Craig will talk about operations and market conditions. Next, we’ll open the call to questions, and Jon will finish up with some closing comments. Tom?

Thanks Aaron, good morning, everyone. The second quarter was another good one for RLI. Our primary focus remains to outperform the industry and underwriting profit and an 85 combined ratio for the quarter is a testament to our continued success in that regard. As with previous quarters, underwriting income was positively impacted from net favorable loss reserve development. In this case $15 million spread across all three segments. The Casualty segment led the way with $11 million of favorable development followed by Property and Surety segments of $2 million each respectively. Slightly offsetting this benefit was $3 million of storm losses, a relatively benign level compared to prior years with $6 million in 2015 by comparison. Despite the inherent potential for quarter-to-quarter variability in both reserve releases and storm losses, RLI’s business model continues to benefit from a highly diverse product portfolio. This applies to growth as well as profit. In the quarter, both the Casualty and Surety segments demonstrated strength. Casualty gross written premiums grew by 7% or posting a 90 combined ratio while Surety grew 4% and posted an outstanding 75 combined ratio. The Property segment’s top line remains challenged particularly for CAT exposed products and this is reflected in the 14% decline in premium. Although absent the final drag from our exit from crop reinsurance, the decline was modestly better at 5%. Despite these challenges, Property posted an excellent 81 combined ratio. In total, gross written premium grew 1% or 3% excluding crop. The investment portfolio continued to post strong returns with 2.8% total return for the quarter and a 6.1% gain through six months. Declining interest rates and positive equity market conditions continue to drive positive performance. With regards to our minority investment in Maui Jim, it turned in slightly lower income although sales continued to grow modestly. Foreign exchange impacts continue to dampen earnings. One item to note, the non-cash goodwill impairment related to our medical professional liability business. Due to continued pricing pressures leading to declining premium volume coupled with some adverse loss experience reported during the second quarter, we reevaluated the fair value of this business and concluded the carrying value of this goodwill was in excess of fair value by $7.2 million. Nonetheless, the business remains profitable albeit at lower premium level and higher combined ratio and we remain committed to this business. All-in-all, with strong underwriting and investment performance driving our results, operating income came in at $0.61 per share and book value per share is now up 12% in the first half of the year inclusive of the dividends. And with that, I’ll turn the call over to Craig Kliethermes for further commentary. Craig?

Thanks Tom. Good morning, everyone. We recorded another solid quarter given market conditions. Gross written premium was up a moderate 1% for the quarter. Removing the impact of crop and the facultative reinsurance business we exited last year our premium was up 4% on a gross basis and more than 5% on a net basis. So our core portfolio is on a good trajectory in a challenging market. At the same time, we’re able to deliver another sub-90 combined ratio. We have made several investments in people, products and technology that are starting to gain traction. In addition, we have about one third of our product portfolio that is related to the construction industry which continues to rebound and provide more opportunity to us. Let me provide some more detail by segment. In Casualty, gross written premium was up 7% in the quarter which is similar to our year-to-date growth rate in this segment. We produced a 90 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 transportation and P&C package businesses continue to grow at a double-digit pace for the quarter. Our transportation business has opportunities resulting from carriers that were undisciplined in their pricing over the last several years. Many established markets appear to have endured enough pain for now that they’re taking a time-out to reassess but they’re now charging enough so that we are more attracted to the risk. Much of our package growth has come the old-fashioned way, pounding the pavement and visiting our producers and finding new ones that value our specialty products, service and narrow and deep expertise. We continue to invest in new people and new products across our Casualty segment and we are working hard…

Yes. Operator, we can now open the call for questions.

Thank you, sir. The question-and-answer session will begin at this time. [Operator Instructions]. And our first question comes from Randy Binner.

Hi, good morning. Thank you. I just wanted to ask a couple actually on Property. It seemed like the underlying loss ratio is actually pretty good there so, exiting out the CAT impact. Was there anything unusual from an underlying loss perspective in the quarter that helped that good result?

Randy, this is Craig. I would say, we’ve been working on marine for a while and those results have been getting better. Obviously our CAT business continues to perform. We haven’t had the big CAT losses I know some others have had. And we’ve been working on I think we’ve talked about our RV business in the past hopefully the results seem to be getting better there. So, I don’t know, other than maybe mix and some small improvements in spaces where we needed some help, that’s really the only thing I could help explain.

That’s helpful. And then I think on the last call or last couple of calls, the commentary around property rates relative to loss cost trends pretty negative and obviously you’re continuing to shrink the top line there. Is that still a good generalization, I mean, I know you have niche businesses in marine and RV as you just mentioned. But are Property rates in general kind of moving below loss cost in the market and should we kind of expect you to continue to pull-back to this degree?

Randy, again Craig. I mean, obviously it’s a very diverse property portfolio, certainly that’s probably true from a CAT perspective. I don’t think we believe the underlying loss costs are getting better but the rates are certainly going down. So, certainly there is some deterioration but it’s hard to observe a lot of deterioration if you don’t have big losses right, because the loss ratio is zero if you don’t have any losses. But certainly that underlying mix is changing. For RVs I think they’re experiencing the same underlying auto trends because that’s mostly physical damage coverage. But they also are exposed to those underlying auto trends which I think you’ve seen in the rest of the market. And I think we’ve felt it a little bit in that space as well. Marine continues to get rates we think equivalent to loss cost, so they are getting some small rate increases. And our Hawaii homeowners businesses admitted product, so, we haven’t seen, again that’s mostly a CAT business. But we haven’t seen a lot of CATs in Hawaii recently.

RV, you mean, so the frequency, you’re observing frequency trend that I mean, it’s summer so we know folks are driving the RVs more. But do you mean, the kind of distracted driving and higher accident frequency outside the normal seasonality, you’re observing in RV book?

Well, it certainly, it kind of stepped up a couple of years ago and I think it remains at that level. I don’t see it continuing at the same growth rate necessarily or continuing to accelerate the trend. But the trend has certainly jumped up a little bit several years ago. And we have yet to see it subside. But we’re getting fairly sizeable rate increases in that space. That’s also an admitted space so we have to file and get approvals but we have filed fairly significant rate increases over the last couple of years. And that book has shrunk fairly significantly, double-digit rates over the last couple of years because of that.

Got it. And then I’m just going to ask one and I’ll jump back in. So, with this Rockbridge deal, I guess, with the benefit of hindsight now in this adjustment on the goodwill what do you, what changed the most since from when you did the deal in 2012? I guess, what was the trend in that business or the issue that’s caused some adverse development?

Randy, it’s Tom Brown. I think you used good word hindsight because that’s basically kind of the look you have to take on this. When we bought it, back in late 2012, the rates were pretty sound. They were producing north of $16 million - almost somewhere between $16 million and $20 million in premium on an annual basis prior to that. And I think unfortunately subsequent to that time we’ve seen a kind of a year-over-year decline in rates. And I think true to the core ROI underwriting discipline, we shrunk that book. And that’s one - because you have to go back to the reason we were attracted to them in the first place as they had ROI like underwriting discipline. And they have shrunk, down to about just north of $10 million today. And I think as you read our prior SEC filings 10-Qs, 10-Ks, we’ve been signaling that the top line has been declining. Well, what happened in this quarter is you had a few adverse developments or claims that had come in the door. And you couple that the decline ratio went up a bit several percentage points. And when you go to the accounting convention that triggers impairment that you go through and fair value as a consequence was below the carrying value of the goodwill. Did that address your question?

What was the nature of the hire of the elevated claims?

It’s a small book. So, probably somewhere in the neighborhood of about 200 policies so you get a couple, you have two particular policies that had some kind of rather large losses and when you have such a low base of premium that can be a very significant impact to the combined or the loss ratio piece of the combined ratio. And unfortunately you have to kind of use your kind of contemporaneous assumptions in looking forward in the perpetuity under the accounting model is your determination of the fair value. Well, I think as we all know this is an industry that works in cycles and we do have confidence that we’ll recover in time. And that’s why we remain confident and like the business. But the accounting model doesn’t allow you to anticipate that.

Okay, understand. I mean, I guess the good news there - to the extent you shrunk the book that may have cut off the tails of even greater losses, is that the positive way of looking at it?

Randy, I mean, I think Tom mentioned, I mean, that is kind of our modus operandi. If the market does not, it’s not going to bear the rate we need, we tend to shrink. And we certainly shrunk this book and we were hoping that the loss ratio would maintain at the same level, it’s elevated a little bit. The combination of that elevated loss ratio and reduced premium unfortunately in the accounting rules is worth less money or worth less money on our books anyway. So, we still have a good lot of confidence that our underwriters can address the underlying deterioration and we’re hoping that market starts to stabilize. But as of right now, I think I mentioned that earlier, that’s one of the reasons why the rates are still declining the most. So it’s a challenge.

Understood. Thanks a lot.

And I think we’re competing with companies that have been in it for a while and they have a pretty big reserve margin built up and may not be seeing what the current action in your loss ratio is or certainly maybe that message is not getting to their underwriters. So, they’ll produce some good calendar year results for the most of the industry.

Got it. Thank you.

And our next question comes from Arash Soleimani.

Thanks. I'm curious also on the med mal front because those books are getting bigger in med mal through medical liability mutual insurance. Does that, you think, impact you guys competitively in any way?

It’s Craig again Arash. Well, I think that company is an admitted company. We compete in the E&S space which is really more with Evanstons, Essexes of the world. So, we probably won’t go head-to-head I say that in most cases. However, we have seen the admitted folks reaching out into the E&S space and starting to write doctors and physician groups that wouldn’t normally be within their strike zone, which would be less of the E&S market. So, unfortunately I can’t say for sure. But we don’t typically compete with them head-to-head.

Okay. That's fair. Kind of just what you were saying before on that front, you still expect rates to be pretty soft for the foreseeable future in that line. Just basically the reason being that a lot of the peers that you're competing against have large positive reserves that they can kind of use to buffer their way through with lower rates? Is that kind of the take-away?

Well, if you, I assume you look at industry studies like I have. But the industry studies I have said the medical malpractice lines are the most over reserved line remaining. So they would probably have some area to compete, some room to compete in the short-term.

Okay, that's fair. And then, you had mentioned getting some products to scale. Should we expect that to start to benefit the expense ratio going forward?

Well, certainly we’ve invested, in some cases it’s been teams of people and some cases it’s been taking existing underwriters and folks on new things. So, obviously as they scale up and gain some margin or some revenue, it’s obviously going to help the denominator of that equation gets larger. And we hope that a lot of those expenses are somewhat checked, there's some variable ones, obviously, in commission and tax. But yes, so that should hopefully help that and help the top line which should help the expense ratio.

That's fair. And lastly, I know you probably can't give too much color on this but in terms of the prior period development, should we expect that going forward to kind of be more in line with what we’ve seen sort of year-to-date? Or is that not the right way to think about it?

Yes Arash, John Michael here. Yes, we can’t forecast any kind of reserve development into the future. Either way, it is what it is. So, I think you know that.

Right, right, that makes sense. Okay, thank you very much for the answers.

Thank you.

And our next question will come from Jeff Scmidt.

Hi, good morning, everyone.

Good morning Jeff.

On the investing side, other comprehensive income was pretty sizable at $19 million. What drove that?

Jeff, its Tom Brown. I touched on it a little bit in my comments. But some of the interest rate declines looking on the accounting model mark-to-market indications on the fixed income portfolio those would increase rather significantly up let’s see if I have it here, but year-to-date about $47 million unless I have a gross number on this quarter. Likewise, the equities had a good run as well. And so that also finds its way into the comprehensive income on the unrealized basis offset by whatever we would have harvested on the realized side. So, we had a very favorable impact quarter and half.

What percentage of the bonds, are available for sale versus held to maturity?

It’s 100%.

But there is still mark-to-market, it’s none of it held to maturity?

Several years ago I think we sold the last bond that was held to maturity. The bond actually matured so yes, it’s 100% in the held for sale category today on mark-to-market.

Okay. And then on the E&S side, I know you had mentioned on the last call you had seen some of the admitted carriers start to package in CAT risk with the liability risk. Is that something you're seeing pick up at all or is that kind of more one-off?

I mean, we continuously see, I mean, we would say our least responsible competition would be admitted in the market that would come in and compete in the E&S space. And most of that we call it irresponsible because they’re competing on price but they’re coverage is much broader than the coverage that we sell typically to those insured. So, by definition the expectation is they’re going to have much higher loss cost than we would have at the same price. And we continue to see that, obviously we don’t see that as much in the hard market because those guys retrench because they get burned. But right now, we still see them.

Got you. Okay, thank you.

[Operator Instructions]. Our next question will come from Mark Dwelle.

Yes, good morning. Just one follow-up question related to the medical liability write-off. I was curious why that was in realized capital gains. I've seen that recorded before through operating. And I know there is some feature of this that moved it up to that part of the P&L?

Yes, Mark, it’s Tom Brown. Yes, I think what you’ll find is fair amount of diversity and practice. Our view is based on the relatively small amount relative to our balance sheet and income statement. That’s why we did spike it up some of the disclosures.

Okay, thanks. That's really my only question. Most of my other questions were covered elsewhere. Thanks.

Thanks Mark.

And our next question will come from Ken Billingsley.

Hi, good morning. Mark asked one of my questions. The other one is on the investment yield. It's dropped over the last few quarters and I’m calculating this, taking the investment income over average cash in fixed investments. But it dropped another 17 basis points this quarter. Could you just talk about I mean, from an investing strategy, if we should expect that this is the new norm or are we going to see another 10 or 15-basis point bleed through the end of this year? It’s kind of what expectations we should build in?

Hi Ken, it’s Tom Brown. Yes, it did drop basically as bonds have rolled off with higher yields and reinvested into current market yield. That has had the downward impact and pressure on the overall yield. We feel pretty good in the average purchase yield and the average for the quarter is about 2.8%. To the extent I guess, I mean, I can’t even - it's little bit difficult to predicting the future. We’re going to have, more turnover in the second half. But we’re in a pretty stagnant low interest rate environment that’s going to have that effect in the foreseeable future when you see some up-tick. Nothing has really changed too much and we’ve been sticking pretty close to about five-year duration for now several quarters, couple of years anyway. One thing assures that we, last half of last year and early this year we did move into little bit higher quality, spiked quality, spiked safety, treasuries and then more recently asset backed MBS.

Okay. So there was a change in some of the asset purchases in the last half of 2015?

Yes, and then into the first half of ‘16.

Okay. Thank you very much.

You’re welcome.

Our next question will come from Ron Bobman.

Hi, good morning. Thanks a lot for the time and congrats on the quarter. I had a question about the commercial auto. You made some comments, I think in the prepared remarks, about competitive behavior. And I was wondering if that’s just really a continuation of I don’t know the last 12 to 36 months where you saw sort of some degree of a change in competitive behavior in the most recent quarter as compared to prior quarters?

Ron, this is Craig. We see a continuation of what we’ve been seeing over the last 24 to 36 months I think, I don’t think, it seems like the market hasn’t found the right price yet. So, you’re still getting higher rates in general. As I’ve mentioned before, we haven’t quite seen the same poor underwriting results that the rest of the industry has in that space. So we certainly are enjoying the opportunity to get below - to be able to look at business we couldn’t look at before because it was underpriced we felt. And obviously get some price where we can afford it.

Got you. And so, I mean, I guess this is sort of the obvious, but in some respects your sort of win to loss ratio, whether it’s buying to quote, it's at a higher level than it was in prior years but hasn't really moved that much further up in the second quarter than it was in more recent quarters. Is that saying the same thing?

Yes, I wouldn’t sort of say we’re binding at higher rate but we certainly are seeing more submissions. So, it might be slightly higher but I wouldn’t, it’s not enough to talk much about. But it’s really an increase in submissions.

Okay, thank you very much.

Okay.

No, go ahead, I'll take any words of wisdom you're willing to offer.

I was just going to say, producers are looking for appointments everywhere for new markets that are interested in entertaining commercial auto because it’s that tight.

Great. That's good news. Thank you.

And our next question will come from Ian Gutterman.

Hi, thank you. First, I just want to clarify, I got a little confused here on the medical. Forgetting the goodwill, the underlying results, are they in the Casualty segment, the premium combined ratio and so forth?

This is Craig, Ian, yes, they are - that's an E&S Casualty product but it does fall through the Casualty results, yes. It’s a very small portion of our overall Casualty results, just so I mean, $10 million, it’s small relatively.

Fair. I just wanted to make sure. Any underlying deterioration is basically all reflective I was just trying to get at. It's nothing we have to worry about incrementally?

As far as I know, no.

Okay, got it. Okay, and then I just had a couple of other things on Casualty in general. Usually this Q2 seems to be historically your big reserve release quarter. And it's about half of what it was last year in the Casualty segment, anything different from prior year's reserve studies that led to that?

This is Craig, I mean, I can answer, Tom you might want to jump in here. But I mean, I know our processes that remain the same for as long as I’ve been here over a decade and I know it’s the same as what has been prior. So, I can’t tell you that there is anything that’s changed certainly in our underlying process and we haven’t seen any significant underlying trends that would be driving it. So, I can’t explain it. But it is down a little bit from last year, although last year was a little higher than normal I think.

Okay. I didn't mean to suggest process change, but anything as far as recent accident years for solid accident years or maybe certain lines of business that have been showing more releases that didn't this year, any kind of color along those lines?

This is Jon. Last year was more of an outlier though, the second quarter of last year was a bit more of an outlier than. This was not really that different than other second quarters except for last year.

Okay, got it. And then the underlying accident year margin improved this quarter and last quarter nicely. Does the fact that casualty rates are starting to flatten out make it harder to continue to improve that? Or is there still because they are written from the last year, baked in, you have to earn it, maybe you still have a little bit to go?

I’m sorry, you’re asking about our underlying loss ratio in Casualty?

Right, ex the development.

All I can say about, I mean, the challenges with that is, our mix is constantly changing as in Casualty obviously we’re growing things that we think the margins are still good. And we’re shrinking the things where the margins are getting tighter. So, it’s very hard to project because almost everything involves an underlying mix change. So when you look at the combined ratio, even though or the underlying combined ratio, even though the overall price change might be flat, what you’re seeing is us growing some of the products we were still able to get rates and still find accounts that are attractive and more shrinking areas where we happen to give up rates and also where we find less attractive from a margin standpoint. So, that’s how I’d say more than anything we’ve been able to stabilize the margin of the underlying combined ratio for all of our businesses in general.

That makes sense that makes sense. Thank you. And then maybe just one last topic, on your paid losses the past couple of quarters have been up double-digit, which is kind of unusual for you guys and is meaningfully faster than the premium growth. Anything one-time in there or?

Ian, its Tom Brown. I think we’re pretty at least, if you look at the first or the second quarter compared to the second quarter last year, it’s pretty close, it might be up about $3 million this year versus last year. But I don’t think you can read into a $3 million move is anything significant, I mean, the top line is large as well. Hopefully these will be paying claims from prior years.

I mean, the only thing I would add is that from our, on the Casualty and the Surety side which are growing, Surety side is obviously little shorter tails so you’re going to get, you write more of it, if you look at it in aggregate you’re going to have more paid losses earlier. And also on the casualty side, the product that we’ve actually been growing are relatively middle to shorter tail Casualty products, transportation we view as a shorter tail product, package business that we’ve been growing is a shorter tail product. So, the umbrella product…

Okay. I might have - again I try to back into the numbers same way that calculators are wrong as well, so I can follow-up there may be on that. So, okay, thank you guys.

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

Thank you very much. Another good quarter, mid-80s combined, we’ll take that all-day long. Casualty and Surety showed strong growth during the quarter. Property continues to be a difficult marketplace but our underwriters remain disciplined and they will remain disciplined and be very selective for that business. Thanks again for joining us and we’ll talk to you again next quarter.

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 of 7360428. This concludes our conference for today. Thank you for your participation. And have a nice day. All parties may now disconnect.