RLI Corp. (RLI) Q4 2017 Earnings Report, Transcript and Summary

Good morning and welcome, ladies and gentlemen, to the RLI Corporation fourth-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. [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 risk factors which could cause actual results to differ materially. These risk factors are listed in the Company's various SEC filings, including the annual Form 10-K, which should be reviewed carefully. The Company has filed a Form 8-K with the Securities and Exchange Commission that contains the press release announcing fourth-quarter results. RLI management may make reference during the call to operating earnings and earnings per share from operations, which are non-GAAP measures of 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 at the Company's website at www.rlicorp.com. I will now turn the conference over to RLI's Vice President of Corporate Development, Mr. Aaron Jacoby. Please go ahead, sir.

Thank you. Good morning to everyone. Welcome to the RLI earnings call for the fourth quarter of 2017. Joining me on today's call are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Tom Brown, Senior 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?

Thank you, Aaron. Good morning, all, and thank you for joining us. We had a strong finish to the year from both a top-line and a bottom-line perspective. Gross written premium advanced 11% in the quarter and is now positive for the full year. From a bottom-line perspective, reported $1.21 per share in operating earnings for the quarter, bringing the full year to $2.30 per share. Underwriting investment performance were solid. And tax-related benefits, primarily resulting from the Tax Cut and Jobs Act, signed into law on December 2016, served to increase net earnings. I'll spend a bit more time now on the impacts of corporate tax reform, simply to get that out of the way before reviewing underwriting and investment performance in more detail. The current-year impact of tax reform relates to the revaluation of deferred tax items to reflect the lower future applicable tax rate, as well as changes to the deductibility of certain items. In our case, given our fairly significant net deferred tax liability, the decline in statutory rate from 35% to 21% resulted in a net reduction to tax expense and a benefit to earnings of $32.8 million. While there are a number of deferred tax assets and liabilities on our balance sheet, as a reminder, our net liability position is driven largely by the unrealized gain on our investment portfolio. From an earnings standpoint, fourth quarter includes $0.63 per share benefit from tax reform, inclusive of performance-related incentive and profit sharing expenses which drove our expense ratio up by approximately 4 points in the quarter and by 1 point for the full year. Looking forward to 2018 and beyond, while there are some aspects of tax reform where it's needed, we will certainly benefit from a lower statutory tax rate. In general, corporate tax reform is anticipated to create economic expansion, which is beneficial to the insurance industry as a whole, and RLI would benefit as well. The timing and sustainability of economic growth is uncertain, as we speak; and is unknown to what extent, if any, tax savings may ultimately find its way to our insureds in the form of [Technical Difficulty]. However, if you look at this from a historical effective rate perspective, say, over the last four or five years, preceding 2017, our effective rate has been in the mid to upper 20s. Over those periods, our effect rate would have been 9 to 11 points lower had this tax reform been in effect at the time. Certainly we can't forecast what our effective rate will be due to the changing levels of pre-tax income and the mix of tax preferred items that will vary over time. But from a historical view, that's what we're currently seeing. Now, turning to underwriting, we are proud to post another good quarter. The combined ratio came in at a 95, which includes the aforementioned 4 point increase to the expense ratio due to increased bonus and proprietary costs related to tax reform. Absent that, the combined ratios are fairly similar between the two periods. Our loss ratio benefited from net favorable prior years' development of $5 million in the quarter compared to $12 million in the fourth quarter of 2016. This favorable development benefited all three segments. Partially offsetting this was a nominal amount of catastrophe losses in the quarter, less than $1 million, primarily California wildfires. This compares favorably to $6.6 million of Hurricane Matthew losses in the fourth quarter of 2016. The combined ratio broken down by segment is as follows. Casualty, 101%; property, 88%; and surety, 79%. Moving to the top line, the 11% growth was driven by our casualty segment, up 15%, with more recent product launches accounting for approximately 1/2 of this growth, while transportation and other mature products counted for the remainder. Our property segment was up 8% as growth was experienced across all major product lines. Surety declined 1%, but was in line with expectations in this highly competitive market. Craig will have more to say on our products in a moment. Complementing this underwriting performance, investment income was up a strong 10% compared to the fourth quarter of 2016, continuing the trend of the last couple of quarters, driven primarily by a larger invested asset base. Earnings in our equity investees, Maui Jim and Prime Holdings, were up considerably from the fourth quarter of 2016. Both Maui Jim and Prime benefited from tax reform as well. Equity earnings from Maui of $800,000 is almost exclusively due to tax reform-related adjustments on the deferred tax items. A positive earnings result compares to a $100,000 loss in the fourth quarter of 2016 reflecting seasonal sales results. Equity in earnings of Prime totaled $1 million. Significant growth in premiums in current-year operations accounted for two-thirds of this result, while tax reform had a modest benefit, as did improvement on prior accident year losses. We would expect fourth-quarter earnings from these equity investees to return to more historical levels, absent future growth and other operational considerations. This being our year-end call, I would like to take a brief moment to point out some of the full-year highlights. First, we ended the full year with a combined ratio of 96, which includes 4 points of hurricane losses from the third quarter, and 1 point from the expense ratio, as mentioned earlier, due to additional incentive and profit sharing expenses from tax reform. This marks the 22nd consecutive year with a combined ratio below 100. Gross premium was up 1% for the full year. You will recall that we had exited certain products during the course of the year. Absent the impact of these products, our growth was about 4%. Investment income was up 3.4% for the full year with a 6.6% total return, with nearly all aspects of the portfolio contributing. Rounding out results, Maui Jim and Prime also had good years, which drove our investee earnings up 59% year-over-year. We were pleased with the positive performance these two investment partners produced in 2017. And finally, we continued to share these rewards with our shareholders [indiscernible] another fourth-quarter special dividend of $1.75 per share, marking the eighth straight year of such a special dividend, as well as the 42nd consecutive year of increasing our ordinary dividend. Inclusive of these dividends, we grew book value by 17% in 2017. And with that, I'll turn the call over to Craig. Craig?

Thanks, Tom. Good morning, everyone. As Tom mentioned, we ended the year with some very good top-line momentum, with gross written premium up 11% while reporting a 95 combined ratio for the quarter. We were able to complete our 22nd consecutive year of underwriting profit despite experiencing our worst catastrophe year in more than 20 years. We were also able to grow our top line 1% for the year, inclusive of some exits and repositioning of our diversified portfolio of products. In an uncooperative market, a willingness to address underperforming businesses quickly and intensely reminds people that underwriting discipline is still the hallmark of RLI. A lot of moving parts of this quarter, but overall, we do see some improvement in the market, a little more in property than casualty. In some markets, our competitors are trying to achieve across-the-board rate increases, which creates opportunities for those who keep their portfolio in order, and who are most skilled at underwriting selection. We think we do that better than most. And given the breadth of our specialty footprint, we are in a good position to act on opportunities that present themselves. Let me provide a little more detail by segment. In casualty, we were up 15% for the quarter while posting a 101 combined ratio. For the year, we finished our top line up 4% and a combined of 99. In this quarter, we realized growth across all of our major products, including our transportation business unit. Transportation completed the full year of repositioning which began in the fourth quarter of last year. The unit benefited from its fourth consecutive quarter of double-digit rate increases, as well as continued market disruption. Although down 13% for the year, transportation was able to grow 24% for the quarter, with about half of that growth being rate-driven. We also saw very good growth out of our personal umbrella product, which grew 6% in the quarter, benefiting from continued investments in systems to make it easier for customers and producers to do business with us, as well as renewed efforts to build relationships and expand distribution. They have also been able to achieve moderate rate increases on some targeted classes. Overall, it is important to note that a large portion of our casualty growth for the year, and about half of our growth for the quarter, came from new products that we have talked about in past quarters, including energy liability, binding authority, healthcare, and cyber liability. In addition, we have grown significantly in our quota share with Prime Insurance, of which we also have a minority equity stake. Our approach with new, rapidly growing, or rehabilitated products is to attempt to take a show-me attitude towards their loss ratio until results start to prove out. This can create a bit of a drag on our overall margins as we carry the expenses of investing in, and building a new product out, while being a little more cautious with our reserving approach. Moving to rate environment, overall rates seem to be stable to slightly improving in casualty. More rate is being achieved in the automobile-related products and other areas that have had more profitability challenges. We are not seeing a lot of rate improvement in the E&S products or our management liability products as of yet. Finally, we did place our largest outward casualty reinsurance treaty on 1/1. Our retentions and structures stayed effectively the same. We were coming off a two-year deal and we did pay a little more in aggregate, a low single-digit rate increase, as a result of some increased severity in transportation and our personal umbrella products. In property, the top line was up 8% for the quarter while reporting an 88 combined ratio with very little impact from the California fires. For the year, we finished down 6% on the top line and reported a 109 combined ratio, with the underlying loss being driven by hurricanes last quarter. Our hurricane estimates are still holding. And I want to thank our claims team for helping our customers resolve nearly half of the reported claims already. The exits of recreational vehicle and treaty catastrophe reinsurance left a $20 million hole to fill this year; and excluding these products, the property segment grew 6% for the year. For the quarter and the year, we realized growth across all the major products, including commercial property in the marine and Hawaii homeowners. We are finding some opportunity as the market rates are moving in our direction. For the quarter, our wind underwriters realized increases on renewal in the [Technical Difficulty] and found it easier to write new business at rate levels we need. While earthquake renewal pricing was still down, we did find that we were a little more competitive on classes of new business that we like, as some incumbent markets were indiscriminate in their rate mandates. The property catastrophe market is in a bit of disarray as a result of large losses this year, uncertainty around continued reinsurance support and cost, and model revisions. Finally, it we did place our catastrophe and per-risk property treaties on 1/1. For the property per risk, we did pay more as a result of increased activity of large fire and wind related losses that hit the treaty over the last year. Our catastrophe treaty was renewed at approximately flat rates. But overall catastrophe exposures have grown a little since last renewal, so we're spending about $1 million more. Limits and retentions remain the same on both treaties. Our surety segment's top line was off 1% for the quarter while posting a combined ratio of 79. For the year, surety was off 3% on the top line but was able to post a 71 combined ratio. The underlying results in this segment were outstanding, and helped offset a year where our property book was impacted by catastrophes, and the casualty segment was impacted by our investments in new products. All of four of our major surety products -- contract, miscellaneous, commercial, and energy -- reported an underwriting profit for the quarter and the year. This year was a good example of where you could shrink top line, demonstrate discipline, and still grow profits. We did exit some programs and accounts that no longer met our risk appetite. We also lost some business as a result of consolidation of some larger principals. Overall, the market is still behaving irrationally from an underwriting perspective as we continue to see a loosening of underwriting standards, credit terms, indemnification provisions, and rates. This can't end well for some sureties. Obviously, it's not our long-term plan to shrink to greatness, but we support our underwriters when they determine it is better to sit out the game until order is reestablished. We'll continue to remain stalwart and steadfast in our underwriting discipline, maintaining a consistent appetite; and stay focused on what we can control, adding value by investing in people, service, and technology that differentiate us for the future. Overall, a decent quarter and a good year, given the headwinds. The measure for excellence at RLI represents a higher standard than for most in our industry. We embrace the challenge. We ended the year with a lot of top-line momentum and unrealized potential of new people, new products, and expanded capabilities. We are also hopeful that tax reform will spur economic growth, which will lead to even greater insurance demand. This could be a boon to our business, particularly if it positively impacts the construction industry that is already seeing signs of improving. I want to thank all the RLI associates for continuing to raise the bar, and for their willingness to stretch and deliver results that realize our full potential. Thank you. And I'll turn it back to Aaron.

Thanks, Craig. We can now open the call up for questions.

[Operator Instructions]. Our first question comes from Arash Soleimani. Please go ahead.

My first question is in terms of the strong growth you had within casualty, and then also, to a lesser extent, within property, to what extent should we expect that to be sustainable in 2018?

Arash, this is Craig Kliethermes. Obviously every month and every quarter, we do the best we can, and really is going to be dependent on the markets. So we don't really give forward-looking information, and I don't really have it, to be honest, to give you. All I could tell you is our underwriters go at it each day. And some quarters they have -- they see the opportunity, and we take advantage of it. And sometimes they decide that we're better off retrenching if the rates don't permit, and we don't find risks that meet our overall standards.

Year to date and I know we're almost done with January -- have you seen a similar momentum in opportunities?

I really can't comment on January yet. We're hopeful that the market starts to realize it's time to get some rate. So that's all I can say.

Okay. And if the market does get rate, and that continues throughout the year, does that change how you guys think about the special dividend? Would you want to keep more of the capital in-house. At that point?

Yes, it's Jon Michael. As we've always said, our first priority is to -- we would rather use the capital and return it to shareholders in increased results. If we cannot use the capital, we will return it to shareholders.

Okay. And I know there's been some talk with regards to California in terms of the regulators there, I guess looking into potentially forcing companies, so to speak, to share some of the tax savings with consumers. To what extent does that impact RLI?

Arash, this is Craig again. Well, first of all, we write about 8% of our business that's admitted in California, and only about 2% of that is basically written without any rate flexibility. The way I've seen these things work in the past -- this wouldn't be the first time I've heard of a state say that they are concerned that companies are making too much money, which I would refute, by the way, overall. Look at the overall industry returns in California or any place. They still aren't earning their -- an adequate return for the risks we take. But typically what happens, and what I've seen, is they come and they ask us to basically refile our rates in those admitted products and justify the current rate level. So I think, at that time, we'd have an opportunity to review all the parameters that are involved in rate and rate adequacy; not just tax reform, but also loss cost inflation and historical loss experience. And obviously states need to allow companies to earn an adequate rate of return if they want competition in their state.

Okay. And just along those same lines, do you expect -- looking more broadly at tax reform -- do you expect a lot of it to fall to your bottom line? Do you think it will eventually get competed away? Just what's the right way to think of the impact of tax reform on your bottom-line numbers going forward?

That's a combination of all of that. And that's -- it's too early to tell.

Arash, for RLI, I think we have explained our competition plan in the past. First of all, it's pre-tax, so the underwriters don't get paid more or less based on the way the taxes apply to underwriting profit. They are motivated and incentivized on driving underwriting profit. And as in the past, as it is in all markets, not just because of tax reform but even when a falling rate environment, we're going to give it back and slowly as we can and keep the best risk through selection. That's what we're going to continue to do, to try and earn in underwriting profit.

And to the extent that you do keep -- you are able to keep a certain chunk of it, is that money that you plan to invest in a certain way? Or I guess what plans would you potentially have for those savings? Or would it just go to shareholders at that point?

Arash, it's Tom Brown. I think Jon did just comment on that. First and foremost, put it to work. And then if we still have excess, we always are very prudent in our capital management, as I think is -- we're known for. I think time will tell whether we really see -- I mean, if you go to the premise of this tax reform, and it's largely commercial -- corporate, not personal taxes -- is designed to increase the gross domestic product. An economic increase helps the industry as a whole. as I said earlier, and particularly RLI. We have a fair amount of construction-related business across the sectors, as Craig said earlier. We have contract, surety; a lot of our commercial in GL is exposed to contractors. If we tend to see that and get some uplift from that, I think the industry benefits, and we do as well.

Thank you very much for all the answers.

Our next question comes from Randy Binner with B. Riley. Please go ahead.

On tax, I think I heard that the -- based on historicals, something in the low teens makes sense for a forward basis. I think, Tom, you said 10% to 12%. And so I wanted to clarify that, but then also ask if that -- the tax rate might follow the same seasonality as it has in the past; meaning you tended to pay lower taxes in the back part of the year, particularly the fourth quarter.

Randy, good morning. It's Tom. In my comments, I said it's probably going to be more ranged in the 9% to 11%. And the way I think of it really is if you think about our historical effective rate has been as a percentage of the 35% statutory rate, really when you look at the breakdown of going to a 21% statutory rate, it should be relatively proportionate. And that would get us, I think, a little to the mid-to upper teens, not the lower teens I think you just mentioned. There's not really seasonality. I think what you're referring to is, because of the last eight years we had a special dividend, we get a few cents per share benefit from the dividend that flows through to the ESOP under the tax rules, and those do not change.

All right. But I'm sorry, maybe I just misheard you. But you said 9% to 11%, then you said high teens. It's 9% to 11% is the bottom-line tax rate, correct?

Yes, yes.

Rate reduction.

Yes.

And then on surety, is there a particular area where that's getting more competitive? Because it seems like there is a little bit of a flip here where maybe casualty is getting a little bit better to do business in; but then surety, which has been pretty good, I guess, over the last few years, seems more competitive. Is there a particular area where you're seeing competition there?

Randy, this is Craig. Well, I think if we go back and look, I think we've been talking that surety has been very competitive for several years now. Just to make sure we got that one straight. And then we're not -- I mean, it's generally across the board, maybe a little bit less in miscellaneous surety because it's a bigger investment in infrastructure technology and ease of doing business. You got to have a good system and be able to do it. That takes time to build, so that takes a little longer. Where you typically find they jump in is the bigger risks with the bigger brokers, and all they're doing is providing capacity. And if that's the way the buyer views it, as capacity, then it's harder to differentiate yourself. Particularly in the commercial surety area and contract surety, it's a little tougher.

Then on the last one, I think your comment was that the large property market is somewhat in disarray. So is that an area where you can write to? I kind of think of RLI as not necessarily going large case. Can you clarify what part of the property market has the most opportunity as -- I assume is that dislocation from the hurricanes?

Randy, this is Craig again. It's probably across the board. We're seeing it more in our cat -- our E&S cat-driven products, the wind and quake -- more wind than quake. But there's a lot of uncertainty out there. And there's -- as I said, with both reinsurance costs, people weren't sure how much their reinsurance was going to cost. They didn't know how much -- whether they were going to be able get the capacity to support them at 1/1. There were some model changes, both directions; different rating modeling agencies went different directions, so there was some diversion there. And I also believe -- and this is more anecdotal. We've heard that people's trying to get across-the-board rate increases, and also if they needed -- if they were trying to go below that mandated rate increase, they had to go run it up the ladder. It's given us an opportunity to act a little more quickly than some of our competitors, because our underwriters still have authority. We have not mandated rate increases because we expect our underwriters are always getting as much rate as they can get on every risk they write. So that's created some opportunity for us, both on the wind side and the quake side, on new business more than necessarily renewal.

Our next question comes from Jeff Schmidt with William Blair. Please go ahead.

Taking a look at the casualty accident year loss ratio, ex-cat, looks to be up about 150 basis points in the quarter, maybe closer to 300 or 400 basis points for the year; highest it's been, I guess, in about five years. I know you had mentioned there were some sort of shift in business mix there that may have driven some of that. But how much of that is that shift in business mix versus maybe higher loss cost trends, medical cost inflation, the legal environment? What are the drivers there?

Well, in the new business, about high single digits is driven by the new products that we've added. So there's more new products coming in with new premium, with business we don't have a long track record with. And we typically try to take a cautious approach. It's not always resulted in retrospect that it was cautious, but it's certainly our view that we're trying to be cautious. So you're not going to -- we evaluate those reserves. But since we don't have a long track record there, we kind of hold our estimates up for an extended period of time. As you see growth in those, we're going to try to be cautious with the booking ratios. And when that mix changes, you are going to have some of that. And as we said with transportation and some of the auto-related products like the personal umbrella we talked about before, which is 80% auto exposure, we believe it's appropriate to be cautious. We've obviously seen some -- we've seen some hiccups there in the past, over the last year. And I don't think we are one that doesn't like to jump and assume everything is great, so we're going to take a cautious approach there as well. And some of it may very well be mix. I can't speak to the mix component of all the pieces that are there.

What have you seen there on the loss cost trend, medical cost inflation? Is there any change in the legal environment? How much of that is driving this here?

Well, I've spoken to that before. I think that in past calls that certainly we believe there has been an uptick in litigiousness. Tort environment is not totally cooperative. Particularly I think the commercial auto area has felt it as personal auto. We don't write personal auto, necessarily, but directly anyway. But certainly you've heard that. And I think we see that more in severity than we have in frequency. Some of that very well could be driving it. And, as always, if we start to see a little bit of a blip, we tend to be a little more conservative with our estimates in regards to those loss cost trends.

Right, right. And then just one on the other insurance expense ratio jumped quite a bit to 10%. Is that mainly the performance-related fees you had mentioned?

Jeff, it's Tom. You said 10%?

Yes, 10%.

Oh, increased 10. Okay, yes. Historically it's been at 40% to 41% has kind of been our run rate for the expense ratio.

Yes, the other insurance expense ratio of 10%.

Correct. Okay. I'm sorry. I thought you were talking about the expense component of the combined ratio. That is pretty much the effect of tax reform as well. There's a component in there that's driving some of that.

Okay. Where's the performance-related fees flow through? You said those were up?

I believe you're looking at the general corporate expenses on the income statement. And it's up similarly to the combined ratio because the folks at home office, corporate side, there was some of the bonus and profit sharing components are flowing through there as well.

Our next question comes from Mark Dwelle with RBC Capital Markets. Please go ahead.

Let me go back to the tax question first. Because I thought I had it when you said it originally; and then when you answered that prior question, I had a different impression. So am I understanding that your best thought on the effective tax rate for 2018 is 10 to 11 points better than the 25% or so effective tax rate you paid for 2017, which, doing the math, would be circa something like 15%? Is that the right way to think about it, or are you deducting the 9% to 11% from the 21% statutory rate?

Good clarification there, Mark. It is Tom. Yes, from the historic rate -- as I think I said in my comments -- we looked back and then we recast that based under the new tax reform law. And so it would be off of the historic effective tax rate. Then you take the 14 points of -- downward from the 35% to 21%. And then you get to your point about -- if it was 25% last year; figure it's 10% to 11% in a range better than that. So it would be in the 15 percentage range, 15% to 18%, depending on -- there's mix. It's a mix of investment income and underwriting income in a given year; and some of the other variable items, proration, et cetera, that go through the statutory new effective rate calculation.

Okay. That's the way I heard it the first time, and then when that one question came through, I thought maybe I had misheard. And I think I'm back on the right page. Hopefully everyone else is, too.

Thanks for clarifying.

Second question relates kind of to investment philosophy. Historically, you have used a reasonable amount of municipal bonds in your investment portfolio. Is that something that you would figure to change going forward as you -- as the lower tax rates impact investment thoughts?

Mark, it's Tom. We are currently looking at that, doing some valuations. On the one hand, there is no AMT. So in some respect, they become more attractive. You don't have to keep an eye on crossing that threshold into the alternative minimum tax. On the other hand, with the lower corporate statutory of 21%, the difference between a tax-exempt, say municipal, versus -- at a 35% rate to a 21% becomes a little less attractive. With the exception of -- it may push you out more on the yield curve, further out on the duration on some of those. So we're in the midst of conducting an optimization of the portfolio as we speak.

Okay. Thank you. And then my last question is for Craig. When you think about the level of rate improvement that you're seeing in some of your key product lines -- property lines, for example, or transportation -- how would you say that the levels that you are seeing compared to what level maybe you thought you would see immediately following the hurricane events -- is it a little better? Is it a little worse? Kind of about right? I'm just looking for a qualitative of maybe how the market has evolved from initial expectations to what you're seeing today.

Sure. Mark, certainly we were all hopeful that maybe the reaction was going to be a little stronger than it has ultimately been. But we are seeing, at least directionally, moving in the right direction. It's a little slower than we would like it to be. But it -- and it's moving in the direction we expect, but maybe not the same magnitude as we were hopeful for. And I think that's true, by the way -- and I know you've probably heard this from the reinsurers as well. I'm sure the reinsurers were extremely hopeful that this was going to trigger significant increases to get back to, let's say, two or three years ago, what the rates were. And basically they are clawing their way back to last year in a good part. So that's kind of where we're at, I think.

Do you have any sense that customers are resistant or pushing back? Or is this just kind of the normal competitive, trying to find your rates amongst many, in terms of rate setting?

Well, I think it's still a competitive environment. And I think the -- we've got a lot of new brokers, and a lot of new brokers that are new to this, and probably have never really been through a hard market before. So I think a lot of them were a little reluctant to push price. A lot of them were hopeful that the carrier -- and put a little pressure on the carriers to stay flat, because I think they were reluctant to sell an increase. But I think things have sorted themselves out. I think there's still a lot of capital in the market. And so I don't think you're going to see these double-digit increases that we were hopeful for--

Well, I will hope for it with you--

We'll get every dollar we can.

Our next question comes from Arash Soleimani with KBW. Please go ahead.

There's just one quick question I had in casualty. So I know the core loss ratio was up year-over-year. But compared to last quarter sequentially it looks like it was down quite a bit. And I know last quarter was elevated a little bit because of 200 basis points of cat exposure within casualty. But even with that, it looks like it was still considerably better. Did anything change in this quarter to allow for that improvement sequentially?

Again, this is Craig, Arash. I would have to attribute it to mix more than anything. Because I don't know that we've taken any -- or I don't think we've taken any of those ratios down, at least from my knowledge. So it would have to be some combination of mix. We're able to grow some of the -- like personal umbrella, that's historically run a little lower loss ratio, but can only attribute that to mix.

Arash, you're talking about calendar year, right? Calendar year or calendar quarter?

No, I was looking at the -- so accident, ex-cat, ex-development within -- for the fourth quarter. I think when you back out cats and development, it looks like it was around 71% in 3Q, but then closer to 66% in 4Q. So if you back out like 200 basis points for cat exposure and casualty last quarter, it will take it to like 69%. So it looks like it was 300 basis points better 4Q versus 3Q. And I know, last quarter, you talked a lot about booking the initial loss picks more conservatively. So I was just trying to see, were you maybe being a little bit too cautious last quarter? And this quarter, you are still being cautious but not as cautious. Just trying to get a sense of what caused the shift, or as Craig said, if it was simply just mix.

Arash, it's Tom. We have not moved off of our amount we recorded for the three hurricanes in Q3. And I can't think it -- other than mix, I'm struggling to come up with a difference.

Okay. And then the other question, I think you said within transportation, you grew 24%, and then half of that was from rate. So if you are growing -- like, if there is growth within transportation outside of rate -- so is that a line that you now see as attractive again at current rate levels? Is it something that you see forward momentum in, going forward?

Arash, we're doing it as cautiously as we can. We think there's a good opportunity and we see a lot of -- still a lot of retrenchment from competitors. It's in all three of our segments that we have within transportation, which is truck, public, and commercial auto. And we've moved out of the -- some of these more challenging metropolitan areas, and tried to focus a little more in, I'll say, rural or suburbia. And we found opportunity there. I think a little bit of that is, as I alluded to in my opening remarks, was these across-the-board mandates. Anybody -- anytime anybody says -- a competitor says, well, I either am going to get out of this because I don't like it, or I need a minimum of 15% rate increase for this class of business, if they don't differentiate between -- and use a little bit more of a scalpel than a chainsaw, I'd say, approach -- it creates some opportunity for people that maybe understand the risk a little better. So that's what we believe that's the case and that's where we're seeing the opportunity.

And are you doing any of that non-emergency medical business anymore, or are you completely out of that?

No, we're out.

Our next question comes from Jamie Inglis with Philo Smith. Please go ahead.

My question is related to loss cost expectations. You've spoken extensively here about where you've gotten rate increases; and, at the same time, you'd like to have gotten more here and there. But I can't -- but ultimately it matters for rate increases versus loss cost increases. And wonder if you could give us some sense on what you think that delta is, or what your thoughts about it might be, going forward.

Right. Jamie, this is Craig. We are getting -- I mean, in the auto area, I think we believe we're getting more rate than the loss cost inflation, although some of that was catch-up, clearly. But we still think loss cost inflation in the auto areas is mid-single digits. So you need a 5%, 6% increase just to tread water, I would say, with your margins and loss ratio. We continue to get I think more rate than loss cost in professional liability. Our -- the architects and engineers and for that professional liability, not necessarily D&O. And any of the auto -- anything that touches auto, I think, we believe we're getting rate in excess of loss cost inflation. Other places, though -- like I said, with E&S casualty, I think there's got to be some underlying inflation. We still haven't seen it take off, but we're not getting very big increases there. I worry about the margins there, and I worry about the margins in the D&O business; although I'm hopeful, D&O, somebody gets religion.

Right, right. So, ultimately, from a product perspective, it sounds like you believe that the rate increases you're getting are more than adequate to cover any loss cost increases--

Yes, well, I mean, we're getting rate -- yes. We're definitely getting rate where we need it. And, in some cases more, than maybe -- I won't say more than we need, because we need as much as we can get -- but more than annual loss cost inflation. Again, some of that is make-up. I would be careful of measuring things relative to the rate increase -- the magnitude of the rate increase you get. A lot of people get rate because they need it, okay? And if you do a good job with selection and you do a good job walking away from business that isn't priced adequately, your rate need is not as much as some of those people that don't have that same discipline. So you can see that, historically, a lot of times that people's rate increases are historically higher than the rate increases they see at RLI. They also don't -- haven't walked away from business and shrunk it at the pace that we've been willing to do at RLI. So I think I'd be very careful just looking at less cost inflation and is price keeping up with it, because there is this selection piece. And I know it's very difficult to measure, and you shouldn't give credit to everybody for that.

Well, I wasn't saying that. I was giving the credit to you guys, because--

I just meant not everybody's earned it.

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

Thank you all for joining us. It was a noisy quarter, to say the least. But it boils down to, our premiums were up 11% on a combined ratio of 95, again, with some noise in that combined ratio. We are expecting increased economic activity which should benefit the whole industry, and RLI in particular, across all segments. We anticipate that tax reform benefits will be used for growth as much as we can, both organic and inorganic opportunities. Our bonus and profit sharing plans allow RLI to pass on some of the savings to all employees. This shared reward philosophy that we have comes naturally to us through our bonus and profit sharing plans. Again, thank you for joining us, and we look forward to talking again at the end of the first quarter. Thanks.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-888-203-1112, with an ID number of 6564664. This concludes our conference for today. We thank you all for your anticipation, and have a nice day. All parties may now disconnect.