Good morning and welcome ladies and gentlemen to the RLI Corp. 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. At the request of the Company, we will open the conference up for questions and answers after the presentation. 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 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 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. Thus Form 8-K contains a 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, 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 2018. 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?

Thanks, Aaron, and good morning, everyone. For the fourth quarter, we reported operating earnings per share of $0.40 bringing the full year to $2.05. Like to provide a high level view of some key drivers of these results. Starting with underwriting profit, we came in at a 98.9 combined ratio. You'll recall that we had pre-announced losses from Hurricane Michael of $22 million to $27 million and the quarter ended up with recorded losses of $23 million at the lower end of our range, or $19.6 million net of bonus related expense offsets. This added about 10 points to the quarter's combined ratio. Partially offsetting the hurricane loss was $9.6 million of net favorable development on prior year's reserves, up from $5.2 million in the fourth quarter 2017. Our Casualty segment was primary contributor to the favorable development and offset a modest amount of adverse development in the Surety segment, which was primarily due to two losses from the early 2000s. Turning to premium volume, gross premiums written in the fourth quarter was up 12%. Casualty grew 16%, supported by a number of our traditional products, such as general liability, excess casualty, executive products and transportation, as well as certain of our newer casualty lines. Property grew 9% driven by marine, up 28%, while Surety was also slightly up. Craig will talk more about these trends in a minute. From an investment perspective, we continue to record higher levels of investment income, which was up 17% in the quarter. Driving this trend are higher reinvestment yields and a larger invested asset base, while duration and credit quality are relatively unchanged. The equity markets were particularly volatile in the fourth quarter. However, we remain steadfast to our long-term approach of using risk assets, including equities to diversify our investment portfolio and…

Thank you, Tom. Good morning, everyone. I want to provide some overall comments about the quarter and then get into some segments specific results and conclude by summing up the year. As Tom referenced, we reported 12% top-line growth and a 99 combined ratio for the quarter. Pretty good results for our Company, given the impact of Hurricane Michael. Despite the loss estimate coming in at the low end of the range we previously reported, Hurricane Michael was a very severe storm and the event resulted in the largest hurricane loss in RLI's history. It was also our largest single event loss since the Northridge earthquake and the first time we ceded loss to our catastrophe treaty since 2005. The fact that we were able to sustain Michael and still achieve an overall underwriting profit for the quarter and an underwriting profit in our Property segment for the year, given the other catastrophes that occurred, is further evidence of our well diversified specialty portfolio and resiliency. Growth for the quarter remained widespread across our portfolio with drivers being a healthy mix of newer products, underlying economic growth and increased marketing efforts in our more established products and rate increases in select spots. We have generally found that the market is coming to us, creating opportunities, where some pain points are starting to be felt by our competitors. We see this in terms of increased submission activity across most of our portfolio. Rates are still relatively flat, but upward is needed most. Despite the improved opportunities, we pride ourselves on our consistency of underwriting appetite and pricing, with the willingness to let accounts go where we have to, staying true to our strong disciplined underwriting culture. I'll now dive into a little more detail by segment. In Casualty, we were able…

Thank you, Craig. Operator, we can now open the call for questions.

Thank you, sir. A question-and-answer session will begin at this time. [Operator Instructions] And we will go ahead with our first question from Randy Binner of B. Riley FBR. Please go ahead.

Hey, good morning. Thanks. I had a question, I guess, about the reinsurance treaty renewal. And, Craig, I think you mentioned that you added an additional $90 million of cover for the price of $5 million. So I want to make sure I understood that and just maybe understand a little bit better where the $90 million fits on top of the reinsurance coverage you already had.

Sure. Randy, this is Craig. The effectively, we bought -- added $100 million to our tower. Now, we take a 10% co-participation on that. So you do the math, it's 90 points or $90 million, we added to the top of our tower. Now, just to be clear on the additional premium, that included the per risk treaty that we're going to pay about $2 million for the per risk treaty, so that $5 million that I referenced, $2 million of that is in our per risk treaty not in the cat part of it. And about half of that cat cover is because of the additional exposure that we're going to add over the year, plus the other half is really just for the $90 million of coverage. Okay?

And if this is exposure adding in basically hurricane wind zones. Is that the right way to think about it?

No, we've added -- I mean, we've added it over the last year, right. And we continue to think we're going to see a few opportunities going forward. So we want to continue to be in a good place in regards to covering PMLs and things, so we want to make sure we constantly relook at that.

Okay. So is it largely PML neutral all that because the growth kind of grows into it?

I mean, I would say that we're going to buy to about the same PML as we bought last year. Does that makes sense?

Yep. And then on the -- so the less premium casualty, you -- I think you mentioned -- so it's easy to model the loss of the 50, but then we have to figure out the bottom-line impacts. So you said, it would improve the bottom-line. I guess, can you expand on how we might think about that from maybe a loss pick perspective or how that book might change with that much less premium?

Well, I mean -- I guess, I can help by giving a little bit of ideas. I mean, the -- I mean, it was probably performing that group of business. I mean, take out the Prime part because Prime actually is then fairly profitable for us. I mean, that had performed in excess of a 110 combined ratio, somewhere in the 110 to 125 combined ratio. So...

And we'll go ahead with our next question from Christopher Campbell of KBW. Please go ahead.

Good morning, gentlemen. So just following up on Randy's question real quick. So the $50 million of premium that you're not going to have in 2019, that was at a 110 combined ratio and higher?

The healthcare and the real estate investment trust portion of that, yes, which is, I will say, a little less than half of the total that I quoted.

Okay. And then, why would you -- if the Prime part is more profitable, I guess, why would you eliminate the quota share or reduce the quota share on that? I guess...

Chris, it's Tom. As Craig said in his comments, it was a collective effort. They have grown rather substantially and no different than what RLI and probably any number of well run insurance companies typically diversify their panel of reinsurers and we were the sole reinsurance market for them for a number of years, so it's a diversification. They've got some very good players on that panel. It does come with a little bit of a price rate. Our participation goes down and we do model it as well and try to hold the line as to the totality of that too -- or as a percentage of our overall book. So it was kind of a win-win. And as Craig said, that piece of it's been profitable to us.

Got it.

And just to be clear...

[Indiscernible] profitable, will there be an option -- or I mean, will there be an opportunity to increase your ownership of Prime? Then -- I mean, if they -- I understand, they might want to diversify their panel of reinsurers and that would derisk it for them. But from your perspective, would it make more sense just to own more of Prime then?

That's really not within our control. The owner of that is -- the principal is the majority shareholder at this time. And if an opportunity came up, we would certainly take a look at it.

Got it. That makes sense. And then just, can we get an update on what you're seeing on the commercial auto and GL loss trends? I mean, we've heard from some primary competitors that they've been like boosting their current year commercial auto loss picks? And I was just wondering, if you're seeing something similar in terms of like elevated bodily injury trends in your commercial auto book?

This is Craig. I mean, we obviously -- we did see an increase in that a couple of years back, it's stabilized over the last two or three years. So it's stabilized at a little bit more elevated level, I'd say mid single-digit, maybe a little higher -- 6% or so loss cost inflation, but we've been getting double-digit rate increases over the last two years. So -- and as far as the loss ratios, our loss ratios have also stabilized to -- and seeing some slight improvement in recent years because of the price.

Got it. And I think you had said, like transportation, but maybe in the script and I just -- I might have missed the actual number, but it was like 13% rate increases, you're saying you're seeing about 6% loss cost increases. When do we start seeing -- and I know you're trying to be extra conservative, given the prior commercial auto, like, reserve headwinds you had. But, I mean, at what point does like the loss pick come down on that business? Do you start getting more comfortable with the existing reserves? Because I'm thinking like a 7% margin should eventually like cycle into more reserve releases.

So -- I mean, we actually did have favorable development in transportation this quarter, but we have kept our, what we call, our booking ratio or the loss ratio for current accident years flat year-over-year. And I won't say an abundance of caution, but to take a more cautious approach. So what's happened is as we kept that flat, we saw some favorable development and we've taken it, but those are on prior years, so we continue to be, I'll say, I don't know if conservative is the right word, we think smart with the current accident years.

Got it. And then just kind of one ancillary question on Maui Jim. I know, it's probably not for sale, but, I mean, have you had that appraised recently? And then, I guess, how much was the book value of RLI, what you have it on the book be impacted, if it were like mark-to-market to your financial?

Yeah. We have not really had Maui Jim appraised recently, but I think the book value is in the 70s, we're carrying it in the 70s, so we think there's extra value there, if you will.

Okay, so $70 million it's on the books?

That's the carrying -- that's the equity basis value on the books. Yeah.

Got it. So what percentage of that is do you own?

40%.

Got it. Great. Thanks for all the answers. Best of luck in 2019.

Thank you.

We'll go ahead with our next question from Jeff Schmitt of William Blair. Please go ahead.

Hi. Good morning, everyone. Just looking at losses ex-cat in that Casualty book, I mean, they look to be high 60s, maybe even 70%. They've been under 65% for a while up until probably 2017. Obviously, you're adding there in the commercial auto, but it seems there are probably some other drivers there. Are you -- are there any particular lines that you're strengthening there or is it more broad-based?

Jeff, this is Tom Brown. That's primarily, where some of these newer products that Craig mentioned reside in that segment. So we do take a little longer-term view of those to see them mature. So it would -- that would result in a mix change. And we just think that's the appropriate way to view that as they're small and growing.

I mean, we've also seen growth in our, I'll say, our umbrella, particularly our commercial umbrella business, which we tend to be conservative because it's a bigger limits and little longer tail. And the same thing with our D&O book, we take a much more longer term approach to where we're going to book the year to. So -- and it will just take a little bit longer to play out. So -- and that is where we've seen some additional growth.

Is that umbrella are you seeing losses impact that from commercial auto? I mean, sort of increased severity there, is that flowing through and hitting umbrellas?

No. Well, I'm not -- let me just speak for RLI specifically because in our commercial umbrella space, we limit significantly the amount of underlying auto exposure. We don't really like risks with a lot of underlying auto exposure. So we've not seen some of those trends, I think -- so the earlier person that asked a question about trends in the general liability and umbrella, we have not seen that and most of our book of general liability and umbrella is in the contractor space with very little auto exposure in the umbrella.

I see. Okay. Okay. And are you seeing -- and I know you'd mentioned in the past seeing kind of a more active plaintiff bar, probably particularly in commercial auto. But do you have any more anecdotal evidence in other lines that you're seeing that?

We have not seen it. Really it's been isolated into the transportation business, the commercial auto and very specifically into trucks and public autos. Those limits we typically carry -- the insurers carry a little higher limits. The accidents obviously involved in that space can be quite severe. There's usually pictures involved, they can have gruesome injuries, they play well in front of juries, at least what we've seen is that's where the plaintiff bar has been focused. As I mentioned, in our general liability and commercial umbrella space, most of that's contractors, those involve accidents on the job site, a lot of those are -- they're not little more complicated, there's not really photos running around and maybe not as graphic, they maybe fell off a ladder or something like that, a lot of closed wound injuries type of things that don't -- at least, they haven't nibbled on yet I guess the plaintiff bar hasn't yet.

We'll go ahead with our next question from Bijan Moazami of Compass Point. Please go ahead.

Good morning, everyone. I'm trying to get a better understanding of commercial auto book that you guys write. In particular, how big is the commercial auto book? What kind of products you guys are writing? Is it mostly physical damage liabilities that are cargo component to it? And is it really trucking, two trucks, what are you writing in there? And how much of your growth is coming from commercial auto? And then I have a follow up question.

Bijan, this is Craig. So transportation books about a $100 million book of business. It's spread across three segments, long haul trucking, which are typically larger fleet, trucks are not really individual owner operator business, that's not really the business we're in. Public autos, which could be charter buses, school buses, any kind of public bus. And then we have, what we call, specialty commercial auto group, which could write anything from careers to ambulances to other types of specialty commercial auto business. As far as growth, almost all of our growth in the last couple of years has come from rate, so we have grown, but it's mostly been rate. So I think that was what your question was.

Yeah. You're not picking up a lot of new business there.

Well, you're always -- I mean, you retain 75%, 80% of your business, so there's always some portion of your business that's new business, but we're not -- it's not rapid growth in the new sectors or new accounts necessarily. We only write about 600 accounts in this whole sector, these are accounts mostly we know, we've either insured either currently or in the past, so it's a fairly narrow niche space that we play in.

And what I was trying to understand is that you're not getting into, let's say, two trucks, are you?

That's not a growth area for us, no. No taxis...

Yeah. The other question has to do with DIC. If you could clarify how much DIC you're writing? What's your PML, especially to an earthquake in California? And then finally, what are you seeing in terms of price writing in the DIC products? Thank you.

Well, this is Craig again. From DIC, I mean, first of all, I think our disclosures in our -- we have this disclosure in our K that shows what our earthquake exposure is by PML, so I mean, I going to refer you to that. As far as a percentage of our overall premium, it's about 4% of our overall gross written premium. It's pretty small relative to the Company, at least relative to some historical parts of the Company.

And is pricing going up or down in that segment?

The overall rates are going up. The rates we're seeing are relatively flat because we've been pretty consistent market with our pricing, so we are seeing a lot more submissions come in. So we're seeing more new business because the market rates are coming to the level that's acceptable for us to write.

[Operator Instructions] And we will go ahead with our next question from Mark Dwelle from RBC Capital Markets. Please go ahead.

Yeah. Good morning. Just a couple of questions related to -- I mean, you had indicated that you ceded some loss in the quarter under the reinsurance contracts. Can you just walk through, which line items were impacted? Obviously, the loss the loss line was. But what was the impact on earned premium or expense ratio or anything else?

Mark, I'm not sure I understand the question. I mean, I did say we ceded to our cat treaty.

I guess, was there any additional ceded premium associated with reinstatement or anything like that?

No. No, those are all prepaid -- we have prepaid reinstatement on our cat and our per risk treaty has -- there is no reinstatement provision. So all the premium is paid. There was no top-line impact.

Okay. The insurance operating expenses then in the quarter were below the recent quarter run rate, so it was obviously below last year's as well. Was there anything particular that led to that outcome? I had thought perhaps it related to the reinsurance session, but apparently not.

Mark, it's Tom Brown. No, it's actually two things. Let me go back to reflect a bit on 2017. It was probably a little over historic norms because of tax reform and the impact that had on our compensation arrangements, so that I think was a little closer if I recall off the top my head about 44% expense ratio. This year's is kind of the opposite. The impact of the catastrophes, particularly Michael has another direct impact on our incentive and bonus arrangements. So the 38% expense ratio this quarter and a lower amount for the full year is really impacted by that, which I think really demonstrates when we talk about the alignment of our compensation arrangements, they truly are aligned with the underwriting performance. So those two have a -- are the primary reasons for the lower overall ratio this year compared to last year. And I think expectations would be short of another catastrophe event more in line with the 40 to low 40s expense ratio.

And that would be probably the same reason then for a little bit lower general corporate expense in the quarter, just reversal of prior accruals or whatnot?

Yeah. It impacts both lines, correct.

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

Thank you all. A good quarter, a good year. For the quarter, combined ratio was 98.9 in-spite of Michael losses of about $20 million, premiums were up 12%, investment income up 17%. The year premiums were up 11%, investment income 13%. That's our 23rd consecutive year of underwriting profitability. Discipline and diversification remain the hallmarks of our model. In the past year, our associates delivered to our policy over during their time of extreme need, while continuing to deliver to our shareholders. Thank you all for attending and we look forward to talk to you next quarter. Thanks.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1888-203-1112 with an ID number of 8948169. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect. Thank you.