Good morning, and welcome, ladies and gentlemen to the RLI Corp., Second Quarter Earnings Teleconference. Today's conference is being recorded. At the request of the company we'll 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 Report on 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 second 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 gains or losses and after-tax unrealized gains or losses on equity securities. RLI's management believes these measures are useful in gauging core operating performance across reporting periods, but may not be comparable to other company's 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, 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 2019. Joining me on today's call are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Todd Bryant, Vice President and Chief Financial Officer. Before I turn the call over to Todd to discuss the quarter's financial results and Craig to talk about operations and market conditions, we're going to hand up the call to Jon. Jon?

Thanks, Aaron. I just want to say thanks to Tom Brown, who has planned to stepped down as our CFO, June 30. Tom served in that capacity since 2011 and did a great job for us. Tom's career spans nearly 40 years, including 31 plus years of PWC. Tom was instrumental in ensuring a smooth transition to the successor, Todd Bryant. And I'd like to welcome Todd for his first analyst call as our CFO. He actually subbed for Tom, once when Tom was ill and couldn't perform. Todd joined RLI in 1993 from Arthur Andersen. He's a graduate of MacMurray College and is a CPA and CPCU. Todd's been a VP of Finance and Controller since 2009. Welcome, Todd.

Thanks, Jon and good morning. Before I start another quarter's financial results, I also want to take a moment and thank Tom Brown for his contributions to the company and to my professional development over the past few years. We certainly wish Tom the best as he transitions into retirement. Moving to the quarter, last night, we reported second quarter operating earnings of $0.66, 10% higher than the same quarter last year. Both underwriting and investment income contributed to those result. And operating earnings coupled with strong investment portfolio returns drove book value per share, up 8% in the quarter. Year-to-date inclusive of dividends, book value per share is up 21%. Starting with the topline gross written premium was up 5% in the quarter. As we've discussed before, last year we exited a reduced exposure in certain casualty products to give us a bit a headwind in 2019. Absent the effect of these changes, premium would have been a 13% which will be consistent with the pace of organic growth we've seen -- we've been seeing for several quarters now. Multiple products within our casualty and property segments drove this growth, while our surety segment continued to face challenging market conditions that hampered its growth but certainly not its combined ratio. Craig will talk more about our product and market conditions in a minute. From an underwriting perspective, we posted a combined ratio of 92.8. On a year-to-date basis, we stand at 90.9. There were several moving pieces within the second quarter results that are worth highlighting. The loss ratio was aided by increased favorable prior years reserve development which net of expenses totaled $18 million compared to $12 million last year. A majority of products developed favorably in the quarter. From a segment perspective, casualty posted $16 million of…

Thanks, Todd and congratulations to you on your recent promotion, well deserved. I also wanted to thank Tom for his service and stewardship to our company. I wouldn't be remiss if I didn't provide one more shout out to Aaron Jacoby, who brought home the gold in the buckets division of our annual Mount Holly member guest golf tournament. Great job to him and his partner Paul Dietrich who runs our professional services product. Congrats, now it's time to put away the Cleanx and party streamers and get back to business. As Todd mentioned, topline was up 5% for the quarter and came in at 93 combined ratio. We feel pretty good about the growth in light of some pruning we did earlier in the year. Growth continues to be widely felt across most of our portfolio with a healthy mix of newer and more seasoned products. Meanwhile, our diverse portfolio especially products continues to deliver on the bottom line with a 91 combined ratio year-to-date. Some competitors have exited or retrenched significantly as a result of poor underwriting performance. As you recall, the first signs of market distress was an automobile liability starting several years back. But we have seen some growing dislocation across several niches, including access liability, habitational, management, liability, transportation, and marine. Sometimes the displacement is limited to certain geographies and classes of business. RLI has a broad footprint of products and people that helps us keep a close pulse on changes that are occurring in our chosen markets. As a very well-respected specialty underwriter told me once, disruption is oxygen for our business. This is particularly true when you have confidence in your balance sheet and the quality of your underwriters to select risks that are adequately priced. We are fortunate to have both. Let…

Thanks Craig. Operator, we can now take some questions.

Thank you, sir. The question-and-answer session will begin at this time. [Operator Instructions] Our first question will come from Randy Binner with B. Riley.

Hey, Good morning, thanks. I have a couple -- I think the first one is for Craig. And I think, I heard in your commentary there that you're seeing a little bit wider dislocation in the market. And you listed off a number of casualty and maybe some property line. So, you all have always been pretty realistic about what's out there in the market. But am I hearing that right that you are feeling like there's wider dislocation across product lines in the market?

Randy, this is Craig. I mean, what we've seen is quarter-over-quarter. We haven't seen any rate increases. They haven't let up. So, they've actually either increased or at least the rate of increase has either stayed flat or increased. And a few of those have accelerated. As I mentioned, I think transportation was one that we -- was even accelerated more that we were able to achieve, I think was a 14% rate increase across our transportation book. We're also seeing it in D&O, we're seeing some more momentum Directors and Officers, which I think I referred to as management liability on the call. As well, some momentum in Marine and I think an excess liability, both commercial and personal.

Thanks for that. And then for E&S in particular, has that flow changed? I think, in earlier calls this year, and late last year, flow has been better on submissions and your ability to buy. Is that Is that still the case? Are you still seeing good opportunity in E&S?

We are -- E&S, I mean, our submissions are up in E&S. I think were asked this question last quarter, and maybe we didn't talk it down a little bit. I'm sorry. Can you hear me?

Sorry, I had a distraction in the - please go ahead. I can. Yes.

So, I think this question was asked last quarter as well and maybe we underplayed the E&S submission flow just because we were seeing even greater flow in some other areas. I mean, we continue to see, I'll say single-digit increases in our E&S casually book and submission flow. Property has been a little more flat. We've been doing some re-underwriting in certain segments on the fire side of that. So, I think that's part of what's contributing to the flatness there, but the submission flows up even more in some of the other areas. So, I think maybe we underplayed the flow in E&S but certainly submissions are up. I'm not going to say across the Board, because there are certain products, whether we're either re-underwriting or whatever but may be the flow is not up. It might be slightly down, but I'd say overall as a company it's up in single digits.

Okay, I'll do one more. I'll try this. So, it there's kind of a pain trade that happens when the property casualty market shifts, which is happening. If you could peg where we are in that inning wise, like a baseball game, where would you put it? Meaning we're seeing some folks have discipline on pricing, we're seeing some reserve issues, but there's surely more to come kind of where are we in the process, or in the baseball game?

Well, I guess, I would say I think the pain is more widely felt, but certainly not across the board. I think as I mentioned, I think people are responding fairly rationally, which I think is a good sign at least where the pain is the greatest. That's where they're being the most aggressive on pricing and addressing problems. I think for us, it feels like the rates have just maybe just started to cross that Rubicon of being in excess of lost cost inflation. So at least the lost cost inflations we assume. So certainly, starting to feel good about that. So, I'd say maybe, hopefully, we're hopeful it's the beginning of the of the hard market. But we're not prepared to called it hard, it's better and improved.

Okay, fair enough. And I'll just I'll add my congrats to Tom. It's been great working with you. So, thanks.

Next we'll hear from Christopher Campbell with KBW.

Yes, hi. Good morning. Congrats on the quarter.

Thank you, Chris.

Is there a way that you guys could break down between like property, casualty and like surety growth? Like how much of that -- of the growth that we're seeing is like rates versus exposure?

I could try. I mean, I think I talked about the rates were up 5% for casualty, that's about how much we grew casualty, I believe net of the exit. So that's mostly, I guess you could call it rate but there's a lot of mix going on in there because there were things as we talked about, that we've pruned and gotten rid of it. At the same time, we've added things and we're growing organically. So, I think that's a very difficult. It's very difficult to kind of broad brush it like that. I mean, property rates are up 3% or 4% overall. So, we feel good about that. And the rest is exposure, whether it be new business or organic, although most of our growth at this point in time is coming from -- I think two-thirds of our overall growth is coming from organic opportunities, products, we've been in for a long, long time.

I’m sure. Can we get color what's happening there? Is that all exposure?

Well, surety half it well -- exposure shrinkage, I guess. So, the reverse there. It's not -- certainly not rate. I mean, there's a good number of these accounts that we're losing that we're actually opting to get off. So, either we're actually asking for collateral because the credit profile has changed on these accounts. And as soon as you ask for collateral, typically the broker will move the account. And if we don't get the collateral, frankly, we're happy that they move the account. So, I mean, most of that decrease is going to be exposure reduction, and there is some small rate reductions in select sub-products I guess within there, because rates aren't typically moved around a lot and surety not as much.

Okay, got it and then just a little bit of like you know deeper dive on the rates. What are you saying -- what did you see for the quarter and like your general liability and then umbrella? I'm thinking like the commercial umbrella side. Like forward rates in those two lines for the quarter.

Well, I mean, commercial umbrella is mid-single digit increases. I'm trying -- and JL was -- it was also mid-single digit increases.

And that's mostly E&S casualty.

I mean, the opportunities we're seeing to grow more often, because of our consistent appetite is typically things coming to us in the marketplace. So, we're seeing the new business opportunities that we're seeing are much better priced, typically than the new business opportunities we've seen in the past. So, we've been able to write more of that new business than historically has been attracted to us. Now that's not true across the board. I mean, we still see a lot of businesses, as I mentioned, that's still well underpriced. It might be getting you significant increase, but insured certainly is not happy with the 50% increase that they're paying sometimes. But in some markets, they need a 100% increase. So, when an account is presented to us with 50% increase, but we think it needs to be doubled we're not going to write that account. So, but most of the -- a lot of that growth, in exposure, whatever that is really an opportunity is new business opportunities we're seeing that are better priced. And that's pretty much across the board.

Okay, that makes sense. And then just I think Todd had mentioned it like just the lower new money yields. I guess, just as rates are coming down, how quickly should we think that these lower yields earn into the portfolio?

This is Todd, Yeah, I think it certainly takes time. I mean, if you think in terms of our duration, I mean, our book yield on the fixed income is about 3.4. So, you go back, it wasn't much different at the end of December and then we're certainly putting quite a bit of money that works. So, I mean, I think it's slower.

And what are new money yields right now, on your fixed income, like blended?

About 3.5.

Okay. Okay, so they're still above the book yield?

Yeah, yes.

Okay, so there shouldn't be that. Okay.

Slight.

Okay, and is that -- you guys are like going up, or I guess going down in credit quality? I guess what's driving that? Or is it just overall, like -- overall risk-free yields are higher, or is there any credit shifts happening in there as well.

The credit quality really is remaining double A minus. So, we're not seeing a significant shift there. I think a little bit of change in the duration would be part of it. A little bit of lengthening, but again, not much.

Okay, got it. And then just one last one, I mean, kind of small, I mean, not a huge dollar, but like times profits were up like 1.5 million year-over-year. So, despite like to produce quota share, I guess what's driving this and should we expect, like their contribution to decline, as the lower quota share starts to earn in?

In terms of the owners, are you talking about the investee earnings, that piece of it?

Correct, yes.

Okay, yeah, that's really driven by -- and when is unchanged, our 23% ownership is what drives that. And if you think in terms of all the growth that Prime had last year, we're seeing certainly more of that on this revenue. Their profits are up the 80% range. And so, you just really seeing more of that coming into to investee earnings. So, it has certainly accelerated quite a bit from last year and second quarter last year was a pretty low quarter for them. But it's really our share of their earnings is going up.

Okay, right. Well, thanks for all the answers. Best of luck in the third quarter.

Thanks, Chris.

We’ll now hear from Jeff Schmidt with William Blair.

Hi, good morning, everyone. Question on the California Earthquake book, it looks to be I guess, around 15 million of direct premiums for you guys, which was about what it was in ‘16. But that markets been drilling quite a bit and I would guess with this recent seismic activity you could see it expand more. What's your outlook there are you looking grow there, why has that stayed flat?

Sure, Jeff, this is Craig. So, if you -- if I take you back to the end of last year, when we made the decision to buy more cat cover, we were growing and the rates were starting to, we're starting to see either flat or slight, maybe slightly positive increases in that market. Since then things have kind of flattened off, and you’ve really not seen any more momentum in that space. So, we actually bought more cat cover in thinking that we might use it for some growth opportunities, those growth opportunities have not materialized yet. The pricing has stayed pretty flat, I mean, it's really not going down, but it's not really going up. Maybe that's because of the competition you're referencing. I mean, certainly there was an earthquake out there on July 4, and subsequently activity not really seen significant submission flow from that. We have seen some requests for re-quotes and as soon as they see the prices the customer chooses not to buy again. So, take up rate out there is relatively low, unfortunately. And that's what we need is more demand, as opposed to a knife fight with a bunch of competitors.

Okay. And you were talking about capital -- organic growth and things he said would have been 13% or 15%. But for the repositioning, is there any more detailed color you can provide on those changes or the repositioning?

Well, just a reminder that I mean, we exited, our healthcare business and a real estate investment trust business earlier in the year that we had announced that first quarter call, and also the downsizing of that Prime quota share. So that left about, those three items plus some other smaller things left about a $50 million hole in the top line, starting after year. That was intentional on our part, we believe that was good risk management. If obviously, we thought we could rehabilitate the underperforming businesses in that group, we would have done it. We felt the best avenue was exit. So, I think that's the difference of us and others is that we're willing to say throw in the towel if we need to, so we can stay focused on the things that we know how to make money in.

Okay, that's helpful. Thank you.

[Operator Instructions] Now we’ll hear from Mark Dwelle with RBC Capital Markets.

Yeah, good morning, guys. Many of my questions have been covered already. But you'd come in a few places about seeing some new business opportunities. And I guess the question I was curious about there was just are these risks that are coming over from the standard market that being rejected by standard writers are these classic E&S risks that somebody else's had enough appetite, and now it's your opportunity?

Mark, I think it's a little bit of both. I mean, we still see competition on the E&S side, we still see competition from midmarkets. But I think a lot of the submission, increased submission flow that we're seeing is either people changing their appetite. So, these are existing customers, existing competitors, changing their appetite, or in some cases, totally exiting spaces. It could be a class, it could be a niche within a class, it could be a geography within a certain segment of the business. And I think our broad footprint gives us opportunity to see a lot of different things. And that's where we've kind of picked up and seeing the opportunity.

So, to be this is -- Michael. So, to be clear, it's coming from Marine, transportation, executive products or management liability products. We're seeing opportunities in personal umbrella, in commercial umbrella, for sure. And in Hawaii, as Craig mentioned. So, there are there are a lot of areas where we're seeing either market disruption or opportunities that we can take advantage of.

Okay. That's helpful. Just quick on Hawaii, as most of the Hawaii growth is it actual new business? Or is it rate plus new business?

Mark, this is Craig, it's mostly new business opportunities. I mean, well, as I mentioned before, I think some people had some challenges with the volcano last year. And then there were some wind storms and fires on the island. I think people gotten some coverage disputes over what was covered, what wasn't covered. There's been some retrenchment on by some of those people. And I think we got some good press. We had people live on the island in advance of the volcano, talking to customers, helping the customers helping them identify property and we're very quick to help pay those claims. So, I think that that gave us some good press, not just with the customers but with the producers.

Okay, thanks. And then one last question. And I mean, this one might not be entirely fair, but for us, the people from corn country that what you're seeing what you might be hearing in the ag business? I know you don't do that anymore, but given your geography, I would think that you would have heard some things or thought some things?

While the corns not as tall as it's supposed to be at this time of the year, I can tell you that.

I had to figured it out that way.

I think the -- if all of our say as long as we could hold off the freezes, they could still harvest. So, we got pretty good farmers, they know what they're doing around here. So…

All right. I appreciate that. Thanks very much, guys.

Thanks.

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

Thank you all. I'll just say that rates are generally up. Craig noted excess liability transportation and management liability pricing up considerably. And there is much disruption in the markets that we participate in. We are well positioned to take full advantage of this. Our underwriters are experienced and disciplined to pick their right spots. Overall our privilege were up 5%. If you ignore the premium we did at the beginning of the year, our premiums were up 13%. We do remain confident in our ability to deliver. Thank you for attending and your questions and we'll talk to you 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 number of 5955367. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.