Good morning, and welcome ladies and gentlemen to the RLI Corp. Second Quarter Earnings Teleconference. As a reminder, 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 factors and uncertainties, which could cause actual results to differ materially, including the ongoing impact of the novel coronavirus, COVID-19 global pandemic. Please refer to the risk factors described in the company's various SEC filings including in the Annual Report on Form 10-K as supplemented in the Form 10-Q for the quarterly period ended March 31, 2020 which should be reviewed carefully. The company has filed a Form 8-K with the Securities and Exchange Commission that contain 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 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’ll now turn the conference over to RLI’s Vice President and Chief Investment Officer and Treasurer, Mr. Aaron Diefenthaler. Please go ahead, sir.

Good morning. On behalf of management, welcome to RLI's second quarter earnings call. We hope you're all staying safe in this new normal and appreciate you listening in. Joining me are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Todd Bryant, Chief Financial Officer. Todd will first offer some additional financial details from the quarter and hopefully answer some of your common questions. Then Craig will break down market dynamics and the current climate. At the close of prepared remarks, we'll open the call to questions, and Jon will close with some final thoughts. Todd?

Thanks, Aaron. Good morning, everyone. Last night we reported second quarter operating earnings of $0.77 per share. We experienced 1% of top line growth, while posting an 88.4 combined ratio. Investment income was relatively flat in the quarter, while unrealized gains on the portfolio reversed the first quarter's trend and positively impacted net earnings and book value. Book value per share ended the quarter at $23.39, up 8% for the year inclusive of the dividends. Craig will talk more about our products and market conditions in a minute, but from a top line standpoint, the 1% growth in gross premiums written was driven largely by rate increases and expanded distribution. As you would expect, premium from some products was down in the quarter, given the impact of the economic slowdown and shelter in place orders brought on by the pandemic. Most notably, transportation premium declined down $12 million in the quarter and $33 million on a year-to-date basis. Excluding transportation, gross premiums written was up 6% in the quarter and 11% year-to-date. While overall premium growth was down from prior quarters trends, top line results were better than our initial expectations as the quarter began. From an underwriting perspective, we posted a second quarter combined ratio of 88.4, our loss ratio was 48.5, and included $6 million in COVID-19 related impacts. As we increased current loss -- current year loss booking ratios on several products where heightened exposure exists. With the $5 million we set aside in the first quarter, our year-to-date COVID-19 reserves totaled $11 million as of June 30. By segment, these reserves totaled $2 million for property, $1 million for surety, and $8 million for casualty. We also recorded $6 million in storm and civil unrest related losses in the second quarter. Offsetting these additions, we posted…

Thank you, Todd, and good morning, everyone. A pretty good quarter all things considered. As Todd mentioned, we achieved top line growth of 1% and an 88 combined ratio. Year-to-date, we've been able to achieve 4% growth with an underwriting margin of 10 points. Rewind 90 days and we would have been pleasantly surprised at these results. Overall, we see the market is broadly improving. In the U.S., businesses are adjusting to the new environment beginning to open back up and people are getting out, even if only on a limited basis. I see this as a testament of American ingenuity and perseverance. Rate momentum has continued with double-digit increases on our property and casualty portfolio on both the quarter and year-to-date basis. We're still seeing pockets in the P&C space and certainly in surety that remain quite competitive, but our results for the quarter speak to our resiliency as a company. The construction industry, which touches about one-third of the businesses we insure never completely shutdown. There have been a number of delays in projects, but very few cancellations. We did not flinch in the face of adversity and continue to execute in markets that were feeling disruption even prior to the outbreak of the pandemic, namely our excess casualty, management liability, property catastrophe, and Marine businesses continue to achieve rate increases and some growth. We remain cautious that a slower economic recovery and new capital entering the market may serve to dampen top line growth opportunities, particularly in the construction industry, where we expect to see some slowing of new projects into 2021. I do want to provide some introductory comments about our assessment of COVID-19, and then I'll go into more details by segment. As a reminder, we do not offer event or travel cancellation, trade credit,…

Thank you. [Operator Instructions] Our first question comes from Matt Carletti, JMP Securities.

Thanks. Good morning.

Good morning, Matt.

Good morning, Matt.

Craig, I wanted to circle back on just one question on your COVID exposure of the claims you've seen. I heard your comments that there's no paid losses to date. You’ve really just investigated some things, and I appreciate a lot of the stats you gave and it sounds like most of what you're seeing are claims for BI. If I go back to last quarter, I remember you saying that a couple of things, one was like the vast majority of the exposure you have has some sort of -- not just the physical damage qualifier, but a buyer's exclusion or pathogen exclusion. And that there is some split along those lines in terms of admitted versus surplus line products. And I was hoping that you might be able to give us a -- just a little bit better of an idea, how to think about that? Is vast majority kind of 90% plus or is it more South of that or just -- there's a lot of broadly amongst the universe, there's a lot of just qualitative terms kind of we put on things and everybody has a different meaning by it. I was just hoping to get a better feel for kind of what part of your book might not have a virus exclusion, understanding that doesn't mean there's exposure that is still has a physical damage exclusion on it.

Sure, Matt. Well, I mean, I think I said last time is that the policies that don't have the virus exclusion specifically are mostly excess and surplus lines policies, and that's still true. And I guess from the definition from a vast majority, I would say, I mean, I'll leave you at greater than 50%. So and that's true, both the claims that have been made as well as the -- as the policies that were written.

Okay. I guess another way to think about this is, or you brought a color here. Is -- I mean, obviously property is kind of the exposure where business interruption would come in. When we think about RLI's property book, can you give us just a rough split of what might be written on an amended [ph] basis versus written on a surplus line basis? Excluding like wide [pj] homeowners and things where there wouldn't be any exposure.

Sure. So, I mean, the businesses that are admitted for us, we have a small home business insurance product, which is -- I mean, it's really just that. It's people that have a business running out of their home, that's all admitted and those are small policies. There's a large number of policies there. And obviously, our personal lines products are admitted and then we have a fair amount of property and casualty packages, commercial packages for like architects and engineers and miscellaneous professionals. That contract pack product I talked about in my opening remarks is an admitted product. I mean, a lot of that is either for the architects and engineers, those folks are white collar workers for the most part that are working from home, much like insurance companies right now. And the contract pact is smaller subcontractors who are still for the most part on the job on very small jobs. On t he E&S space, I mean, those classes can be anything from a warehouse. It could be an apartment building. We don't do a ton of restaurants, but we do some. We don't do very many bars and that's mostly written to our excess and surplus lines property unit. Those are mid-sized risks. So, we don't write these really big limits, right? I mean, a typical property limit for us would be less than $10 million, and the business interruption or income coverage would be sub-limited even under that. So -- and then some of the binding authority business that we've started doing over the last couple of years is also in excess and surplus lines space, but again those folks typically buy even lower business income coverage which I think the average is less than a $100,000 of business interruption or income coverage, and it has monthly limitations in addition to that total limit that I just outlined.

The one thing I would add there too, just real quick is a number of those policies, the package policy, the general binding authority policy, those are in the casualty segment. We book all of our package policies in the casualty segment if they’ve property and liability components. So, I just want to make sure there's clarity on that.

That's helpful. Great. Well, that's great. Thank you for the color. I mean, all those tidbits help in, kind of painting the mosaic of what's out there. So that's all I got. Thank you for the answers and congrats on a nice result in a tough environment.

Thanks, Matt.

Thanks, Matt.

[Operator Instructions] Our next question comes from Randy Binner, B. Riley.

Hey, good morning. I'd like to try and ask a more direct question about the COVID related claims that you mentioned at the top of the call. I guess, is it possible for you to describe one of those BI claims that's still open? What the dynamic would be to have something that you still -- you're still determining what the loss might be?

Well, Randy, so obviously all these claims didn't come in on one day. So, we've had claims that are reported as frequently as yesterday around business interruption. So, there is no -- we are investigating every claim and talking to everyone of the claimants and walking through and understanding the circumstances and then evaluating whether there's coverage for each claim. So, there's no -- we certainly are approaching this on a one by one individual basis. There is no summarily decision or some summarized decision here. It's we go into each claim looking to see if there's coverage and evaluating the circumstances of that. I mean, one example would be talking to someone about whether they had actually had COVID or someone on the premise has been tested for COVID and has that test turned back positive, so that might – so they might be able to prove that there actually was COVID on the premises or in the premises. So, every situation, every claim is different. So, I don't think I could describe an average claim in this.

Okay. But I mean, is it -- are some of them advancing more from a claims perspective, meaning that they've retained a lawyer and they may have -- there may be -- they may be in a jurisdiction where they can advance their case, or I mean, because based on what I'm understanding on how you describe your policy forms and how I understand policy forms, it doesn't seem like there'd be a lot of coverage. So I'm just curious if there's -- if there are some cases where they're able to push the claim forward?

Well, there's ultimate decision is made in a court of law, right? If someone chooses to retain an attorney and pursue that avenue. So …

I think ultimately, Randy, I mean, those types of things are what our claim folks and our actuarial folks is talking together, consider in establishing what we have -- from a reserve -- from an IBNR standpoint. The -- nearly a 100% of the reserves we have up are in IBNR.

Yes. Okay. Fair enough. And then just a couple more, one quick one, just on Maui Jim, real quick. Do you -- can you quantify for us that result is actually a little bit better than I would have thought. Can I take it they have e-commerce sales? And if so, can you give a rough percentage of how much they can operate online?

Well, Randy, it's Jon. Actually when Maui -- when this happened, as you might expect Maui Jim does have a direct line. They also have a relationship with Amazon Prime. And I thank God they did because largely their operation retail wise was shut down worldwide and it was shut down during their three best months for sales. So the fact that they were able to do roughly half on an earning basis for the border, what they did last year is a testament to Maui Jim's management and operations. As the quarter progressed, retail began to open up not just in this country on a limited basis, but in other places worldwide so that their orders on a retail basis began to come in as the quarter progressed. So the latter months were better than the early months. So for example, April was not a very good month, but May and June were much better months. So -- but I will just say that there -- those direct-to-consumer type distribution channels. We're not a very large part because Maui Jim was really focused on retail, but thank God they did have those direct channels and did have very good technology around those channel that enabled them to see pretty good increases in the use of those channels. So we think they’ve done very well through this and they think they've done very well, even more important.

Okay, great. And just one more. And I apologize if I missed this, but did you all quantify submission activity in the NAS area specifically?

No, we talked generally that submissions were up in certain areas. I mean, it's a mixed bag. I think certainly on the property side of the house, submissions are significantly up. On the casualty side, realizing the E&S space, we write predominantly construction risks. So there are not a lot of new projects that were undertaken during or during COVID. So the submission flow was flattered to even slightly down in some of our primary general liability.

Got it. Okay. Thanks.

Our next question comes from Jeff Schmitt, William Blair.

Hi, good morning.

Good morning, Jeff.

The COVID losses of $11 million year-to-date, could you break that out between the LAE component and the peer loss component? And does these -- there've been a couple of court rulings in favor of that fiscal damage requirement. Does that change the math at all on the LAE component?

I don't have the breakdown between loss and LAE, Jeff. I mean, I think as our actuaries go through it, there's not necessarily a distinction in what we put up in the second quarter. I know we talked in the first quarter, the bulk of that really was defense related. But they really are looking at in the totality from both a loss and defense standpoint. But I don't have the breakdown between IBNR.

Okay. And then just looking at property margins, obviously they're pretty good compared to where they were a couple of years ago. You continue to get rate there, the markets getting rate. If anything that, probably more likely to go up and down. Is there an opportunity there to sort of pull back on rate and try -- and try and really expand that business? I mean, I know if you go back five, six, seven years ago, 35% or 40% of gross premiums, is there an opportunity to try and grow that back to a larger book?

So Jeff, this is Craig. I mean, obviously our underwriters make those decisions and tradeoffs every day and try to evaluate. I can tell you from a portfolio level, whenever they do the math, it never -- the math never works. So when you do the math to figure out, well, how much rate do I have to cut to grow more? The margin gets so thin that you end up being bigger, but you don't really make any more money. And there's no incentive to do that for us. Why would we take on more exposure for no more profits? So that's generally the math. That doesn't mean there aren't going to be pockets of opportunity there. Certainly we'd love to continue to grow that business. We think that right now we're getting rate, I'll say above what we'd like to see as technical rate. Of course, there's no such thing as enough, but -- and let's also keep light that the reinsurers, I believe are in the process of they've already started the process, but I believe that will continue for a while as getting rate increases. So we're going to be paying more for reinsurance I think as well as the whole market on a go-forward basis. So we need that rate to pay for the additional protection that we -- or the protection that we currently have.

Got it. Okay.

Jeff, one more thing. Jeff one more thing on that. Jon Michael. We are restrained as to how much cat risk we can take too.

Okay.

So that would restrict our writings.

Got it. And just one -- last one on the E&S market. It seems like there could be more exposure there. There's probably less fires exclusions. I mean, I know you mentioned it. I think others have as well. There was already sort of some large players pulling back there. And if they have more exposure here on the COVID, are you seeing sort of even more dislocation there, or is it been similar to what it was a quarter or two ago?

I mean, I think the disruption is on the -- is the fact that the reinsurers are starting to raise rate and that rate has to get into the primary at some point in time to be able to continue to make your margins. I don't think we would classify the disruption necessarily to be COVID related or virus related on the E&S side. I think it's just rate we've needed to get for a while. And now that the reinsurers are charging more, we know that the cost of our goods sold have gone up and we need to pass that along or get more rate to be able to make the same margins.

Okay. All right. Thank you.

Our next question comes from Meyer Shields, KBW.

Thanks. One question I really probably should know the answer to this, but are any of the defense costs against BI claims recoverable?

You say recoverable by reinsurers -- from reinsurers or from …?

No, no. I mean, from the claimants or from the attorneys.

I don't think I can answer that question.

Well, Meyer, that's -- it could be litigated, right? But largely in this country, no. But it could be litigated.

Okay. Fair enough. Is there any way we can get the -- both the weather related losses and the COVID losses in dollars by segment just for the second quarter?

Yes. Yes. Meyer, it's Todd. So if you look at the second quarter, the storms and civil unrest, the $6 million there splits about $4.5 million to the property segment and $1.5 million to the casualty segment. Again, that general binding business and other package business that we have in the casualty segment. So, that's how that splits. And then the COVID-19 is $5 million in casualty and about a $1 million in surety for the second quarter piece.

Perfect.

And I think this is the first quarter we were $3 million casualty and $2 million property for COVID-19.

Excellent. Okay. That’s very helpful. Final question. When I think probably just talking about reinsurance rate increases, is there any reason to anticipate any change in maybe how much of your gross premiums you’re seeing as reinsurance prices rise and as primary prices rise?

Yes, it's Jon. We evaluate that all the time, obviously. We view reinsurers as our partners. So as rates increase on the margins, I've heard other companies talk about reevaluating their retentions, and we do that all the time. But we -- largely we're doing our reinsurers as partners in the whole process. So, yes and no, but I don't see any significant change in -- we haven't.

I mean, we’ve obviously, Meyer, we priced the stuff up internally and try to figure out what we think is a fair price loss costs, with their margin on top. And if we would change retentions, it normally it would be around the co-participation as opposed to our first dollar retention. And as Jon says, we have long-term partners that reinsurers, and that's exactly the way we view them as partners. And we talk about our alignment all the time. We talk about our alignment with shareholders, but we also have a lot of alignment with other stakeholders, particularly reinsurance partners, and we need them to continue to be able to thrive and be successful as well.

Okay, perfect. Thanks a lot.

Our next question comes from Mark Dwelle, RBC Capital Markets.

Yes. Good morning. Just a couple of questions that haven't already been covered. I just want to clarify on all of the COVID related charges that you've taken, those are all just being ordinarily run through the loss ratio. So those metrics that you gave us to extent we wanted to back them out of kind of the run rate of your loss ratios we could just do that math off of the premiums and the numbers you gave, is that correct?

Yes. With respect to the casualty and the surety, I mean, that really is booking ratio based. So yes the $2 million that was put up in property that you just -- you could still do the same thing with it, but it's not truly booking ratio base from that standpoint. Property is really more of reported based, but similar approach either way from your standpoint.

Okay. And then, I mean, you had indicated all of this is sort of IBNR, we would -- I guess we would, based on some of Craig's comments, it sounds like the pace of incoming claims is continuing to slow. So I guess I'm inferring, accordingly that we would expect that, kind of the need for further reserves would likewise continue to slow alongside of a slowing claim count, presuming that persists, is that likewise correct?

Mark, I think some of it's going to determine over what period of time this ultimately develops over. I think Craig talked about that too, is it will become more difficult over time to know what's directly related to COVID and indirectly related. So it really is going to be a quarterly view as our actuaries and claim folks get together and look at loss trends and those have another quarter worth of information. I would say it's really a quarter-by-quarter review in that respect.

Okay. That's helpful. I think we've had enough of COVID discussion for today. Let's move on. So, Craig, you had mentioned on the transport business if I wrote it down, right, it was the premiums were down $12 million. Was that primarily the result of lay up credits or whatever you might call them or maybe, I guess what I'm trying to get at is, was the -- was there an underlying growth in the book of business due to premium pricing or -- and/or new business that was then offset down to that level or was there an actual reduction in the amount of business you were writing that contributed to the decline?

Mark so on transportation, the biggest hit has been taken in the public transportation area and we did take all the policies that were in force at the time last quarter, first quarter, we had adjustments we offered to people to be able to lower their exposures because basically, on average, people were taking 9 out of 10 units out of service and storing them. And they weren't obviously operating them. So we allowed them to basically take credit for that. So the things, mid-term we had to make a bunch of mid-term adjustments. So ever -- So now as you start to renew these policies, some of them are putting some business, some buses are going back into production, but not very many. I'm going to tell you, public transportation, it's still operating at about 10% to 20% of what it was prior to the pandemic and I think that's the way it's going to be for a while. And I think that also as things renew, we're additionally, recognizing some of the other businesses like a truck and small commercial specialty business within transportation that the exposure bases are down and they're getting credits and their insurance premiums for the fact that the miles they're driving or anticipating are going down. So therefore, they're paying less premium. And I think as I said, we expect that business is probably going to cut about in half, overall, this year and then we will have to build it back up. We've done this before, the business was as big as $80 million at one point in time and shrunk to $40 million because people -- it was just way too competitive and our people were willing to cut it to stay profitable. In this case, this isn't really about rates as much as it is because we're still getting rate. It's really more about exposures and exposures are down there -- for the premium is down.

All right. I appreciate the clarification. Thanks. That's good color. And then the last question I have this is just kind of a small question within the Prime Holdings business, is there. I'm trying to understand, is there some seasonality to that business or is there something that we can track independently to, kind of, get an understanding of, kind of, the ups and downs. It seems like a much more jaggedy earnings pattern than maybe I would have expected?

Yes. Well, he writes, he is the market of last resort and where there is disruption, he will step in. So it really, it is going to depend on where the opportunities are for disruption and if he feels he has expertise in that space and he will step in and -- so you will see fairly jaggedy results -- or not results probably as much as top line in his business. Just because, it's just really depends I mean I'll tell you frankly, I’m as surprised as probably you are every month when he reports his premium.

As long as we're all surprised together.

We are a small player. Just a reminder, we're a small player on that business so.

Understood. I appreciate the color. Thanks.

There are no further questions in the queue at this time.

Thank you. It's Jon Michael. Craig was being more modest than we're used to around here. He called the quarter a pretty good quarter. I'm going to say, it was a great quarter given the circumstances. I'd like to thank our employees for remaining focused on our customers. Our employees have not missed a beat. We're effective, they are effective and productive. And thank you for listening, stay healthy and keep you and your family safe.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.