Rli Corp Q1 FY2020 Earnings Call

Good morning, and welcome ladies and gentlemen to the RLI Corp. First Quarter Earnings Teleconference. As a reminder, we will open up the conference for questions and answers after the presentation. Before we get started, let me remind everyone that through the course of 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 our Annual Report on Form 10-K and the Form 8-K filed by the Company yesterday, with a supplemental risk factor related to the COVID-19 pandemic, all of which should be reviewed carefully. Form 8-K filed yesterday also contains a press release announcing the first 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 Chairman and CEO, Mr. Jonathan Michael. Please go ahead, sir.

Thank you, and good morning, everyone. We hope that you and your families and colleagues are all safe and well. Before we discuss the quarter today, I'd like to take a brief moment to acknowledge the current environment. We recognize these are challenging times for everyone, as the global pandemic has had a profound impact on the economy and many people's lives. Our hearts go out to all of those who have lost loved ones and those that continue to suffer due to the illness. As an employee-owned company, the wellbeing of our entire RLI family, our customers, business partners, and associates is our highest priority. We responded to the crisis by quickly taking action to protect our associates while continuing to deliver the highest service and support possible for our customers. Nearly all of our employees are working from home, and we're in a good position to maintain our remote business operations for as long as necessary. Our entire team is doing an outstanding job despite the imperfect circumstances. Throughout this transition, we've benefited from the robust business continuity plans we had in place and the investments we've made over time in our technology infrastructure. This has enabled a relatively smooth shift to a remote work model, allowing us to protect our team members while maintaining business operations and strong customer support. Amid rapidly changing dynamics, we're continuing to evaluate all aspects of our operations on a daily basis and making necessary adjustments to carefully manage our business during the current climate. I want to take a moment to thank all of our associates who are going above and beyond every day to help our customers address the many challenges that they're facing. I'm very proud of our team and what they've achieved in the first quarter. I'll now turn it over to Aaron Diefenthaler.

Thanks for your thoughts, Jon. Well, much has changed in the last six weeks. The structure of our first quarter earnings call for 2020 will be largely the same as in prior quarters. Apart from Jon, we're joined by Craig Kliethermes, President and Chief Operating Officer; and Todd Bryant, Chief Financial Officer. Todd will first give some comments on the quarter's financial results. Next, Craig will give some segment color and discuss market conditions. We will then open the call to questions, and Jon will close with some final thoughts. Todd?

Thanks Aaron, and good morning, everyone. Last night we reported first quarter operating earnings of $0.66 per share. We experienced 6% topline growth while posting a 92 combined ratio. Investment income advanced 7% in the quarter, while unrealized losses on the portfolio negatively impacted net earnings and book value. Book value per share into the quarter was $20.38, down 7% for the year inclusive of dividends. Craig will talk more about our products and market conditions in a minute, but from a topline standpoint, as mentioned, gross premiums written were up 6% in the quarter. A majority of products in our diversified portfolio experienced growth. The loss, however, came from approximately $3 million from last year's announced product exits, and premium writings on our transportation book were down significantly, which Craig will discuss further. Both of these negative effects were within our casualty segment, which still ended the quarter up 5%, while property was up 16% and surety was up slightly. From an underwriting perspective, we posted the first quarter combined ratio of 92, our loss ratio of 51.5 continues to benefit from favorable reserve development. From a reserve perspective, net of expenses, prior year's benefits were $13 million for the quarter. While down from last year's $17 million benefit, all three segments developed favorably with casualty adding $7 million, and property and surety each at $3 million. For more recent years, and with the uncertainty of the current environment, we continue to remain cautious in our approach to reserving. Moving to expenses, our expense ratio declined 2.5 points to 40.5. As discussed on prior calls, amounts earned under our bonus and incentive plans are driven by various performance metrics. These metrics, which include book value growth, were down during the quarter and resulted in lower amounts achieved. The decline in amounts accrued under bonus and incentive programs accounts for the majority of the decrease in our expense ratio, as well as the bulk of the decrease in general corporate expenses. Turning to investments, obviously, capital markets volatility in the second half of the quarter was the most significant influence on the decline in book value from year-end. While price declines in the bond portfolio were roughly offset by income for a flat total return on the quarter. Public equities and other invested assets were down just over 20% from 12/31. We've always taken a long-term view on investing and believe consistent investment income is an important component of operating earnings. Should treasury yields remain low and credit spreads normalize from current wide levels, reinvestment rates will likely be at lower levels. As with many aspects of the world we live in, there is a fair amount of uncertainty for capital markets as we look forward. Outside of the core portfolio, our share of earnings from Maui Jim and Prime continued to post positive results but were off modestly in the quarter. Maui Jim results were down reflective of the current economic environment. The results for Prime were modestly higher due to growth in both revenue and net operating profits. Certainly, the length of any downturn will impact the results of these investees, particularly any lasting impact on the retail sector, as it relates to Maui Jim. Lastly, I will note that we replaced our revolving credit facility at the end of the quarter, with our existing agreement set to expire in May. We upsized our borrowing ability modestly to $60 million, and under certain conditions, the facility can be increased to $120 million. In addition to this arrangement, we have borrowing capability via our membership in the Federal Home Loan Bank system. There was no amount outstanding on any of these facilities at the end of the quarter. We've also performed a number of stress tests on our cash flows and believe we have adequate liquidity to meet anticipated needs. And with that, I'll turn the call over to Craig.

Thank you, Jon and Todd. Good morning, everyone. All things considered, we're pretty happy with the quarter. We enjoyed 6% topline growth and a 92 combined ratio, ending the quarter in an environment filled with many more uncertainties than the one we entered. The RLI shift enjoyed a steady breeze and full sales for the first 2.5 months of the year. Premium was continuing to grow at a double-digit pace in products where we have enjoyed the most underwriting success. By the middle of March, the market calmed as a result of COVID-19. We believe this new environment will differentiate those that have been disciplined risk takers and prudent risk managers. I'm going to provide some commentary for each of our major segments, some words on the impact the economic shutdown resulting from COVID-19, and then I'll offer some closing remarks and open it back up for questions. The casualty segment grew topline by 5% and reported a 101 combined ratio for the quarter. We realized growth across all of our major product lines except transportation. Because a large number of our passenger transportation customers were unable to effectively operate under the shelter-in-place orders, we allowed our customers to suspend coverage for all vehicles they were not using and return premium to them. This resulted in a $23 million negative adjustment to written premium in the quarter. Despite this significant headwind, we were still able to grow casualty and overall submission flow continues to be up across most of the segment. Rate levels continue to accelerate, up 11% driven by our management liability, excess liability, and wheels-based products. Given the uncertainty involved in the last couple of weeks in the quarter, we thoughtfully examined our current accident year loss ratios and reserve position for the segment and adjusted accordingly. The property segment grew the topline by 16% while reporting a 78 combined ratio. Submission counts were up double digits for all major products in the segment, and all underlying products reported an underwriting profit. Rates in this segment were up 8% led by catastrophe win business but also bolstered by improved earthquake and marine pricing. For the quarter, our surety segment reported a 69 combined ratio with a very small amount of growth on the topline. The contract and small miscellaneous businesses grew moderately for the quarter, and underwriting profits were earned by all products. The surety space continues to be a very tough one to grow. The competitive environment, declining commodity prices, and consolidation within some industries all put pressure on the topline. The temporary closure of many government agencies who have the obligee for many bonds only adds to the current challenge. We have sacrificed topline over recent years in order to upgrade the overall credit quality of the principles that we support. We believe this will serve us well as we move forward. On to the impacts of the virus and resulting economic shutdown. First and foremost, as Jon mentioned earlier, RLI is fully operational. RLI owner associates are all working from home with very little impact on our ability to serve our customers and distribution partners. We've been fair and flexible with our customers in regard to modifying exposures and resulting premiums mid-term. We have deepened relationships by reaching out to our distribution partners and customers to check in and offer help where possible. Our emphasis on personal relationships and responsive service are paying off and our culture of ownership has fostered a team of associates who are willing to step into the breach, solve problems, and volunteer to take on the next challenge. As owners, we are focused on doing the right thing that leads to success in the long term. We believe there will be revenue consequences as a result of the economic shutdown. The timing and amount of the impact will be dependent on the economic recovery. It is too early to quantify the rate of any revenue deceleration. For RLI lines that will be significantly impacted will be those products supporting the passenger transportation, non-essential and international cargo haulers, and the energy sectors of our economy, which will be felt by about 15% to 20% of our portfolio. Many other underlying industries will be affected over time as exposure bases are tied to revenue, payroll, values insured, and construction projects or other obligations undertaken. On a more positive note, we have several product lines that may see little to no impact, including our personal lines products, management liability products, and property businesses. In regard to the heightened loss exposure, we do not offer event or travel cancellation, trade credit, or pandemic related coverages. We have received approximately 500 claim notices to date across multiple insurance products, with about 95% of them being business interruption related. We believe that any exposure arising from the spread of COVID-19 and the resulting shutdown will take significant time to reveal and resolve itself. RLI's more notable exposures are in the financially related product lines, like management liability and surety. For some perspective, the 2007 through 2008 financial crisis had no material impact on RLI's underwriting performance, but we recognize the impact of this economic shutdown will be different. Our claims department has always been a differentiator for our company. The claim examiner conducts an investigation of each claim, including taking into account the loss details and any documentation provided by the insured, the nature of the claim, as well as any other relevant and available loss details. Every claim is individually analyzed in conjunction with the insurance product purchased by the insured, and is then handled in accordance with the appropriate claim handling laws and regulations that apply. RLI will stand by and fulfill its obligation to pay claims we owe, but it will take more time to assess and quantify any amount. The insurance industry is a key contributor and provides important protection to the engines of our economy. A viable insurance industry operating with contract certainty is necessary for the economy to restart and function normally and efficiently. Through governmental overreach and an opportunistic plaintiff bar, we are bearing witness to another attempt to retroactively rewrite and impose coverage into policies that don't provide it. This poses a visible threat to the insurance industry and will impact the cost and availability of insurance going forward. No industry should be asked to accept the transfer of risk onto its balance sheet without the opportunity to consider price, underwrite, or risk manage the exposure. Our diversified portfolio of products, underwriting process, financial strength, and resiliency will continue to lead the way and distinguish RLI. In conclusion, we had a good solid start to the year with a 92 combined ratio on 6% topline growth. I want to leave you with a 20-year-old quote from our founder, Jerry Stephens. "Your last ship is a sturdy vessel, built for the long haul. You can weather the storms because the crew knows how to adjust the sails to avoid the roughest weather, and even if the weather gets bad and the waves crash onto the deck, there is no port in the world that we can't reach." I'm very proud to work with such a dedicated and committed RLI crew; we will navigate the storm. Thank you. I will now have the moderator open it up for questions.

Thank you. Good morning. So I just had a couple. The first is just related to COVID. We saw some other commercial lines writers take charges, they're relatively small, kind of directly related to the crisis. Have you put up any reserves related to COVID yet?

Hey Randy, it's Todd. Craig, we have a bid on the just given the sheer number of the claims Craig talked about. The claims team is in the process of individually analyzing all of those. We have not put up any indemnity estimate in the quarter. But just given the sheer number of the claims, we did put up $5 million in the quarter for the cost of investigating and defending or adjusting those claims. The other thing, I think that we talked about this on prior calls; just from an uncertainty standpoint that doesn't influence our loss picks and reserve positions as it relates to both current and prior years. So, we had seen a bit of lower emergence prior to losses in accident years than we expected in the first quarter. That means the shutdowns late in the quarter impacted access to courts and access to medical services. That did add a little bit of additional uncertainty from our perspective, and we thought about things. So, we did not recognize all the indicated net reserve benefit on the prior years. It's not something we would put a number on, but certainly that uncertainty did influence the selections and considerations there.

Okay. And then, on surety, could you review kind of the nature of your energy, surety exposure? And then kind of dimension, you mentioned some of the financial-related exposures within surety, but everything would be helpful for me and some others just to have a review, particularly with energy? I know we discussed this back, I think it was in 2016. Just kind of the nature of where you are exposed within the kind of the energy production chain?

Sure, this is Craig Kliethermes. Energy makes up less than 15% of our total surety portfolio. We provide bonds for the plugging and abandonment of both onshore and offshore oil wells. Over the past couple of years, this has been a decreasing part of our portfolio as we focus on the best operators in the Gulf and onshore. We believe that the quality of our operators is among the best in class in these areas. However, if a company or individual we have bonded goes bankrupt and cannot fulfill their obligation to plug or abandon a well, and if the organization that acquires their assets does not intend to activate it and will use the well instead, we would then be expected to carry out the work or pay someone else to do it. While this situation is rare, it is a possibility.

It didn't happen a lot though back in 2016, correct?

We don't have a lot of losses in that space. So, the loss ratios are relatively low, but it's a high severity line.

Thank you. Staying within surety, could you clarify the nature of the financial exposures? In your opening remarks, you mentioned some professional indemnity. Are you referring to that within surety, or is it more about the general credit exposure for those who purchased the policy?

I don't want to confuse. I think I said management liability, which is like D&O and those types of risks. So, that was a separate product line for us.

That's within casualty?

Yes. So, I'm sorry. What was the question again, Randy?

Yes, I misheard you, I apologize. I thought you were talking that within the context of surety. You're referring to the context in normal casualty, so I'm good. Thanks for the answers.

I mean, the only thing I'd add to surety, just to be clear, it's really a two-trigger type scenario, right? You have to have someone that doesn't have the financial wherewithal to be able to perform their obligation and then either they do not perform that obligation or the successor organization doesn't perform it. That goes for most of surety. And don't forget, we have personal identification against a lot of these principles that we could go after their assets when we have collateral as well.

All right. Thanks.

On from JMP, we have Matt Carletti.

Thanks. Good morning. I wanted to follow up on your comments regarding commercial auto, which I believe focused mainly on revenue. Can you provide insights on the loss side, specifically regarding both frequency and severity? I understand that we only have data for part of the first quarter, possibly March. Did you notice any changes then? And what are your observations for April?

Sure, Matt. This is Craig. So just remember, we have three parts to our transportation business. One is the public transportation, which is the one I talked about where we returned $23 million worth of premium, because most of those are charter buses, school buses, transit buses, and limos that are laid up; they're not really operating. So, when you think of laid up, laid up means to us as they've been taken off the policy and there is no liability coverage. So therefore, they should be entitled to some return of premium because they're basically cancelling part of their policy. We also ensure the trucking industry. And actually, from the trucking standpoint, we've actually seen miles driven increase at least in the short term. There's been an increase in delivery of goods for particularly consumables. So, the miles driven may actually be up for some of our trucking operations. Obviously, you've probably heard congestion is down, the average speed of trucks is higher. So they can actually deliver more goods faster. But that also potentially might lead to more severity; I mean, we've not observed that yet, but obviously, you could have a more severe accident. Of course, they have to hit something, so there's not as many cars on the road to hit. I think it kind of cuts both ways in regards to transportation. I think we would suspect that the speed of traffic is up. So that's a downside maybe. Severity could possibly be up, but certainly the congestion is down. And you have more experienced drivers on the road, I should also add, that truckers are typically experienced drivers, they do it for a profession; with fewer people to hit, passenger vehicles, you have fewer accidents. So we've certainly seen the number of losses drop. The claims count dropped significantly. But again, remember, on the public transportation side we also have exposures that have dropped significantly. So it could cut both ways.

Okay, great. And then just wanted to shift. You mentioned that the 500 claims, it sounds like most all of them are BI. Is there any color you can give us on, I don't know if it varies across kind of policy lives, or claims come into play, or there's some rule of thumb? But are there government action exclusions? Is it more of a standard, direct physical damage language that is the defense? I'm just curious kind of how you guys thought about it over the years.

So, Matt. This is Craig. So first of all, all those policies, I've read a few BI policies in the last couple of weeks, just to let you know. So, it's been a while. And I'm a CPCU as well. So, it's probably 30 years since I actually had to read it, insurance policies. But, I read a few business interruption policies or property policies that every policy that I've seen - and I can't guarantee you that that's 100% of all that we've offered, but certainly, I've looked at all of our major policies, and everyone has a trigger that basically says that there has to be direct physical loss of or damage to property. In some cases, we're actually more than some. And the vast majority of our policies particularly the ones in the admitted space have a specific virus or communicable disease exclusion. But that's not on every policy. But certainly, the vast majority contain those exclusions.

No, that's helpful. That's very helpful. And the last question and I'll be done. Just any observations on kind of the pricing momentum or pricing cycle either in March or into April, just as kind of all the time hit. I know it's early, but just curious if you've observed anything and pricing kind of kept momentum or things have cooled off a little bit?

Yes. I mean, I had that conversation with our product leaders over the last week or so. And I think they feel that we've so far, I mean, the pricing momentum has stayed about the same. So there are some exceptions, but I think that certainly in some of these places, like, I'll say public auto where people are not, or public transportation or passenger transportation businesses, I mean, they're hardly operational. So I think there's going to be some pressure there or some that may not continue at the same pace as it has in the past on the public transportation side. But I would say broadly across the rest of our portfolio and in our other real estate businesses, we continue to expect it. And as I said before depending on, certainly there is a lot of uncertainty out there and then certainly doesn't usually bode well for the consumer, unfortunately, with regards to risk. Companies are going to want to factor that risk into the pricing of the products.

That makes sense. Well, Craig, thank you for the answers. And best of luck going forward.

Thank you, Matt.

And moving on, we have Jeff Schmitt with William Blair.

Hi, good morning, everyone. Could you discuss how Maui Jim results are looking, and what your outlook is there, just given this slowdown? I mean, it's still operational I presume, but what's your sense there?

Yes. Jeff, it's Jon Michael here. Yes, Maui Jim is impacted. Obviously, their outlets are largely retail. They do have a direct and Amazon operation, so they are impacted from the economic slowdown. There's no question about it. And then they were impacted in the first quarter from the economic slowdown. So, Maui Jim is a very strong company; they've got liquidity. I think they are able to withstand the slowdown. But, yes, they will be impacted, it's yet to be seen how much that will impact their results. But they have taken steps already through the slowdown.

Is there a potential even for losses there, I mean, you think in the second quarter? Or is it not that bad?

Well, that's yet to be seen. But, I think that they potentially could have some losses. And until markets begin to open back up again, they're going to struggle a bit through the summer. This was their peak season. If you think about it, this was when Maui Jim makes a lot of their sales, and it's pretty seasonal going through spring and summer, so.

Right. And then I was interested to hear, you’d mentioned you didn't think management liability was going to be impacted. Some other insurers have thought that could even be one of the key areas that could be impacted. And I was surprised you'd said that. What is the makeup or what class of the business? Why do you think that won't be impacted here?

When discussing whether it will be affected, I genuinely believe it will be impacted. I mentioned this in my opening remarks. We consider management liability to encompass various product lines, including public D&O, side A coverage, employment practices liability coverage, some cyber coverage, and fiduciary coverage. We experienced a similar situation during the 2008 financial crisis, which ultimately turned out to be a minor issue for us. However, I expect an increase in claims related to these coverages. Since we frequently write excess, it may take some time for any claims to reach our layer, so we should keep that in mind. Moreover, as previously discussed, we are still observing pricing momentum, particularly in the management liability sector, which was nearing a 50% rate increase. I anticipate that rate increases will continue to accelerate in this area. From a risk management perspective, it's important to note that we heavily reinsured these policies, so for any policies written after January 1, we retain only about 22.5% of the exposure on these claims.

Got it. Okay, thank you.

Moving on, our next question will come from Meyer Shields from KBW.

Thanks. Referring back to the BI question for a moment, I think Craig highlighted the difference regarding physical loss and the direct damage trigger between the policies. Does that distinction also relate to the occurrence of the virus exclusion? Is it likely to be less common in E&S paper?

Meyer, it's Craig. You're asking me would the terminology requiring direct physical loss or damage to property also be a standard wording in the E&S policy? Is that the question?

No. I'm asking about the virus exclusion. In other words, would that be less common on E&S paper than on a bit of admitted paper?

That's correct. I mean, it is not very commonplace in excess and surplus lines space. That is not uniformly true. And I would say, we have E&S policies with virus exclusions on them. A significant portion of the number of policies having on them. But, it's not universally true. It really depends on the competitive marketplace, and a lot of people in that space do not have specific virus exclusions on their policy.

Okay. That's helpful. Is there a way of sort of comparing the 500 or so the interruption claims to what a normal flow would be?

Claim counts are still lower for the year, even considering the addition of those 500 claims I mentioned. Without those, the decrease would be even greater. The flow of business interruption claims isn’t something we would typically expect to reach 500 in a year, unless there was an extremely catastrophic event like a hurricane.

Okay, understood. And then I know this is tiny. It's like 1% of the book, but can you give us a sense of what sectors you insure in workers' comp?

Yes. So this is basically the only real places we do workers comp is on office professionals and specifically architects and engineers; it's really 99% of our exposure. And as far as we know, those clients are actually still working. They're working much like us, just working from home.

Okay. But they're not the group that's likely to have presumption of getting sick at work?

Not based on the broad things where they've tried to focus on the first responders. We don't do any workers comp in the first responders.

Okay, perfect. Thank you so much.

Next question comes from Mark Dwelle with RBC Capital Markets.

Yes. Good morning. A couple of additional questions. You mentioned about the $23 million of return premium related to some portions of the transportation book. Can you just walk through like which accounting lines are impacted? Is that all earned premium? Is that written and earned? Are there any expense offsets? Just kind of just understand all the lines that are impacted when you do something like this?

Mark, it's Todd. That is recorded, so there is no minor impact on the earned side. We do have commissions associated with that, but from that perspective, it's entirely written. The main impact is on unearned premium. From a cash flow perspective, many of these are installment payments, so the actual cash return is around $6 million. In some cases, it seems to be retained as a credit on account, as they expect to return to business, as Craig noted.

I'll also add that we're going to have to return commissions on that. And there will be losses on that business either. It's a fairly small market.

So that really doesn't ultimately impact sort of the combined ratio in the quarter. It's just in terms of the growth rate in premiums, all else equal would have been a little bit better had you not made this choice?

I think that's correct. And then if you were to pull this out, casualty would have been up closer to 20%, and overall more in that 15% range.

Got it. Thank you. The second question that I had goes back to one of the early questions, related to the plug and abandon on the surety book. What are the typical kind of limits that you write on that business? I'm sure it's not one size fits all, but there's probably like a normal and a max, maybe something like that if you can share them?

Well, this is Craig. There is a diverse range of bond amounts present. Many of them are quite small, around $1 million or $2 million. However, there are a few that are larger. I'm not certain if you're referring to an individual bond or the bonding capacity for an entire account, as that can differ. Individual bonds can go up to $10 million, $15 million, or even $25 million, but they typically range from $500,000 to that upper limit.

The exposure...

If I were to focus more on being account-driven and someone is not going to make a selection, that doesn't mean it's necessary. For instance, if you are drilling five wells and four of them have significant capacity left while one does not, the four that have capacity are very desirable, and someone may want to purchase them. If they decide to buy them, even if they prefer not to continue operating or want to restrict production from the well, it becomes their duty as the new owner. We aren't obligated to plug that well until they choose to utilize it. It's the new owner's responsibility. As long as there are buyers in the market for these active wells, that is part of our assessment process. We evaluate not only the financial strength of the operator but also the inherent value of the assets to ensure there are tangible assets present. This helps us avoid being involved with wells that are at the end of their productive life, thus preventing any triggers. This is why we have significantly reduced the number of claims we hold; it's necessary for us.

That's helpful. And then one other question. I mean, you people have been very diligent in highlighting lines that could be exposed. Are there lines that you're writing that are getting benefit from the fact that everybody is staying home and nobody is doing anything? I mean, I know there's certain E&S coverages that you write; liability for bars and restaurants or things like that. But I would assume that those are getting very favorable experience.

It's Craig. I mean, we don't do a ton of bars and restaurants. So we do some but not a ton. We are certainly not doing the ones with the big chefs or anything like that. But, I mean, we write personal umbrella which is both in auto and homeowner's liability exposure. Again, you could say there's maybe less personal driving on the road, although, there are more pedestrians and bikers on the road. There are also more people at home, which can create a potential risk at home or in the house as well from the liability standpoint. But that’s one that may benefit but we can’t, we couldn’t quantify that. Certainly, I think I talked to the commercial auto side of things, I think that’s probably beneficial to us.

While it may not be advantageous, we anticipate that as exposures and premiums decrease, losses might also reduce. Aside from the products I mentioned, I’m not entirely convinced that we believe the factors are quite proportional.

Okay. Thanks very much. Those are all my questions.

And then moving on, the next question will come from Ron Bobman with Capital Returns.

Hi, good morning. I had a couple of questions. I was wondering of late, if you've noticed any change in the buying to quote ratio, sort of the success in converting quotes to bonds. Curious to know about sort of competitive behavior is having an impact on your success there, particularly in medical and commercial property?

I think, I don't think we've noticed anything or anything that stands out in regards to the buying to quote. And certainly, the number of the amount of new business that is being shopped is decreasing we believe, at least that's what we've seen, at least in April, the beginning of April probably. So, submissions are down a little bit, but I think that's because people aren't shopping new business, which I think will also increase retention for the business you already have. So I think you're going to see an increase in retention and maybe a drop off of new business is what you're seeing across not just RLI, but I think the industry, I'm guessing based on what we're seeing. Producers just aren't as productive, and they don't have that face-to-face meeting with people. It's a lot harder to move accounts.

Got you. In the well plugging surety bond book, when there's a transaction in the well changes hands, does the bond obligation continue? Or does it cease sort of coincident with the change in ownership?

The only time that would, I mean, we would have to actually opt in to that, so they'd actually have to elect to be. I mean, basically the bond is exonerated at that point in time and then we may want, if they would like us as their surety, we may very well continue. But, that's our option and their option if the contract has ceased effectively.

Okay. And then do you have reinsurance on that book with no return yet?

Yes.

Could you just run through that?

Well, we buy a $75 million tower. So, we have a $2 million retention for style retention and some co-participation alongside.

Okay. And then the last question was, you mentioned the D&O sessions; and relatively small now, but you keep, I think that is 22% as of 1-1 this year. And so you have the mindset to consider increasing your retention prior to the next renewal date? And can you even do that if you wanted to?

You can certainly, there's that opportunity. I think we actually have reduced our retention from where we were a year ago. I think we were more than the 35% if you go back a year and we elected to reduce that, looking at all things, looking at the total limit that we retained from that standpoint, from an exposure. So there's a lot that goes into that consideration.

I mean, a lot of things that factor in as I mentioned. For, I mean, rates are increasing dramatically right now. So, you'd be seeding almost all that rate increase to a reinsurer. So, I mean, we're going to strike the right balance. We're going to look at that, and we obviously are going to continue to buy reinsurance, whether the retention changes. I don't think we're actively pursuing to raise or lower our retention. We'll see what happens in the marketplace.

Okay. Thanks a lot, Jon.

Moving on, next question will come from Jamie Inglis with Philo Smith.

Hey, good morning guys. I'm trying to get a sense of where the business might go in the aggregate, meaning right now we have a positive rate environment. But on the other hand, it was undoubtedly we're going to have some kind of economic impacts as a result of staying at home, sort of, et cetera. Is there any way to get a feel pool, what that means to your business? Meaning if GNP is down by X percent, what might happen to your topline? That's admittedly that sort of net premium issue and not the non-premium issue immediately. Is there any way to get a sense of how that shapes out?

Yes. I think it is very difficult to begin to estimate that at this point. I mean, certainly we've talked about that before, a third or so of our business that is economically sensitive from a construction standpoint to the construction industry, but at this point, it's just too early to make that type of estimation.

Okay. That's good. Most of my questions already asked. Thank you.

Operator?

Yes, sir. Apologies. It appears at this time, there's no further questions. I'd like to turn the floor back to Mr. Jon Michael.

Thank you for joining us this morning. Once again, our hearts go out to those who have suffered most through illness or the death of a loved one. Our prayers go to all first responders, who put themselves in harm's way, some of whom have made the ultimate sacrifice. Our thoughts are with those who have suffered financially, including our customers. For our industry, the real existential threat is that regulators and politicians are attempting to retroactively impose coverage on policies that did not provide coverage, and insurers did not underwrite for that coverage nor charge premium for that coverage. Plaintiff attorneys will attempt to force the issue as well. In the end, only the lawyers win. My view is the only solution for this is a federal one, similar to what happened after 09/11. Our industry needs to help the government shape that solution so that if and when this happens again, there's a fund and backstop for uninsurable pandemics. Lastly, thanks to all the RLI associates who continue to underwrite process premium and pay claims, and all the things we do daily to support our customers and other stakeholders. Sincerely, thank you. Thanks again for listening. Stay safe and stay healthy.

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