Good day and welcome to the RLI Third Quarter Earnings Teleconference. This call is being recorded. It is now my pleasure to turn the conference over to Mr. Aaron Diefenthaler. Sir, please begin.

Thank you, Chelsea. Good morning and welcome to RLI's third quarter earnings call for 2021. Joining us today are: Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Todd Bryant, Chief Financial Officer. As usual, Todd will kick things off by walking through the financials. Craig will follow with additional comments on current market conditions and our product portfolio. We'll then open the call to questions and Jon will close with some final thoughts. Todd?

Thanks, Aaron, and good morning, everyone. Yesterday we reported third quarter operating earnings of $0.65 per share. The quarter's results were negatively impacted by hurricanes, most notably Hurricane Ida, but solid underwriting results, excluding catastrophes as well as favorable benefits from prior year's loss reserves positively impacted earnings. All in, we experienced 18% top line growth and posted a combined ratio of 94.6% for the quarter. Year-to-date, our combined ratio stands at 88.9%. From investments, income advanced 8% in the quarter, and we have continued strong operating cash flow, with $116 million in the quarter and $280 million for the year adding to our invested asset base. Earnings for Maui, Jim, and Prime were up 3% in the quarter, and while not core, continue to benefit earnings. Realized gains were relatively flat in the quarter, while changes in unrealized gains and losses on equity securities were impacted by varying amounts of market volatility on a quarterly and year-to-date basis. As mentioned in prior calls, large movements in equity prices in comparable periods could have a significant impact on net earnings, which you can see in both the quarterly and year-to-date comparisons to 2020. Aggregate underwriting and investment results pushed book value per share to $27.63, up 13% from year-end, inclusive of dividends. Craig will talk more about premium in a minute, but at a high level, all three segments experienced growth as we continue to take advantage of favorable market conditions in most areas of our business. From an underwriting income perspective, this quarter's combined ratio was 94.6% compared to 99.5% a year ago, both periods were impacted by elevated hurricane losses. Hurricane losses in the quarter were within our pre-announced range and totaled $34 million net of reinsurance. $33 million of that is from our property segment and $1 million impact of Casualty where several of our package policies are reported. Net of bonus-related impacts, the events totaled $28.9 million or $0.50 per share net of tax and added 11 points to the quarter's combined ratio. From a prior year's reserves perspective, all three segments experienced favorable development. Casualty led the way with $26 million of favorable loss reserve in the majority of product lines. Moving to expenses, our quarterly expense ratio decreased by 2.7 points to 37.9% as did general corporate expenses. The declines are due in part to reductions in certain bonus measures but are also reflective of the increase in net earned premium and improved leverage on certain expenses. Turning to investments, it was a flat total return quarter with income offsetting modest price declines in the portfolio. Overall market yields remained subdued, but we have seen a slight uplift recently as 10-year yields inched back toward the highs we saw in late March. Operating cash flow remains the primary support for growth and investment income, which turned positive in the quarter. There have been few shifts in the allocation over the course of the year, but our strategy continues to focus on putting money to work in nearly all environments. Apart from capital markets exposure, investment earnings were up slightly from the comparable period in 2020, with Maui, Jim, and Prime contributing $5.4 million and $4.4 million respectively. All in all, it was a very good quarter and strong first nine months of the year. And with that, I'll turn the call over to Craig.

And before I start, I want to try to ask Chelsea if she would go back and maybe read the forward-looking statements that I think we may have forgotten at the beginning.

I didn't do any forward-looking statements, Craig. So as long as you don't either, we're going to be okay.

I'll make my comments assuming that those have been implied and read. Thanks, Aaron and Todd, and good morning, everyone. As Todd mentioned, we had a very good quarter in light of Hurricane Ida and smaller catastrophes that impacted our customers and our results. After factoring in these events, we were still able to report a sub 95% combined ratio for the quarter and more than 10 points of underwriting profit year-to-date. At the same time, we are growing our portfolio through rate and exposure, reporting 18% top line growth for the quarter and 21% year-to-date. We continue to see rate increases across most of the portfolio, although there is some tapering in spots. We are maintaining a good flow of business that meets our underwriting appetite. The business we're underwriting is generally stickier, with higher renewal retention and new business ratios. We are monitoring impacts from the supply chain and labor shortages as well as derived inflation. Our talented underwriting and claims teams are working diligently to mitigate any resulting increase in loss costs by identifying risks, sharing information across our businesses, adequately pricing the tailored coverage we provide, and taking advantage of any market disruption. Now to some more specific comments at the segment level. In Casualty, we reported an 86% combined ratio for the quarter and 84% year-to-date. We achieved an overall Casualty rate increase of 9% for the quarter, which contributed to a good portion of our 14% growth in this segment. Growth is widespread across all major products in our portfolio, and much of the rate continues to be driven by excess liability products, particularly commercial and management liability coverages. Our Transportation business continues to bounce back with increased bookings in public auto, but it's still challenged by driver shortages. Overall, wheels-based rates continue to be up, but rate increases are more moderate in size. Despite the overall growth in the Transportation space, we still find the trucking class to be increasingly competitive as top-line rates decreased for the quarter. Claim counts continue to climb to previous levels, and more jury trials are being scheduled. We will remain vigilant for social inflation and work to mitigate it through our investment in superior talent, training, and triaging of claims. In Property, we reported a combined ratio of 127% for the quarter and a 105% year-to-date, with the surplus lines wind product being the driver of the unprofitable results. Hurricane Ida was one of the most intense and damaging hurricanes in recorded U.S. history. From day one, we have had our teams on the ground assessing losses and helping our customers get back in business. About 90% of our claims reported have been in the State of Louisiana, as the Metro New Orleans area is one of our peak zones for wind exposure. The event, along with general market conditions and expected inflation, have kept catastrophe rates up double-digits for the eighth consecutive quarter. Overall top-line growth was 32% for the Property segment in the quarter, driven by exposures and a 7% segment rate increase. All products in this segment realized growth. In Surety, we reported a 75% combined ratio for the quarter. All three of our major products in this segment have grown profitably. Overall, our top-line grew 10% in the quarter. Despite economic challenges in both the commercial and contract Surety markets, we remain very competitive. We are back visiting producers in person and continue to invest in capabilities that make it easy to do business and help our producers grow with us. There are more construction opportunities in the market, and we are supporting our contractors as they win this business. We will continue to expand our writings with existing clients and producers and invest in technology where it differentiates. We had a quiet quarter on the claim front despite the added risks from supply chain and labor issues. Overall, another profitable quarter with solid growth. Our underwriting experts are ready to participate where disruption and market pricing permit us to flex our underwriting capabilities at rates that are commensurate with the risk. As always, we are alert to the uncertainty associated with inflation and supply chain disruption. We will continue to do what we do best: focusing on the basics. We will diligently underwrite quality accounts, assess evolving exposures, require adequate valuation of insured property, and walk away from underpriced business. We are good stewards of our capital as well as our insured's risk and reputation. I want to thank our RLI associates for delivering great results and value to all our stakeholders and for helping our customers, especially in times of need. I'd now like to open it up for questions.

Thank you. Before we begin the Q&A session, I want to remind everyone that during this teleconference, RLI management may share comments regarding their intentions, beliefs, and future expectations. These forward-looking statements are subject to various factors and uncertainties that could lead to actual results differing significantly. Please review the Risk Factors outlined in the company's SEC filings, including the annual report on Form 10-K and the Form 10-Q for the quarterly period ending June 30th, 2021. The company has also filed a Form 8-K with the Securities and Exchange Commission that contains the press release announcing second quarter results. RLI management may discuss operating earnings and earnings per share from operations, which are non-GAAP financial measures. These figures reflect net earnings after removing after-tax realized and unrealized gains or losses on equity securities. Management believes these measures are useful for evaluating core operating performance over time, but definitions of operating earnings may vary among companies. We will now begin the question-and-answer session. Our first question will come from Cullen Johnson.

Hey, good morning. Thanks for taking my question. It looks like a relatively large quarter-over-quarter jump in earnings of Prime Holdings this quarter. Is there anything in particular that drove that acceleration?

Cullen, this is Todd. I would say not outside of just continued revenue growth. I mean, they've grown quite a bit and just like us with our growth, you're seeing more being realized through earned premium through revenue. So outside of that growth, no, there really isn't anything.

Okay, thanks. That's helpful. And then as you kind of continue to grow the balance sheet, leverage ratios have gradually declined. Not that leverage I think is a huge consideration or part of the story here. But as we approach the 2023 maturity of the $150 million senior notes, I'm just curious could you share how you all think about your capital structure going forward?

Cullen, it's Todd. Certainly something - you're right from a leverage standpoint we're low from that perspective, because we have grown capital as much as we have. So it's something we talk about, we've tended to be conservative there. There certainly is room to increase the leverage, and it's something we have been discussing, and we'll look to make some decisions as we move through to 2023.

Great, thank you. Those are all my questions.

Thank you. Our next question comes from Jeff Schmitt.

Hi, good morning. Could you discuss how much of your growth in the Casualty books is coming from E&S lines? I guess that would mainly be general liability and excess liability. But are you seeing standard riders for kick more business into that market or what are you seeing there?

Well, Jeff, this is Craig. E&S business is growing at about the same pace as the rest of our Casualty portfolio, maybe a little faster, but not significantly. All the products in there are specialty products, and while they may not be E&S, they are a little less regulated than other products, so the formal definition of E&S is growing about the same pace. Casualty is probably growing at a slower pace than the Property business. The Property rates obviously continue to climb at a faster rate than the Casualty rate, so our underwriters are trying to take advantage of that.

Yep, okay. And then just looking at the acquisition expense ratio. If you go back, I think it was 34% historically, 33% last year or year-to-date, and it's 33%. Is that really just kind of a changing business mix that's driving that? I mean, how should we think about that run rate going forward? Is 32% the right level?

Well, yes, some of it is changing in the next year. You're right about that. If you think in terms of our divisional side of the house, and home office too, but that's not in the acquisition as half of our overall operating expenses, and a lot of that is people, as you can imagine. So we're going to leverage people a bit better, or should, as we continue to grow earned premium, you've seen that improvement a bit. I think if you look at the totality, right at the expense ratio, we were down a couple of points last full year, which I think is a better way of looking at it. You've seen some improvement and roughly another point this year. So there are some things that we can leverage a bit better, but you're right; it's reflective of a bit of the mix of products and that's where the opportunity is.

Right, right. Okay, thank you.

Thank you. Our next question comes from Meyer Shields.

Thanks. On the Construction Surety side, if we have a combination of a worker shortage and rising material inflation, does that have any impact on Surety losses?

Meyer, this is Craig. Yeah, I mean, potentially yes. Obviously, any delay in the construction of the project can put pressure on the principal and may create claims. However, we typically have opportunities to work our way out of that. The other thing that offsets that is that it's also very difficult to find a replacement contractor to do the work. Often, they just want to continue with the contractor they had, despite the delays. There is some understanding around the labor shortage; more construction projects are being done correctly and well rather than hastily. So a lot of these contracts have ways to pass on extra costs associated with completing the project, and the increased cost of materials is often passed on to the party paying for the project.

I think, Meyer, if you look to - we're probably seeing a bit elevated, again, if you go back and look from an underlying perspective over the past year and a half in terms of the loss booking ratio on the Surety side. So I think that uncertainty—whether you call it COVID last year or some of the things Craig referred to this year—has been recognized.

Okay. Yeah, perfect. That's what I was looking for. And then I think, Craig, in your comments you mentioned a shortage of drivers in Transportation. Is there a way of assessing how good drivers are now compared to, let's say, 2019? So more apples-to-apples excluding COVID?

How much shorter they are? Is that what you're asking?

Really, driver's quality, in other words, is the—

Yeah, I don't think we're in a good position to assess that. I mean, we’re going to continue to be very selective. We’re looking for professional drivers to handle public automobiles, buses, and trucks that we ensure. That doesn’t mean the general population isn’t evolving. I did see an article about allowing 18-year-olds behind the wheel of big trucks—that's probably not our target market. Given the shortage overall, I assume the risk on the road has probably increased, especially with larger vehicles.

Okay, perfect. That's what I need to know.

Thank you. Our next question will come from Scott Heleniak.

Hi, good morning. Just wanted to first touch on the property premium growth, which is significant, and you talked about your rate increases being good at about 7%. But could you touch more on the opportunity you're seeing there just by counter geography? Do you see that growth continuing to 2022? Do you think this is more short-term? Also, is there any change in mix, in terms of more or less catastrophe-exposed property written recently? Any detail there would be helpful.

Scott, this is Craig. We're seeing growth across the portfolio with double-digit growth rates. We are seeing probably more opportunity particularly on our E&S side of the business, especially with hurricane-related products in the southeast, where the catastrophes have impacted. There's the inflationary impact that everyone is starting to realize—it costs more to replace buildings, particularly in the southeast. We're not seeing it as much on the earthquake side; we are getting rate increases there, but certainly not at the same level as we are on the hurricane side. I expect we'll continue to see rate increases and possibly some growth in both exposures and rates in the hurricane books. However, we are experiencing growth across the property portfolio—for instance, the Hawaii Homeowners book is still growing at double-digit rates, which includes some hurricane exposure. But most of that is in higher exposure areas on the islands. Our marine business is also growing; while it is somewhat catastrophe-exposed, not as much as our E&S business. I expect continued growth as long as the market permits.

Sure. And so regarding the southeast hurricane, do you feel there's more opportunity than usual given the current rates, or are you cautious about taking on cat exposure?

Yeah, Scott. If we can grow at adequate premiums, we’re optimistic that we can, but rates must continue to be adequate down there. The bar has indeed gone up in terms of pricing due to reconstruction costs; fortunately, we are able to command higher prices. So we consider that an opportunity. When I mention the southeast, the opportunity is more non-Florida than Florida right now, but we have room in Florida if we can achieve the right rates.

Okay, yeah, that's helpful. And Craig, you mentioned in your comments some tapering of rates in a few areas. Is there any specific line you could identify that's holding up better than expected?

Yeah, I mean, mostly excess Casualty products, which are primarily commercial excess in the E&S space, particularly for contractors. Our D&O business or management liability business has held up better than I anticipated; the rates for this quarter don’t appear to be declining as I expected. In the wheels-based businesses, while we are still seeing increases, they have moderated from prior double-digit increases to now mid-single-digit increases, which demonstrates the tapering.

Okay, yeah. And lastly, Todd, you mentioned a slight increase in yield potential. Obviously, the 10-year treasuries are increasing, but could you share what your new money yield is in the marketplace versus the existing portfolio yield? What's the spread?

Yeah, Scott, it's Aaron. We're probably in the low 2s versus the upper 2s for what's in the portfolio today.

Okay, still ways to go to narrow the gap.

Yes, we would like to close the gap with a continued rise in yields. So we welcome that trend, as we noted before—bond prices are going down, but we're able to invest at higher rates.

Craig has asked the underwriters to keep pushing for operating cash flow. Aaron, wait for the portfolio.

It's been a help. It's been a big help.

Thank you. Our next question comes from Jamie Inglis.

Hey, good morning, folks. Craig, I’ve got a query about your thoughts on climate change, something everyone's been talking about. What is RLI's view regarding climate change's impact on your book of business? What have you done over the last three to five years, and what do you think it will lead you to do going forward?

So I've been waiting for that question. Our policies are, of course, renewable every year, and we are very attentive to the impact of climate change; however, it's challenging to measure that impact. Fortunately, we can reprice our accounts annually. I'm not a scientist, so I can't quantify its impact, but certainly, we are vigilant. If severe hurricanes and storms continue due to climate change, those factors certainly need to be incorporated into our pricing for those locations.

Okay, thanks. That's all I have.

Thank you. There are no further questions, so I would like to turn the conference back to Mr. Jon Michael.

Thank you. What a great business we are in. We're able to help our customers get back in business from these hurricanes and other catastrophes like this while still being able to post a very satisfactory quarter—mid-90s combined ratio, with excellent growth during the quarter and a strong beat of the analysts' expectations. So with that, we'll talk to you again next quarter. Some of us will, and we'll leave it at that. Thank you all for joining.

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 988-4611. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.