Good morning and welcome to the RLI Corp's third quarter earnings teleconference. After management's prepared remarks, we will open the conference up for questions and answers. 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. Please refer to the risk factors described in the company's various SEC filings, including an annual report on Form 10-K as supplemented in Form 10-Q, all of 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 third quarter results. During the call, RLI management may refer 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 realised gains or losses and after-tax unrealised gains or losses on equity securities. Additionally, equity and earnings of Maui Jim and the related taxes were excluded from operating earnings and operating EPS for 2022 due to the sale of RLI's investment in the third quarter of 2022. RLI's management believes these measures are useful engaging core operating performance across reporting periods but may not be comparable to other companies' definition of operating earnings. The Form 8K contains a reconciliation between operating earnings and net earnings. The Form 8K and press release are available at the company's website at www.RLICorp.com. I will now turn the conference over to RLI's Chief Investment Officer and Treasurer, Mr Aaron Deeson-Faylor. Please go ahead whenever you're ready.

Good morning. Thank you for joining RLI's third quarter earnings call for 2023. Joining us are Craig Cleef-Hermitz, President and CEO, Jen Klobnak, Chief Operating Officer, Todd Bryant, Chief Financial Officer. Today's agenda will include Craig opening up the call with some high-level remarks. Todd will add detail on our financial results for the quarter. Jen will offer additional commentary on market conditions and our product portfolio. The operator will then open the line for questions, and Craig will close with some final thoughts.

Thank you, Aaron, and good morning, everyone. The devastating Maui wildfires that occurred in early August were a notable event for our customers, our team, and our business this quarter. We continue to extend our heartfelt support to all who were affected by this tragic event. As Todd will touch on shortly, the quarter's results were significantly impacted by this catastrophe. Our claim team, both in Hawaii and other parts of the country, responded quickly to assess the damage and remain dedicated to helping affected policyholders begin to recover as quickly as possible. Our purpose is to take on and diversify risks that can't be borne by an individual or business in exchange for a premium. Subsequent to catastrophic or unexpected events, we execute our mission to fulfill the promises we have made to our impacted policyholders. Our financial strength is a benefit to those affected as well as our shareholders. I will let Todd and Jen go into more detail on the financials

and the market in general. Todd, take it away. Thanks, Craig. Good morning, everyone. Yesterday, we reported third-quarter operating earnings of $0.61 per share. The quarter's results were adversely affected by losses from the Hawaii wildfires, but remained positive with an overall combined ratio below $100 and continued growth and investment income. All in, we posted a combined ratio of 98.7 for the quarter, now 88.0 year-to-date. We continue to experience top-line growth, up 11% in the quarter, which Jen will unpack in a bit. Investment income advanced 50% as improved reinvestment rates and a larger invested asset base have been accreted. Operating cash flow remains strong at $329 million year-to-date and continue to support growth in invested assets. Q3 net earnings per share of $0.29 is challenging to compare to last year's $9.61, as 2022 was heavily influenced by the realized gain achieved on the sale of our stake in Maui Gin. Our underwriting profitability, the previously mentioned investment income growth, and modest realized gains of $7 million were partially offset by net unrealized losses on equities of $25 million in the quarter. From an underwriting income perspective, the quarter's 98.7 combined ratio compares to 97 reported last year as catastrophe activity affected both periods. Losses recorded from the Maui wildfires were 66 million for the quarter, which was on the lower end of our previously announced range. Of this amount, 14 million relates to reinstatement premiums on our catastrophe treaties impacts from this event added 17 points to the quarter's combined ratio we also recorded 5 million other storm related losses in the quarter the comparative quarter last year included 40 million in losses from hurricane ian as a reminder first dollar retention on our catastrophe catastrophe trees increased to 50 million in january of 2023 up from the 25 million previously apart from catastrophe events incurred losses in the property segment were low for the third quarter of 2023 and remain well contained for the year elevated catastrophe losses certainly made a notable impact on the property segment's loss ratio but revenue growth is also part of the story earned premium growth from rates achieved over the trailing four quarters continued to moderate the overall impact of storm losses with the property segments combined ratio at 88 on a year-to-date basis from a prior year's reserves perspective casualty drove the majority of the overall benefit recorded casualty posted 22 million of favorable loss emergence across a number of product lines executive products commercial excess general liability and personal umbrella had notable benefits over multiple accident years property was modestly adverse on the 2021 accident year this was largely driven by marine which remains favorable on a current year basis for surety favorable reserve development was 1 million driven by the commercial segment as noted each quarter our approach to reserving remains the same and the quarter's results are reflective of a consistent process for evaluating loss reserves. Moving to expenses compared to last year, our quarterly expense ratio decreased 1.2 points to 39.2. The decline would have been greater but for the aforementioned reinsurance reinstatement premiums. These seeded premiums are fully earned as recorded and result in lower net premiums earned from a trend perspective. The elevated seeded premiums adversely impact expense ratio comparisons. For the quarter, the expense ratio was up 1.8 points due to this impact. On a year-to-date basis, the impact was half a point increase. We have, however, continued to increase investments in people and technology to support growth, improve the customer experience, and drive long-term efficiencies. Turning to investments, capital markets had a challenging quarter with both stocks and bonds declining, resulting in a total return of minus 1.7% for the combined portfolio. High-quality fixed income has dominated our purchase strategy for some time and yields average 5% of the Q3, well above the portfolio's current book yield. Our cash and short-term investment allocation was down from June 30th as claim activity and the repayment of our 2013 long-term debt issue at RLICOR required additional liquidity. A portion of the proceeds used for bond repayment on September 15th were sourced by drawing $50 million from our existing credit facility at PNC. Overall, the balance sheet is in solid shape with an increased allocation to high-quality fixed income, slightly lower leverage, and strong available liquidity. Incorporating fixed income declines and comprehensive earnings and adjusting for dividends, book value per share declined slightly from June 30th, but remains up 13% from year-end 2022 to $28.47. Away from the traditional investment portfolio, investee earnings were up slightly when compared to the $2 million, significantly, excuse me, when compared to the last year through the $2 million in the quarter. 2022 was heavily influenced by transaction-related expenses at Maui Gym, and as referenced in our press release, we have excluded Maui Gym's impact on operating earnings, which offers a better comparison. All in all, a solid operating quarter and continued positive momentum for the year. And with that, I'll turn the call over to Jen.

Thank you, Todd. I will jump right into some details on our business by segment. Property premium for the quarter was up 26%. The growth continues to be led by our E&S Property Division, which grew 39% and included a 42% rate increase. The catastrophe market remains hard with opportunities on both hurricane and earthquake business. Capacity has been reduced or pulled from many MGA markets and binding facilities. The delegated authority markets are still competitive, but only when the risk meets their narrower appetite. We are starting to see some limited competition return from admitted markets. Commercial businesses in Florida are increasing deductibles or buying less limit to control their spend. We are controlling our exposure by continuing to sell lower limits and managing our concentrations by region to acceptable levels. Our growth, which is driven predominantly by rate at this point, has positively contributed to the bottom line. Our Hawaii homeowner boasts root premiums 17% in the quarter. We have been a stable market with local underwriting and claim talent supporting Hawaii homeowners for over 25 years. The Lahaina wildfire in August was an extreme and tragic event for our insurers, producer partners, and employees. We mobilized immediately after the event, providing direct support, including alternative housing and care packages within the first week. Given the severity in Lahaina, many locations were complete losses, which allowed us to quickly fulfill our promise and pay counterclaims expeditiously. We continue to work with insurers to understand the totality of their loss and to help them secure long-term housing. We are committed to the Hawaii homeowner's market and will continue to write new business in the state. We're proud of our associate owners' response to this event and their ongoing commitment to provide exceptional customer service. Our marine division has slower top-line growth in the quarter due to market dynamics and underwriting adjustments made. However, we see continued opportunities in all of our property markets in the near-to-medium terms. The combined ratio for the quarter for our property segment was 122 due to the Hawaii losses, but the combined ratio year-to-date is 88, which reflects the increased margin we're achieving in the current hard market. Turning to our surety segment, premium was down 2% for the quarter. but we posted an 82 combined ratio. Contract surety premium was down 7% for the quarter. We are in a more uncertain economic period, particularly for private sector construction, which is slowing due to higher material costs and interest rates in particular. These conditions can cause contractors to stretch to win projects, but it puts pressure on their profitability and their ability to execute. We are closely monitoring our contractors' financial security and project backlogs. We are seeing some increased claim notices and are working collaboratively with our contractors to ensure jobs are completed while closely managing claim costs. Commercial surety premium was also down slightly. We are having broad-based success in writing new business in this market, but the timing of bond renewals that shifted into the fourth quarter and the release of several sizable bonds put pressure on top-line growth. As we review the overall surety industry results, we are pleased with the profitability achieved by our surety team as we continue to focus on underwriting discipline. Casually premiums grew 6% on a 90 combined ratio. Personal umbrella premiums led the way with 33% growth, supported by the continued market disruption. As a reminder, our personal umbrella product is sold on a standalone basis, and demand is rising in those states where personal lines carriers have been pulling back on their auto or their homeowner's businesses due to losses or the inability to obtain adequate rate levels. Given these issues, we work with our producer partners to manage the growth and have instituted higher underlying limit requirements or have surcharged insurers who buy down their attachment points. We have also obtained rate increases from many states. We've translated into a 7% rate increase for personal bro this quarter. Premium in our professional services and small commercial division grew 6% this quarter as we continue to focus on serving architects, engineers, and contractors for a broad product offering and value-added risk management services. For our other casualty businesses, we are experiencing some challenges due to competition, consolidation of insurance in select market segments, a slowdown in construction in certain regions, and revenue decreases for some transportation and construction risks. Despite these challenges, our more mature business units in casualty, transportation, and executive products are collectively flat from a production standpoint. Rate change for the casualty segment was up 5% for the quarter, which includes a 5% decrease for executive products, which is showing some moderation, and a 10% increase in transportation as we continue to stay ahead of increasing loss costs. We would like to see the industry news of loss emergence in older accident years drive more discipline within the market overall. As referenced, there are several moving parts in casualty, but we continue to focus on risk selection with a constant eye toward underwriting profit. Once again, we are very pleased with the performance of our product portfolio, and we see positive momentum in several key areas going forward. Our diverse portfolio, supported by outstanding service to our producer partners and insurers, continues to perform well. Now I'll turn the call over to the moderator to open it up for some questions.

Thank you. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star followed by one on your telephone keypad. And if you wish to withdraw your question for any reason, please press star followed by two. Your question will be taken in the order that it is received. Please stand by for your first question. Our first question today comes from Greg Peters from Raymond James. Greg, your line is now open. Go ahead.

Great. Good morning, everyone. um i wanted to go back jen during your com comments on pricing in casualty i think you said uh seven percent an umbrella but you also called out financial products and some of the other lines where pricing is flatter down can you spend a minute and just give us your view on how these pricing trends are matching up with your expectations around lost cost inflation

Sure, Greg. Thanks for the question. You know, it varies by market within the casualty segment. Our casualty bulk is fairly diverse, and we're seeing opportunity in a lot of spots, you know, personal umbrella leading the way on growth, but that is subject to approved rate filings, which we've had a lot of success in certain states, and in other states, I'd say that it's been more challenging. So, you know, we are managing that growth by region and working with our producers to make sure that we're not growing too quickly in states where we can't get those approvals in place. But we think overall, based on how we're managing that growth and based on our commitment to dedicated claim service in that area, that we are staying on top of, you know, trends that are happening. I know that in the industry, that is a difficult coverage. We hear that from our re-entry partners. But as they compare our book performance to others, they continue to support us. So we think we're doing okay in that area. I think transportation is an area that's hit the news a lot recently too. It's related as far as the auto losses. You know, we've got 10% rate increase for transportation for the Corps, 7% year to date. I've got a chart here that shows back to 2018. We've had rate increases between 6% and 12% every year consecutively. And so, you know, we continue to know that losses happen every day in our transportation division, so we need to continue to get rate as inflation, whether it's, you know, damage or bodily injury or the court system happens, you know, we do need to continue to get rate there. We're focused really on risk selection though too, so in our transportation division in general, you know, we've been shrinking in certain parts because it's been so competitive and so it's not all about rate versus loss trend, it's about, you know, looking at the individual risks and making sure that you understand the possibility of how they are controlling losses, how they're training their drivers and maintaining their trucks and things of that nature. So we dig into the details there. And then I think the other area of interest usually is our executive products group, which includes the DNO area. I mentioned the 5% rate decrease for the quarter, 6% year to date. You know, the headlines there have been that it's been a drastic reduction. And, yeah, we did see some larger reductions in the first half of the year. But, again, we've used risk selection to get off of accounts where we think that rate decreases too much. And so it comes back to individual underwriting and looking at the risks and making sure that we're comfortable with each one going forward. You know, the momentum of renewing an account is pretty strong. But as an underwriter that's paid on the bottom line, you know, they take a moment and they look at it to see what of that risk has changed since the last renewal. and should they actually continue even if there is a rate decrease? And sometimes the answer is yes. That account has performed well and we can keep supporting them, and at other times we have to be able to walk away. And so that's kind of the scenario. If you have questions on any of the other areas, I'm happy to answer any other questions on that.

Well, that was great, Collin. Thank you. I guess I would like to pivot for a second on the reinsurance portion I'm just curious about how I think you said the Hawaii losses wound up coming at the low end of the range of what you originally guided to. So just curious about how the reinsurance worked for that loss, you know, how much cover is left or some parameters that you can provide. And then do you think it's going to affect your pricing for next year or considering that your catastrophes elsewhere have been pretty limited, at least year to date? maybe you'll get a pass on that i'm just curious if you have an early view on reinsurance costs

for next year well i'm not like jen this is craig i'm gonna let jen talk about her what she thinks about next year because she's probably a lot closer to me but matt all you say is the loss with the reinstate premium that todd referred to there are no holes in our program the program exists just like it did previous to the maui loss so if we were to have another large event we would have coverage through the tower just like it was free valley as a result of the

reinstatement premium that we paid yeah so we had disclosed a 65 to 75 million net range that of returns that would be and that would include all in so that includes reinstatement premium we booked 66 million so you can see it was at the low end of the range that included 14 million of reinstatement premium as todd referenced earlier um if you look at it you know our tower is a 750 $50 million tower acts as a $50 million retention. We're not going to get near, you know, the top of that tower with this event. In fact, we're towards the lower end. We think we have plenty of coverage for events like this. I think this was an odd event. If you talk to our local Hawaii underwriting and claim staff, they would say they, you know, they have never seen anything like this on the island. They've been there quite a while. It was quite a severe event. but we look at concentrations for property business across our portfolio we have a number of units that write property business from ENS properties and marine to our package products to Hawaii and in all cases we you know we do the old-fashioned circles of limits how much limit do we put in an area and are we comfortable that it's a particular event of whatever time came through that area are we comfortable sustaining that loss on a net basis and you know, just sharing that information with our reinsurers. I think we'll have more conversations with our reinsurers given this was unusual for our portfolio, at least in our history. But we have been in contact with them. We've been, we've done our trips to Bermuda and London already this year. So we're in contact with everybody. We're pretty transparent when it comes to a loss. So we give them a lot of detail around the particular individual losses and what's happening and how we adjusted the claim. In this particular event in Hawaii, you know, there are several coverages involved, so we – in our loss estimate, you know, we looked at things like additional living expense, for example, and we have reserved the full amount of that limit because we have seen an increased cost for housing in the area, and we think it'll take a long time to rebuild. So, we've built in all of those assumptions into our estimate. We're comfortable with that. Going forward, the reinsurers, of course, are going to say, you know, we want to charge you more. That's what they do. You hear that in all the headlines. We're going to work with them to show them what our exposure is, what our process is, and look for differentiation in the market because, again, we think we do a pretty good job in this area. We've been doing it for a long time. And so we wouldn't expect it to cause a huge impact to our reinsurance renewal process. But we're very early stages in the negotiation for 1-1s at this point. So we'll see how it turns out.

Excellent. Thanks for that color. I guess the final question I had is just in the area of surety, you talked, you know, the premium growth, you talked about some of the economic challenges for premium growth in that business. I'm just curious. There's a lot of headlines out there and noise in the marketplace about how the economy is going to look for next year. And as you guys are going through the budgeting process, I'm curious with your customer set, how you think the surety business might shape up next year. Any sort of guideposts you might be willing to provide would be helpful. That's my last

question. Sure. So, I don't know if you follow the SFA results that get published every quarter. They came out about months ago. They're on a pretty big lag. But if you look at the results for the industry, they've been elevated for the last couple of years. And if you look at our results, we're performing very well compared to the industry from a bottom line perspective. From a top line perspective, you'll see that we've actually, I'll say, fallen down the chart a little bit in terms of the larger surety market. So, we're now ranked around the 20th largest surety market. And some people would say, oh, that's disappointing that we're not, you know, we used to be, I think, the 10th largest. And so that is a little bit disappointing, but the point is more competitive. You know, sometimes, as I mentioned, they do stretch, and so they want to be sure that they bid projects on the contract side in particular, that they're building in enough profit to sustain their business. So it's hard to say how our business is going to grow. It's going to depend on how our competitors act. But for us, we're going to continue to focus on the discipline and the risk selection. Great. Thank you for the

answers. Thank you, Greg. Our next question comes from Andrew Anderson from Jeffries. Andrew, your line is now open. Please proceed to your question. Hey, good morning. Looking at casually

reserve releases that were a bit stronger quarter over quarter, though a little bit lower year over year. I guess to start, is there different reserves that are reviewed in the third quarter versus the second? And secondly, has the approach to reserve studies and viewing inflation trends changed through nine months this year?

Hi, Andrew. It's Todd. The process is the same. So there's nothing different quarter to quarter, so nothing unique about the third quarter relative to the first two quarters, and nothing different as we compare to what would have been done third quarter of last year. So no change whatsoever. This is just how the studies fell out, if you will.

Got it. And I think in the second quarter of this year, you made some changes to current accident year picks for some of the energy business. Was there any similar type of changes in current year picks this quarter in casualty?

Nothing material whatsoever on the current accident year.

Not at all. And maybe last one for me. At the top of the call, you kind of mentioned the expense ratio improving and perhaps a little bit of noise from the reinstatement premium. But what kind of opportunities do you see here with the investments that you're making in technology to perhaps improve the expense ratio a little bit from here?

Well, yeah, that's a good question. I think we're always looking to see where we can drive efficiencies as we grow. So there is opportunity there on the technology front, you know, trying to get fewer either front-end systems or getting to one building system. So looking on the efficiencies there. But a big part of it is really that customer experience. So anything positive that we do from that standpoint, you know, the hope would be, you know, that would be supportive of growth and premium, which will also improve the expense ratio. So there's opportunity, certainly investments we need to make, and we're focused on all of that.

Great. Thank you.

Thank you. As a reminder, if you'd like to ask a question, please press staff, followed by one on your telephone keypad. Our next question comes from Maya Shields from KBW. Maya, your line is now open. Please go ahead whenever you're ready.

Great. Good morning. One quick question for Jen. You talked about underwriting adjustments in the arena. I was hoping you could expand on that a little bit.

Sorry, you were talking so fast, I didn't understand the question.

That's an occupational hazard. Yes, in your opening comments, you talked about underwriting adjustments in marine,

and I'm not sure what that actually means. Sure. So, you may have heard Todd say that the property reserve loss reserve release was a little bit adverse in this quarter, and that was related to marine liability claims that we had from a couple of years ago. So, marine is, even though it's in the property segment, it's a combination of both property in live-only coverages, predominantly property. That's why it's in that segment. But we have seen a little bit of activity on the live-only side and we have seen some issues in our cargo book and so we've made a few small underwriting adjustments. I don't want to, we're not like re-underwriting the book, but we're just adjusting on the edges a bit, which has caused us to reduce a little bit the growth that we've seen historically in marine as of late. That's a very healthy book though. We continue to get positive rate in marine. So for the quarter we had a five percent rate increase in marine six percent years date so we're just taking minor underwriting actions which is what we do throughout but in this particular case it's a little bit more noticeable on the top line

so that's what's going on in the marine book okay so it wasn't like a numerical adjustment it was just uh typing underwriting standards yeah yep okay all right sorry i wasn't sure um related question. I know we've talked a lot about how turmoil in the personal lines market is creating opportunity for standalone personal umbrella. I'm wondering, is there any downside? Are there any business that's lost sort of that you wouldn't want to leave because of all the

challenges in personal lines? That's an interesting question. We're not really losing business right now. We are, our retention is pretty much steady. So, I would say there's nothing notable there. In fact, it'd be nice if our retention was higher because it does take effort, you know, to gain new business. So, it'd be nice if that would be higher. But, you know, we're not seeing any business that we're losing that we would not want to lose at the same point.

Okay. Excellent. And then one final question just for modeling purposes. Is there a given breakdown of the catastrophe losses and the reinstatement premium between the property and casualty segments that we can use?

Yeah, Merit, Todd, for the quarter, it really was contained. All of the Maui losses were contained within the property segment as well as the reinstatement premium. The other storm losses in the quarter, but the other $5 million that I mentioned, there was around $1 million of that, just south of the million that was in the casualty segment. So the bulk of that was in the property segment as well.

Okay, perfect. Thank you so much.

Thank you. As a final reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Scott Helignac from RBC Capital. Scott, please go ahead whenever you're ready.

Yeah, morning. I was wondering if you're able to share what the gross losses are from the Hawaii wildfires. I think somebody was trying to get at that before. But is that something you're able to share?

Scott, it's time. I mean, I'm not sure the relevance from that standpoint. I mean, to the extent that you're trying to, you know, do a comparative to prior periods when you think in terms of changes in the reinsurance. But you're going to be in that 150-plus range. I mean, you can kind of see it in the initial reserves that we estimate that we have made. we're going to do you know a 130 to 150 range and we're constantly attempting anyway to be to be more on the conservative side in our initial initial

book okay that's that's helpful and then just touching on their reserve releases again was there any particular accident year that stood out where most of those releases came from or was it was it spread out anything notable there

It was spread out. I mean, we have a little bit in the 15 to 17, some of the 19 to 21. I mean, it really wasn't any particular accident here that a bulk of that was coming through. Pretty spread.

okay and then just my last one was a comment that was made about um i think it was on the the property book there was uh some signs of increased competition from mid-market carriers and i was wondering if you you might be able to to give a little more detail on that is is are you just seeing that from one or two in in certain areas certain regions or just just curious if you can share anything more on that

Sure. So, this is Jen. So, you know, we focus on Florida these days. So, I'd say in Florida, we're seeing, it was surprising to see something. We lost one account to somebody, but it's not widespread. But, you know, you see these little green shoots and you're surprised by it. So, I think the Florida market in particular would be very difficult to navigate on an admitted basis. So, I don't know that that's the start of a trend. I think that the big competition comes from, you know, a lot of those MGAs and things, but then also citizens as well continues to be a big force there, which is unfortunate to see. You'd hope that that would be less of an emphasis. So, I don't know. That market will continue to evolve. We're not seeing a ton of competition there, but there is some starting to emerge.

Okay. I appreciate that.

Thank you. If there are no further questions, I'll now turn the conference over to Mr. Craig Kilkenness for any closing remarks.

Thank you everyone for joining today. The financial results we reported yesterday reflects our organizational resiliency. Consistent profitability and top-line growth are a testament to our diversified specialty product portfolio, our deep underwriting and claim expertise in our chosen markets, and a willingness to prudently lean into disruption where we understand the exposures in the market environment. We grow with the opportunities and with investments in talented experts and deep relationships. We don't seek growth simply for growth's sake, and we don't run away from markets we serve with the first large loss. Our disciplined commitment to make the best long-term decisions for our customers and our shareholders has served us well and is a differentiator of our culture and our organization. I'm proud of our associate owner's effort and the unique ownership model we have maintained. We are committed to being different because being different works. Look forward to visiting with you all next quarter.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-866-813-9403 with an access code of 457397. This concludes our conference call for today. Thank you all for participating and have a nice rest of your day. All parties may now disconnect.