Good morning, and welcome to the RLI Corp. Fourth Quarter Earnings Teleconference. After management's prepared remarks, we'll 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 the actual results to differ materially. Please refer to the risk factors described in the company's various SEC filings, including in the annual report on Form 10-K as supplemented in Forms 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 realized gains or losses and after-tax unrealized 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 in gauging core operating performance across reporting periods but may not be comparable to other companies' 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 Chief Investment Officer and Treasurer, Mr. Aaron Diefenthaler. Please go ahead.

Thanks, Lydia. Good morning from Peoria. Welcome to RLI's fourth quarter earnings call for 2023. Joining us are Craig Kliethermes, President and CEO; Jen Klobnak, Chief Operating Officer; and Todd Bryant, Chief Financial Officer. As usual, Craig will start with some preliminary highlights, Todd will run down the financials, and Jen will offer commentary on current market conditions and our product portfolio. Lydia will then open the line for questions, and Craig will close with some final thoughts. Craig?

Well, thank you, Aaron, and good morning, everyone. We ended this quarter and year with profitable growth across all segments. Notably, it is our 28th consecutive year of underwriting profit. We've been able to grow our top-line at a double-digit pace for the last three years, resulting in doubling the size of our company over the last six. We believe disciplined underwriting is a core competency of our company, which has proven out in the consistency of our financial results, which we have delivered over time. Remaining profitable enables us to provide a stable and secure market to our customers and partners for the long haul. All in all, we completed another successful year and are enthusiastic about our opportunities going forward. I will let Todd and Jen go into more detail on the financials and the market in general. Todd, it's all yours.

Thanks, Craig. Good morning, everyone. Yesterday, we reported fourth quarter operating earnings of $1.54 per share, aided by both positive underwriting and investment income. Overall, we posted a combined ratio of 82.7% for the quarter and grew top-line 13%, which Jen will discuss further. On a full-year basis, gross premiums written increased 15%, and we managed an 86.6% combined ratio, marking our 28th consecutive year of underwriting profitability. Investment income advanced 40% on the year, as improved reinvestment rates and a larger invested asset base have been accretive. Operating cash flow remained strong at $464 million for the year and continued to support growth in invested assets. Net earnings per share were $2.49 for the quarter and $6.61 for the year. The full year result was down from last year, which was heavily influenced by the realized gains achieved on the sale of our stake at Maui Jim in the third quarter of 2022. Fluctuating levels of unrealized gains and losses on the equity portfolio also impact the comparison of net earnings between periods. From an underwriting income perspective, the quarter's 82.7% combined ratio compares to 82.1% reported last year. Both periods benefited from relatively benign catastrophe activity and reductions in losses from prior period events. Overall, our loss ratio was up 0.5 points, while our expense ratio advanced 0.1 points, which we will discuss further. In Property, we recorded $4 million in losses from current year storms and maintained a low loss ratio on non-catastrophe events. With respect to prior period events, we reduced loss reserves a total of $3 million on prior year's catastrophes and $2 million on other claims. In addition, based on currently available information, we reduced our net estimate of Maui wildfires to $61 million from the $66 million reported in the third quarter. The $5 million reduction is evenly split between losses and reinstatement premiums. Overall, the segment's loss ratio was 19.5% in the quarter and 42.9% on a year-to-date basis. In 2023, net catastrophe losses were notably higher, influenced in part by higher first dollar retention on our reinsurance treaties. Despite this, the segment recorded a combined ratio of 78.5% on a year-to-date basis as earned premium growth from rates achieved over the trailing four quarters continued to moderate the net impact of storm losses. From a prior year's reserves perspective, Casualty drove the majority of the overall benefit recorded. Casualty posted $9 million of favorable loss emergence across a number of products. We continue to remain cautious on both current and prior years, particularly for auto-related exposures. For Surety, favorable reserve development was just under $1 million, driven by the commercial sector. Turning to expenses. Compared to last year, our expense ratio increased 0.1 points for the quarter and 0.4 points on a year-to-date basis, closing the year at 39.9%. As discussed on our third quarter call, reinsurance reinstatement premiums related to the Maui wildfires impact the comparison. These premiums are fully earned as recorded and result in lower net premiums earned from a trend perspective. These elevated ceded premiums earned adversely impact the expense ratio comparisons and account for 0.3 points of the increase on a year-to-date basis. For the quarter, we recorded just over $2 million in non-recurring expense in our Surety division that is notable on a comparative basis to last year's fourth quarter. In addition, all three segments include increased bonus and profit-sharing amounts in the quarter. Amounts achieved are driven by continued strength of operating results and notable growth in comprehensive earnings and book value during the quarter. Overall, we continue to increase investments in people and technology to support them, improve the customer experience and drive long-term efficiencies. Moving to investment results, headwinds experienced in Q3 turned into tailwinds in the fourth quarter as stocks and bonds moved higher, driving positive total portfolio returns of 6.4%. Purchase activity remained in line with prior quarters and focused on high-grade bonds where we continue to find opportunities to support investment income. Yields averaged over 5% during the quarter and a higher balance of cash equivalents offers flexibility without impacting income potential. Away from the traditional investment portfolio, investee earnings were down in the quarter as 2023 reflects only firm while last year included the final true-up of earnings from Maui Jim, which as I mentioned, was sold in the third quarter. As referenced in our press release, we have excluded Maui Jim's impact on operating earnings, which offers a better comparison. From a balance sheet perspective, debt leverage remains well below historic levels as we paid down debt in the third quarter, and we will await a more favorable environment to contemplate issuance. Strong year-to-date comprehensive earnings drove book value per share of 31% when adjusting for dividends to nearly $31 per share. Our capital management strategy again includes a special dividend of $2 per share paid in the fourth quarter in addition to our ordinary $0.27 quarterly dividend. Consistent financial performance and conservative capital stewardship has allowed RLI to return over $1.4 billion to our shareholders in the last 10 years. All in all, a very good quarter and a strong finish to the year. And with that, I'll turn the call over to Jen.

Thank you, Todd. I'll jump right into our segment results. Premium in the Property segment grew 24% for the quarter on a 55 combined ratio. Consistent with prior periods, our E&S property group led the way with 29% growth, including a rate increase of 31%. Following the quiet hurricane season, the market is starting to loosen with competitors increasing their limits. As rates continue to climb, we have allowed our hurricane exposure to decline a bit while the competition picks up. It's a bit early to provide insight on market behavior based on reinsurance renewals as those changes can take a while to filter down to the underwriter's desk at some companies. We are allowing more flexibility for our underwriters, especially on renewals, so we can continue to navigate the market effectively and capitalize on this generational price level. Our marine book grew by 15%, led by inland marine. The division posted a 6% rate increase in the quarter. The team has achieved consistent, profitable growth by providing solutions when our producers come across unique risks and by attaining rate over time. We appreciate the team's commitment to our customers and their contribution to our bottom line. Our Hawaii book grew the top line 13% in the fourth quarter. The team continues to focus on supporting our insurers and our producers who were impacted by the Maui wildfires. Our timely response to their needs has once again strengthened relationships and differentiated our team in the market. The Property segment's improvement from the fourth quarter a year ago is driven by increased rates. Total rate increase for the segment was 24%. Earned premiums growth outpaced expenses, which caused a notable decline in the expense ratio. We believe the market will continue to provide opportunities in each of our property businesses in the near term. Surety premiums grew 11% in the quarter on an 85% combined ratio. All Surety products contributed to the growth. We have added a number of underwriters and support staff to the division over the last couple of years who have added to our underwriting and customer support capabilities to ensure we provide excellent service to our producers and principals. At the same time, we have transitioned also with several accounts where the principal financial condition has deteriorated. We are growing at a slower pace in the surety industry, and we believe that it is a prudent strategy during this period of inconsistent economic conditions and increased competition. The segment's combined ratio increased from the fourth quarter of 2022 due to the expense ratio. We continue to invest in this business through people and technology to support long-term growth. We believe slow and steady growth is the right strategy at this time in the cycle for our Surety business. Casualty segment premiums grew by 8% on a 99 combined ratio for the quarter. Growth was led by personal umbrella with premium up 32%. This includes a 7% rate increase for the quarter. We have received regulatory approvals that we expect will accelerate rate increases into 2024. As loss frequency for this product has returned, we are managing growth through updates to select underwriting guidelines. Our transportation product group also grew premium by 20%, including an 11% rate increase. This is a diverse portfolio as we added several small products last year that contributed to the top line. This group is in a challenging market with plenty of competition, consolidation of insurers in the public space, and pressure on rates by our competitors, despite the fact that there is plenty of loss activity that should cause rational underwriters to take pause. As we have in the past, we will continue to push on rate to cover loss trends and walk away from business that is underpriced. Within the Casualty segment, we have two areas where premiums decreased. Our executive products group premium declined by 5%, which included a 5% rate decrease. Brokers continue to push for notable rate decreases on public D&O in particular. We try to be accommodating, but we will not support business at an inadequate rate, which has become more frequent during the softening market. Finally, Energy Casualty now renewed $3 million of premium in the quarter. We closed this business in July of 2023. During the full calendar year, we wrote $2.2 million of premium, which creates a small gap in the top line for 2024. The segment's combined ratio increased from last year's fourth quarter due to the loss ratio. This is a function of the change in mix of business as well as our continued prudent stance on loss estimates. Although we have achieved increased rates, we recognize loss trends are still relatively high. Our investments in claims and underwriting talent and relationships with producers should provide continued growth opportunities for this segment in the near term. Lastly, I'll make a few comments on reinsurance renewals. As has been widely discussed, we found the reinsurance market much more orderly this year. We renew about 60% of our reinsurance treaties effective January 1. Although there was a lot of posturing from reinsurers seeking material rate increases on Casualty business, our risk-adjusted rate increases on casualty coverages were 5% to 10% on largely the same structures and placement percentages. On Property coverages, we eliminated minor non-concurrencies that had been introduced last year. The estimated risk-adjusted rate change on Property coverages was flat to a slight decrease. We maintain retentions and structures as expiring. We were able to place more of our catastrophe layer, while we marginally increased co-participations on our working property coverage treaty. With all of the changes to retention over the last two renewals for Property, we expect to retain a little bit more of Property segment premiums in 2024 compared to 2023. The broad support from the reinsurance community demonstrates confidence in our approach to underwriting our business. While we are constantly working on improvements to our products and processes, we have a healthy, diverse product portfolio. Inevitably, there will be challenges that will arise in 2024. But like the Kansas City Chiefs' Isiah Pacheco, "We might get tackled, but we'll bounce right back up and keep going." Kudos to our employee owners for serving our customers well, especially during this recent growth period and for producing a financial result that continues to make RLI a stable insurance partner in the market. Now, I'll turn the call back to Lydia for questions.

Thank you. Our first question today comes from Gregory Peters of Raymond James. Your line is open. Please go ahead.

Well, good morning, everyone. I'm going to start sort of based on some comments that were made in the presentation. First, on reinsurance, I think you mentioned that you're getting more property coverage with this renewal than you had last year. Maybe you could give us some perspective. Is that just more in the risk remote areas? Or what did you mean by that comment?

We purchased more reinsurance on June 1, 2023, which is why we have a slightly higher ceded property premium in the second half of the year. During the renewal on January 1, we acquired a similar structure and were able to place a bit more of those layers. We usually take co-participations in layers, for instance, placing 90% to 10%. This year, we managed to increase that percentage, providing us with greater coverage. For the lower treaty, the property per risk, we also received more of those similar layers and retained a couple more points of coverage. Overall, our situation remains roughly the same as it was after the increase we made in June 2023.

Thank you for the clarification. Regarding the property count, the property business is a collective segment. Looking at the fourth-quarter results, you had a strong year, but it seems to be slightly below my expectations for growth. At this point, it appears that the primary factor is rate, with limited growth in policy count or total insured value. Could you provide some additional insights into the property segment as you evaluate the outlook for 2024?

Certainly. As we analyze the fourth quarter and the current marketplace, we are noticing increased competition. This trend is expected to intensify into 2024. Recently, we have been evaluating various factors that influence our market opportunities. We maintain a risk tolerance that encompasses several metrics, including policy limits, modeled losses, and potential claims based on the number of policies. While we experienced significant growth in 2022 and 2023, we are now weighing the growth in Property against our overall portfolio, which includes Surety and Casualty. This diversification has historically helped us achieve an overall underwriting profit, but we need to ensure balance among the segments. We want to capitalize on market opportunities without allowing Property to outpace the other areas too dramatically. Additionally, our risk perception adapts over time, particularly in relation to catastrophic events, influenced by factors like model updates, legal trends, and lessons learned from claims. Currently, we are still able to achieve favorable rates, but we are deliberately reducing exposure as we prepare for the 2024 reinsurance renewal. It's important to note that Managing General Agents in this sector are behaving differently than carriers and are becoming more aggressive, which may indicate a shift in market discipline. We need to consider this as we move forward. Fortunately, most of our business operates on Excess and Surplus lines, enabling us to adapt our strategies quickly. We have a flat organizational structure that supports regular reporting, allowing us to make necessary adjustments promptly. Our approach will be somewhat reactive to ongoing market developments while still recognizing the attractiveness of the current landscape. Additionally, we value our marine and Hawaii segments, which remain robust, growing, and profitable despite challenges such as the Maui wildfire event in 2023.

Perfect. An interesting comment on the MGA side of the equation. I guess my last question, Todd, in your comments, you started going through the prior period reserve development and you called out, I think, $9 million in Casualty favorable development. Wondering if you could just unpack the development, whether it's Casualty or Property just on an accident year basis? That's my last question.

Sure. The $9 million I mentioned was related to Casualty and was distributed across various lines, including some on the General Liability side. It mainly came from commercial excess and EPG. At $9 million, it isn't a large amount from any specific line, but it does span several accident years. There was a bit from 2016 and 2017 on the General Liability side, along with some contributions from 2021 and 2022. Overall, while it was broad in terms of accident years, it is not substantial when viewed on a quarterly basis.

Correct. Okay. Thanks for the answers.

Sure. That's good.

Our next question comes from Andrew Andersen of Jefferies. Please go ahead. Your line is open.

Hey, good morning. Looking at the underlying loss ratio in the Casualty segment that increased a few points year-over-year, can you kind of help us think about the drivers here? I know you called out mix shift, but perhaps also just a change in loss trend or maybe some non-cat weather here?

Yes, I'll address that. This is Todd. We observed an increase of a little over 300 basis points in the Casualty segment for the fourth quarter in the current accident year. Jen mentioned a slight rise in frequency for personal umbrella policies, and we have also noticed an uptick in severity in transportation. Considering these trends, we decided it was wise to add approximately $6 million to $6.5 million in IBNR for the fourth quarter in the current accident year. We typically respond quickly to emerging signs, which prompted this action in the fourth quarter. This adjustment impacted the full year’s Casualty loss ratio, raising it by about a point. We’ll see over time whether this decision was necessary. While we tend to be cautious about good news, we felt it was sensible to increase our reserves for the current accident year.

Okay. And with the increased frequency and severity that you called out, are you incorporating a higher Casualty loss trend in '24 than how maybe you were thinking about it previously?

I think we have adjusted our Casualty trend up by about 1 point. The actuaries will evaluate both trends, including whether they need to extend the tail. All of these factors will certainly be taken into account.

Okay. Great. And then maybe one more. Jen, you kind of talked about still these rate increases that are coming through and still an opportunity near term for growth in the Casualty segment. If I look at second half and maybe making some adjustments for the runoff of this energy book about like 8% gross growth, is that kind of a good indicator of where we could see maybe the first half of '24?

We don't really look forward in new top-line budgeting. Our underwriting teams are compensated on the bottom line. So, we kind of ignore the budgeting process within the business units. Having said that, we do see a lot of opportunities to get momentum from the investments we've made. And so, a lot of our business is individually underwritten and we'll have to see how the competition behaves as well. So, I think we have room for growth, but I'm not going to put a number on it.

Our next question comes from Meyer Shields of KBW. Please go ahead.

Great. Thanks so much. So Jen, I think you touched on this, but I'm not sure I fully understand it. I understand that within Property, there was a lot of ceded premium in the third quarter because of the reinsurance reinstatement. But I'm not sure I understand why the ratio of net to gross premiums in the fourth quarter was lower than in the first half of the year.

On June 1, 2023, we repurchased an additional $150 million of cat treaty cover, which obviously incurs a cost. We also expanded our first layer cap by an excess of $50 million as of the same date. In the first five months of 2023, the ceding premium number was lower compared to the last six months, and this is reflected in our slightly reduced net retention in the second half of the year.

Okay. Perfect. That's helpful. And one of the questions on Casualty reserves, and I know we're probably over-talking this, but were there any increases to recent accident years' loss rate?

Hey Meyer, it's Todd. Overall, when we discuss the year 2023 specifically, there haven't been increases in recent accident years. In commercial auto, you might notice a slight increase, even for the years 2015, 2016, and 2017, but it's minimal. Overall, those accident years still show redundancy, and that includes the leases.

Okay. Fantastic. And that leads to the last question, if I can. Is there any upward trend in, I guess, commercial auto or maybe typically transportation in terms of pricing that you're seeing?

Sure. The transportation rate change for the fourth quarter was 11%, while for the year, it stood at 8%. This segment can be variable due to some large accounts affecting quarterly results. Most of this business is assessed on an individual basis, so we need to evaluate our starting point and determine our rate adequacy, along with individually underwriting each account for future needs. The team has observed that loss trends persist, but competitors are not discounting the 2020 and 2021 accident years. Consequently, companies in this market are somehow giving credit for those years as they evaluate loss rates on those accounts. We also noted that exposure has decreased. Therefore, we strive to appropriately price this business and require sufficient rates since claims occur frequently. Overall, I believe the rate outlook in this area should remain positive, but we will keep analyzing it on an individual basis.

Okay. Perfect. Thank you so much.

Our final question in the queue is from Scott Heleniak of RBC Capital Markets. Please go ahead.

Good morning. I have a question about retention as well. On the Casualty side, the net written premium and gross written premium retention have increased significantly in 2023. Do you anticipate this trend will persist into 2024? Additionally, while discussing Casualty, are there any specific areas where you are pulling back that should be noted? I understand you mentioned some heightened competition, but could you elaborate on both retention and growth opportunities for Casualty?

Sure. So, the Casualty retention, I'd say, in 2023, knowing that we were going into the year with additional retention on the Property side, we also increased our co-participation on our Casualty, our main Casualty treaties. So, sharing in that exposure at the side of our tower with our reinsurance partners. And that is why our retention in '23 and '24 now is a little bit bigger than prior. But outside of that change, there's really nothing I can point to that I would say that the retention is probably a mix of business issue in some way. In terms of business that we're a little more wary of, obviously, the D&O market gets talked about a lot. So, we're being very careful in that space. I'd say that the auto market is tough. Again, I don't quite understand it because losses are up, frequency has returned. There's real activity there, but the marketplace is very competitive. So, we're going to do the right thing. And if that means we lose a little bit of business, then so be it. But we're going to try to be a stable market long term, and so people will know that we're there when they want to come back to us. And other than that, our portfolio is in pretty good shape. So, we have minor tweaks going on all the time in different places, but nothing material to point to.

Okay. That's helpful information. My second question is about the expense ratio. You mentioned several factors affecting it, such as commissions, compensation, and investments in technology. Do you expect that to increase in 2024 compared to 2023? I'm not sure if I interpret your comments that way, but can you provide any specific insights on where that might be headed?

When we consider how this supports our growth, we've not only added underwriting claims but also operational staff, as it requires involvement from everyone in our business. We are dedicated to underwriting, meaning our team uses data and technology to inform decisions. This results in underwriting and claim decisions that necessitate experienced and skilled personnel. We will assess growth opportunities and ensure we can support that expansion. It's important for us to be well-staffed because our service excellence often leads to our success. Therefore, we need to be available for our customers. On the technology front, we're working to modernize, as many others are. We constantly have various initiatives in progress, and it's essential to factor in future depreciation. Recently, we've accelerated a few projects, but I don't anticipate further ramp-up beyond what we are currently pursuing. Our focus will be on the ongoing projects without taking on too many new commitments at this time, ensuring that each of our products remains a sustainable, modern platform to meet our customers' needs.

I think if you consider Jen's point about technology, we've seen an increase of over 50% in the last couple of years, and we're continuing to invest in that area, which is positive. Looking ahead, it does present some challenges currently. It's also important to remember the impact of our incentive structure at RLI on our expense ratio. If we weren't as successful, it would lower our expense ratio, but that's not our goal. This quarter, the incentive structure contributed about 6 points to our expense ratio, which can fluctuate between 2 to 6 points. Nevertheless, we have a very low loss ratio, and this has been a trade-off we've been willing to make for quite some time.

Yeah. I get it. It's totally worth it to have the higher expense ratio. If you have the lower loss ratio, you can make up for it. But I was just curious. That's helpful comments on that. Thanks.

We have no further questions. I will now turn the conference over to Mr. Craig Kliethermes for some closing remarks.

Well, thank you all for joining today. The Kansas City Chiefs are playing in their sixth consecutive AFC championship game this weekend. Sustained success is demanding and requires discipline and commitment and has proven somewhat elusive in our industry. RLI has been able to reward shareholders with 28 consecutive years of underwriting success. This achievement doesn't come easy, and it doesn't come without a high level of engagement from the RLI team. We focused on three things: serving our customers as a financially secure and stable market; creating a community and culture of ownership and underwriting discipline; and continuously improving and adapting to the market environment where we have narrow and deep expertise and have chosen to compete. These principles have not changed since we were founded some 59 years ago, and have allowed us to outperform through all market cycles. I'd like to thank our 1,100 RLI associate owners for their past, current and future contributions to our shared success. I ask them to keep being different because their difference works. See you all next quarter, and best of luck to the Chiefs.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1866-813-9403 with an ID number of 474923. This concludes our conference for today. Thank you all for participating, and have a great day. All parties may now disconnect.