Rli Corp Q4 FY2025 Earnings Call

Good morning, and welcome to the RLI Corp. Fourth 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, our 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 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 fourth 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 unconsolidated investees and related taxes were removed from operating earnings and operating EPS to present a consistent approach and excluding all unrealized changes in value from equity investments. 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. I will now turn the conference over to RLI's President and Chief Executive Officer, Mr. Craig Kliethermes. Please go ahead.

Good morning, everyone. We appreciate you being with us today, and I'd like to introduce Aaron Diefenthaler, our Chief Financial Officer; and Jen Klobnak, our Chief Operating Officer, who are joining me. I'll start by saying we feel very good about where RLI Corp is today, and just as importantly, where we're headed. 2025 was another strong year for our company. We delivered underwriting income of $264 million on an 84 combined ratio, grew book value per share by 33%, inclusive of dividends, and achieved our 30th consecutive year of underwriting profitability. That kind of consistency is extremely rare in our industry, and it certainly doesn't happen by accident. It's too long to be considered a hot streak; it reflects disciplined execution over time and the principles we work to uphold every day. The environment remains competitive, and premium growth was modest, but that's exactly when our model tends to show its strength. We don't measure success by how fast we grow; we measure it by how well we grow and whether today's decisions stand the test of time. Jerry Stevens, our founder, used to remind us that you don't win the long game by swinging at every pitch; you win it by knowing which ones to let go by. That mindset is deeply ingrained at RLI. We're comfortable pulling back when the risk-reward equation doesn't work, and we're confident leaning in where we have the expertise and when the market supports it. Our diversified specialty portfolio, strong balance sheet, and ownership culture give us a lot of flexibility and a lot of confidence as we look ahead. We're well positioned and optimistic about the opportunities in front of us. And with that, I'll turn it over to Aaron to walk through the financials in more detail.

Thanks, Craig, and good morning, everyone. Yesterday, we reported fourth quarter operating earnings of $0.94 per share, up from $0.52 in the year-ago period. Better underwriting performance, minimal storm activity, and increases in investment income drove most of the improvement compared to last year. For the quarter, we generated $71 million of underwriting income on an 82.6 combined ratio versus $22 million on a 94.4 combined ratio in Q4 last year. For the full year, we delivered $264 million of underwriting income on, as Craig mentioned, an 83.6 combined ratio, marking our 30th consecutive year of underwriting profit. I wanted to call your attention to a change we made to our definition of operating earnings. As referenced in a footnote on Page 1 of our release and in the non-GAAP disclosures on Page 2, operating earnings now excludes equity and earnings of unconsolidated investees and related taxes. Prior periods were recast to conform to that definition for comparability. Currently, unconsolidated investees only include our minority investment in Prime Holdings. We believe excluding these investments from operating earnings better reflects RLI's core operations, where we maintain full operational control and aligns the treatment of investee results with other equity investments. On a GAAP basis, net earnings were $0.99 in the quarter and $4.37 for the year, an increase of 17% over full year 2024. In addition to operating earnings, net earnings include net realized gains and losses, net unrealized gains and losses from equity securities, and now earnings of unconsolidated investees from Prime. Our Q4 net earnings reflect Prime's core operating results based on our minority ownership and a reduction to Prime's value on our balance sheet to $53 million. Turning to premium, top-line growth was down 2% for Q4 and up 1% for the full year as competitive dynamics necessitated heightened discipline in several businesses while other products continued to find opportunities. Property premium was down 11% during the quarter, consistent with the rate environment for catastrophe-exposed commercial property, although other parts of the segment, Marine and Hawaii homeowners, continue to grow. Properties underwriting profitability was supported by $17 million of favorable loss emergence on prior year's catastrophes, modestly offset by $4 million of storm activity in the quarter. Inclusive of these net benefits, properties combined ratio was 49.2 in Q4 and 57.2 on the year. Casualty premium was up 2% in the quarter and 7% on the year with strong contributions from personal umbrella. The bottom line for casualty benefited from $4 million of favorable prior years' loss development; just under $2 million of this release was related to prior year catastrophe activity. Surety premium remains flat in the current period and up slightly on a year-to-date basis. The segment's quarterly underlying underwriting results included $2.7 million of favorable loss emergence from prior years, which improved the surety loss ratio by 7 points in the quarter. On the expense ratio, Q4 came in at 39.3%, up from 37.6% a year ago. Bonus and profit-sharing expenses were higher on strong results, and business-level expenses were up as we've continued to invest in people and technology. On the investment side, net investment income increased 9% in the quarter, and the portfolio generated 1.5% total return in Q4 and 9% for the year. The yield environment has been relatively stable for intermediate maturities, and we continue to find accretive fixed-income opportunities. Purchase yields averaged 4.9% in the quarter, which was 70 basis points above our book yield. Putting it all together, we produced $5.29 of comprehensive earnings for the year, driving 33% growth in book value per share, inclusive of dividends. This level of generated capital again allowed for a special dividend to shareholders of $2 per share in addition to our ordinary fourth quarter dividend. Overall, a solidly profitable championship caliber closed in 2025. With that, I'll turn it over to Jen for more color on market conditions.

Thank you, Aaron. I will dive right into our segments, starting with Property. While premiums declined 11% in the fourth quarter, our property team delivered an excellent 49 combined ratio, underscoring the quality of our portfolio and ability to execute. E&S property premiums decreased by 18% due to intense competition from other carriers and MGAs, along with increased risk retention in some areas by insurers. Hurricane rates were down 15%, while submissions continue to grow as insurers shop for the best terms. We are seeing pressure on terms and conditions, and our underwriters are flexing selectively to retain high-quality accounts. This competitive dynamic extends to other property lines as well. Earthquake rates declined 12% as insurers saw rate relief or decided to retain the risk. We see carrier competitors in the E&S property market slowly giving back terms and conditions, while MGAs are being more aggressive. Despite the rate moderation on catastrophe coverages, we continue to achieve returns on retained business that exceed our long-term targets. Our experienced E&S property team delivered meaningful underwriting profits despite challenging market conditions. We have navigated many hard and soft market cycles with discipline and remain focused on securing terms and conditions at an appropriate rate while reducing uncertainty when a loss occurs. Hawaii homeowners premium grew 5% in the quarter, supported by a 16% rate increase. For the year, premium was up 26%, due in part to a couple of book rollovers we assumed following the Maui wildfires. We will continue to see growth in this profitable book through our outstanding local customer service, investments in customer experiences, and additional rate increases from recent filing approval. Marine premium was up 2% in the quarter. Our diverse portfolio is evolving based on market opportunities. Inland Marine continues to grow through strategic talent additions and new product adjacencies. Ocean Marine remains competitive, particularly in cargo where we had pulled back. Our underwriting teams continue to apply patience and discipline, which resulted in underwriting profit across both Inland and Ocean in 2025. Surety premium was flat but produced a strong 80 combined ratio in the fourth quarter. Transactional surety grew 4% through continuous marketing efforts and investments in our distribution capabilities. These are very small premium bonds, so it takes significant volume to move the needle. Commercial surety also grew 4% as our talented team secured new accounts by closely engaging with our distribution partners. Increased customs bond requests offset the slowdown in renewable energy, with both trends driven by government policy. On the contract surety side, premium declined 5% as we navigated the ending to a year that included multiple fits and starts in construction spending. We know that infrastructure investments are needed at the federal, state, and local level, and we remain well-positioned to support that business as public funding increases. Our surety underwriting teams remain committed to underwriting discipline and prudent risk selection in this evolving environment. The Casual segment premiums grew 2% on a 99.6 combined ratio for the fourth quarter. Personal umbrella led the way with premium growth of 24%. This included a 12% rate increase, and we secured additional approvals that will further add rate to the book in 2026. This controlled growth reflects reduced new business in several challenging seats where we have taken larger rate increases, required higher underlying limits, and worked with our distribution partners to improve the quality of our book. The personal umbrella market continues to present opportunities as our competitors respond to deteriorating results by adjusting their appetite and terms and conditions. Our continuous product collaboration, supported by intensive data mining, actuarial analysis, and claim trend identification, produced an underwriting profit for the year. Transportation premium declined 10% in the quarter despite a 13% increase in rates as we continue to prioritize profitability over volume in a highly competitive environment. Severity trends and economic pressures have reshaped the market with heightened volatility and increased expenses forcing some transportation companies to consolidate or close, reducing the demand for insurance. At the same time, despite some insurance providers leaving this space due to poor financial performance, there always seems to be new markets entering and pushing for growth. Acute pressure on the largest size accounts has led to a decrease in our average account size over the last two years. Our in-house loss control team provides an advantage as they assess and try to improve the safety of our insurers, which helps all drivers. Our underwriters are empowered to make bottom-line driven decisions. We remain disciplined, pushing for more rate and walking away from underpriced accounts. Our Executive Products group achieved an underwriting profit again this year. Premium in the fourth quarter was down 2% with rates down 1%. The market is stabilizing amid broader industry loss development. Our focus remains on marketing to increase access to business and disciplined risk selection to maintain our quality book. The E&S casualty team also produced an underwriting profit for the year. We saw increased competition in the fourth quarter, particularly on larger six-figure premium accounts due to competitors chasing top-line growth, presumably to meet year-end goals. Our primary excess liability premiums declined 8% in the quarter, but full year premiums finished up 10%. Competition varied by region with some markets exiting while others leaned in. Submissions increased by double digits, and we are constantly engaging producers to see the best new business opportunities. Much of our business is construction-related and projects are taking longer to bind. We have many quotes outstanding waiting for permitting or funding. The group knows that words matter and have not relaxed terms and conditions despite competitive pressure. We continue to provide a stable solution for our business partners in the construction space. Before I provide perspective on the full year, I'll update you on our reinsurance renewals. On January 1, we renewed about two-thirds of our annual reinsurance spend. It was a buyer's market for property. We secured 15% to 20% rate decreases on our catastrophe programs and more modest relief on our property working layers. With our reduced exposure and continuing soft market conditions, we purchased $150 million less catastrophe limit for 2026, but we remain ready to approach the market midterm should an opportunity present itself as we have done in previous years. On the casualty side, rates were down around 5%. We achieved similar terms and conditions with some broadening of coverage in the property attributes. For the full year, we achieved modest growth while producing an 84 combined ratio. While E&S property prudently contracted in response to softening market conditions, other teams capitalized on opportunities, most notably personal umbrella, E&S casualty, and Hawaii homeowners. We pushed for rate change where we needed it, achieving an overall 16% rate increase in auto liability coverages across our portfolio. In 2025, we also spent time with our distribution partners, broadening and deepening those relationships, and we invested in operational efficiencies. This included simplifying and automating processes, developing new capabilities to improve ease of doing business, and investing in our data infrastructure to support granular real-time decision-making. Internally, we brought our teams together regularly to talk about how we are doing and where we can improve. These actions position us well for another successful year in 2026. In a more challenging environment, capital discipline and alignment of interests differentiate successful insurers. Underwriting, which we define as underwriters, claims, and analytics collaborating to evolve our products, is the disciplined pursuit of opportunity. We are an underwriting company as evidenced by our unmatched track record of 30 consecutive years of underwriting profit. I'm incredibly proud of our entire team for producing these results and for how they do it by taking care of our customers and striving to improve every day because they are owners. With that, I will turn the call over to the moderator to open it up for questions.

Your first question comes from Michael Phillips with Oppenheimer.

The accident year loss ratio in Casualty improved a bit from last year once you back out the reserve addition you did. Can you talk about how much of that was because of the mix shift from pulling away from the transportation book versus anything else that might have caused that improvement?

So as you look at the casualty loss ratio, you did see improvement. And we did pull back in both transportation and other areas of auto where we provide coverage like in our package businesses. Last year, in the fourth quarter, we did recognize additional reserving related to those auto-related coverages, both in our transportation and our personal umbrella product. This year, as we looked at losses coming in, we did not see the need to take such action. And so you did see that improvement. I can't quantify specifically the difference. Aaron?

Yes. I think the bulk there on a comparative basis to Q4 of last year that you're seeing is the action we took for the full accident year in 2024 around auto-related exposures, also true of the 2023 accident year as well. So we feel we're on more stable footing around those exposures because we didn't take the same level of action in the current accident year. Still cautious around auto-related exposures. And our incentive structure is set up for those business leaders to pull back from those markets when they see underpriced competition coming to bear on submission activity. So everything is set up for there to be a natural pullback from markets that are underpriced. But the underlying results themselves that we're seeing, we feel better about because of the stability relative to the action we took the last couple of years.

I think the reserve addition last year was due to increased severity in the umbrella and transportation sectors. This year, there has been a slight slowdown in favorable prior year development in Casualty, which suggests that the same level of severity remains, contributing to the reserve additions from last year. My question is about how much of that reserve addition was related to accounts that you've lost from midterm cancellations, as mentioned last quarter. If some of those reserve additions were tied to those accounts, what implications does that have for any potential favorable development now that those accounts are no longer with us?

Yes. Well, it's hard to get down to the account level when you're examining these things. But I'll just say, overall, you're right to identify lower levels of favorable development for Casualty here in the fourth quarter. I think you do have to rightsize that for a small proportion of the prior year catastrophe activity as well to get closer to that $4 million number that I referenced. However, just overall, we're seeing lower levels of favorable development out of casualty. We're still seeing drivers out of GL and commercial excess and still some challenges around auto-related exposures, all of that being maybe to a lesser extent than what we saw in the year ago period.

Yes. To supplement that, I would just add that there are many metrics that you can track to see what direction you're headed. And I'll tell you that new claim counts in 2025 were down significantly in those auto spots. So for example, our Transportation division, new claim counts were down 24% for the year, which is a positive indicator that the actions we're taking are going to translate into a more stable going forward.

Yes, that's helpful, Jen. Switching gears, my last question is about the Property side. Previously, you mentioned how you made several investments as you expanded in that challenging market. What does that look like today, especially considering the current situation? Is there any area in Property that may need to be adjusted as we face pressure on the expense ratio in the coming year?

That's an interesting question. In addition to becoming more efficient to manage an increase in submissions, we have brought in more talent. We’ve hired seasoned underwriters who have thrived in this challenging market. As some of them approach retirement, we're already preparing the next generation through training. Furthermore, our submission count remains high, and we're experiencing growth in submissions, particularly in our property book, which we intend to review. Although the workload has increased and the terms and conditions have become more difficult, we cannot compromise on the quality of work. It's essential to support the producers who are providing us business, so we must continue investing in that area.

Our next question comes from Hristian Getsov with Wells Fargo.

Regarding the property competition, what needs to occur in the market for us to observe a shift in the rate decreases, at least somewhat moderate from this point? Is it as straightforward as a significant catastrophic event, perhaps exceeding $50 billion? Additionally, in terms of the competitive landscape you’re experiencing, how much of that competition do you view as irrational in pricing compared to a more rational normalization of the cycle, considering the substantial rate increases and profitability we have witnessed in this area?

Well, this is Jen. I think what we need is a little bit less capacity. And whatever can cause that to happen would be beneficial to the market. So whether that's an incredible cat event, whether that's a change in the investment opportunities to shift to a better opportunity in the greater space, anything of that nature that would reduce capacity would be beneficial. Having said that, all we need is a stable market. I will tell you that the current catastrophe market is well-priced with reasonable terms and conditions in a lot of places. So we can navigate this market easily if it would stay where it's at. Now with reinsurance renewals being a little more friendly on 1/1, it could soften further. And so again, looking for either a large cat or some other event that would take capacity out of the market would be beneficial. I can't quantify how many are reasonable or unreasonable as we are navigating that market every day, responding to our producers, we see business being stolen between producers. There's a lot of movement going on just because people have changed which wholesalers they work for. So that's one factor, but we also see carriers that have aligned interest being responsible. And so we don't mind competing against those people. That's a fair playground. It's where capital providers that don't have aligned interest; the MGAs, in some cases, have no downside. It's not aligned with the carriers who have to pay those claims at some point. That's where there's a disconnect and where the MGAs want to use up that capacity quickly because right now, the market could be better than it is a few months from now. So I don't know how much of that market there is. I can tell you there are examples where people have received capacity for this year that are multiples and multiples of what they were able to provide in terms of capacity last year. So we just know that we can't compete on some of that, so we don't spend a lot of time on those types of deals. We kind of moved in the spaces where we know we have a chance of the business.

Got it. And then switching to personal umbrella, are you seeing a shift in the competitive dynamics there, just given we're seeing more of a focus on growth from some of the bigger personal line carriers and mutual? I'm trying to get a sense of the ability to compete as a monoline provider becomes more challenging given a lot of these other players are focused on bundling, which would include personal umbrella.

Yes, I'm a fan of the commercial. However, the personal umbrella market continues to evolve. Some personal lines carriers that bundle their business are significantly increasing rates and changing their coverage, as seen in filings and the press. We partner with some of these carriers to offer our personal umbrella when it doesn't align with their appetites. Our business is well-established, and we have strong relationships with our business partners who value our product and the support we provide. We update our information daily on the business we receive and engage with our producer partners monthly to understand their needs and how we can service them better. I believe we have a solid foundation to move forward with confidence into the next year. We are also receiving rate increases in various states where they're necessary, presenting growth opportunities from both rate adjustments and our excellent service to producers. While there is increased competition, we believe our consistent performance is noted, and we plan to defend our market share. We will continue to develop this product and provide a quality option for insurers who require this coverage.

Got it. And if I could sneak one more. Have you seen any benefit on submission volumes from the elimination of the diligent search documentation requirement for surplus lines in Florida? I know that's a pretty good portion of your premium mix. And I just wanted to see if there's any updated thoughts there. And then also if you have any updated thoughts around the general tort reform we've seen, not only in Florida but in states like Georgia on loss trends?

In Florida, over the past year, we have intentionally moderated our new business growth due to the previous severity we experienced. We've taken actions since the last fourth quarter, including adjusting rate attachment points and limiting production from certain producers. As a result, we haven't observed a significant impact from specific regulations because we are being more selective with our growth in that state. On the brighter side, total reform has been beneficial. While we don't have a specific number to reference, we notice that individual cases are resolving more reasonably since we can present actual medical costs and what individuals are paying. This allows us to better manage claims against plaintiff attorneys and create a more equitable environment for settling claims fairly for insurers with authentic losses. We are prepared to cover those losses; we just aim to reduce the attorneys' fees. The situation has improved, and we expect similar benefits in other states. It's still early for Georgia, but there are positive developments happening there as well. Furthermore, many states are enacting legislation to mandate the disclosure of third-party litigation arrangements, which will be advantageous for both personal umbrella and broader auto coverages.

Your next question comes from Andrew Andersen with Jefferies.

Recognizing really strong overall results and a very good long-term track record here. If we just kind of focus on Casualty over the last 2 years, 98% reported combined ratio, a little bit uncharacteristic to have that 2 years in a row. And I realize there were some headwinds on trucking, both on the reserving side and on the premium side. But do you feel that some of these headwinds within this Casualty segment are behind you or have really worked their way through and you're kind of entering '26 in a better position, both from a booking ratio and from any premium growth headwind into next year?

Well, Andrew, I think as we've characterized the product level rate increases we've gotten within the Casualty segment, we think that's probably the strongest foundation we can offer in terms of data itself. We feel better about where the overall rate level is for a lot of these businesses that have had some challenges related to them. So it's hard to say the exact point in time where you turn the corner into something that may offer some additional potential for expanded margins, but having that rate profile and having some compounding of those rates over multiple years, we think, is a good foundation.

Yes. Additionally, I would mention that we have definitely slowed down in releasing reserves for certain coverages. We've discussed this before as well. Initial booking ratios tend to remain stable for a longer period. Although we are seeing some positive indicators, such as claim counts, we tend to be cautious and not rush to act on good news. Instead, we prefer to wait and ensure that there is a consistent trend of positive developments before we fully recognize it.

Andrew, I grew up in the Show Me State of Missouri. So we got to wait and see. On good news, we're slower to usually recognize that. But if we see something go in the other direction, we obviously like to try to get that up as quickly as possible. So that's the way we look at things.

Understood. And on the property side, you've talked quite a bit about the MGA market being aggressive there. How would you characterize kind of more of the traditional or admitted carriers?

Everyone is aiming for premium. It's competitive out there, but I think the other E&S carriers are fairly reasonable, and I give them credit for that. We don’t mind competing with them. If we could reduce some of the capacity in that market, it could at least stabilize, which would be a good thing.

And then maybe last one. I think I heard 5% for Hawaii home. Is that just reflective of we've lapped kind of the book rolls here because it's quite a decel quarter-over-quarter?

Yes, that's correct. So we had a couple of book rolls that ended right at the end of the third quarter. And so now we're back to our outstanding local service and just competing on a regular basis at this point. In addition to getting green, we have gotten rate increases that will drive a little bit of growth as well.

Your next question comes with Mark Hughes with Truist.

Can you provide any details on the property dynamics in terms of competitive pressure for Q4 compared to Q3 or even on a monthly basis throughout the quarter? I understand that it's more challenging year-over-year, but has it shown any signs of stabilization, or is it still experiencing additional pressure?

That's a tough question. You're getting pretty detailed, I would say. Every month, we definitely review the situation closely. If the news is positive, we hope it signals a trend. If it's negative, we question what's happening. Therefore, I don't think I should share specifics on a monthly basis. In the fourth quarter, we see the lowest number of renewals due to fewer renewal dates. It's a challenging quarter to draw conclusions from. The start of the year is significant, and then we have bigger dates in the spring, which are critical for building our business. All of that is approaching, and I believe offering detailed insights on renewals at the start of the year might give away too much information. The market remains competitive, and we will see how it evolves this year.

Yes. Considering the lower reinsurance costs, do you think pricing has already factored that in? There seems to be a broad expectation for a 10% to 20% decline. When that actually occurs, what impact might it have on the market in the short term?

Well, as we prepare for our 1/1 renewals, we did contemplate a bit of a decrease in our cost. And so we built that into our benchmark pricing, which indicates how we need to price the business. I don't know what other companies do. I will tell you that last year in 2025, January, we didn't really see an impact from the reinsurance renewals. But in February, we noticed that that's when all of that information trickled down to the underwriter desk and people got more aggressive because they did get relief last year on 1/1. So January, we're just going to put it in the books, and we'll see if the behavior changes later this spring to incorporate that. We also see changes on 4/1 because that's when some MGA relationships renew their capacity. And so we may see further change in behavior at that point in time, but that's yet to be determined.

And then one quick one, if I might. You've mentioned that you were seeking additional rate increases in personal umbrella, and that would help 2026. Can you size that?

Well, this is a 50-state product where we have to file in each state, and each state has a different process. So I can tell you that effective December 1, we did get a California rate increase of about 20%. And so that will bleed into part of the book. California is one of our bigger states. I can tell you our process is that every quarter, and now that we have year-end, it will be nice to, again, look at results to see which states require rate, where we're not getting adequate rate and where are we? Those analyses are underway already. And so we'll conclude in the next couple of weeks if we need to start taking additional action. But just based on these filings that were approved in the second half of last year, we know that there will be a pretty good amount of rate going into the book this year as well.

Your next question comes from Meyer Shields with Keefe, Bruyette, & Woods.

Jen, when you talk about lower auto claim emergence, is that across accident years? Or was that an accident year 2025 comment?

These are just new claims that are received in 2025. They could be related to 2025 accident year or previous accident years.

I was just going to say, I think we did see a reduction last year as well, so 2 years in a row.

Okay. That makes sense. I just want to make sure that I was understanding that correctly. The $150 million catastrophe reinsurance limit reduction, was that at the top end of the tower? Did your attachment point change at all because of the smaller book?

No. So we maintained our $50 million attachment on the cat tower and just brought that tower down.

Okay. And then final question. You mentioned concerns about competitors trying to meet their budgets. How significant is the competition in the fourth quarter compared to other quarters? I've heard this comment quite often, and I'm trying to understand how material you think it is in the market.

Overall, the fourth quarter is always challenging, and our underwriters often mention that others are compensated based on top line results, sometimes even without consideration for the bottom line. This creates a rush to secure bonuses. However, I contend that this scenario occurs every year. The crucial question is whether this year's fourth quarter is more demanding than last year's. In some segments, people feel it's tougher, but those feelings are not easily quantifiable. In areas like property, for instance, we are experiencing a reduction in business renewals, making it difficult to measure the situation compared to other quarters where more business is available.

Okay. No, that makes sense. I guess the question for me is always is the first quarter so far less competitive than the fourth quarter that just ended?

Well, it's too early to say. We haven't closed January yet, so it's difficult to gauge; all I have right now is data for part of the month.

Your next question comes from the line of Carol Bruzzese with Philo Smith & Co.

Sorry, it's James Inglis. Great quarter and year. But I have a question about the reserve development. If you look at the 2024 and prior catastrophic events, there was a significant change in both the quarter and the year. I'm wondering if that is just a normal occurrence while determining the actual outcomes of the catastrophes or if there is something specific or unusual going on.

Not unusual, Jamie. This is Aaron. If you think back to last year, we had a couple of significant storms, Helene and Beryl. We shared our expectations for those in our third quarter results and mentioned potential loss activity around Hurricane Milton, which occurred early in the fourth quarter last year. We refined our expectations in the fourth quarter release last year, with an estimate close to $50 million for Milton alone. Now, a year later, we feel more confident about what the actual losses will be and believe it's wise to reduce some of the IBNR. The analysis included various events, and we've reviewed cat activity over several years. Each storm is considered individually, and it requires detailed examination of claim activity, outstanding claims, and those in litigation to inform our decisions on reductions.

Your next question comes from the line of Gregory Peters with Raymond James.

This is Mitchell Rubin. You referenced the 13% rate increase in transportation this quarter. Is there any quantification you could provide on the magnitude of the underlying loss trend you're seeing in the portfolio? And what level of rate increases you believe might be required in 2026 to sustain rate adequacy in the book?

Yes, we expect to pursue further increases moving forward, likely in the double-digit range. We've noticed a heightened severity trend across nearly all auto sectors since COVID, particularly with the reopening of courts. At some point, we believe this trend will have to diminish, as people may struggle to afford the current 10% to 15% insurance increases. Eventually, there will be a breaking point that could lead to more tort reform in certain states, allowing us to manage the loss severity. In the meantime, while I can't speak for other companies, you can expect us to aim for increases that at least cover the trend. If we're unable to achieve that, we will downsize accordingly. We intend to keep pursuing 10% to 15% increases in auto business until we see a decline in loss costs.

Great. That's very helpful. Can you provide any additional detail on how your technology investments over the past several years have impacted your underwriting performance, particularly touching on changes in submission to bind ratios within the transactional surety business?

Well, I would say our investments in technology have done a couple of things. I focus on a couple of things. One is really improving our customer experience, and that starts actually before the technology. So considering, for example, what questions we ask, we've tried to simplify it in a few places, the application questions that we're asking, making them more straightforward. I don't know about you, but whenever I get an application, I struggle with how do you answer this question. So trying to simplify it based on feedback and input from our producer partners and insurers has been really critical, then providing that through automation and modern systems, which we've been upgrading over the last few years. For example, in surety, we're rolling out an upgrade to our current offering. We've been in that business since 1992. As you can imagine, that technology has changed tremendously over the decades. And so our recent investment is rolling out to provide end-to-end ability to look at what's going on with surety bonds by those producers so that they can service that business better without feeling like they're bothering us to ask questions and whatnot. So that will be very helpful to them. So really kind of that customer experience and getting business in the door has been a big investment. Our second large bucket would be efficiencies. So there are a number of things we've done with efficiencies through various types of artificial intelligence and various types of other automation to try to just have people spend more time using their brains instead of doing administrative tasks. So that can include things like summarizing submission information, summarizing claims, lengthy claim information, they can mean inputting various e-mails that come in regarding claims go straight into claim files. So that we have to look at them and decide where they go, updating loss runs that come right in and go straight into our systems. So things of that nature on efficiencies have been a big category. And then lastly, I would say is just that improving that feedback loop that we have between underwriting, claim, and analytics, really getting our data in places where we can really look at it, slice and dice it very granularly, having the ability to update that daily where it makes sense. Some business units that doesn't make sense, we don't need to invest in that. But in others, there's data available to drive decisions that we like it updated more often. So we've invested in that. We've rolled out a number of dashboards to provide people insight into submission counts, binding percentages, as well as marrying that up with loss information, so which producers, which states, which types of business, which attributes of an insurance drive loss activity. All of that information has been ramped up to help us make better decisions as we're underwriting and handling claims. So those are kind of the 3 big buckets that we have focused on. And I would say, given our diverse portfolio, you're never done, but we have spent a lot of time and effort, and I think we're reaping the rewards in that we continue to make an underwriting profit, which is in a more challenging environment as the market softens, we've got everything in place so that we can keep making great decisions for that bottom line.

There are no further questions at this time. So I will turn the conference over to Mr. Kliethermes, RLI's President and CEO, for some closing remarks.

Thank you. Before we wrap up, I want to take a minute to reflect on what this year, our 30th consecutive year of underwriting profitability truly represents. 30 years ago, RLI was a very different company. We wrote about $270 million of gross written premium. Roughly 1/3 of our business was earthquake insurance. We were still in the contact lens business. Our market cap was under $200 million, and we were proud to make Ward's top 50 performing insurance companies for the fifth straight year. For the record 2025 representing our 35th consecutive year on that list. The world was a different place, too. Public access to the Internet was just getting started with AOL and Prodigy. The Sony PlayStation had just hit the market. Cell phones were used for one thing, to make phone calls. A lot has changed over those 30 years, but the things that matter most to us haven't. There are still no shortcuts in this business. Sustained success is built the same way it has always been, with discipline, accountability, and a lot of hard work. What gives me the most confidence as we look forward is not just our results, but how we produce them. We have a strong balance sheet, a diversified portfolio, and a team of engaged employee owners who care deeply about the decisions they make and the outcomes they produce. Every day, they show up committed to making RLI a better company for its customers, their coworkers, and our shareholders. Our founder liked to say that great companies are built one good decision at a time and that those decisions never seem easy at the moment. That philosophy has served RLI well for 3 decades, and it continues to guide us today. We're proud of what we've accomplished, but we're not done. We're optimistic about the future, confident in our approach, and committed to doing what we've always done, staying disciplined, staying different, and playing the long game. I would be remiss to end without thanking Todd Bryant, our CFO, who just retired at year-end after 31 years of dedicated service to RLI. I also want to thank our employee owners for their hard work, and we appreciate you all for your continued interest in RLI. We look forward to speaking with you again next quarter.

That concludes today's call. Thank you all for attending. You may now disconnect.