RLI (RLI) Q1 2025 Earnings Call Transcript

Image source: The Motley Fool.

DATE

Monday, Apr 28, 2025

CALL PARTICIPANTS

Craig Kliethermes: President and CEO

Todd Bryant: Chief Financial Officer

Jen Klobnak: Chief Operating Officer

Aaron Diefenthaler: Chief Investment Officer and Treasurer

RISKS

Increased auto severity across the personal umbrella portfolio has not subsided, requiring ongoing rate increases and underwriting actions.

The casualty segment's underlying loss ratio increased by 1.5 points compared to Q1 2024, primarily due to auto-related losses.

E&S property premium declined 14% due to aggressive competition, particularly from MGAs expanding terms while reducing rates.

Need a quote from one of our analysts? Email pr@fool.com

Combined Ratio: 82.3%, due to lower favorable reserve development and a slight increase in the underlying combined ratio.

Gross Premium Written: with mixed growth across segments.

Casualty Segment: driven by a 34% increase in personal umbrella premiums during Q1 2025.

Property Segment: 6% premium decline, with a 57% combined ratio despite $12 million in catastrophe losses during Q1 2025.

Surety Segment: with a 69% combined ratio during Q1 2025.

Investment Income: with fixed income purchases averaging 5.1% yield.

Book Value Per Share: a 6% increase from year-end 2024, adjusting for dividends, during Q1 2025.

SUMMARY

RLI Corp reported solid Q1 2025 results amid challenging market conditions, leveraging its diverse specialty product portfolio and underwriting discipline. The company maintained profitability despite increased competition in property lines and ongoing severity issues in auto-related coverages.

Management emphasized a cautious approach to wheel space businesses, including commercial transportation and personal umbrella, with ongoing rate increases and underwriting actions.

The company is selectively pursuing growth opportunities in construction-related casualty lines, benefiting from market disruption and increased submissions.

RLI's marine business grew 10% with a 3% rate increase, capitalizing on the ability to navigate challenging market conditions.

Contract surety premium decreased 10% due to slowdowns in bid activity for larger multi-year projects, influenced by tariff uncertainty.

INDUSTRY GLOSSARY

E&S Property: Excess and Surplus lines property insurance, typically covering hard-to-place or high-risk properties outside the standard admitted market.

FAC: Facultative reinsurance, a type of reinsurance arranged on an individual risk basis.

Full Conference Call Transcript

Operator: Good morning. And welcome to the RLI Corp First 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 our intentions, beliefs, or expectations for the future. 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, or 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. RLI management believes these measures are useful, engaged in 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-Ks 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 Diefenthaler. Please go ahead.

Aaron Diefenthaler: Thank you, Adam, and good morning, everyone. Welcome to RLI's first quarter earnings call of 2025. We'll be following our typical agenda today with opening remarks from Craig Kliethermes, President and CEO, followed by a summary of the financial results from Todd Bryant, Chief Financial Officer, and an update on the insurance market landscape and our product portfolio from Jen Klobnak, our Chief Operating Officer. After prepared commentary, the operator will queue up any questions and Craig will close with some final observations. Craig?

Craig Kliethermes: Thank you, Aaron, and good morning, everyone. I'm pleased to report that we began our sixty-first year in business with continued growth in book value and top-line premiums while reporting a combined ratio of 82%. A very good start and something to build on as we move through 2025. RLI is a unique franchise built on a foundation of customer service, ownership, and talented people who value making a difference. Our narrow and deep underwriting and claim expertise combined with a very diverse portfolio of specialty products give our underwriters the license to lean into disrupted markets, underwrite with discipline, select risk discerningly, and take remedial action in underpriced or underperforming markets if needed. We have a healthy balance sheet that enables us to navigate and thrive through periods of market disruption. As respected coaches often advise their teams, act like you've been here before. In our case, we have. Whether it was the soft market years at the turn of this millennium, the financial stress and credit crunch of 2008, and or the economic supply chain and contract uncertainty we faced during the COVID pandemic. RLI continued to grow profitably while delivering exceptional service to our customers. The insurance industry is now faced with the rising challenges of legal system abuse, trade disruption, and economic uncertainty. We have owners who are empowered to execute and competently manage through whatever the market presents. As Todd and Jen will go into in a minute, we remain focused on opportunities where we have the expertise to differentiate ourselves and the market supports adequate returns. It is never easy and there's always room for improvement. What sets RLI apart is that, you know, our ownership culture there is no place to hide. We tackle our challenges with a sense of urgency try to keep them from becoming outsized. And we are committed to pushing ourselves by raising the bar in pursuit of excellence and continuously building on our strengths. We are playing the long game. I will let Todd and Jen share more detail on the financials and the market in general. Todd? You're up.

Todd Bryant: Thanks, Craig. Good morning, everyone. Last evening, our first quarter release reflected operating earnings of $0.92 per share supported by solid underwriting performance, and a 12% increase in investment income. As a reminder, per share data reflects the two-for-one stock split that was due to shareholders at the end of 2024 and payable in January. Underwriting income benefited from continued growth in earned premium, and favorable prior years reserve development, across all three segments. The total combined ratio of 82.3% was up from last year's 78.5% on lower levels of favorable prior year's reserve releases and a slight increase in the underlying combined ratio. Although top-line growth was mixed across segments, total gross premiums written increased 5% when compared to last year. On a GAAP basis, the first quarter net earnings totaled $0.68 per share versus $1.39 in Q1 2024. This comparison is heavily influenced by the relative price performance of equity securities between periods, and saw $45 million of unrealized equity gains of last year turn to $42 million unrealized losses this quarter. The property segment experienced a 6% decline in gross premium due largely to rate decreases in E&S property which were modestly offset by continued growth in marine, and the Hawaii homeowners. Jen will have some additional color on sub-segment market conditions. Contributing to properties bottom line was $17.6 million of favorable prior year reserve development, largely attributable to marine, E&S fire, and Hawaii homeowners offering a 13-point loss ratio benefit. Storm losses and catastrophe events totaled $12 million which was comparable to last year. Losses from the California wildfires account for about half of that total. This quarter's catastrophe losses are almost entirely captured in this segment with very little attributable to package business and casualty. While property loss ratio declined modestly, the expense ratio increased two points driven by changes in our reinsurance compared to Q1 2024 and a higher amount of acquisition-related expenses. That influenced the comparison between periods. All in, property had a great start to the year. With a 57 combined ratio. For the casualty segment, we posted a 99 combined ratio for Q1 and remain cautious regarding wheel space businesses. Including commercial transportation, and auto exposure in the personal umbrella. Something we discussed at length during the fourth quarter call. Although growth continues, the gross premium with gross premium up 14% over last year, our measured reserve approach influenced the level of overall favorable development and segment. Which totaled $5.1 million during Q1. Compared to $18.1 million last year. General liability, commercial excess, and subsegments within professional liability were the strongest contributors to favorable prior year's experience. Now this was partially offset by an increase on our Wheels business reserves, I referenced previously. We continue to approach more challenged coverages with rate increases, and underwriting action to address casualty's current loss environment. Securities gross premium was relatively flat to last year the first quarter combined ratio came in at 68.5% Below that, 80.9 combined ratio in 2024. Underwriting profitability benefited from $8.3 million of favorable development, which had a significant influence on the loss ratio. As a reminder, we recorded $2 million of reinsurance reinstatement premiums last year, which weighed on the net earned premium in the comparable period. Operating cash flow for Q1 totaled $103 million up $33 million from last year. And giving us a basis for portfolio activity that remains accretive. Although treasury rates moderated during the quarter, fixed income purchases averaged 5.1% or 120 basis points above our book yield. Recent market volatility has not dampened our focus on putting money to work in investment-grade fixed income. But the strength of our balance sheet allows us to also consider risk assets as valuations and Bond price improvements through March 31st were enough to overcome the decline in equities resulting in a positive 1.3% total return for the entire portfolio. Away from our traditional invested assets, our investee earnings turned positive again totaling $3 million in the quarter as Prime's results were more stable than in the fourth quarter. Incorporating comprehensive earnings of $1.01 per share, and adjusting for dividends, book value per share increased 6% from year-end 2024. Additionally, we announced an increase in our ordinary quarterly dividend to $0.15 per share our fiftieth year of paying an increase in dividends. All in, we are very pleased with the start to the year And with that, I'll turn the call over to Jen.

Jen Klobnak: Thank you, Todd. We had an excellent start to the year with 5% growth and an 82 combined ratio for the first quarter. Increased competition in several areas of our portfolio has led to slower top-line growth. However, our underwriting teams continue to explore where competitors are pulling back and we have found opportunities in the business they leave behind. We are being more selective on providing auto coverage as we have seen continued increased severity across our auto portfolio. Our property and insurance segments performed very well in the quarter. We have manageable loss activity. Let me provide more detail by segment. Cashier segment premiums were 14% which included a positive 9% rate change overall. Other liability coverages provided within this segment achieved a 17% rate increase. Both were once again driven by personal umbrella, where premium grew by 34% which included a 15% rate increase in the quarter. The rate increase was down slightly from last quarter, as some of last year's higher rate filings have worked their way through the book. We do have additional approved rate filings effective midyear will help us continue to address lock on trends. Due to the loss severity we have seen in this book, we are making several changes beyond rates For example, we raised required underlying coverage limits in several geographic areas. We are also working with our producer partners to slow growth in problematic areas as we continue to focus on underwriting profit bills. C and S casualty brokerage grew premium by 25% includes 18% growth in primary general liability business and 32% growth in excess liability. Rate increases are in the mid to upper single digits. We do have a long track record of underwriting profitability in the construction industry. Based on that starting point, our rate change may not be comparable to what other carriers disclose. There are admitted and not admitted markets who are pulling back in this business. Submissions have increased almost 20% for these ones. We're doing a good job of collaborating internally and offering an excess vote to support a primary liability opportunity. And have been successful in finding more construction business in all regions of the country. The top line for other casualty products was fairly flat. The actions we are taking on auto are impacting our package businesses with rate increases staying ahead of loss trends. Transportation division grew by 6% while achieving a 15% overall rate increase. Our executive products group achieved a 3% increase in premium due to our producer outreach even though rates continue to decrease by 4% in the quarter. And finally, we exited a couple of captive relationships that reduced premium by $6 million in the first quarter. The market for casualty business varied significantly by product. While we are seeing carrier competitors increasing rates for most coverages, introducing some exclusions or exiting certain classes or geographies, we still see new markets and MGAs in particular who are willing to write business at lower rates with broader coverage. We rely on our local specialty underwriting team to stay abreast of their producers' needs and to continuously remind them of our risk appetite. We are ready to take their calls and provide a quick quote or quick decline so they can move on. Based on our underwriters' efforts and deep relationships, we are well positioned take advantage of opportunities for long term profitable growth in the casualty segment. The property segment's premium declined by 6% while producing a 57 combined ratio. Our marine and Hawaii homeowners businesses continue to find opportunities for growth. Marine premium was up 10% with a positive 3% rate change. The marine market is challenging, but our underwriters have developed the ability to sift through a growing number of submissions to find the opportunities that make sense. Submissions were up 10% for the quarter, with growth driven primarily by inland marine. Hawaii homeowners premium grew by 37%, which includes a positive 18% rate increase. We continue to benefit from our competitors pulling back in this market after the Hawaii wildfires. More recently, we are seeing a change in appetite with some markets reentering this phase to varying degrees. E and S Property is experiencing the most competitive market conditions in our product portfolio. With premium down 14% in the quarter. The property insurance market is known for large catastrophes and short memory. And the current market conditions reflect us. Competitors, particularly MGAs, who are compensated on top-line growth, are very aggressive in the Florida wind market. Have increased line capacity expanded terms and conditions while slashing rates. We continue to refine our underwriting guidelines to provide our underwriters the flexibility to compete on the best account. Although we saw a 14% decrease in cap win rates in the quarter, we believe this business is still very well priced. The earthquake market is also challenging given the increasing tendency of insurers to take this risk net. Our rates were down 6% in the quarter on the earthquake business. New business is hard to win in the E and S property space. But we are continuing to stay in front of our producers and letting them know we are consistent long term, reliable market for their customers. As I mentioned, the property segment performed well with a 57 combined ratio this despite a heavy quarter of catastrophe losses for the industry. We will continue to look for areas to grow in the segment despite the increased competition. Insurey segment's premium was down 1% in the quarter, while posting a 69 combined ratio. Bottom line improvement was due to benign loss activity in the quarter this year, compared to one large commercial energy loss posted in the first quarter last year. The top line was challenged because contract surety premium decreased by 10% In As this business focuses on public construction projects, we saw a slowdown in bid activity for larger multiyear projects influenced by tariff uncertainty. Our bond count actually increased which means we're still seeing plenty of opportunity on smaller, quick turning jobs. Which is our target appetite. Our commercial and transactional businesses were able to grow due to some new regional bonding requirements, and our continued marketing efforts. Overall, we're very pleased with this quarter's results. In a quarter of elevated catastrophe loss activity for the industry, and continued auto severity we were able to close an 82 combined ratio are continuously improving our portfolio while focusing on bottom line results. Our underwriting teams are navigating increasingly difficult market conditions by regularly interacting with our producers in person to address their needs. By working with our claim and analytical teams, to incorporate the trends and feedback they're hearing to ensure we continue to maintain discipline and write profitable business where available. This is what we do. And now, I'll turn the call over to the moderator to open it up for questions.

Operator: Thank you. Question and answer session will begin at this time. You're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your telephone. And the first question comes from Bill Carcache from Wolfe Research. Bill, your line is open. Please go ahead.

Bill Carcache: Thank you. Good morning. Craig, following up on your comments around having managed the business through many business cycles, if uncertainty caused by tariff policy were to push the US economy into recession, could you give a little bit of insight into the RLI playbook? What would you adjust? What stays the same? Where would you expect to see greater opportunities? Any color would be helpful.

Craig Kliethermes: Thanks, Bill. I mean, we've also managed our way through recessions in the past as well. I mean, the big advantage we have obviously is a very diversified portfolio of products. So some are more impacted than others by recession. We do have a significant presence in percentage of our portfolio in the construction space. So obviously, if construction slows significantly, it would put some pressure on us. Although, I would say construction is a big segment for most specialty companies. I'm not sure it would be outsized pressure on us, but certainly there would be pressure on exposure basis because sales and revenues would be going down of our underlying insurance, which would drive prices down or premiums down anyway. So you know, that but also decreased activity also slows claims as well. So from a profitability standpoint, I don't know that we've managed our way through these before. I'd expect we would manage our way through this again. But certainly, that would create pressure on exposures It's not limited to construction and beyond the auto side as well, transportation side, things like that. So, you know, the insurance industry ensures the economy. So the way the economy goes is the way we go. I guess the offsetting that is if you know, the end result of you know, I guess, the uncertainty that's being created today by tariff policy If it would increase, you know, building more at home, investing more at home in America, since we are exclusively in the US. We would also be a proportioned, I guess, been a factor of that as well. So obviously, more building in the US would create more opportunity for us. So that that's And that inclusive of, you know, the impact of tariffs on lost cost inflation trends overall on that But That's Usually, loss of that inflation during your session drives the loss of that inflation with probably be a help to us. It would probably offset some of the inflationary things that are going on right now. However, you know, from a legal system of view standpoint, that's a little more isolated from materials and labor inflation. So that needs to be addressed in a different different way through tort reform as you've seen in Florida. You most recently saw in Georgia, although the impact haven't been felt yet, You you're seeing, I think, in Louisiana, they're trying to do that as well. I think that that is what, you know, will help most mute the inflationary pressures on casual business.

Bill Carcache: That's really helpful. Thank you. And then separately, Jen, following up on your commentary around seeing MGAs willing to more aggressively underwrite business at lower rates with broader coverages. Are you viewing this as a bit of a harbinger of undisciplined market behavior that could lead to more widespread challenges for the industry. Down the road. And, ultimately, you know, something that that could potentially present some more opportunities for for for your business.

Jen Klobnak: Yeah. So Bill River used to MGAs in our space. We've we deal with them every single year. I think it's more irritable in property because they're they're affecting the market so aggressively, and it was such a great market that was going on. So to have them go so aggressively after the business is really putting a dent in what's available there. But but we do experience MGA on the cash and property side on a regular basis every year. Our business model is, you know, we're a very consistent market, very strong financially, so we're there for our producers and our insurers over time. They know what we offer. We stay in front of them. We have a pretty consistent risk appetite. We do tweak it over time, but because of our results, we're able to stay consistent and not make drastic moves from a pricing or a terms and conditions standpoint. So what happens is an MGA comes in, they start taking our business They tend to blow up over time, and cash will take a little longer. Property sometimes just do that a little faster. And so then after they blow up, the producer ends up shifting that business back to us because they know we're still here. And that's why sometimes our top line is not as consistent and and does, you know, it can actually be reduced in some market conditions. Again, we're focused on the bottom line and the consistency in being there for our producer and insurers. And so that's kinda how the macro cycle plays out for us based on our business model.

Craig Kliethermes: I guess I would just add to that. You know, we've seen this beyond NGAs as well. You've seen some unrated carriers that have come back into the market particularly in Florida. You've seen Lloyd come back much more aggressively or I won't say as aggressively as they were before. You know, as as as someone sitting a little bit removed from from this of getting the reports on the ground. I mean, it's a bit disheartening how quickly the discontent rises in the insurance marketplace. You know, the market's full of people that seem to be too smart for their own good. And many were the same people that created the contraction and the lost capacity and withdrew from the market because they lost their capacity from their reinsurers just a couple of years ago. They also were screaming that the sky was going to fall when Milton was you thought Milton was gonna hit possibly Tampa last year, and and that just happens to be the same market that's doing what I would say is some things right now. So the lack of discipline is a bit disheartening for those companies that are a little more disciplined. I would say.

Bill Carcache: That's very helpful. Thank you so much for taking my questions.

Craig Kliethermes: Thank you, Bill.

Operator: The next question comes from Michael Phillips from Oppenheimer. Michael, please go ahead. Your line is open.

Michael Phillips: Thank you. Good morning. You talked you mentioned a little bit this quarter and certainly last quarter, you expanded on the personal umbrella. Auto book frequency flat, severity up, cautious view on that. Can you just kinda maybe hit that again? And if I assume frequency is still down. We've we've heard that before from others, but just remind us if that's still the case. And what does severity look like in your personal umbrella book today?

Jen Klobnak: If I look at, personal umbrella, you know, we been experiencing severity for a few years increase severity, I'll say, for a few years now. And it it's not subsiding. I think from our standpoint, we are trying to address this in in various ways. One is the obvious is right. And we continue to regularly go back to each state with the filed product. So we have to go to each state and ask for a rate increase We work through that process on at least an annual basis, but we can if we need it, and we and we can, we go and and try to get it even within a year that's what we're in the process of doing again. We've got you know, our annual filing that's been approved in most states. Effective midyear. And so we start with rates. We also look at trends within what claims are we getting. What's driving the claims. That's where we made some other changes. And I referenced the increase in attachment We see certain venues as being more problematic, and so we're working with our producer partners to not get as much new business in those venues. Letting more of the quality of the underlying insured, you know, do they have prior acts accidents or or other issues or larger exposures that we're not as comfortable with and slowing down ensuring those new business opportunities in those particular venues. So that feedback loop between claims our analytical folks, and underwriting is critical in informing our marketing teams on where we wanna target growth and where we wanna pull back So we continue to do that From a claim standpoint, we ramped up our staffing. And if anybody knows any excellent personal brand of claim examiners, so we do specialize by product. We'd be happy to talk to them. We have hired a few folks and are ramping them up to train them in how we do plain manning, which is to thoroughly investigate the claims and make sure that we are paying what we owe, but also addressing the shenanigans that the plaintiff's attorneys put forth in the the various claims that are are presented to us. So it's a a number of factors that we work on with First Umbrella to stay ahead of us. We have regular conversations almost daily. Between those different groups to make sure that we're addressing things that come up as they do.

Craig Kliethermes: So I I guess I would just add that just to be clear that those conversations are going on between the underwriters that manage that business and the claim people that are dedicated to that business. I mean, obviously, we participate from time to time and we get reports out on what's going on, but we're not driving that behavior. That's being driven from the ground up. These people own these products. They get paid underwriting profit that's delivered in these products. So they have a keen interest in trying to to make sure that this product remains profitable. It's been been in for a long time.

Jen Klobnak: Thirty five, forty years. Yeah.

Craig Kliethermes: And it's one that's been a very profitable product for us. But but certainly we have seen an increase in lost of the inflation in it. So I I do think I would just expound upon Joan's point on the attach points is that the attachment points that come with, you know, the higher the attachment point, usually there's credit associated with the tax report. But then a side benefit of having a higher tax is you have more skin in the game from your underlying claim examiners. We when we're saying that about personal develop for us, obviously, that's a different company because ours stand alone personal growth. So this is having other people that are writing the underlying coverage is they're claiming damage having a lot more skin in the game in regards to outcomes when they have a bigger limit exposed than a than a smaller limit exposed. So we think there's some additional benefits to that. And and I also would note on on the new businesses, we have grown a lot over the last several years in this business. And we've seen great opportunity. We've leaned into this opportunity. We also know that in this business, particularly, there is a called a new business penalty associated with leading in. We know that our new business have a higher loss ratio than our renewal business. So if we were to slow new business growth, we will probably get a benefit from that time as as those accounts season as those insurance season. I I might add, Todd, one more thing. It's with that.

Todd Bryant: I think if we talk about the cautious approach, on the push on the rail side of the auto side in general, and Jim talked about the the 17% rate that we're getting on the auto side. If you compare, I think, in terms of caution where we started last year if you look at where the casualties underlying loss ratio was about, a point and a half higher than what we started last year, that that increase is largely auto related. So we've increased our auto related loss booking ratio even while we're getting this rate increase and have been getting the rate increase now for for for a little bit. So that's that's goes to build that caution as well.

Michael Phillips: Yep. Okay. Thank you. Thanks for all that detail. I I guess, what are you done with or with mean, would you classify your end with the transportation books, nonrenewable large accounts?

Jen Klobnak: Well, the job is never done. I would say as as we look at renewals, you know, we're constantly looking at that lost experience. So with transportation, it's a benefit that they do have losses. You could say, because we do rate based on loss experience The key there is understanding if those loss reserves are real. So as we get new business in and we are looking at reserves from other carriers, we tend to be cautious and and maybe pessimistic about if those reserves are accurate or enough. So as we price up that new business, you know, we try to understand what those claims that are already on the books look like to see what what that premium should be going forward. On our own business, we try to get our reserves up as quickly as possible so that we can properly rate our renewals. And also if those you know, insurers are shopping coverage that our competitors see the real cost that that could be coming with that insurance. So you know, we evaluate annually then each of our insurers. The added benefit we have is we have in house walk control where we have people who physically go out and visit our insurance and and kick them tires, so to speak, so they do understand, like, what kind of maintenance are those insurers doing, what kind of training, how are they hiring their drivers, all those things that would indicate, is this a a an account that really values doing business well and trying to be safe and avoid losses. And and so usually, one of these, the fairly aggressive to maintain those insurance. And if they don't, we have to either charge for it or you know, work with them to try to make sure that you know, we're aligned in our view of of the exposure there. So we're never done. Having said that, you know, we still have some large accounts on the books that we believe in and are supporting. But that rate that rate change reflects what we think we need to make sure that our portfolio is still making the underwriting profit at the end of the day.

Michael Phillips: Okay. Thank you. Last one if I could, I guess. Any change in your philosophy of viewing the opportunities in California residential owners?

Jen Klobnak: So, you know, we have long and we we still go back to the Northridge refi, which is the last time we got an underwriting loss. At that time, we insured individuals. We had residential earthquake coverage and dealing with individuals and dealing with the claim family process. So then nobody thinks their house is perfect. You gotta an endless list of things to tweak so that the claim family process is extended and it's problematic. And I think our long memory is kind of skew our view of of personal lines business that we do. Obviously support personal lines in Hawaii. That's a little different case because we have local folks who work very closely with insurers and those are necessarily high value. Dwellings, I think the California market from the wildfires largest disruptive piece is the high value homeowners. And, again, those tend to be difficult claims to come to a a good resolution on. So don't have a different view. I think we're still hesitant to get into that. We we like to lean towards the commercial space.

Michael Phillips: Okay. Thank you, Jim. Appreciate it.

Operator: The next question comes from Gregory Peters of Raymond James. Gregory, your line is open. Please go ahead.

Gregory Peters: Good morning, everyone. I think in the prepared comments, you noted that there was some downward rate pressure on earthquake. I was wondering if you could go back and just give her some more color behind that. And, also, can you talk about the reinsurance costs on Quayke? Or is that coming down commensurate with any rate pressure you're seeing?

Jen Klobnak: So earthquake exposure in it's mainly in California, but it is, you know, in the other regions where the coverage is is possible as well. But I would say in California, it's it's fairly competitive. We have procured and MGAs that compete in that space. Because there hasn't been a loss and long time of knock on wood, You know, people see that premium to come extent of being free premium. Right? I don't know that everyone appreciates the downside, particularly the MGA I don't think they appreciate the downside risk on that. The issue with California relates a bit to overall economic conditions where we get over insuring small businesses who have felt pressure from a number of rising costs from employees to supplies, inventory, gas, everything that they do. And so this is another cost to them, this insurance, and it has been going up over time. And when the loss doesn't happen, they think, well, maybe I should just take that net or buy less or increase my deductibles to the point where I don't have to pay as much. And all of those factors have caused that marketplace to to be more competitive because you know, more people are taking that risk net, and so then there's less of a path to fight over from standpoint of the the remaining carriers and MGA. So those are the market dynamics that we're dealing with. Our underwriters are trying to stay ahead of it by getting you know, communicating early on renewals, trying to put our best foot forward. And work with our producers to to get that business in if we can. New business though, it's very difficult. And what else makes it difficult is is the words. I would say, you know, in all of these cases, words matter. We're producing a policy that delineates what we're gonna cover. And for us, we actually consider that there could be a loss And so when we look at the words, we wanna be clear on definitions so that people know what's covered, what's not covered. We do have some sub limits, deductible, things of that nature. It seems like other carriers in NGAs, they're a little looser with the words. Again, they maybe they don't appreciate the fact that a claim will happen. When the claim happens, the only thing that matters is the words. And we believe that having certainty in our wording and understanding what it says is going to help when a claim happens. The resolution of that claim. And understanding what our downside exposure actually is So all that being said, I think your original question was about rate decreases, and I would say you know, given those market conditions that that's that's probably where the market's gonna be for a while.

Gregory Peters: Oh, and can you also Yeah. Also,

Operator: Yeah.

Gregory Peters: Right.

Jen Klobnak: I was gonna circle back on the reinsurers. Their earthquake coverages of our overall catastrophe treaty. So we don't really I mean, there are separate rates. But we look at it as a as a full know, whole purchase. I would say, I don't know the Earthspace rates. I mean, they kinda fluctuate based on what our exposure is and our exposure has been coming down a bit over the last couple of years. So we are paying less for that coverage at this point in time. A bit less. I don't know if it's coming through with rate decreases on the primary side. I'd say you know, those are those are to some extent disconnected because we do have the benefit of the wins and other perils within our capture

Gregory Peters: Got it. Thanks for the detail. The other question I had just in your comments Jen, you you talked about the inland marine market. So I I mean, inland marine is a broad category. Can get more specific about what you're doing in the inland marine market? And where the opportunities are?

Jen Klobnak: Yeah. So inland marine, we've grown that book for the last six or seven years very profitably, and we have a a larger team than we used to. So that's part of it is we've got better coverage around the country. So, again, we focus on hiring talent locally that knows that area, knows producers in that area. To produce that business. So having larger teams is one item. In addition to that, you know, I would say the construction market, the construction industry has been and a lot of marine coverages do touch that space. So from builders risk, to contractors' equipment, to you know, motor truck cargo, lot of physical damage, all these coverages that we provide there are related to some extent to construction, well, other industry. And because of our local presence, we've been able to take advantage of those items We've also partnered a lot more of the cool sailors in that space They tend to get, I'll say, interesting rates And so we our phone lines are open. We like to entertain those things and talk to our producers about the uniqueness of some of the things that come in and see if we can help them provide some coverage. So we put out a lot of quotes and see what what gets on that.

Gregory Peters: Got it. Thanks for the answers.

Operator: Thanks, Greg. Next question. Next question comes from Meyer Shields from KBW. Your line is open. Please go ahead.

Meyer Shields: Great. Thanks so much. Two quick questions. Questions on transportation if I can. First, when we talk about non-renewing some of the larger accounts, is that like, a definite decision by RLI to non-renew, or is it that you come in with a price increase and maybe terms and conditions that your, insurance aren't willing to accept.

Jen Klobnak: It's both. That's what you've provided a good answer there, ma'am. I'd say some some of those larger accounts have you know, lost experience that we don't think is acceptable anymore. And so we go ahead and actively non-renew those. In other cases, you know, we think that they need an increase, and so they start shopping and they find somebody who's willing to do it for a lot less. So all kinds of scenarios happen.

Meyer Shields: Okay. No. That's helpful. Maybe I should be on the other side of this phone. The second question, and I guess this is mostly for Todd. If you look at the Wizard Triangle in the 10-K so transportation has had some accident years where ultimate losses are down 20 to 40%. From the initial estimates. And I'm wondering when you do leave reserve strengthening that you mentioned at this quarter, is it to get to sort of expected losses or is does the reserving now incorporate the same sort of cushion that we've seen in past years?

Todd Bryant: Well, I I think you get we're factoring all that in there. I mean, if you look let's say, if you just look quarter over quarter comparisons to last year, I think transportation was was a little bit positive last year. Not so much this year. But you know, you you have you may have I think 2023 was the year on on transportation this quarter, that that had some adverse to it. So I think there is a a measured approach to looking at all of that factored all of it in. And probably more recent as we've talked about, we tend to try and jump on things that are that are having a challenge. And and that's what that's what we're doing. So no no difference in that approach.

Meyer Shields: Okay. That's perfect. Thank you so much.

Todd Bryant: Thanks, Meyer.

Operator: The next question comes Casey Alexander from Compass Point. Your line is open. Please go ahead.

Casey Alexander: Yeah. Two real quick questions. One is, you know, the the tariff situation you know, feels like it could cause a slowdown in you know, port activity and delivery and receipt of goods coming in and out of ports, would that impact any of your transportation coverage And then secondly, in construction, do you worry that that a large increase in construction materials cost could slow down that construction market and impact your construction underwriting.

Jen Klobnak: That's a good question. So I would say you know, this tariff situation is is kind of a replay of COVID situation we had a few years ago. So we've just practiced what's gonna happen here in terms of economic slowdown and, you know, reduced shipping. I'd say in the first quarter, we did see some signs of increased shipping. I think trying to get ahead of what was rumored to be tariff situation. So we did see some increased shipping in our marine and our transportation division. That's where we see that hopefully. And now we haven't necessarily seen it slow down, but we anticipate it could. And again, that's where we would see most of the impact of the the miles driven for trucks to deliver those items or a marine. We have a small cargo look in there where we we are you know, receiving things or shipping things elsewhere. From the construction standpoint, again, it reminds me of COVID. Where you've had increased construction costs, which we build into know, the bidding process and how we quote business. A lot of our policies, particularly, like, in our cash and brokerage division, we can audit that premium to the end to see what does that construction project actually cost So know, we already have all that in place, and that's how we do it normally, and and it would just know, incorporate these issues. Our feeling is from our underwriters is that this time, the cost has been a big issue. Last time, we had a scarce issue as well. I'm not really thinking there'll be scarcity this time, except things are gonna cost a lot more. And so we'll build in again. We're used to construction delays, because of the time it takes to ship or know, getting your your supplies lined up from a cost standpoint. So we're we're pretty much used to this, and I think we'll just do it you know, execute like we did during during COVID.

Craig Kliethermes: Casey, it's Craig. So I'll just add to what Jim said. So, I mean, I certainly is gonna create bidding uncertainty for smart contractors You know, they're they're more reluctant to bid on a project know, if they don't know what their costs are. In this case, the only difference is we're talking about multipliers or multiples of it's not just a it's not just a shortage of supply and then maybe they can get it for paying a little bit more. Like, you know, where supply and demand by the meat is I mean, this is a multiplier effect. So it it till this thing settles down, it could create you know, some pressure on on especially smaller, I'd say, contractors, you know, who who are a little more reluctant to bid on something because if they've locked in the price of what materials are you know, what's gonna cost to build something, and then it goes up significantly. Mean, it could slow things down. I think in the long term, obviously, you know, if there were tariffs that drive increased costs, I mean, one, we're always on top of valuations. Making sure and this is one thing that Jen was talking about. Is maybe somebody who's left this one markets in in Jay's. They don't care as much about valuations. They're willing to work off last year's last year's submissions, things like that. We always look at valuations, whether it be the value of property, the value of the goods being moved, It's important to have great care of that because when you're offering business income coverage, you need to understand that if those costs arise, we also increases premiums. So we actually get more premium from that increase And if if costs rise, you know, the value of things rise, then that means, like, when you're offering a bond, for a certain amount either to build or to move goods. That that goes so much higher, which means the premium goes. A lot higher. So we're gonna benefit You you lose on the loss side, you do, but you also benefit on the premium side. So, you know, over the long term, I think we view that as a relatively mutual thing. But certainly in the short term, it could create uncertainty that could slow things down. And again, I would lean on the diversity of our portfolio We have some products that are gonna be more impacted than others, and I think the others will be much more stable. So I think overall, you know, we feel like we we've been here before. We can get through this again regardless of what happens.

Casey Alexander: Yeah. Well, I and I appreciate that. Answer. I'm I'm thinking as much from the standpoint that that a significant increase in construction costs could cancel a lot of construction programs, which would reduce the the volume opportunity that you might have. One other question is you know, there's been a a real loss of of property capacity in California, and and many people have suggested that it's similar to where Florida was few years ago before Florida had some legislative changes that that improved the profitability of the market, but it was while they were that capacity was out of the market that you guys took advantage to build a really significant and profitable property book Florida. Do you see any similarities to California? And are you sharpening your pencils at all on that market?

Jen Klobnak: Well, we certainly are looking at opportunities in California This is correct. But I I would say there there's a much different environment in California than there was in Florida, even prior to toward the form in Florida. I mean, it was a much more inviting place to do business you know, as as a publicly traded company who has to figure out ways to make money over time, I would say Florida was much more inviting in regards to capitalism than perhaps Florida. Well, I would add to that. California. I'm sorry. I I would add to that, you know, just an example that is a rate filing. So even though some are cashier businesses where we have to file rates know, to get a rate change in Florida. It's a process, but they are relatively easy to work with. For California, we've experienced you know, difficulties and delays in in getting that rate that we need to stay in that marketplace. That's just one example, but it it is a more difficult place to work and we don't see the we're not as optimistic that it will become a better place to to navigate.

Casey Alexander: Alright. Thank you.

Operator: As a quick reminder, that's star followed by one to ask a question today. Next question is from Andrew Anderson from Jefferies. Andrew, your line is open. Please go ahead.

Andrew Anderson: Hey. Good morning. Just looking at the property segment session ratio, it seem to be up a couple points year over year. I'm not sure if there was a a change in reinsurance or business mix change, but should we think of a higher session ratio for full year year over year?

Todd Bryant: This is Todd. Yeah. I think it you look compared to quarters, it is a a couple of points. I think if you look across the year, we can have some variances in how much FAC has been used. We did add a second and third event coverage. Last year. That we wouldn't have in the comparable period. But if you look over the last two to three years, it has still been in that seventy two to seventy three range. So that we would think that's still still pretty reasonable. In the first quarter of last year, would have would have been the one that was was a little bit higher.

Andrew Anderson: Okay. And then just within casualty, you know, some large cap peers are talking about some good opportunities within small commercial in the middle market. I think you provide a small commercial breakout at least in the quarterly filings. It has it grew 10% last year. Are you seeing kind of good opportunities within that segment of the market And could you just give us some color on on what that small commercial segment is?

Jen Klobnak: Sure. This is Jen. So our small commercial operation really targets the other coverages for our architect engineers and other miscellaneous professionals where we leave with a professional liability coverage, but then we offer pop, auto excess types of coverages. In addition, we have program that targets small contractors, and we offer them general liability and then some other coverages for their businesses. So those are two main markets in that space. I would say we do see plenty of opportunity there. The issue has been that we've offered auto coverage in the past that has been challenging. Just similar to the results we've seen within transportation of first umbrella. And we wanna be sure that we're being selective in what we're offering and what types of insurance we're offering that coverage to. We've been increasing rates in that book as well for the auto coverages. And we've been reducing coverage where we can. So for example, where there's a required US one AM limit in a particular state, that's as much as we're gonna offer. We're not gonna match our other auto coverage limit. So we're being a little bit careful in that space on certain coverages. But we do appreciate the middle market business and are targeting to ensure more of those types of insurance over time.

Andrew Anderson: Thanks. And maybe quickly just on investment income, it was down a little bit quarter over quarter. And yeah, maybe it's it looks like last year that was kind and one q maybe that's more of an issue, but I guess, are you are you thinking of yield expansion from here on out for the rest of the year?

Aaron Diefenthaler: Andrew, this is Aaron. You know, we're always trying to be as accretive as we possibly can can be cognizant of the risk profile of of the asset side of the balance sheet. And, you know, if you you go back to the fourth quarter, we didn't return a fair amount of of capital to shareholders in the form of our special dividend. Maybe that was a little bit of a headwind rolling into into the into the new year. Still are finding very adequate high quality opportunities to succeed on it. Todd mentioned. To put money to work above our book yields, a fair amount above our book yield, frankly, and we feel pretty pretty good about that. But changing the makeup of the portfolio in terms of overall credit risk, or duration is probably not a near term change that we're

Andrew Anderson: Thank you.

Operator: And the final couple of questions, that's star one There are no further questions. I'll now turn the conference over to Mr. Craig Kliethermes for some closing remarks.

Craig Kliethermes: Well, thank you all for joining today and we appreciate all your questions and your interest in our company. A solid quarter to begin our sixty-first year. Our uncommon underwriting discipline and diversified portfolio of specialty products has translated into consistent financial outcomes over time and allows us to serve as a stable and consistent market for our customers. I would like to thank all of our RLI associates owners for their contributions to our shared success and encourage them to keep being different. Because being different works. Thank you all again for participating today and we'll visit again next quarter.

Operator: Ladies and gentlemen. If you wish to access the replay for this call, you may do so on the RLI home page www.rlicorp.com. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 829%* — a market-crushing outperformance compared to 155% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of April 21, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.