RLI Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 26, 2023

There are 8 speakers on the call.

Operator

Good morning, and welcome to the RLI Corp. 4th Quarter Earnings Teleconference. After management's prepared remarks, we will be opening the conference up for a question and answer session. Before we get started, let me remind everyone that through the course of the teleconference, RLI management may make comments that reflect their intentions, beliefs answer 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.

Operator

Please refer to the risk factors described in the company's various SEC filings, including in the annual report on Form 10 ks as supplemented in Forms 10 Q, all of which should be reviewed carefully. The company has filed a Form 8 ks with the Securities and Exchange Commission that contains the press release announcing Q3 results. During the call, RLI management may refer to operating earnings and operating answer, an 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, operating earnings and operating EPS exclude equity in earnings of answer Maui Jim and related taxes due to the sales of RLI's investment.

Operator

RLI's management believes these measures are useful in gauging core operating answer across reporting periods that may not be comparable to other companies' definitions of operating earnings. The Form 8 ks 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 Dieffenthaler.

Operator

Please go ahead.

Speaker 1

Answer. Thank you, Drew. Good morning, everyone. Thanks for joining us to close out 2022 with RLI's 4th quarter earnings call. Participating with me are Craig Cleethurmas, President and CEO Jane Clodnock, Chief Operating Officer Todd Bryant, Chief Financial Officer.

Speaker 1

Todd will kick things off with the financial results for the quarter. Craig and Jen will offer some commentary on current market conditions, our product portfolio and possibly reinsurance, answer. Just a guess there. After our prepared remarks, we will take your questions and Craig will close with some final thoughts. Todd?

Speaker 1

Thanks, Aaron. Good morning, everyone. Yesterday, we reported 4th quarter operating earnings of $1.53

Speaker 2

per share

Speaker 1

answer. Both underwriting and investments contributed. Overall, we posted a combined ratio of 82.1% for the quarter And experienced continued top line growth, which was up 14% in the quarter. On a full year basis, gross premiums written answer. Increased 16% and we posted an 84.4% combined ratio, marking our 27th consecutive year of underwriting profitability.

Speaker 1

Answer. Investment income advanced nearly 60% in the quarter and closed the year up 25%. Reinvestment rates moved higher answer. As did our invested asset base, driven largely by funds received from the sale of Malligen. Operating cash flow was negative for the quarter As we paid $116,000,000 in taxes on the gain from the sale of Maui Jim.

Speaker 1

This amount is included as a reduction to operating cash answer. While the cash proceeds received from the sale were reflected as cash flow from investing in the 3rd quarter. Apart from this nuance, operating cash flow was very similar to last year on both a quarter year to date basis. Answer. Realized losses of $3,000,000 in the quarter were the result of adjustments to Maui Jim's pre closed financials, which increased our equity in Maui earnings And correspondingly decreased our realized gain recorded on the sale.

Speaker 1

This adjustment had no impact on net earnings. Answer. For equity securities, change in unrealized gains and losses reflects a $34,000,000 gain in the quarter as the market rallied to close the year. As mentioned on prior calls, large movements in equity prices between periods can have a significant impact on net earnings, Which you can see in the comparative quarterly and year to date results. Greg and Jim will talk more about the market and premium in a minute, answer.

Speaker 1

But at a high level, all three segments experienced growth as we continue to benefit from favorable market conditions in most areas of our business. From an underwriting income perspective, the quarter's combined ratio was 82.1% compared to 80.7% a year ago. Our loss ratio increased 2.6 points due to higher weather related losses. In the quarter, we incurred $8,000,000 in storm losses, answer. $7,000,000 in property $1,000,000 in casualty from a number of main storms.

Speaker 2

At the

Speaker 1

same time, we reduced our estimate of net loss answer. From Hurricane Ian by $2,000,000 which is now at the bottom of our initial range estimate. Answer. Claim volume and severity have come in below initial expectations for this storm, which occurred very late in the Q3. From a prior year's perspective, we continue to benefit from favorable reserve development.

Speaker 1

Casualty posted $14,000,000 of favorable loss emergence with contributions from a number of product lines. Property posted $4,000,000 in favorable emergence, largely due to reductions in reserves for prior year's storms. In addition, we experienced improvements in the current year's underlying loss ratios for both property and casualty. Answer. Year to date, property's underlying loss ratio declined 4 points compared to last year due to lower attritional losses in both inland marine And commercial fire, while casualties declined 1 point aided by a shift in mix of in business mix and overall rate increases.

Speaker 1

Moving to expenses. Compared to last year, our quarterly expense ratio decreased 1.2 points to 40.3. Answer. On a full year basis, our expense ratio declined 0.8 points to 39.5. Growth results are reflective of improved leverage on our answer.

Speaker 1

As net premiums earned continue to grow. Turning to investments, total return performance improved And came in at 2.3% during the Q4 and minus 11.5% for the year. Without question, it was a difficult year for the markets. But as a long term investor, we are encouraged by stabilizing equities answer. And higher bond yields, which are accruing to investment income.

Speaker 1

In the quarter, we continue to invest in high quality bonds with incremental cash flow and answer. And have yet to pivot toward riskier assets. Apart from a short lived short term portfolio associated with the Mountain Gym proceeds, answer. New money yields continue to exceed 4%. Moving to other investments, we recorded $7,000,000 in investee earnings in the quarter With Maui Jim contributing $3,000,000 and Prime posting $4,000,000 The result for Maui was due to the true up of pre close financials As mentioned previously, this adjustment had no impact on net earnings for the quarter as realized gains were reduced by an equal amount.

Speaker 1

As noted in the press release, we have excluded earnings from Maui Jim from operating earnings. As such, this adjustment did not affect those earnings either. Answer. On a year to date basis, investee earnings are down significantly due largely to transaction related expenses incurred by Mao Chem from the company's sale. As a reminder, we received $687,000,000 in exchange for our shares in Maui Jim in the 3rd quarter.

Speaker 1

Answer. Final proceeds remain subject to customary post closing working capital and other adjustments. We expect most of that adjustment process to conclude during the 1st half of twenty twenty three and could modestly increase this amount. For 2022, our net earnings with realized gain, answer. Investee earnings, taxes and other sale related amounts reflect $434,000,000 answer.

Speaker 1

For $9.49 per share from the sale of our minority investment. The combination of solid underwriting investment results answer. Took book value per share to $25.89 up 25% from year end 2021, inclusive of dividends. This growth benefited from the gain associated with the sale of Maui Jim, a portion of which was returned to shareholders via a $7 per share special dividend in December. All in all, a very good quarter and strong finish to the year.

Speaker 1

And with that, I'll turn the call over to Craig. Answer.

Speaker 2

Craig? Well, thank you, Aaron and Todd. Good morning, everyone. As Todd mentioned, we finished the year with continued momentum, Reporting excellent underwriting results and double digit growth for the quarter. 2022 marks our 27th consecutive year of underwriting profit answer.

Speaker 2

On both a net and gross basis, we've now benefited from back to back years of top line growth in excess of 15% answer. And another year of rate increases in excess of underlying loss trend across the Property and Cash segments. This has resulted in very good returns that we are pleased to report to our shareholders. Our underwriters have been able to grow almost all the products within our portfolio, but there are a few pockets answer. We still face stiff competition.

Speaker 2

A hard reboot in the reinsurance market, continued multifaceted inflation answer. And weakened balance sheets should provide a stronger backbone to the industry's underwriting discipline and be supportive of more firming. Answer. Assuming the competitive environment responds rationally, we anticipate rate increases and disruption that should create new opportunities for profitable growth. We've already seen additional improvement in price terms and conditions in the property market at the end of 2022.

Speaker 2

Answer. Over the last decade, we've been able to access low attaching earnings protection from high quality reinsurers at favorable prices. At each reinsurance renewal, we evaluate the risk reward equation carefully using our actuarial team and reinsurance brokers to inform decision making. Answer. Given our conservative balance sheet, diversified portfolio of specialty products and underlying profitability, we have always retained the optionality To take more net where the expected reinsurance ceded margins exceed a fair return.

Speaker 2

We believe the cost of property reinsurance increased beyond that point answer. As a result, we adjusted our retentions and co participations accordingly and are comfortable with our new reinsurance structure. Answer. We remain optimistic about the expected underlying profitability of our portfolio. We believe we are in strong answer.

Speaker 2

I will turn it over to Jen, who will provide more detail on the quarter results answer. And the reinsurance placements made on 1 morning.

Speaker 3

Thank you, Craig. From a product portfolio standpoint, the Property segment led our Top and bottom line for the quarter. Premium grew by 40%, while underwriting profit increased 61% with all major sub products answer. Premium in our E and S property book grew by 54%, including material rate increases for all coverages. Answer.

Speaker 3

The hurricane rate increased by 29% for the quarter and has been accelerating throughout 2022. We believe this trend will continue given the disorderly market conditions that are further supported by increased reinsurance costs. I'll provide more detail on our reinsurance renewals towards the end of my comments. It's worth noting that our E and S Property division achieved both a gross and net underwriting profit for the year, Notwithstanding our 2nd largest natural catastrophe loss in ROI history. Our Marine product group also exhibited strong growth answer.

Speaker 3

With premium up 17%, including a 6% rate change for the quarter. Marine is now a consistent contributor to our bottom line And this quarter was no exception. They experienced very little loss activity in the quarter and their growth over time has helped right size their expense ratio. Answer. Finally, our Hawaii homeowners product grew premium by 17% due to our local underwriters efforts.

Speaker 3

Answer. The Hawaii team is committed to providing responsive service, which has helped us win new accounts. Overall, we are very pleased With the Property segment's 62 combined ratio for the quarter. Turning to the surety segment, premium was up 5% in the quarter, which was split between contract And commercial surety. Contract surety premium continues to experience a lift from inflation and the cost of construction projects answer and increased public spending on infrastructure projects.

Speaker 3

We also won some new accounts through our active marketing efforts. Answer. Commercial Surety experienced growth by expanding both existing and new account relationships. Surety produced Underwriting profit with very little loss activity in the quarter. We continue to carefully pursue growth opportunities, while monitoring the financial results of our principles closely Given the evolving economic environment, the casualty segment's premium grew by 4% in the quarter despite some headwinds.

Speaker 3

The public D and O market is under pressure. We exited accounts with unreasonable changes in terms and conditions and provided a 9% rate decrease on our renewals. Answer. The exit from cyber liability and reps and warranties business also affected the quarter over quarter premium comparison. Excluding this premium reduction impacting our Executive Products Group, the casualty segment would have grown 10%.

Speaker 3

Answer. Energy casualty is another area in which we are retrenching, specifically in excess layers. We wrote almost $14,000,000 of answer. Our Energy Liability business in the 2022 calendar year that will be run off throughout 2023. Answer.

Speaker 3

Our transportation business unit grew 13% in the 4th quarter, although we are seeing a lot of competition in the truck market. Answer. REITs increased 8% in the quarter, driven by public and specialty commercial auto, which are experiencing more stable market conditions. Answer. Personal umbrella was up 16% as we continue to collaborate with our production partners to improve our processes and better meet customer needs.

Speaker 3

Answer. The personal umbrella market continues to be disruptive as many of our competitors for standalone umbrella have significantly reduced their appetite answer. Side of the competitive New York City construction market. Rate increases in excess liability business were 8% for the quarter. Answer.

Speaker 3

When looking at bottom line results, I also have to mention our professional services and small commercial group. This product group is in a fairly stable environment And has been quietly grown. Premium increased 9% for the quarter and they achieved a very good combined ratio. This group supports the construction industry on an admitted basis and covers classes of business ranging from architects to small to midsized contractors. The expertise we've developed in underwriting and claim handling over time continues to meet the needs of our customers.

Speaker 3

Now I'll turn your attention to our reinsurance purchase on January 1. We renewed about 2 thirds of our reinsurance coverage this month. The reinsurance market changed abruptly in the Q4. Casualty treaty coverage renewed as expiring with rate change estimated at flat answer. It's up 15% on a risk adjusted basis depending on the line of business.

Speaker 3

We increased co participations marginally To balance the increased retention that I'll talk about in our property business, I would describe the casualty reinsurance market as orderly Compared to the property and catastrophe renewals. As our property per risk treaty has been loss impacted over the last few years, We renewed it with an estimated 40% risk adjusted rate increase and increased the 1st dollar retention to 2,000,000 We renewed our catastrophe treatment with a roughly 45% risk adjusted rate increase and an increase in first dollar retention of $25,000,000 to $50,000,000 Coverage is similar to expiring, including renewing our expiring reinsurance treaty limits for main coverage and adjusting our limit for earthquakes to match our exposure. We have the advantage of writing almost all critical cat risk on E and S paper, which means we can adjust rates and terms and conditions very quickly. Throughout the latter half of twenty twenty two, we had already been tightening terms and conditions, Reducing commission and increasing our benchmark pricing on property cat business, anticipating the increase in reinsurance costs. We have been writing catastrophe insurance for about 40 years.

Speaker 3

The last time we materially increased our catastrophe retention was in 2,007. Answer. Since that time, our Property segment's premium has grown over 140%. Our consolidated premium has more than doubled And shareholders' equity has grown over 50%. But we maintained our retention because the economics made sense.

Speaker 3

Our reinsurance strategy going forward will primarily focus on buying traditional reinsurance from financially secure partners answer. We support concurrent terms and have a high regard for our business model and disciplined underwriting. We will supplement this support with additional capital sources to replace the reinsurers who have become less relevant and commoditize their role. We will continue to assess our reinsurance purchases To maintain a balance in the risk reward economics, given the increase in cost at January 1, we anticipate further rate increases on our primary business answer and believe the E and S property market remains attractive. With that, I will turn the call back over to Craig.

Speaker 2

Answer. Well, thank you, Jim. A great quarter and another year of differentiating underwriting results. We believe we are adept risk managers. Answer.

Speaker 2

The proof is ultimately determined by results. Each day, we seek better ways to be the most profitable, Diversified portfolio of specialized products in our industry, while meeting the risk transfer needs of our customers. We do this by adapting and re optimizing our portfolio and weighing opportunities subject to the constraints we control and those we operate within. Answer. We will continue to serve our customers' needs with a focus on stability and consistency.

Speaker 2

We will work to grow our businesses that are profitable, Invest in new and existing businesses that provide opportunity and from time to time rehabilitate or exit the few products that may require. Our ability to be agile and adapt to the market environment is reflected in the 27 consecutive years of underwriting profit we have delivered to shareholders. Answer. The engine of our success is founded in the 1,000 associate owners who show up every day focused on the long term success of their company With a vested interest in delivering the best outcomes for our customers and our shareholders. I want to thank answer.

Speaker 2

All our RLI associate owners for another tremendous effort in 2022 and for taking care of our customers with their specialized knowledge and expertise, answer. Outstanding service, stable appetite for risk transfer and deep relationships that are forged and reinforced over a long period of time. Answer.

Speaker 1

Now I'll turn it back to the operator

Speaker 2

who will open it up for questions.

Operator

Thank you. The question and answer session will begin at answer

Speaker 3

time. Answer. Our

Operator

answer. Our first question today comes from Greg Peters from Raymond James. Your line is now open.

Speaker 4

Answer. Well, good morning, everyone. Thanks for the comments. Can we go back To the discussion on the reinsurance renewal for Onetwenty 3, I believe The retention has moved up to $50,000,000 Can you give us a sense, I know things have changed, but How that would have affected with the higher retention, the reported cat loss on a net basis for 2022 2021 answer. Had you had that higher retention?

Speaker 3

I haven't looked back to 2021. This is Jen, by the way, but I can tell you for Ian, answer. It would have been probably $10,000,000 to $25,000,000 of additional net loss depending on which underlying treaties were triggered. So that's a rough estimate.

Speaker 1

Answer. The other thing, Greg, to note there, and I think you would think we could just put a Square number to it, but as Jen mentioned, we range it because you don't know how some of those property per risk tree will play in. The other thing to really think about from a rate increase that we have gotten and are continuing to get, there's a lot more dollars in that Property bucket that play well as far as the total underwriting results there from the segment.

Speaker 4

Answer. I understand. That makes sense. Can we pivot just Given the reserve development, I know you commented about prior development answer. And your view on accident year loss ratios.

Speaker 4

I'm just curious, some of the numbers you reported sort of Or counterintuitive just because of all the inflationary pressures we've heard about. What's your when you think about Specifically, the Casualty and Property segment, what's your view on sort of loss pick, accident loss pick assumptions answer. In 'twenty three versus where they were in 'twenty two, etcetera.

Speaker 2

This is

Speaker 1

Todd, Greg. I think Really the items you mentioned, whether we want to call it inflation or social inflation, what you read about out there, answer. That certainly influences our actuarial view. I think you'll see it really in 2022 and normally answer. You're going to see it in the year.

Speaker 1

I think we talked about that and Craig mentioned too from a loss cost trend standpoint. We do believe answer. It's adequate in total and really in most areas. But I know we've talked before as well answer. Our actuaries are going to weigh all that in.

Speaker 1

They're going to typically take the longer term trends, but they are influenced in periods shorter periods Of uncertainty or inflation, other factors or where short term trends are a bit higher, that's going to influence the initial booking ratio. Answer. It can also influence how long we hold on to those initial picks and potentially extend loss reporting period. So all those things factor into the actuarial view, whether it be on casualty or our other segments. There is an influence there.

Speaker 4

Answer. Okay. Thanks for that color. I guess, just as a follow-up, my well, Another question, that would be my last question. Just now that your property cat program has renewed, answer.

Speaker 4

What's is it changing sort of your strategy as it relates to growing your property business? Or does it reinforce the strategy you have in place or how does this how does the reinsurance program, the increased retentions change answer. Sort of the matrix of ROI as we think about 2023 and 2024?

Speaker 2

That's my last question.

Speaker 3

Sure. Thanks, Greg. This is Jen. Answer. I would say that our catastrophe strategy is constantly evolving.

Speaker 3

So things are in that space are happening all the time, whether there are events or no events answer. Can impact how you're approaching that segment and the various costs, providing that business as they change over time as well. So this latest chapter, answer. We are revisiting and have revisited throughout 2022 as we anticipated some change in the reinsurance market. And answer.

Speaker 3

Ian, of course, provided something to talk about. And so that also had us looking at what we needed to do. Throughout 2022, answer. We had been increasing rates throughout the year and we anticipate that that trend is likely to continue. We phoned in on terms and conditions, watching deductibles, coinsurance, things of that nature to make sure that We are properly covering the exposure, but also sharing the loss with our insurers where that makes sense, depending on All of the factors that drive the outcome.

Speaker 3

So part of it is premium, but part of it is coverage as well. So you have to see how all that kind of comes together. So going forward, it's going to be similar to before. We're going to be very active if an event happens in helping our insurers During that time, boots on the ground, which is what we've emphasized a lot in 2022, that gives us really the best sense answer. What's needed in that market and how we need to continue to evolve, that's really the best input is from our insurers and also our producers to some extent as well.

Speaker 3

So I would say we're not intending to grow exposure significantly in 2023. We're looking more to optimize what we have on the books. Answer. And so that's reflected in the fact that we did not buy additional reinsurance limits on January 1. So we'll work within the capacity we have At this point in time and continue to have really attractive returns hopefully on that portfolio.

Speaker 4

Answer. The answer makes sense. Thank you.

Operator

Our next question today comes from Casey Alexander from Compass Point. Your line is now open.

Speaker 5

Answer. Hi, good morning and thank you for taking my questions.

Speaker 1

I have two

Speaker 5

questions regarding answer. One is, with the increased rates but also the increased retention, is it reasonable to think of more answer. Seasonal volatility of your earnings stream with higher margins in non cat quarters and obviously a little more impact in cat quarters. And then as a follow-up to that question, we've heard tell of potentially more capital coming back to the market In the June reinsurance renewal period, if some of that seems reasonable, does that provide you an opportunity at the June renewal period To add on some additional coverage that might cover some of the increased retention that you've taken down at this point in time.

Speaker 2

Answer. So Casey, this is Craig. I'm going to jump in here, although I think Jen is fully capable to answer the question. But the I mean, certainly, there'll be a little more volatility. I mean, although I would argue there's a lot more premium that's going to be that's going to offset some of that volatility.

Speaker 2

So we're going to have a lot more premium in the pool. So from a ratio standpoint. I'm not sure that you're going to create a lot more volatility from a seasonal standpoint, but certainly there will be more by raising your retention. To answer your second question, absolutely. Are we in the or will we be open to adapting our strategy?

Speaker 2

As Jen says, it changes every day. It adapts To the constraints that we have, if there's opportunity for capital to reenter the market or come back to the market and realize that the rates We're a little bit above what we believe were fair. Certainly, we would take advantage of opportunity. We think there's going to be plenty of opportunity out there. So as Jen mentioned, we optimize their portfolio.

Speaker 2

We're going to have a lot of options in regards to what we want to write, what we don't want to write. Answer. We've already seen that, by the way, in the last couple of months of 2022. We expect to continue to see that. Answer.

Speaker 2

And if you recall last year, just to your point, I mean, we added capacity during the year as we saw there was opportunity. If we continue to see the opportunity at a and acquire that capital at a reasonable price, we could certainly take advantage of it.

Speaker 3

Answer. Yes, I'll just add if I can, if you think about volatility, we did retain a little bit more on the casualty side We'll continue to evaluate that through the year as we renew other reinsurance coverage. The point being, we have a very diverse product portfolio. Answer. And while a lot of our products do very well on a consistent basis, there's some that have a miss one quarter or another and the diversity of our portfolio steps answer.

Speaker 3

And it's very good results overall. So if you look at our results over the 27 years, there are segments answer. I have had an underwriting loss in one of those years, but the other segments stepped up and provided us a nice underwriting profit on a growth basis even for those years. So answer. I think that diverse portfolio is really a big plus for us and I would point to that a little bit to answer your volatility question.

Speaker 5

Answer. All right.

Speaker 1

Thank you. Secondly,

Speaker 5

was that a Fairly large increase in your NII and I heard your comment that some of that may have come from Investing short term proceeds from Maui, Jim, do you have a number that is more of Reflective of a recurring NII rate, I mean, how much should we strip out of that $28,000,000 that was sort of bonus money that came before you paid out the dividend and the taxes? Answer.

Speaker 1

Yes. Hey, Casey, it's Aaron.

Speaker 2

I'll take that one. Yes, we

Speaker 1

fortunately, short term rates We're higher than they've been in a long period over a long period of time.

Speaker 2

And cash actually has a return on it these days, answer. Which did help us

Speaker 1

in the quarter. It probably represents about $4,000,000 of kind of bonus investment income in the quarter answer

Speaker 2

from those short term proceeds

Speaker 1

that were invested very quickly after we received them on ninethirty.

Speaker 5

Answer. Okay, great. Thank you very much. Appreciate your help.

Speaker 2

Thanks, Casey.

Operator

Our next question today comes from Meyer Shields from KBW. Your line is now open.

Speaker 6

Answer. Great. Thanks. Good morning. And one quick question and one maybe bigger picture.

Speaker 6

On the quick side, Todd, if I didn't miss Here, you talked about adjusting the exit year picks for casualty and property, but not surety, which had a phenomenal underlying loss answer. Did I just mishear or is there something else going on in surety?

Speaker 1

Nothing else going on, Maher. I mean, I think we're being cautious there certainly, answer. Given the economy and that type of thing, I mentioned specifically property because it was answer. Larger on the current accident year, if you will, the 4 points and casually just because it is a much bigger book and certainly way to answer. But nothing unique on the Sherry side, no.

Speaker 6

Okay, fair enough. Answer. And then I'm thinking about Jen's comments about how you're maintaining sort of the overall exposure base In property, and I'm wondering whether when you look back the portion of excess capital That you retained from the Maui Jim proceeds. Looking back, does that seem like it was the right amount now that you have theater clarity on reinsurance?

Speaker 5

Answer.

Speaker 3

Sorry, this is Jen again. With our diverse portfolio, we kind of look at the entire portfolio as we evaluate Capital adequacy, and I would say given the growth of our portfolio over the last few years in particular, you think about what drives answer. The need for capital, that additional capital really does support the current and some near term growth that we think could happen in the future.

Speaker 2

Answer. And may I just add, and Tom may have been up there too. I mean, I do say that retaining that amount of capital gave us the flexibility answer. And the options that we talked about is increasing co participations and retentions, it gave us some answer. Flexibility in regards to what we want to do.

Speaker 2

I think we didn't want to be totally at the mercy of the reinsurance market answer. Given the abrupt change in appetite. So I don't know if we actually used all that, but it gave us the

Speaker 1

answer. No, that's perfect.

Speaker 6

Thank you so much. I appreciate it.

Operator

Our next question comes from Mark Dwelle from RBC Capital Markets. Your line is open.

Speaker 7

Answer. Yes, good morning. I guess continuing on the reinsurance theme as you Correctly prognosticated. When you think about trying to pass along your 40% rate increase To customers on renewal business, on property and cat exposed business. I mean, what does that amount to sort of a 20% or 5% rate increase that your customers would need to take in order to match the increase that you've paid?

Speaker 3

Answer. So this is Jen. I would say we've already built in some rate increase throughout 2020 To anticipating this cost, and I'd like to take a moment to talk about our customers. So as we look at our renewal process, answer. We call 30 to 60 days out so that we can help our insurers manage their business.

Speaker 3

So they've got a lot of increased costs already. They've got answer. Increased employee costs, they have, in some cases, increased gas and transportation costs, all kinds of costs that are going up, we're one component of their business. And we try to help manage their ability to stay in business by not taking too drastic of action. Answer.

Speaker 3

In contrast, I would say, the reinsurance market acted a little more quickly on their change in both attempted change in coverage as well as answer. And so it's difficult to turn on a dime and pass that along, nor is it really something you want to do when you're trying to be very consistent in the primary market. So we'll continue to push on each renewal what makes sense. I mean, we are individually underwriting this business, but in particular in the state of Florida, for example. So as the business comes in, we're looking at all the details of that exposure and that location and the various dynamics in that area To understand what has changed from the prior year, and yes, our costs have gone up.

Speaker 3

So yes, we will increase costs to some extent. We're going to try to manage it over time, so that our insurers can continue to be insured. The danger of this abrupt change answer. Is that the insurance marketplace actually decreases because people will attempt to buy less coverage answer. And once they start doing that, that's never going to come back.

Speaker 3

And that's a shame for the industry because then the opportunity decreases. So answer. In partnership with our brokers who are accepting a little bit less commission, we're able to provide that change in coverage and terms A little more gracefully to our insurers.

Speaker 2

I mean, I would just add to that, that you know

Speaker 7

That was actually going to be money. Adjustments to our

Speaker 2

answer. Well, I was just going to add Mark, but just in addition, we did after updating our benchmark pricing answer. For the additional reinsurance costs, I mean, we still believe that our business is priced above our benchmark pricing to hit a targeted return. It doesn't mean we're not going to answer. Try to get more rate and pass some of this along, but we also want people to be comfortable that we believe current market pricing is still in excess of what we think answer.

Speaker 2

What our benchmark pricing is, so a lot more of the market. I mean, go out

Speaker 7

of the range That's definitely helpful.

Speaker 1

Answer. Okay.

Speaker 7

I mean that's helpful. And answer. Jen's comment, I mean, was actually going to sort of be my next question was, are you seeing any evidence answer. That customers are basically doing what you did in raising retentions and lowering changing their limits answer. Strategy, such that I mean, I know from your perspective, you might be getting whatever a 20% rate increase, but in fact, The actual amount of premium growth would be considerably smaller than that.

Speaker 7

Are you seeing that behavior yet or that's something that we would anticipate over 2023?

Speaker 3

Answer. Yes, Mark. We are seeing that particularly in Florida, where insurers are buying full limit coverage for their fire answer. And they have to work with their banks or their mortgage providers to make sure that that all passes muster, but that is something that we're witnessing

Speaker 7

answer. It's definitely consistent with some comments that one of the insurance brokers made earlier this week. Answer. Was there something you were adding, Craig? I'm sorry.

Speaker 2

Answer. Obviously, deductibles are certainly increasing on a percentage basis. I mean, the management deductibles are increasing pretty much across the market, not just

Speaker 7

answer. Okay. Thanks for all of that. You had mentioned in the answer. That you were pulling back from some of the cyber liability business.

Speaker 7

Answer. Is that something you can quantify in terms of how many dollars of annual premium run rate that had been, Just really to run rate what the outlook would be for the upcoming year?

Speaker 3

Sure, Mark. We actually exited that business in the during the Q4 last year. So this was the year of runoff, which we've just completed

Speaker 7

from our

Speaker 3

large account side.

Speaker 7

Answer. I had that confused. My mistake. And changing gears over on the investment side, I feel almost feel obliged to ask Craig, what he's going to do with the Myo Jim proceeds even though I already know the answer because I've been asking you for a year now. But I guess that's what I am going to ask is, Are you still considering or evaluating other equity investee opportunities or is that something that answer.

Speaker 7

You're content with just the prime business and if an opportunity falls in your lap, you'll look at it, but you're not really seeking anything there?

Speaker 1

Answer. I'll

Speaker 2

say something maybe Aaron will join in. But I mean, certainly we're always looking for opportunities. Every day we look for opportunities. So we find a good opportunity for an investment that we would take advantage of that.

Speaker 1

Answer. I'll only add, Mark, old habits die hard, I

Speaker 2

guess, in asking those questions around Miogen proceeds. Answer. We are investing

Speaker 1

every day, general account assets

Speaker 2

of the company and the Maui Jim answer. Situation going all the way back to the mid-90s was a very unique situation for us, definitely. Answer. So we tend to look a lot more things, as Craig mentioned, a little closer to home, I'll call them, in terms of in our space or around our space, answer.

Speaker 1

But we do look a lot.

Speaker 7

Okay. Thank you. That's all my questions.

Operator

Answer. Our next question comes from Matt answer. Carletti from JMP. Your line is now open.

Speaker 1

Hey, thanks. Good morning. Apologies in advance for another reinsurance question, but answer. Can you help us just with maybe the question is kind of how

Speaker 4

did the dollar spend answer. On the property side, I mean, I know rates went up 40%, 45% across the two treaties, but obviously, you're retaining a lot more of The most expensive layers. So as we think about kind of gross net retention, like what sort of order of magnitude or dollars if you can, might the dollar spend change there?

Speaker 3

Answer. Let's see. This is Jen. Answer. I would say, it will depend, of course, ultimately on what our rate change is for 2023.

Speaker 3

Answer. So we're not anticipating a material change given we expect that the rate increases will continue to some extent. Answer. But there is some additional costs obviously. So it might be a point or 2 of retention that's lower, but it's not going to be significant.

Speaker 1

Answer. Okay, great. Very helpful. And Craig, best of luck to your chiefs this weekend.

Speaker 3

Answer. Well,

Speaker 2

thank you. We'll take all the help we can get.

Speaker 1

He has the Chiefs' nest on right now.

Speaker 2

Take all

Speaker 1

the help we can get. Answer.

Speaker 2

Thanks.

Operator

There are no further questions at this time. So I will turn the conference back over to Mr. Craig Cleothermos for some closing remarks.

Speaker 2

Sure. Thank you all for joining us. Answer. Again, we think it was a good quarter, good year. We're just going to get back to work, talk to

Speaker 1

you next quarter. We're just going to keep doing what we do.

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Earnings Conference Call
RLI Q4 2022
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