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RLI: Great carrier, strong quarter, excellent year

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While this quarter RLI passed on its common bellwether status for the industry by reporting a week into earnings season, it did not prevent management from delivering an excellent quarter and full-year result.

Even with a drag from Covid losses, 2020 marked the firm’s 25th consecutive year of underwriting profit. Additionally, the firm provided useful commentary on the state of the market, which continues to harden. Like its peers, RLI emphasized that it stands to benefit from strong rate increases and an eventual turnaround in the broader economy.

Pricing momentum continues, while the pandemic’s influence was muted

Off the bat, RLI discussed how pricing momentum continued across a number of its products and that the pandemic’s influence was muted during the quarter. In line with this, the firm’s overall growth in GWP was driven primarily by rate increases and expanded distribution. More generally, RLI’s management appears confident that it is set to see continued earnings growth with the market moving in its favor.

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Growth and rate commentary further highlighted management’s optimism.  For example, in its casualty segment, RLI saw 9% top line growth for the quarter and 6% for the year. Growth for the segment has been widespread with its excess liability business “leading the way”. Additionally, management sees opportunities in its personal/commercial umbrella businesses focused on first excess layers.

Other businesses such as executive products are growing mostly due to rate, and others such as transportation are shrinking due to exposure reductions, seeing 25% revenue declines for the quarter and 40% for the year.

On rate, the casualty segment saw 11% increases for the quarter and 10% for the year, both outpacing management’s expectations for loss-cost inflation.

We have consolidated additional key casualty commentary below:

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As discussed in our Travelers’ note there is continued debate whether this cycle will be similar to rate improvements seen during the 2011-2014 period. While rates started to decelerate heading into 2015, ROEs continued to improve as rate earned in.

Comparable to the casualty businesses, the property segment is seeing strong growth and rate. The group grew top line 15% for the quarter and 11% for the year. Rates are up 11% for the quarter and the year with cat-focused wind/quake businesses seeing rate increases up to 35% for the year.

Below we’ve consolidated additional key commentary:

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The overall commentary compares to Travelers’ pricing highlights which were true to form with their “middle ground” semblance (+8.4% rate BI ex Nat), and WR Berkley which highlighted a market where peers would maintain price discipline given social inflation and the possibility of a reversal in loss-cost trends. Next week, peers including Markel and AFG are set to report and strong focus will likely fall on whether their respective managements expect to see continued rate momentum.

True to its style, RLI underwriting figures don’t miss a beat

Staying true to its past, RLI had a great year and quarter. As noted above, 2020 marked the firm’s 25th consecutive year of underwriting profit. Not only has the firm consistently provided underwriting profits, it has outperformed its peers by an average 6pts a year on its combined going back 20 years.

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For the quarter, RLI saw an 88% combined ratio, a 4.4pt improvement YoY. The result was driven by a 3.5pt drop in its loss ratio to 45.8% as favorable development offset 6.5pts of cat losses. On an underlying basis, RLI saw a 7.6pt improvement in its loss ratio to 48.5%. Covid losses amounted to 1.6pts. The Q4 result included 10.8pts of favorable development.

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On expenses, while the annual figure improved YoY to 40.8% (-1.8pts), the fourth quarter saw a sequential rise to 42.2% (+1.6pts). Management attributed this to various incentive plans related to margins and book value growth which were all strong. The YoY improvement was aided more generally by operating leverage and initiatives that began at the onset of the pandemic.  

Taking a step back, management stated that it continues “to evaluate areas of opportunity for efficiency gains and expense savings, while increasing our investment in technology, particularly those related to customer experience and ease of doing business”.

That said, RLI has historically maintained a high expense load relative to its peers. Some new entrants such as Kinsale boast low cost bases as a means to reduce policy costs, however for names like RLI, putting funds to use intelligently has led to better underwriting/servicing, ultimately paying off in the full overall underwriting profitability.

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All in, the firm’s long track record of quality earnings and underwriting profitably have earned it strong investor confidence, and the stock trades at ~4x book. Interestingly though, while holding the top spot in underwriting consistency amongst its peers, others such as WR Berkley have exhibited higher long-term TVC figures over the past two decades.

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With next week’s print including several specialty players, will they maintain pricing and margin momentum or will there be breakout names who hold the line on the underlying loss trends and reserve takedowns?  

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