RLI: rising risk levels to drive sustained rate momentum

RLI has warned of the potential long-term impact of social inflation as well as loss cost inflation associated with rising building, material and labour costs that could prove challenging in this year’s hurricane season as it said it expects rate momentum to continue in the insurance sector.

Speaking on the US specialty carrier’s earnings call this morning after it reported a strong earnings beat that included 25 percent top line growth and an 85 percent combined ratio, president and COO Craig Kliethermes was bullish on RLI’s position in the marketplace.

“We’re seeing widespread growth across almost every product in our portfolio as a result of an improving economy, higher retention rates on renewal business, increased submission flow on new business and rising rate levels,” he commented.

But the executive – who is set to replace Jonathan Michael as CEO next year – warned about claims frequency and severity and said there remains a need to push on rate.

He noted that while claims frequency had slowed during the pandemic, it has begun to climb back to previous levels, as he said the insurer is also watchful of the long-term impact of social inflation.

“We also continue to keep an eye on loss cost inflation associated with rising building, material and labour costs. This could prove challenging as we enter the hurricane season, which will likely increase the cost of rebuilding but also lengthen related business interruption claims,” Kliethermes commented.

He said there is still more opportunity to get rate as the industry continues to underperform overall.

“The industry must more broadly recognize the rising risk levels associated with inflation, the uncertain impact of the pandemic, the possibility of a rising number of severe weather catastrophes and more unique exposures like the recent building collapse.

“We anticipate that these factors will drive and sustain current rate levels and momentum,” he continued.

Kliethermes said the insurer’s underwriting discipline and product diversification meant it can navigate all market conditions, pushing for rate adequacy where needed, and shrinking its position if it is necessary to maintain underwriting margins while growing shareholder value.

As previously reported, RLI’s casualty segment was the biggest contributor to underwriting income in the quarter as it benefited from significant favourable reserve development.

Casualty driver

Rates in the segment were up 6 percent in the quarter, which was at or above loss costs, with rates up “significantly” in excess liability and the select auto markets it competes in.

Rates are relatively flat in primary liability and small package business, however.

Commenting on the casualty pricing environment, Kliethermes said the 6 percent average increase compounded rate increases last year.

But he added that with loss cost inflation likely to come in at another 5 percent or 6 percent next year too, the insurer would need to continue to achieve rate increases to stay ahead of inflation.

In property, the pace of rate change is flattening, but positive across the board with pricing up 8 percent led by catastrophe wind accounts where rates were up 17 percent, the executive said.

Last night RLI reported operating earnings of $49.9mn for the second quarter that were up on the $34.8mn generated in the prior-year period and comfortably ahead of Wall Street forecasts as it delivered top and bottom-line growth driven by its casualty book.

Operating earnings per share of $1.09 compared with the consensus of analyst forecasts compiled by MarketWatch of $0.78 a share.

The overall combined ratio improved from 88.4 percent in the prior-year period to 84.8 percent, including a 9.7 points reduction in the casualty combined ratio to 83.1 percent and a 2.3 points reduction to 84.1 percent in property.