Prepared remarks
Good morning, and welcome to RLI Corp. Second Quarter Earnings Teleconference. After management's prepared remarks, we will open the conference up for question and answers. 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 and expectations for the future. As always, these forward-looking statements are subject to certain factors and uncertainties, which could cause actual results to differ materially. Please refer to the risk factors described in the company's various SEC filings, including in the annual report on Form 10-K as supplemented in Forms 10-Q, all of which should be reviewed carefully. The company has filed a Form 8-K with the Securities and Exchange Commission that contains a press release announcing second quarter results. During the call, RLI management may refer to operating earnings and earnings per share from operations, which are non-GAAP measures of the financial results. RLI's operating earnings and earnings per share from operations consist of net earnings after the elimination of after-tax realized gains or losses and after-tax unrealized gains or losses on equity securities. Additionally, equity in earnings of unconsolidated investees and related taxes are excluded from operating earnings and operating EPS to present a consistent approach and exclude all unrealized changes in value from equity investments. RLI's management believes these measures are useful in gauging core operating performance across reporting periods, but may not be comparable to other companies' definitions of operating earnings. The Form 8-K contains a reconciliation between operating earnings and net earnings. The Form 8-K and press release are available at the company's website at www.rlicorp.com. I will now turn the conference over to RLI's President and Chief Executive Officer, Mr. Craig Kliethermes. Please go ahead.
Well, good morning, everyone, and thank you for joining us today. With me are Aaron Diefenthaler, our Chief Financial Officer; and Jen Klobnak, our Chief Operating Officer. Before we begin, I'd like to thank our associate owners. Their hard work and excellence helped RLI earn recognition as Ward's Top 50 Property and Casualty performer for the 36th consecutive year, the only company to achieve that distinction every year since its inception in 1991. We are pleased with another quarter of profitable growth. We generated an 86% combined ratio, grew gross premiums written by 3%, increased net investment income by 17%, produced a 25% return on equity and returned significant capital to our shareholders through both a special dividend and share repurchases. Those results reflect another quarter of disciplined execution across our diversified specialty portfolio. Markets change, our principles don't. One other thing that hasn't changed: insurance is still a relationship business. Our business partners choose RLI because they know our people are accessible, empowered to solve problems and consistently show up through every phase of the insurance cycle. We help customers better understand risk, tailor coverage to their needs and deliver better claim outcomes, lowering their cost of risk. That's how trusted relationships are built and it's become one of our greatest competitive advantages. When we step back, this quarter reinforces what we have believed for more than 60 years: strong relationships, disciplined underwriting, sensible capital management and continuous improvement remain the foundation of our long-term success. Those principles are producing results today, and they leave us optimistic about the opportunities ahead. With that, I'll turn it over to Aaron to walk through the financial results.
Thanks, Craig, and good morning, everyone. Yesterday, we reported second quarter operating earnings of $0.83 per share versus $0.82 last year. The results reflect solid underwriting performance and a consistent increase in investment income. As a reminder, and as referenced by the operator, beginning in the fourth quarter of 2025, we changed our definition of operating earnings to exclude equity in the earnings of unconsolidated investees and the related taxes. All prior period comparisons in the release reflect that change. On a GAAP basis, second quarter net earnings totaled $1.82 per share compared with $1.34 in the year-ago period. The difference between net earnings and operating earnings was primarily influenced by the strong performance of our equity portfolio. We recognized $103 million of unrealized gains on equity securities during the quarter compared with $44 million last year. Realized gains were $9 million in the quarter, reflective of modest portfolio rebalancing. Underwriting income totaled $59.9 million for the quarter, and our overall combined ratio was 85.6% compared to 84.5% last year. The loss ratio improved 0.4% to 45.5%, while the expense ratio increased 1.5% to 40.1% due to personnel-related costs, acquisition expense and investments in technology. Results benefited from $39.8 million of favorable development on prior years' loss reserves compared with $27.6 million in the second quarter of 2025. The quarter also included $10 million of net incurred losses from 2026 catastrophe events. As Craig mentioned, overall growth in gross premium was 3%, in line with the first quarter and again led by casualty, which was up 11%. Growth in this segment was also on trend with personal umbrella and transportation being the primary drivers. Underwriting profit for casualty resulted in a 99.3% combined ratio, bolstered by $13 million of favorable development on prior years' reserves. For clarity, in casualty, the $13.7 million of favorable development disclosed in the earnings release was modestly offset by $0.5 million of reserve strengthening on prior-year catastrophe activity. Notable contributors to casualty's overall favorable development were excess liability, transportation, our professional services group and executive products. I'll also note that there was about $1 million of 2026 catastrophe losses in casualty associated with our package businesses. For property, the combined ratio was very strong at 56.8% on lighter catastrophe activity at $9 million and $23 million of favorable prior-year development from both marine and prior-year catastrophe events. While the competitive dynamics for E&S property persist and the segment's gross premium was down 6%, we continue to see opportunities to buy business at an adequate rate and have experienced persistent growth in Hawaii homeowners and marine. Surety posted a solid 87.2% combined ratio, modestly better than last year and supported by $3.4 million of favorable development. The loss ratio improvement for surety was partly offset by a 3-point increase in the expense ratio due to continued investments in infrastructure and higher acquisition expenses. Growth in the segment was muted, down 6% in the quarter as commercial surety faced some headwinds related to a slowdown in our renewable energy business. As usual, Jen will go into more detail at the product level. Turning to investments. Our activity during the quarter was supported by $145 million of operating cash flow. While this is down compared to last year on higher levels of paid loss, it offered meaningful support to fixed income purchase activity, which was accretive with yields averaging 4.9% in the quarter. Net investment income increased 17% to $46 million and continued to be an important contributor to our results. The investment portfolio produced a 3.4% total return for the quarter and a 3% return for the first six months of the year. At quarter end, total investments and cash were approximately $4.9 billion. From a capital management perspective, in addition to our regular quarterly dividend of $0.18 per share, we paid a $2 special dividend in total, returning just over $200 million to shareholders. We also added flexibility in how we return capital with a newly authorized $250 million share repurchase program. During the quarter, we were active in the market and repurchased approximately 235,000 shares at an average price of $51.25. At June 30, around $238 million remained available under the authorization. Putting it all together, comprehensive earnings were $166 million or $1.80 per share compared with $143 million or $1.55 per share last year. Adjusting this result for the dividend and share repurchases, book value per share increased 11% from year-end 2025. We are pleased with our second quarter and first half performance. On a year-to-date basis, our results are very consistent between quarters in terms of both top line and underwriting profitability. We generated another quarter of combined ratios in the mid-80s, continue to benefit from higher investment income and return a meaningful amount of capital to shareholders while maintaining a strong balance sheet. And with that, I'll turn it over to Jen for more detail.
Thank you, Aaron. I'll begin with a few comments on the market environment that are relevant across many of our product lines. Market conditions continue to evolve with increased competition, creating opportunities for carriers to differentiate through underwriting expertise, financial strength and most importantly, service. Producers are evaluating a broader range of market options as coverage offerings expand and commission structures remain competitive. We target producers and insurers who value stability and recognize RLI as a long-term, financially strong, service-oriented partner. We remain flexible on pricing where appropriate, while maintaining discipline in our coverage, providing clarity for our insureds when claims occur. Our customized underwriting approach continues to be a meaningful differentiator, allowing us to tailor solutions to individual risks rather than relying on broad underwriting mandates. While many carriers and MGAs continue to emphasize digital capabilities, we believe insurance remains fundamentally a relationship business. We are leveraging technology to enhance our underwriting processes and improve efficiency while continuing to invest in in-person engagement with our producers. These touch points help us better understand their needs, deliver responsive service and position us to win profitable business. Our reputation as a stable, dependable carrier continues to resonate with both producers and insureds, and that proven approach contributed to another quarter of excellent results. Turning to our segment performance. Casualty premium rose 11% with rates up 10%, which matches the rate change from last quarter. Personal umbrella premium was up 26%. Rate increases totaled 17%, influenced by higher approved rate filings in California and Florida. Rate increases in the second half of the year will be tempered as some of those filings have already earned through the book, and our next approved rate increase is taking effect on January 1. Renewal retention is down 2 percentage points from last year due to underwriting adjustments and cumulative rate increases implemented over the last several years. We achieved growth in non-coastal states, which are more favorable from a litigation environment standpoint. The combination of rates and targeted growth position this already profitable book of business for continued strong performance. Transportation premium increased by 19% in the quarter, including an 8% rate increase. Several accounts renewed at or near expiring as strong account performance and prior rate actions supported pricing. This is an example of our focus on rate adequacy at the account level to retain profitable business while keeping an eye on loss trend at the portfolio level. New claim counts continue to decrease for the second year in a row. This was another factor that provided confidence in our direction and allowed us to recognize a reserve release this quarter. We are seeing more new business opportunities with several competitors pulling back in certain geographies or altogether. This is partially offset by some standard markets using the auto to get to the GL or package business. Given the loss severity trends in this market, we are emphasizing risk selection and focusing on insureds who value our in-house loss control services, which are designed to reduce our insureds' cost of risk and improve overall road safety. We are getting plenty of opportunities with submissions up 9% in the quarter. Casualty brokerage premium was down 6% in the quarter as competition has increased from other E&S carriers, MGAs and standard markets. Producers and insureds are looking for broader coverage for less rate. The industry is meeting those requests while we are picking our spots. The good news is that submissions were up 14% in the quarter, so our marketing efforts are paying off in that we are seeing more new business opportunities. Meanwhile, our auto pricing within the excess liability coverage has reduced our competitiveness on contractors' annual practice policies. Even so, rate increases on the excess remained strong at 7%, up slightly from last quarter. While competitors are increasing limits offered on the excess, our ability to offer $10 million in capacity through all phases of the market cycle is still a differentiator, and we continue to deploy it selectively considering the severity inherent in this product line. Our casualty portfolio is rounded out with admitted lines products, including professional liability and package coverages for architects and miscellaneous professionals, small contractors packages and directors and officers coverage. These markets are fairly stable, and we are achieving slow, steady growth and improving underwriting profits. We introduced a new non-admitted offering this month in the entertainment and amusement space, which is just now accepting new business submissions. These product lines contribute to our diversified product portfolio and allow us to take advantage of opportunities in various casualty spaces as they arise through the market cycle. Surety premium was down 6% in the quarter, primarily due to a couple of nonrecurring items, including moderating renewable energy construction activity and customs bonds that required larger limits last year. We also made the decision to exit a few larger accounts where we no longer believe the risk-adjusted returns justified the exposure, reinforcing our discipline when the risk no longer aligns with our underwriting standards. While the largest contractors continue to benefit from strong demand tied to data center construction, large public infrastructure and health care, activity among our targeted small and mid-market contractors has been a little more measured, although we are seeing bid activity starting to increase. Across the industry, surety loss ratios are beginning to move higher, and we believe that will create attractive opportunities over time as the market responds. With an 87% combined ratio and an entrepreneurial mindset, we are in a position of strength to take advantage of those opportunities when market disruption occurs. The Property segment's premium decreased 6% while producing a 57% combined ratio. The E&S property industry continues to experience heightened competition. We have heard that an individual submission can be sent out to over 45 markets. Some of our brokers have reported receiving unsolicited quotes based on last year's submission. New markets are coming in. Standard markets are getting back into classes that they exited during the last hard market. They are offering broader terms for less premium. As a reminder, we saw our first rate decreases on hurricane-exposed risks in the third quarter of 2024 and for earthquake risks in the first quarter of 2025, which means accounts are just now receiving rate decreases on their second renewal during the soft market. The rates we are achieving are approaching our benchmark price, which equates to our targeted risk-adjusted return on the business. Our underwriters are proactively protecting our renewals and pursuing new business opportunities by offering more quotes, which oftentimes include multiple coverage options. We are increasing limits by moving from the primary policy to full-limit coverage or providing larger shares of layers within an insurance tower. We are holding the line on terms and conditions that will matter when we handle the claims after a loss. This is evidenced in our renewal retention ratio, which is down to just under 70%. We see more responsible behavior from competitors who are putting their own capital at risk. We will maintain discipline, own the underwriting results and fulfill our commitment to insureds when losses occur. Our producers remember how we help them solve problems during the recent hard market. Our stable, responsive market presence with underwriters who have the authority to make decisions is a differentiator. Hawaii homeowners premium grew by 9%, including a 12% rate increase. New business opportunities have slowed due to competitors expanding their appetite and the conclusion of a book rollover. However, our local team continues to win new business based on outstanding service and our reliable long-tenured presence in Hawaii. Profitability rebounded with a quiet loss quarter following a busy first quarter with the Kona low-wind events. We are pleased with Marine's results this quarter. The team grew premium by 7%, including a 1% rate increase in a market that is becoming increasingly more competitive. In a throwback to our founder, Jerry Stevens, this team demonstrates hustle. The broad definition of marine risk requires creative problem solvers to evaluate the variety of exposures presented. Our team produced a healthy underwriting profit based on consistent discipline in inland marine and improved results in a difficult cargo market. We renewed a couple of reinsurance agreements during the quarter, including marine, executive products, professional liability and our earthquake surplus share treaty. Reinsurance market conditions were favorable with stable coverage and rates flat to down on all treaties. We ended the first half of the year with an 86% combined ratio while growing 3% in an evolving market. We benefit from 61 years of underwriting experience in a variety of market conditions. Our experienced underwriters, claim professionals and support teams are in constant communication to provide feedback and adjust our approach to take advantage of profitable growth opportunities. These are available within pockets of each of our segments. As employee owners, our decisions on where to deploy our capital are aligned. We are approaching the back half of the year with strength and confidence in our approach. Now I'll turn the call back over to the moderator to open it up for questions.
Questions and answers
Your first question comes from Michael Phillips with Oppenheimer.
I want to talk about casualty growth for a moment. You mentioned the umbrella and transportation books as some of the drivers this quarter and last quarter as well, I think. You've been taking a lot of rate in both segments. I want to get a sense of how much of the growth from last quarter to this quarter is rate-driven, since you've also mentioned many new business opportunities. It makes me think you're fairly optimistic about growth in those areas going forward without significantly impacting margins. When I look at the casualty loss ratio, it's high, around a 67% accident-year loss ratio. That's higher than in prior quarters and prior years. So I'm wondering about the growth opportunities in umbrella, casualty, and transportation given the new business and the rates you're seeing.
Yes. Great question, Michael. Thank you. I think we are seeing a lot of growth opportunities in those spaces, as you mentioned, and I appreciate you commenting on rate. If you look at auto rate overall it was 10% for the second quarter across our various types of commercial auto coverages. That's down a bit from the first quarter. Some of our accounts in transportation, which can be large, renewed closer to expiring because they had great loss experience. They bought into our loss control services and are improving their results. That translated into them saving money on the renewal, which is what we're looking for. Outside of that, the transportation marketplace is disrupted. There are markets that we compete against that are reducing their appetite either in a particular geography or altogether, and that has resulted in us having more new business. For one thing, we are going out and seeing more producers. So we're really leaning into marketing activities. Some competitors are limiting the amount of limit that they're putting out. For example, a public bus company needs to purchase $5 million of limit. If one competitor is only putting out $2 million of limit, that creates more work for the producer and the insurer. Our $5 million solution is very helpful in that scenario. So we are seeing more opportunities in transportation, and we are taking advantage of that by offering more quotes and are very excited that some of those are binding at the pricing that we think is adequate to cover the loss experience for that account. We have the benefit of loss experience in the transportation area, so we check the data around that to make sure we're comfortable with it. We think that's well-priced business that we're putting on the books. When it comes to personal umbrella, we are seeing a good amount of rate. We had 17% rate in the quarter, which matches the rate increase for the year. We are looking at rate adequacy by state on a regular basis every quarter. We have more approved rate filings that are going to be effective early next year, which is great. In addition to that, we work with our producers closely to monitor and direct the type of business that comes onto the books. We've emphasized getting away from some of the coastal states where litigation is more challenging or severity is larger, and we're moving more towards non-coastal states, and we're seeing the mix of the book change in that regard. We also monitor various risk characteristics, and we're seeing those data points improving. That requires regular contact and communication with our producers. Many of them have monthly or quarterly calls where we talk about their book in particular, what we're seeing and what we'd like to see going forward. It's a very fruitful conversation. On commercial umbrella, we are seeing it slow a bit. We took action last year by reducing our appetite on the auto portion and by increasing our rates and asking more questions around the auto exposure. We would like someone with a lot of auto exposure to purchase an auto liability policy rather than having it flow into their umbrella. So we try to encourage that behavior. We see standard markets and others being a little more aggressive so that they can get the profitable GL coverage on their paper. That has been a headwind, but we feel it's important in this litigation environment to be careful around those auto coverages. Outside of that, our team has done a great job of individually underwriting accounts. If an account has an issue at a particular location, we can address the issue for that location without a blanket exclusion across the board. That meets the insured's needs, the producer's needs and our needs. We're digging deeper into submissions to make sure that we're providing needed coverage but not extra coverage. That summarizes those three marketplaces.
Great. That's always super helpful. If I could turn to the expense ratio for a second. Aaron mentioned in his comments some of the pressures from acquisition and investments. Given all that, the last couple of quarters have been a little higher than expected. How should we think about the expense ratio components over the near term?
Yes. I'll characterize the 1.5-point increase in the expense ratio versus last year as two-thirds people-related and one-third acquisition-related. About half of the people-related increase is coming from incentive compensation structures. We've had strong performance in the first half of the year and strong equity market returns, which is supporting our book value growth. The other third is really acquisition cost, some of that reflecting investments and some reflecting mix of business and where the ultimate commission comes in on an overall basis. That's how I would break it down.
Okay. Last one, if I could, on your buyback program. A pretty good-sized buyback this quarter, about $12 million at a good price. It seems like you got in in May when the price was good. Could you remind us of the philosophy on buybacks? Is it selective repurchases? And do you have any timeframe for completing the $250 million authorization?
Yes. There's no formulaic answer around this. By the time the program was authorized by our Board and we had infrastructure in place to transact, we were into the beginning of June. We really had about two weeks before the quiet period at the end of the quarter during which we could transact. So that was a short time frame. We consider the share repurchase program a complementary form of returning capital and not mutually exclusive with special dividends. You saw the announcement of the special dividend and the authorization announced and we actually purchased some shares in the quarter. There is a selective element to repurchases going forward, but I don't have a timeframe for exhausting the remaining $250 million authorization.
Your next question comes from the line of Hristian Getsov with Wells Fargo. Please go ahead.
My first question is on excess casualty. A large national carrier that reported earlier in the month talked about excess casualty trends in the double digits. How do you feel confident about writing excess casualty given you said pricing was up about 7% and holding margins?
Yes. I would say our excess casualty book is mostly construction business. When you look at our book specifically, we believe we are pushing rate where we can. Construction business is overall a profitable unit for us, as evidenced by reserve releases and profitability in our book. There is some competitive pressure, so we balance getting rate with keeping our profitable book. We individually underwrite those accounts, try to hold on to renewals because we know them well and make our best effort on new business to take advantage of opportunities. If you look at our rate versus our trend, we're close and we're basically keeping up with trend. We're comfortable with that given our starting position. I like to think about rate adequacy rather than just rate change, and when I look at the rate adequacy of that book, we're comfortable where we're at.
I'll just add that our excess casualty typically is first-layer excess casualty. About half of that attaches above our own primary, which we handle the claims for. We're controlling the claims, which gives us more confidence relative to someone participating in very high excess where they might not hear about claims for quite some time. We usually hear about them fairly quickly.
Got it. Then pivoting over to property. How are you thinking about growth and underlying margins in this segment as pricing continues to decelerate and likely will continue to? We've heard from some peers about potentially dropping picks for the sake of growth. How rate adequate is that book with these rate decreases and how are you thinking about it over the next 12 months?
Good question. If you look at rate, we have given back a little rate. We're on the second renewal for some accounts, so while we may be tired of the soft market, we've only been in it for a couple of years. We are seeing rates we're quoting that are roughly at 2022 levels, so we've reversed a couple of years but they're still well above some historical points. We evaluate what all the costs are with a benchmarking tool at the underwriter's desk to understand what that account is adding to the portfolio. We consider expected losses, reinsurance, underwriting costs, technology costs and a profit load. We're still achieving our benchmark pricing, which means we're getting the targeted return. Rates are one factor; policy language and terms matter a lot. We're going to be handling our own claims when they happen and need to know what that coverage is. We see some competitors including additional coverages, sometimes with rate decreases, and that's where we draw the line. Our renewal retention ratio has been down and is just under 70%. Some competitors claim they're drawing the line but show retention in the 90s, which raises questions. We don't have a top-line target, which gives us freedom to be responsible when claims happen. We feel our portfolio is well priced and are comfortable with where we're at. We have room to grow from an exposure standpoint, but we'll only do that if the market improves.
Your next question comes from the line of Mark Hughes with Truist Securities. Please go ahead.
Aaron, the uplift sequentially in investment income was pretty strong. Anything unusual or nonrecurring there? Or is this a good baseline on a go-forward basis?
I think the foundations are in place for continuing to grow investment income should the rate environment hold. Today we're seeing 10-year rates up again, which is a solid backdrop as we put the next marginal dollar to work. I referenced the purchase yield side of the equation being roughly 60 basis points above our current book yield. To the extent that rates hold and the portfolio continues to grow, that should be a solid backdrop for us.
I appreciate that. Jen, on inland marine, that has been a good business for you and for the industry as a whole. How do you think that cycle is going to play out? Is there a risk it could get caught up in some of this wider property downdraft? Or do you think it will be a more moderate cycle?
Mark, the inland marine market is getting more competitive and we're seeing that in rate changes. Where we used to get upper single-digit increases, we're now seeing instances where a 1% rate increase feels like a win. We are focused on rate adequacy while holding on to renewals. We are highly individualized in account underwriting to retain profitable business. Marine is broad; anything that moves can be marine, and some business flows between property and marine depending on where that market can get better rates. Right now that's not a major issue, so for us it's about keeping our eye on the ball and having the right people in place to grow selectively. Inland marine remains a healthy space for the industry.
I'll just add that inland marine is a huge space with many niches. We're focused on five or six of those niches and we aim to be narrow and deep.
Your next question comes from the line of Andrew Andersen with Jefferies. Please go ahead.
You had mentioned surety loss ratios are beginning to rise across the industry. Could you talk about where you're seeing signs of that deterioration? How quickly do you think the market typically responds here as there hasn't been a surety cycle in quite some time?
You're right — there hasn't been a surety cycle for a while. We've been patient trying to see a surety cycle, and it hasn't arrived broadly. We have some insight into where industry losses are coming from, though we haven't seen many ourselves. Industry surety losses have been mainly on the construction side, whether large construction projects or some renewable energy projects that have seen issues. There have also been a couple of fairly large commercial surety losses in the industry. We observe these from a distance and hope a cycle will occur so we can take advantage of it. For us, we want to keep our book clean so we're not cleaning up someone else's issues and so we can be positioned to take advantage of opportunities when they arise.
Aaron, on casualty underlying loss ratio, it seems up about 70 basis points year-to-date compared to the first half of '25, and it increased a bit quarter-over-quarter in Q2. Can you talk about the drivers of that change?
Yes. The slight sequential increase quarter-to-quarter is primarily driven by mix of business. Where we've been growing in the first half of the year and the characteristics of that new business influence the underlying loss ratio. We are cautious in those businesses and want to ensure our process is sound and that we reserve appropriately to reflect uncertainty in the business. So mix is the main driver.
I'll add that a lot of our growth is coming from personal umbrella and transportation, which are wheels-based businesses. Those are areas where we've been operating for decades and have historically outperformed the industry, but we remain cautious when growing in products with higher historical severity and where legal system effects can be more prevalent. We have confidence in our people and wouldn't lean in unless we believed in our team and the business, but we will remain cautious.
Your next question comes from the line of Gregory Peters with Raymond James. Please go ahead.
Throughout your prepared remarks, you referenced service as being a differentiating feature of your value proposition. I think you talked about using that as a lever to offset competitive pricing pressures. Could you go deeper into that? How does the service argument help offset when a competitor comes in with a renewal rate that's much lower and how do you win that argument?
It varies by business unit. In transportation, we literally provide services through our in-house loss control group that works with a prospect even before they become a customer to understand hiring practices, driver training, equipment maintenance and data usage like telematics and camera systems. We help them use that data to improve driving practices and provide training courses. Those are literal services that many competitors do not provide in the same manner. In other areas, responsiveness matters: answering the phone and having a person available is a differentiator. We hire experienced people who know the space and can respond to producers. In First Umbrella, for example, we have monthly or quarterly calls with some producers to ask how we're doing and get direct feedback on systems and processes. By gathering and responding to that input, we improve the ease of doing business. Each business unit is challenged to win on service because simply buying business in a soft market can ultimately be poor business. We aim to win by providing real value to our customers.
I'll add that our underwriters are empowered and have the authority to make decisions. They're running their businesses and can get back to brokers quickly. Often a quick no is better than a long uncertain process. At the end of the day, brokers like our people; they find them authentic and easy to work with.
Can I pivot to the umbrella line? You called out California and Florida and said you have another rate approval effective January 1. Is that a nationwide rate increase or are your umbrella rate actions happening state by state? Any granularity would be helpful.
Typically we file state-by-state as needed. That can vary. In this case, the upcoming filing is a countrywide filing because we're changing infrastructure around it, which requires more technology work to implement. It's a little unusual that it aligns nationally, but it's because of the implementation effort rather than a typical one-off state filing.
Your next question comes from the line of Meyer Shields with Keefe, Bruyette & Woods.
If casualty rate increases are decelerating in the back half, should we anticipate, given the normal written-to-earned lag, a bit more increase in the underlying loss ratio for casualty?
Meyer, we have a lot of mixed factors. Our actuaries will update estimates of prior years' loss ratios, which is the starting point. If we're not getting the same level of rate and loss trend stays the same, math could result in a higher loss ratio. We haven't completed that midyear process yet; we do that twice a year and will have updated actuarial estimates as we proceed.
When we look at the property book now compared to two years ago, how has it changed? Specifically, how much of your premium is there to cover attritional losses versus catastrophe and weather losses and how has that changed over two years?
If you think about our mix today, as we've been growing we've been putting on relatively more rate and exposure in the catastrophe-exposed space versus the non-cat space. Historically, our book had more concentration in the Midwest with fewer hurricane and earthquake exposures and more habitational business. We learned from that that habitational had underpriced elements, maintenance challenges and coverage issues. Since then we've shifted to maintain more concentration in hurricane- and earthquake-exposed states rather than the middle of the country. When spring storms or tornadoes occur, where they occur matters for potential losses. As premium has decreased recently, we've seen more decrease in the cat-exposed areas, while the non-cat areas have been more stable.
To help further, the attritional, non-hurricane or non-earthquake loss ratio tends to be higher on an expected basis and has a faster feedback loop — we see those claims more frequently. It's also less volatile. The catastrophe portion has historically had a lower expected loss ratio but can be more volatile. How the total behaves depends on the mix going forward.
Your next call comes from the line of Mark Hughes with Truist Securities. Please go ahead.
Ceded premiums in property have been down four or five points year-over-year the last couple of quarters. Your ceded premium has been around 27-28% the last couple of years. Is the mix changing such that you're going to be ceding less premium?
On the property book, our largest reinsurance renewal is January 1. For the calendar year, the current reinsurance structure reflected pricing that was down and we bought less of a catastrophe tower. So that five-point differential compared to last year should continue for the balance of this year. Everything reaches 1/1 again and we'll see where we're at at that renewal. But yes, at least for the next six months that differential should persist.
On general corporate expenses, you talked about personnel expenses being up and some extra compensation. On an underlying basis, what should expense growth be in corporate?
General corporate expense has been fairly consistent over time unless there is a discrete driver like incentive compensation that causes a quarter-specific increase, which is the case this quarter. Absent incentive-related variability, general corporate is fairly steady.
Your next question comes from the line of Hristian Getsov with Wells Fargo.
Any additional color on how to think about premium growth for personal umbrella in the second half versus the 26% growth you saw in Q2, given your comment that rate increases will moderate in the second half?
It's hard to predict. Our personal umbrella product has over 500,000 policies, so average premium is small and it takes many policies to move the needle, showing we have scale. With rate increases pausing and a shift toward inland states, growth could slow a bit. But over the long term we still see great opportunity. Other carriers have reported poor performance in their personal umbrella books, so demand remains. We want to manage growth to ensure it remains profitable. It's a balancing act between taking advantage of opportunity and preserving long-term results.
I'll add that rate will probably slow, which would affect growth somewhat, but this space is highly disrupted. Disruption is oxygen for our business, so I expect many opportunities. The question is where those opportunities are — if they're in states with higher litigation like California or Florida, we'll be more selective than if they are in Montana or South Dakota.
Your next question comes from the line of Meyer Shields with Keefe, Bruyette & Woods.
When brokers send submissions to 40 markets, does broker commission rate become a bigger part of the competition?
People always want more commission, and brokers often ask. Commission is a factor and it depends on the account. There are many factors in what gets bound, and sometimes the urgency of the producer means they can't wait for a few extra commission points. We do sometimes concede on commission in selective cases, but we manage that alongside other considerations. In a soft market, brokers ask for more commission but their margin tends to be larger than ours, so it's hard for us to share more broadly. We try to be selective.
There are no further questions at this time. I will now turn the conference over to Mr. Craig Kliethermes for closing remarks.
Before we conclude, I'd like to leave you with one thought about what drives our company. Our culture comes down to two basic tenets. We are owners and we care deeply. Ownership means underwriting for profit, continuously improving and focusing on long-term value instead of short-term premium growth. If we can create attractive returns, we'll invest. If we can't, we'll return capital to our shareholders. That's how we've remained financially strong and present through hard and soft markets. And we care deeply. We help customers better manage risk. We stand behind our business partners and our products. We take pride in our company, and we challenge one another to improve every day. It's simple. Simple does not mean easy. Those tenets have guided RLI for more than 60 years, and they will continue to guide us through what comes next. They are the reason we are confident about the future. Thank you for your time, your thoughtful questions and your continued confidence in RLI. We look forward to speaking with you again next quarter.
Ladies and gentlemen, if you wish to access the replay for this call, you may do so on the RLI homepage at www.rlicorp.com. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.