RLI Corp. 2023 Form 10-K Summary
Business context and reporting period
RLI Corp. is a U.S.-based specialty insurer underwriting property, casualty and surety products through three insurance subsidiaries. Operations are primarily domestic and distributed through brokers, agents, carrier partners and digital channels. The filing covers the fiscal year ended December 31, 2023; it is an annual report rather than a standalone fourth-quarter filing.
- 2023 gross premiums written were $1.807 billion: casualty 53%, property 39% and surety 8%.
- Financial strength ratings were reaffirmed at A+ by AM Best, A by Standard & Poor’s and A2 by Moody’s for the applicable insurance groups.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net premiums earned | $1.294 billion | $1.144 billion | 13% increase |
| Total consolidated revenue | $1.512 billion | $1.698 billion | 11% decrease |
| Underwriting income | $173.2 million | $178.2 million | 3% decrease |
| Combined ratio | 86.6% | 84.4% | 2.2 points higher |
| Net investment income | $120.4 million | $86.1 million | 40% increase |
| Net realized gains | $32.5 million | $588.5 million | Prior year included Maui Jim gain |
| Net unrealized equity gains | $64.8 million | $(121.0) million | Improved by $185.8 million |
| Net earnings | $304.6 million | $583.4 million | 48% decrease |
| Diluted EPS | $6.61 | $12.74 | 48% decrease |
| Operating cash flow | $464.3 million | $250.4 million | 85% increase |
Net earnings were depressed by the absence of the $571 million realized gain from the 2022 sale of Maui Jim. Excluding this unusual comparison item, underwriting remained profitable and investment income improved materially.
Balance sheet, debt and liquidity
- Total assets were $5.180 billion and shareholders’ equity was $1.414 billion at December 31, 2023, compared with $4.767 billion and $1.177 billion, respectively, at year-end 2022.
- Investments and cash totaled $3.676 billion, including $2.856 billion of fixed-income securities, $590.0 million of equities, $134.9 million of short-term investments and $36.4 million of cash.
- Fixed income represented approximately 78% of the investment portfolio; 81% of fixed income was rated A or better and 58% was rated AA or better.
- Total debt was $100 million, or approximately 7% of total capital. It consisted of $50 million drawn under a PNC revolving facility and $50 million borrowed from the Federal Home Loan Bank of Chicago.
- Cash, short-term investments and other investments maturing within one year totaled approximately $328 million. The PNC facility permits borrowings of up to $100 million, potentially increasing to $130 million under specified conditions.
- Net unpaid losses and settlement expenses increased to $1.689 billion from $1.576 billion; gross reserves increased to $2.446 billion from $2.316 billion.
- RLI Insurance Company reported statutory surplus of approximately $1.5 billion against an authorized control level RBC of $273 million. Ordinary dividends from the principal insurance subsidiary are subject to regulatory limits; only $7 million of net assets were unrestricted for ordinary dividends at year-end.
Material changes versus the prior comparable period
- Gross premiums written increased 15% to $1.807 billion. Property grew 40%, casualty 4% and surety 6%.
- Property was the primary growth driver, particularly wind-exposed commercial property; commercial property gross premiums increased 55%.
- Underwriting income declined modestly as the combined ratio rose to 86.6% from 84.4%. The loss ratio increased to 46.7% from 44.9%, while the expense ratio increased to 39.9% from 39.5%.
- 2023 underwriting results included $49 million of pretax Hawaiian wildfire losses, $12 million of reinsurance reinstatement premiums and $31 million of other storm losses. The comparable 2022 period included $38 million of Hurricane Ian losses and $13 million of other storm losses.
- Favorable prior-year reserve development declined to $108.5 million from $122.6 million, although all three segments experienced favorable development.
- Net investment income benefited from higher reinvestment yields and a larger asset base. The equity portfolio increased to $590 million from $498 million after strong market performance.
- Financing cash outflows decreased to $238.8 million from $365.3 million, primarily because the 2022 special dividend was $7.00 per share versus $2.00 per share in 2023. The company did not repurchase shares and terminated its $100 million repurchase program.
Guidance, outlook, risks and unusual items
- Management expects healthy specialty insurance market conditions to support profitable growth across much of the portfolio in 2024, while maintaining underwriting discipline.
- For January 1, 2024 renewals, casualty treaty risk-adjusted rate changes were expected to be mid- to high-single digits. Property treaty rate changes were expected to be flat to slightly down, with higher property premium retention from increased co-participations.
- Management expects property rate increases to slow in 2024 and is moderating hurricane exposure as competition increases. Surety growth may also be moderated given economic and competitive conditions.
- Key risks include catastrophe losses, climate and weather volatility, reserve inadequacy, inflation and social inflation, litigation and changing coverage interpretations, reinsurance availability and credit risk, interest-rate and equity-market movements, regulatory restrictions and cybersecurity or vendor failures.
- Catastrophe models indicated a 99.6% likelihood that a single-event net loss would be below 8.0% of policyholders’ statutory surplus under the January 1, 2024 treaty structure; actual losses could exceed modeled results and reinsurance limits.
- More than 93% of reinsurance recoverables were due from reinsurers rated A or better by AM Best and Standard & Poor’s, but RLI remains directly liable to policyholders if reinsurers fail to perform.
- The independent auditor identified unpaid losses and settlement expenses as the critical audit matter because of the significant actuarial judgment and uncertainty involved in reserve estimates. The auditor issued an unqualified opinion, and internal controls over financial reporting were deemed effective.
Investor verification points
- Reconcile underlying underwriting performance excluding favorable prior-year reserve development and catastrophe losses.
- Monitor whether property growth, especially wind-exposed business, remains profitable as competition and pricing change.
- Assess reserve adequacy, particularly in long-tail casualty, transportation, environmental, asbestos and mass-tort exposures.
- Review catastrophe exposure, modeled net losses, retention levels and the availability and cost of reinsurance at subsequent renewals.
- Track investment income sensitivity to interest rates and the $214 million of unrealized fixed-income losses at year-end.
- Verify holding-company liquidity, subsidiary dividend capacity and the refinancing or repayment of the $50 million FHLB borrowing due November 12, 2024.
- Distinguish recurring earnings from the nonrecurring Maui Jim gain recognized in 2022 and the additional $14 million escrow-related gain recognized in 2023.