RLI Corp. 10-Q Summary
Business context and reporting period
RLI Corp. is a specialty property and casualty insurance holding company operating through casualty, property and surety segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net premiums earned | $211.3 million | $200.8 million | $623.5 million | $587.4 million |
| Consolidated revenue | $236.9 million | $240.6 million | $738.8 million | $645.9 million |
| Underwriting income | $13.7 million | $7.8 million | $51.1 million | $39.4 million |
| Combined ratio | 93.5% | 96.1% | 91.8% | 93.3% |
| Net earnings | $32.3 million | $39.4 million | $138.3 million | $84.8 million |
| Diluted EPS | $0.71 | $0.88 | $3.06 | $1.90 |
| Operating cash flow | Not separately provided | Not separately provided | $186.8 million | $163.4 million |
Derived net earnings margins were approximately 13.6% in Q3 2019 and 18.7% for the first nine months of 2019. Underwriting margins, calculated as underwriting income divided by net premiums earned, were approximately 6.5% for Q3 and 8.2% for the first nine months.
- Net investment income was $17.5 million in Q3 and $51.1 million for the first nine months, up from $16.3 million and $45.1 million, respectively.
- Net realized gains were $3.2 million in Q3 and $17.0 million for the first nine months. Net unrealized gains on equity securities were $4.9 million in Q3 and $47.2 million year to date.
- Comprehensive earnings were $47.7 million in Q3 and $210.8 million for the first nine months, including $15.3 million and $72.5 million, respectively, of other comprehensive earnings primarily from fixed-income securities.
- At September 30, 2019, total assets were $3.51 billion, shareholders’ equity was $999.6 million, and cash was $64.0 million.
- Long-term debt was $149.3 million, consisting principally of senior notes maturing in 2023. Debt represented approximately 13.0% of total capital.
- The company paid quarterly dividends of $0.23 per share, or $30.4 million during the first nine months. No shares were repurchased during 2019; $87.5 million remained under the repurchase authorization.
Material changes versus the prior comparable periods
- First-nine-month consolidated revenue increased 14%, while net premiums earned increased 6% and gross premiums written increased 9%.
- First-nine-month net earnings increased 63% to $138.3 million, primarily reflecting favorable equity-market performance, higher underwriting income, lower catastrophe losses and favorable prior-year reserve development.
- Q3 revenue declined 2% and net earnings declined 18%, primarily because 2018 included substantially higher realized equity gains. Q3 underwriting income nevertheless increased 77% and the combined ratio improved from 96.1 to 93.5.
- First-nine-month underwriting income increased to $51.1 million from $39.4 million. The loss ratio improved to 49.3% from 51.8%, while the expense ratio increased to 42.5% from 41.5%, partly due to higher bonus, profit-sharing and technology expenses.
- Casualty gross premiums written increased 10% for the first nine months, property increased 14%, and surety decreased 5%. Casualty underwriting income rose substantially, property improved modestly, and surety underwriting income declined.
- Prior-year reserve releases were $55.2 million in the first nine months of 2019 versus $38.5 million in 2018. Executive products and medical professional liability experienced adverse development, while most other major lines were favorable.
- Storm losses were $8.0 million in the first nine months of 2019 versus $17.5 million in 2018; Q3 storm losses were $3.0 million versus $7.5 million in the prior-year quarter.
- Invested assets increased to $2.51 billion from $2.19 billion at December 31, 2018. Fixed-income fair value increased to $1.96 billion and equities to $428.3 million.
Guidance, outlook, risks and unusual items
The filing does not provide specific earnings or premium guidance. Management states that its priority is underwriting profitability rather than general premium growth and expects operating cash flows and investments to meet anticipated liquidity needs over the next 12 to 24 months.
- Management reported 23 consecutive years of profitable underwriting and an historical average combined ratio of 88.1%, but insurance results remain exposed to pricing competition, economic conditions, catastrophe events, inflation, regulation, litigation and reserve-estimation uncertainty.
- The property segment has significant catastrophe exposure, particularly earthquakes on the West Coast and windstorms affecting the Gulf and East Coasts and Hawaii. Reinsurance, geographic limits and policy terms are used to manage exposure.
- RLI exited medical professional liability in 2019 because losses exceeded expectations and management did not expect near-term underwriting profitability. The Prime quota-share participation was reduced from 25% to 6% at the beginning of 2019.
- The fixed-income portfolio had a 4.8-year duration, an average rating of AA-, and approximately 85% rated A or better. Declining interest rates materially increased unrealized fixed-income gains; future rate changes could reverse those gains.
- The company had a $50 million revolving credit facility, expandable to $75 million under certain conditions, expiring May 24, 2020. No borrowings were outstanding. It also had no borrowings from the Federal Home Loan Bank of Chicago.
- Insurance subsidiary dividends to the holding company are subject to Illinois regulatory restrictions. RLI Insurance Company paid $14.0 million of ordinary dividends during the first nine months, and certain net assets were restricted until the middle of the fourth quarter of 2019 without regulatory approval.
- The company adopted the new lease standard in 2019, recognizing $23.6 million of right-of-use assets and $25.8 million of lease liabilities. Management expected the forthcoming credit-loss standard to have no material effect, while the effect of a cloud-computing implementation-cost standard remained under evaluation.
- The filing reports no material changes in legal proceedings or risk factors, no material control deficiencies, and no impairment of goodwill or indefinite-lived intangible assets in 2019.
Important facts for investors to verify
- Whether favorable prior-year reserve development remains sustainable, particularly in casualty lines with adverse development in executive products and medical professional liability.
- The underlying current-accident-year combined ratio excluding reserve releases and catastrophe effects.
- The durability of premium growth and rate adequacy in casualty and property, and the effect of selective exposure reductions in surety.
- The sensitivity of book value and comprehensive earnings to equity prices and interest rates, given the $428.3 million equity portfolio and $1.96 billion fixed-income portfolio.
- Future catastrophe losses, reinsurance recoverability and the adequacy of unpaid loss reserves.
- Regulatory limits on upstreaming capital from insurance subsidiaries and the availability of holding-company liquidity for dividends and debt service.
- The company’s ability to refinance or repay the $149.3 million of senior notes maturing in 2023.