RLI Corp. Form 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 six-month periods ended June 30, 2018, compared with the corresponding 2017 periods.
On May 4, 2018, the company reincorporated from Illinois to Delaware. The transaction did not change its business, management, assets, liabilities, or fiscal year; it resulted in a $66.6 million reclassification from common stock to paid-in capital.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net premiums earned | $196.5 million, up 6.6% | $386.5 million, up 5.2% |
| Consolidated revenue | $219.3 million, up 11.8% | $405.2 million, up 3.1% |
| Net earnings | $33.3 million, versus $26.2 million | $45.5 million, versus $46.0 million |
| Diluted EPS | $0.74, versus $0.59 | $1.01, versus $1.03 |
| Net investment income | $14.6 million, up 10.1% | $28.8 million, up 9.8% |
| Operating cash flow | Not separately reported | $100.0 million, versus $74.6 million |
| Combined ratio | 92.8, versus 89.3 | 91.8, versus 91.1 |
Six-month underwriting income was $31.6 million, compared with $32.8 million in 2017. Six-month underwriting results by segment were casualty $4.4 million, property $9.5 million, and surety $17.7 million. The approximate six-month net margin was 11.2%, compared with approximately 11.7% in 2017; quarterly net margin was approximately 15.2%, compared with 13.4%.
Six-month net realized gains were $29.3 million, compared with $0.7 million of realized losses in 2017. The 2018 gains primarily reflected $34.5 million of equity-security gains from portfolio rebalancing, partially offset by fixed-income losses and a $4.4 million non-cash impairment charge on medical professional liability goodwill and definite-lived intangibles.
Balance sheet, debt, and liquidity
- Total assets were $3.008 billion at June 30, 2018, compared with $2.947 billion at December 31, 2017.
- Investments and cash totaled $2.168 billion, including $1.711 billion of fixed-income securities, $386.6 million of equity securities, and $34.1 million of cash.
- Shareholders’ equity was $849.8 million, compared with $853.6 million at year-end 2017.
- Long-term debt was $149.0 million, consisting primarily of senior notes maturing in 2023 with a 4.875% interest rate. Debt represented 14.9% of total capital.
- Cash increased $9.8 million during the first six months to $34.1 million. Investing activities used $74.9 million and financing activities used $15.3 million, including $19.0 million of dividends.
- The company entered a new $50.0 million revolving credit facility, potentially expandable to $75.0 million, expiring May 24, 2020. No borrowings were outstanding.
- Management stated that operating cash flow, investments, financing sources, and the liquid investment portfolio should provide sufficient liquidity for the next 12 to 24 months.
Material changes versus the prior comparable period
- Gross premiums written increased 11.7% to $486.7 million for the first half, led by casualty growth of 11.2% and property growth of 19.5%; surety increased 2.9%.
- The second-quarter combined ratio deteriorated to 92.8 from 89.3, primarily because of Hawaii volcanic losses, higher casualty current-year losses, lower favorable reserve development, and higher expense ratios.
- The first-half combined ratio increased modestly to 91.8 from 91.1. The casualty ratio improved to 98.3 from 99.3, while property increased to 86.8 from 83.4 and surety increased to 69.8 from 68.3.
- Hawaii volcanic activity contributed approximately $10.0 million of catastrophe losses in the first half, including $8.0 million in the second quarter, compared with $3.0 million in the comparable periods.
- Prior-year reserve development was favorable by $28.0 million in the first half of 2018, compared with $19.6 million in 2017, but transportation and medical professional liability experienced adverse development.
- Adoption of ASU 2016-01 moved $142.2 million of accumulated unrealized equity gains and losses into retained earnings at January 1, 2018 and required $39.4 million of equity-security unrealized losses to be recognized in 2018 net earnings.
- Other comprehensive earnings fell to $11.4 million from $68.4 million because rising interest rates produced $34.1 million of after-tax unrealized fixed-income losses in 2018.
- The effective tax rate declined to 15.7% for the first half and 16.0% for the quarter, versus 23.9% and 23.0%, respectively, primarily due to the Tax Cuts and Jobs Act reduction in the federal tax rate from 35% to 21%.
Guidance, outlook, risks, contingencies, and unusual items
The filing provides no formal quantitative earnings or premium guidance. Management emphasized underwriting profitability over premium growth, citing competitive insurance markets and a strategy focused on selective risk underwriting.
- Key insurance risks include pricing competition, catastrophe losses, inflation, interest rates, regulation, litigation, court decisions, and uncertainty in estimating unpaid losses and settlement expenses.
- The investment portfolio is exposed primarily to equity-price risk and interest-rate risk. Fixed-income duration was 4.8 years, and 82.5% of the fixed-income portfolio was rated A or better. Rising rates caused significant unrealized losses.
- The company had $29.9 million of unrealized fixed-income losses at June 30, 2018; management concluded the portfolio was high quality and expected recovery of amortized cost.
- Medical professional liability goodwill and intangible assets were fully eliminated following $4.4 million of non-cash impairment charges in the first quarter of 2018.
- In the Carriage Hill coverage dispute, a South Carolina court found Mt. Hawley responsible for $21.7 million of compensatory damages and held that attorneys’ fees, costs, and punitive damages may also apply. Mt. Hawley is contesting the ruling. Management believes defenses are meritorious, but stated that an unfavorable outcome could materially affect results, cash flows, or financial position and that the potential loss cannot currently be estimated.
- The company had $28.2 million of unfunded private-fund commitments and $2.0 million of unfunded low-income housing tax-credit commitments. Approximately $31 million of undiscounted future operating lease liabilities would be recognized upon adoption of the new lease standard.
- RLI Insurance Company paid no dividends to the parent during the first half of 2018. Only $0.6 million of its net assets were available for ordinary dividends at June 30, reflecting regulatory restrictions on holding-company liquidity.
- No material changes to previously disclosed risk factors were reported, and management concluded disclosure controls were effective.
Investor verification checklist
- Verify the sustainability of premium growth, particularly in casualty and property, amid competitive pricing conditions.
- Assess underlying current-year loss trends separately from favorable prior-year reserve development.
- Monitor catastrophe exposure, including Hawaii volcanic losses and future earthquake, hurricane, and windstorm activity.
- Evaluate the effect of equity-market volatility and rising interest rates on earnings, accumulated other comprehensive income, and book value.
- Track the Carriage Hill litigation, including any ruling on attorneys’ fees or punitive damages and potential insurance recoveries.
- Confirm the availability of parent-company liquidity given insurance-subsidiary dividend restrictions.
- Reconcile reported earnings with underwriting income, realized investment gains, unrealized equity losses, tax-rate benefits, and non-cash impairment charges.