RLI Corp. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; filed February 23, 2018. The filing is an annual report, although the requested metadata references 2017 Q4. RLI is a U.S.-based specialty property and casualty insurer operating through RLI Insurance Company, Mt. Hawley Insurance Company and Contractors Bonding and Insurance Company. Its principal segments are casualty, property and surety.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Gross premiums written | $885.3 million | $874.9 million | +1% |
| Net premiums earned | $737.9 million | $728.6 million | +1% |
| Consolidated revenue | $797.2 million | $816.3 million | -2% |
| Underwriting income | $26.8 million | $76.1 million | -65% |
| Net earnings | $105.0 million | $114.9 million | -9% |
| Diluted EPS | $2.36 | $2.59 | -9% |
| Net cash from operating activities | $197.5 million | $174.5 million | +13% |
| Shareholders’ equity | $853.6 million | $823.6 million | +4% |
| Total investments and cash | $2.14 billion | $2.02 billion | +6% |
| Total debt | $148.9 million | $148.7 million | Approximately flat |
- Margins: The GAAP combined ratio increased to 96.4% from 89.5%; the loss ratio increased to 54.4% from 48.0% and the expense ratio increased to 42.0% from 41.5%. RLI nevertheless produced its 22nd consecutive year of underwriting profit.
- Segment performance: Casualty underwriting income was $3.9 million, with a 99.2% combined ratio; property generated an $11.9 million underwriting loss and a 108.6% combined ratio; surety generated $34.8 million of underwriting income and a 71.2% combined ratio.
- Cash and liquidity: Year-end cash was $24.3 million, while cash, short-term investments and securities maturing within one year totaled approximately $50.2 million. The company reported positive operating cash flow and no outstanding borrowings under its $40 million revolving credit facility.
- Capital strength: Statutory policyholders’ surplus was $864.6 million, and RLI Insurance Company’s statutory capital to authorized control level RBC ratio was 548%. Insurance subsidiaries were rated A+ by A.M. Best, A+ by Standard & Poor’s and A2 by Moody’s, where applicable.
- Investments: The portfolio had a fair value of $2.14 billion, consisting of 78% fixed income, 19% equities and 3% cash, short-term and other invested assets. Net investment income was $54.9 million, up from $53.1 million.
- Debt: The company had $150 million of senior notes, net carrying value $148.9 million, bearing 4.875% interest and maturing September 15, 2023.
Material Changes Versus 2016
- Gross premiums written grew modestly, but growth was concentrated in casualty. Casualty premiums increased 4%, while property declined 6% and surety declined 3%.
- Commercial transportation premiums declined 13% as RLI completed a re-underwriting initiative involving rate increases, non-renewals and exits from underperforming classes.
- Property results deteriorated sharply because Hurricanes Harvey, Irma and Maria generated approximately $34.9 million of property-segment losses and contributed to the company’s largest wind-related loss in history.
- Total catastrophe losses rose to $39.8 million from $16.3 million in 2016, adding approximately four points to the consolidated combined ratio.
- Favorable prior-year reserve development declined to $38.9 million from $42.0 million, compared with $65.4 million in 2015. Net unpaid losses and LAE increased to $969.5 million from $851.1 million.
- Net realized gains declined substantially to $4.4 million from $34.6 million. The 2017 amount included $3.4 million of non-cash impairment losses related to goodwill and definite-lived intangibles.
- The Tax Cuts and Jobs Act produced a $32.8 million reduction in income tax expense through remeasurement of deferred tax items. Adoption of share-based payment guidance also generated a $5.8 million tax benefit.
- Comprehensive earnings increased to $140.3 million from $113.8 million, primarily because of stronger unrealized investment gains.
- RLI declared a $1.75 per share special dividend in December 2017, compared with $2.00 per share in 2016, and increased ordinary dividends to $0.83 per share from $0.79.
Outlook, Risks and Unusual Items
- 2018 outlook: Management expected moderate top-line growth, an overall underwriting profit assuming normal catastrophe activity, and stabilization or modest improvement in current accident-year margins. It expected price stabilization or firming, property profitability to recover from the 2017 catastrophe losses, continued casualty growth and ongoing surety profitability despite pressure on premium volume.
- Catastrophe exposure: RLI’s principal exposures are California and other earthquakes, windstorms, hurricanes, marine risks and Hawaii homeowners’ business. The 2018 catastrophe program retained limits of $300 million for California earthquakes, $325 million for non-California earthquakes and $225 million for other perils, generally above a $25 million first-dollar retention.
- Reserve uncertainty: Reserves are based on actuarial estimates and may be affected by claims inflation, litigation, judicial developments, changing loss emergence patterns, mass torts, environmental claims and shifts in business mix. A general liability sensitivity analysis showed potential reserve changes of approximately $24.1 million favorable to $24.6 million unfavorable under combined modeled assumption changes.
- Reinsurance risk: Reinsurance does not relieve RLI of its obligations to policyholders. Reinsurance recoverables totaled $302.0 million at year-end, and more than 94% of recoverables were due from reinsurers rated A or better by A.M. Best and Standard & Poor’s.
- Regulatory and liquidity constraints: RLI depends substantially on subsidiary dividends to fund holding-company obligations and shareholder dividends. Subsidiary assets were restricted through the third quarter of 2018 because of prior dividends and could not be distributed without regulatory approval.
- Other contingencies: The filing discloses ordinary-course litigation, operating leases totaling $32.6 million, and unfunded investment commitments of $17.7 million for a business development company, $7.2 million for a global credit fund and $3.1 million for low-income housing tax credit investments. Management did not expect legal proceedings to have a material adverse effect.
- Accounting changes: Adoption of ASU 2016-01 in 2018 was expected to reclassify approximately $142.2 million of net unrealized equity gains from accumulated other comprehensive income to retained earnings, with future equity-market volatility affecting net income.
Important Facts for Investors to Verify
- Whether catastrophe activity in 2018 and later periods normalizes sufficiently for the property segment to return to underwriting profitability.
- Whether commercial transportation results remain improved after the completed re-underwriting program and whether auto loss-cost inflation persists.
- The adequacy and subsequent development of the $969.5 million net loss and LAE reserve balance, particularly casualty, transportation, environmental and latent-liability reserves.
- The sustainability of favorable prior-year reserve development, which has been an important contributor to underwriting results.
- The effect of the Tax Cuts and Jobs Act, including final IRS guidance on performance-based compensation deductions and loss-reserve discounting.
- The amount and timing of dividends available from insurance subsidiaries and the effect of regulatory restrictions on holding-company liquidity and shareholder distributions.
- The impact of ASU 2016-01 on reported earnings, retained earnings and volatility from the equity investment portfolio.
- RLI’s ability to maintain its A+ or equivalent financial strength ratings, reinsurance protection and statutory capital levels.