RLI CORP quarterly report, Q1 FY2016

RLI Corp. 2016 First-Quarter 10-Q Summary

Business Context and Reporting Period

RLI Corp. is a specialty property and casualty insurer operating through casualty, property and surety segments. The filing covers the three months ended March 31, 2016, with comparisons to the three months ended March 31, 2015. The interim financial statements are unaudited.

Key Financial Metrics

Metric	Q1 2016	Q1 2015	Change
Net premiums earned	$176.9 million	$169.0 million	+5%
Consolidated revenue	$201.7 million	$195.8 million	+3%
Net earnings	$31.4 million	$30.6 million	+3%
Diluted EPS	$0.71	$0.70	+1 cent
Comprehensive earnings	$53.2 million	$23.0 million	+131%
Underwriting income	$21.3 million	$17.6 million	+21%
Combined ratio	88.0	89.5	Improved 1.5 points
Operating cash flow	$21.3 million	$23.4 million	Down $2.1 million

Net earnings represented an approximately 15.6% consolidated revenue margin in both periods. The loss ratio improved to 45.9% from 47.8%, while the expense ratio increased to 42.1% from 41.7%.

Segment underwriting income was $9.1 million for casualty, $6.2 million for property and $6.0 million for surety.
Gross premiums written increased 3% to $196.2 million. Casualty grew 9% and surety grew 7%, while property declined 13%.
Net investment income was $13.4 million, down slightly from $13.5 million; realized investment gains were $11.4 million versus $13.3 million.
Net investment income after tax increased 0.6%, despite lower pretax yields.
Income before taxes was $45.6 million, and the effective tax rate was 31.1%, compared with 31.3%.
Total assets were $2.76 billion and shareholders’ equity was $872.2 million at March 31, 2016, compared with $823.5 million at December 31, 2015.
Investments and cash totaled $2.01 billion, including $1.56 billion of fixed income securities and $389.6 million of equity securities.
Long-term debt was $148.6 million, representing 14.6% of total capital. The debt consists primarily of senior notes bearing interest at 4.875% and maturing in 2023.
Cash, short-term investments and other investments maturing within one year totaled approximately $56.9 million; approximately $307.7 million of investments matured between one and five years.
The company had no borrowings outstanding under its $40 million revolving credit facility or its Federal Home Loan Bank facilities.

Material Changes Versus the Prior Comparable Period

Casualty underwriting improved substantially, with its combined ratio declining to 91.6 from 94.7. Growth was supported by transportation, medical professional liability, package business and umbrella coverages.
Property premiums and underwriting income declined because of the exit from crop and facultative reinsurance, competitive pricing pressure, lower excess and surplus property rates and reunderwriting of recreational vehicle business. Its combined ratio worsened to 84.0 from 80.6.
Surety performance improved, with the combined ratio declining to 79.8 from 85.1, supported by favorable prior-year reserve development and better current accident-year results.
Favorable development on prior-year loss reserves contributed $12.5 million of pretax earnings at the consolidated level, compared with $8.0 million in the prior-year quarter. Management identified $10.9 million of improvement to group underwriting results, including $1.6 million of related bonus and profit-sharing expense.
Catastrophe losses remained immaterial overall; property catastrophe losses reduced 2016 underwriting income by approximately $0.2 million, compared with no reported impact in 2015.
Comprehensive earnings benefited from $21.8 million of after-tax unrealized investment gains, compared with $7.6 million of unrealized losses in Q1 2015. The gains were primarily driven by lower interest rates and positive equity-market pricing.
Operating cash flow declined because of increased paid losses. Cash nevertheless increased by $3.5 million during the quarter, compared with a $0.9 million increase in Q1 2015.
On February 29, 2016, RLI acquired Associations Liability Insurance Agency, Inc. for $1.2 million, including $0.9 million paid at closing and a $0.3 million contingent earn-out liability.
The quarterly dividend increased to $0.19 per share from $0.18 in the prior-year quarter. No shares were repurchased during 2016; $87.5 million remained under the repurchase authorization.

Guidance, Outlook, Commentary and Risks

The filing does not provide formal earnings or premium guidance. Management emphasizes underwriting profitability over premium growth and reported 20 consecutive years of underwriting profitability, with a long-term average combined ratio of 87.3.

Management expects cash generated from operations and investments to meet anticipated liquidity needs over the next 12 to 24 months.
The insurance marketplace remains highly competitive, with new entrants, alternative capital, soft pricing and lower catastrophe activity affecting the industry.
Key insurance risks include inaccurate loss-reserve estimates, casualty claim inflation, evolving legislation and court decisions, economic deterioration affecting surety customers, and catastrophe exposure from earthquakes, hurricanes, windstorms and other perils.
Property results remain exposed to competitive rate declines and the company’s decisions to exit or reduce certain businesses, including crop and facultative reinsurance.
Investment risks include equity-price volatility, interest-rate changes and credit deterioration. The fixed-income portfolio had a 5.0-year duration, and 19.4% of invested assets were equity securities.
Unrealized gains materially increased comprehensive earnings but are market-sensitive and may reverse. The company reported no other-than-temporary impairment losses during the periods presented.
Dividend capacity from the insurance subsidiaries is subject to Illinois insurance-law restrictions. RLI Insurance Company paid $13.2 million of ordinary dividends to RLI Corp. during Q1 2016, and $65.0 million of subsidiary net assets were available for ordinary dividends at March 31, 2016.
Management stated that there were no material changes to legal proceedings or risk factors, and concluded that disclosure controls and procedures were effective.

Important Facts for Investors to Verify

Determine how much of the earnings improvement depends on favorable prior-year reserve releases rather than current accident-year underwriting.
Monitor casualty growth and profitability against transportation, medical professional liability and other newer product exposures.
Assess whether continued property premium declines and business exits will improve long-term returns or reduce scale and operating leverage.
Track catastrophe losses, loss-reserve development and the combined ratio across all segments.
Evaluate sensitivity of book value and comprehensive earnings to interest rates and equity-market movements, given the $2.0 billion investment portfolio.
Review liquidity at the holding-company level, subsidiary dividend restrictions and the maturity profile of the $148.6 million debt balance.
Confirm the financial impact of the Associations Liability Insurance Agency acquisition and any contingent earn-out adjustments.