RLI Corp. 2011 Form 10-K Summary
Business Context and Reporting Period
RLI Corp. is an Illinois-based specialty property and casualty insurer operating primarily through RLI Insurance Company, CBIC, Mt. Hawley Insurance Company and RLI Indemnity Company. It underwrites casualty, property and surety products in the United States and has no material foreign operations. The filing covers the fiscal year ended December 31, 2011, and was filed February 28, 2012.
RLI acquired Contractors Bonding and Insurance Company and affiliated entities on April 28, 2011. CBIC contributed approximately $36 million of gross written premiums and $53.5 million of net unpaid losses and loss adjustment expenses from acquisition through year-end.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net premiums written | $549.6 million | $485.1 million | 13.3% increase |
| Net premiums earned | $538.5 million | $493.4 million | 9.1% increase |
| Net investment income | $63.7 million | $66.8 million | 4.7% decrease |
| Net realized investment gains | $17.0 million | $23.2 million | Decrease |
| Net loss and LAE reserves | $796.9 million | $819.8 million | 2.8% decrease |
| GAAP loss ratio | 37.2% | 40.8% | 3.6 percentage-point improvement |
| GAAP expense ratio | 41.2% | 39.9% | 1.3 percentage-point increase |
| GAAP combined ratio | 78.4% | 80.7% | 2.3 percentage-point improvement |
| Statutory policyholders’ surplus | $710.2 million | $732.4 million | 3.0% decrease |
| Net premiums written to surplus | 0.8 to 1 | 0.7 to 1 | Higher leverage |
The filing text provided does not contain a clear consolidated GAAP revenue, consolidated net income, diluted earnings per share, or consolidated operating cash flow value. The parent-company schedule reports 2011 net earnings of $130.6 million, but this is not a substitute for consolidated net income.
At December 31, 2011, investments and cash totaled approximately $1.90 billion, including $1.41 billion of fixed-income securities, $388.7 million of equity securities and $105.0 million of cash and short-term investments. The parent company reported $100.0 million of long-term debt and $818.9 million of shareholders’ equity. The consolidated debt balance is not clearly provided in the supplied filing text.
Investment return on average invested assets was 6.1% in 2011 versus 6.5% in 2010. The portfolio generated a $32.9 million pretax change in unrealized appreciation, compared with $28.7 million in 2010. Equity securities increased to 20% of cash and invested assets from 18% at year-end 2010.
Material Changes Versus the Prior Comparable Period
- Net premiums written increased 13.3%, primarily reflecting the CBIC acquisition and growth in property reinsurance, surety and other specialty businesses.
- Net premiums earned increased 9.1%. Property segment net premiums earned rose to $203.7 million from $181.6 million, while surety increased to $98.6 million from $79.7 million.
- The combined ratio improved to 78.4% from 80.7%, driven by a lower loss ratio and $110.1 million of favorable prior-year reserve development, compared with $83.2 million in 2010.
- All three segments reported favorable prior-year reserve development: casualty $83.9 million, property $18.5 million and surety $7.7 million.
- The expense ratio increased to 41.2% from 39.9%, reflecting growth-related expenses and the CBIC acquisition.
- Net loss and LAE reserves declined despite the acquisition, ending at $796.9 million versus $819.8 million in 2010.
- Statutory surplus declined to $710.2 million from $732.4 million, while net premiums written increased, raising the premiums-to-surplus ratio to 0.8 from 0.7.
- RLI paid $150.0 million of extraordinary dividends from RLI Insurance Company to the parent after receiving regulatory approval. The parent used $105.8 million of the December dividend to fund a special shareholder dividend.
- The company repurchased 111,956 shares for $6.6 million during 2011 and ended the year with $87.5 million of remaining repurchase authorization. No shares were repurchased in the fourth quarter.
Guidance, Outlook, Risks and Unusual Items
No formal earnings or revenue guidance is provided in the supplied filing. Management emphasizes specialty-market underwriting discipline, selective growth, product innovation and withdrawal from markets that become unprofitable.
- RLI renewed its crop reinsurance treaty for the 2012 crop year with a smaller participation and a one-year term.
- The company purchased additional catastrophe reinsurance to support growth in its wind portfolio. Based on the January 1, 2012 catastrophe program, management estimated a 99.6% likelihood that modeled loss from a single event would be less than 15% of year-end 2011 policyholders’ surplus.
- Catastrophe models were revised in 2011 to include more extreme events and higher event probabilities, leading management to assess catastrophe risk more conservatively.
- Management estimated that reserve development over the following calendar year could range from approximately $80 million favorable to $24 million unfavorable.
- Primary risks include catastrophe losses, reserve inadequacy, adverse litigation or legal interpretations, reinsurance collectability and availability, insurance-cycle pricing pressure, investment-market volatility, regulatory restrictions and economic deterioration.
- More than 95% of reinsurance recoverables were due from reinsurers rated A or better by A.M. Best and Standard & Poor’s, although reinsurance does not eliminate RLI’s primary obligation to policyholders.
- Environmental, asbestos and mass-tort reserves were $34.8 million net at year-end 2011. The filing notes unfavorable activity in discontinued assumed reinsurance, partly offset by favorable direct-book development.
- Insurance financial-strength ratings were reaffirmed: A.M. Best A+ for the RLI Insurance, Mt. Hawley and RLI Indemnity group; A.M. Best A for CBIC; Standard & Poor’s A+ for RLI Insurance and Mt. Hawley; and Moody’s A2 for the group.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2011. The assessment excluded CBIC, representing approximately 10% of total assets and 5% of gross written premiums, as permitted for a recent acquisition.
Most Important Facts for Investors to Verify
- Verify consolidated net income, earnings per share, book value per share and operating cash flow in the incorporated 2011 Financial Report to Shareholders, because those values are not clearly included in the supplied text.
- Assess how much of premium growth and reserve balances is attributable to the CBIC acquisition versus organic growth.
- Review the sustainability of the unusually strong favorable reserve development and the disclosed sensitivity of long-tail general liability reserves.
- Evaluate catastrophe exposure against modeled losses, reinsurance limits, retentions and potential losses exceeding modeled or purchased protection.
- Monitor statutory surplus, dividend capacity and the parent company’s dependence on regulated subsidiary dividends to fund debt service and shareholder distributions.
- Assess the impact of the higher equity allocation and interest-rate changes on investment income, unrealized gains and capital.
- Review reinsurance recoverable concentration and collectability, particularly for legacy environmental, asbestos and mass-tort exposures.