RLI Corp. Form 10-Q Summary
Business context and reporting period
RLI Corp. is a U.S.-based specialty property and casualty insurer operating through casualty, property and surety segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Results were materially affected by COVID-19, financial-market volatility and related economic disruption.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net premiums earned | $208.7 million | $207.5 million | $424.3 million | $412.2 million |
| Consolidated revenue | $298.2 million | $238.1 million | $416.4 million | $501.9 million |
| Net earnings | $92.2 million | $40.5 million | $30.9 million | $105.9 million |
| Diluted EPS | $2.04 | $0.89 | $0.68 | $2.35 |
| Net underwriting income | $24.2 million | $14.9 million | $41.4 million | $37.4 million |
| Combined ratio | 88.4 | 92.8 | 90.2 | 90.9 |
| Net operating cash flow | Not separately provided | Not separately provided | $83.8 million | $105.3 million |
- Q2 net earnings benefited from $74.7 million of unrealized equity-security gains, versus $8.8 million in Q2 2019. Six-month results included a $55.7 million unrealized equity loss, versus a $42.3 million gain in 2019.
- Q2 earnings before taxes were $114.9 million and the effective tax rate was 19.8%. Six-month pretax earnings were $35.5 million and the effective tax rate was 13.0%.
- Other comprehensive earnings were $53.6 million in Q2 and $40.5 million for the first half, primarily reflecting after-tax unrealized fixed-income gains from declining interest rates.
- At June 30, 2020, total assets were $3.62 billion, shareholders’ equity was $1.05 billion and cash was $84.8 million.
- Invested assets and cash totaled $2.65 billion, including $2.08 billion of fixed-income securities, $422.2 million of equity securities and $63.4 million of other invested assets.
- Long-term debt was $149.4 million, consisting of senior notes bearing 4.875% interest and maturing in September 2023. Debt represented 12.4% of total capital.
Material changes versus prior comparable periods
- Six-month consolidated revenue declined 17.1%, primarily because equity securities produced a $55.7 million unrealized loss in 2020 versus a $42.3 million gain in 2019.
- Six-month net premiums earned increased 3%, and gross premiums written increased 4% to $533.0 million. Property premiums grew 11%, casualty grew 2% and surety declined 3%.
- Commercial transportation gross premiums written declined $33.3 million, or 69%, in the first half as stay-at-home orders sharply reduced public transportation activity.
- Six-month underwriting income increased 11% to $41.4 million. The combined ratio improved to 90.2 from 90.9 as the expense ratio declined to 40.2 from 42.8, partly offsetting a higher loss ratio.
- Q2 underwriting income increased 62% to $24.2 million, and the combined ratio improved to 88.4 from 92.8. Property underwriting income improved to $6.2 million from a $0.4 million loss.
- Six-month operating cash flow fell $21.6 million, while investing cash use improved to $26.7 million from $100.7 million. Cash increased $38.6 million during the first half, compared with a $5.3 million decrease in 2019.
- Shareholders’ equity increased from $995.4 million at December 31, 2019 to $1.05 billion at June 30, 2020, supported by comprehensive earnings. The company paid quarterly dividends of $0.24 per share and repurchased no shares.
Guidance, outlook, risks and unusual items
- The filing provides no formal earnings or premium guidance. Management expects transportation premiums to remain below prior periods until public-transit activity recovers and stated that construction-related disruption could continue to affect general liability and surety premiums.
- RLI recognized $10.8 million of COVID-19-related net losses in the first half, including $5.8 million of additional reserves in Q2. These comprised casualty, property and surety loss, investigative and defense costs.
- Management noted uncertainty regarding business-interruption claims, delayed court proceedings, extended statutes of limitation, changing settlement trends, reduced insured exposures and potential legislative, regulatory or judicial actions. These factors could produce future reserve deficiencies.
- Catastrophe reinsurance purchased for 2020 provides limits of $500 million for California earthquakes, $525 million for earthquakes outside California and $375 million for other perils, generally subject to $25 million retentions and certain co-participations.
- The fixed-income portfolio had an average rating of AA-, 84% rated A or better, and a duration of 4.6 years. Credit spreads created $7.7 million of unrealized fixed-income losses at June 30, while an allowance for credit losses of $1.0 million covered 36 securities.
- Management reported adequate liquidity for the next 12 to 24 months. Cash and investments maturing within one year totaled approximately $160.7 million; no amounts were outstanding under the $60 million revolving credit facility or the approximately $30 million Federal Home Loan Bank facility.
- COVID-19 prompted expense reductions or deferrals, including hiring freezes, position consolidations, suspended executive merit increases and delayed decisions on certain equity awards. Management also noted lower investment yields and potential pressure on investee Maui Jim from retail-sector disruption.
- RLI adopted ASU 2016-13 on January 1, 2020. The cumulative-effect adjustment increased retained earnings by approximately $1.1 million; management characterized the ongoing impact as immaterial.
Most important facts for investors to verify
- Whether COVID-19 claims, business-interruption litigation and potential regulatory or judicial actions lead to additional reserve strengthening.
- Recovery in public transportation and construction activity, particularly the effect on transportation, general liability and surety premiums.
- Sustainability of underwriting profitability excluding favorable prior-year reserve development and the unusually volatile equity-portfolio results.
- Future investment income as lower interest rates reduce reinvestment yields and the equity portfolio remains exposed to market volatility.
- Catastrophe losses, reinsurance recoverability and the adequacy of the stated catastrophe limits and retentions.
- Regulatory restrictions on dividends from insurance subsidiaries, including the $43.3 million of ordinary dividend capacity available without prior approval at June 30, 2020.