RLI Corp. 2018 Form 10-K Summary
Business context and reporting period
RLI Corp. is a U.S.-based specialty property and casualty insurance holding company. Its principal insurance subsidiaries write admitted, excess and surplus, and specialty reinsurance products through casualty, property and surety segments across the United States and certain territories. The filing covers the fiscal year ended December 31, 2018; quarterly data are provided, but this is an annual report rather than a standalone Q4 filing.
- Gross premiums written: $983.2 million, including $619.6 million from specialty admitted, $316.9 million from excess and surplus, and $46.7 million from specialty reinsurance operations.
- Employees: 912 at year-end.
- Insurance financial strength ratings: A+ Superior from A.M. Best, A+ Strong from S&P, and A2 Good from Moody’s.
Financial performance and condition
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Consolidated revenue | $818.1 million | $797.2 million | +3% |
| Net premiums earned | $791.4 million | $737.9 million | +7% |
| Net earnings | $64.2 million | $105.0 million | -39% |
| Diluted EPS | $1.43 | $2.36 | -39% |
| Operating cash flow | $217.1 million | $197.5 million | +10% |
| GAAP combined ratio | 94.7 | 96.4 | Improved 1.7 points |
| Underwriting income | $41.6 million | $26.8 million | +55% |
| Total investments and cash | $2.194 billion | $2.141 billion | +2.5% |
| Total shareholders’ equity | $806.8 million | $853.6 million | -5.5% |
| Total debt | $149.1 million | $148.9 million | Essentially unchanged |
Profitability remained positive for the 23rd consecutive year. The loss ratio was 54.1% and the expense ratio was 40.6%. Catastrophe losses totaled $40.5 million, adding 5.1 points to the combined ratio. Favorable prior-year reserve development was $50.0 million, partially offsetting current-year catastrophe and loss costs.
Net loss and loss adjustment expense reserves increased to $1.096 billion from $969.5 million, while gross reserves increased to $1.461 billion from $1.272 billion. Reinsurance recoverables on unpaid losses totaled $365.0 million. The statutory policyholders’ surplus of the insurance group was $829.8 million, and RLI Insurance Company’s statutory capital-to-authorized-control-level RBC ratio was 489%.
The investment portfolio totaled $2.194 billion at fair value: approximately 80% fixed income, 16% equities, 2% other invested assets and 2% cash and short-term investments. Net investment income increased 13% to $62.1 million. The portfolio recorded a $98.7 million pretax unrealized loss on equity securities and a total 2018 investment return below zero, reflecting market declines late in the year.
Material changes versus the prior comparable period
- Premium growth accelerated: gross premiums written rose 11% to $983.2 million, and net premiums earned rose 7%.
- Casualty gross premiums increased 12% and underwriting income rose to $11.1 million; transportation growth resumed after prior re-underwriting actions.
- Property gross premiums increased 16%, and the segment returned to a modest underwriting profit of $0.9 million despite significant hurricane and Hawaii volcanic losses.
- Surety premiums increased 1%, while underwriting income declined to $29.6 million from $34.8 million; the segment remained highly profitable with a 75.0 combined ratio.
- Net earnings declined primarily because 2018 equity-market losses were recognized in earnings under ASU 2016-01. The accounting change moved $142.2 million of accumulated unrealized equity gains and losses into retained earnings at adoption.
- 2017 earnings benefited from a $32.8 million deferred-tax benefit associated with the Tax Cuts and Jobs Act; this benefit did not recur in 2018.
- RLI paid a $1.00 per share special dividend in December 2018, compared with $1.75 per share in December 2017. Regular dividends declared totaled $0.87 per share in 2018.
- RLI reincorporated from Illinois to Delaware in May 2018, with no change to its business, management, assets or liabilities.
- In early 2019, RLI exited long-term-care healthcare liability business on a runoff basis and reduced its participation in the Prime quota-share treaty from 25% to 6%.
Outlook, commentary, risks and unusual items
Management expects a 24th consecutive year of underwriting profit in 2019 and modest growth in investment income. Management expects property growth to continue at a slower pace, surety premiums to remain approximately flat, and casualty premiums to face pressure from exiting or curtailing selected businesses. The Prime treaty reduction, healthcare liability exit and Real Estate Investment Trust business exit are expected to reduce gross written premium by approximately $50 million but improve risk and profitability.
- Catastrophe exposure remains concentrated in California earthquakes, non-California earthquakes, hurricanes, windstorms, Hawaii homeowners’ risks, wildfires and other aggregating events. The January 2019 CAT program provided $400 million excess of $25 million for California earthquakes, $425 million excess of $25 million for other earthquakes and $275 million excess of $25 million for other perils.
- Loss reserves are inherently judgmental, particularly for long-tail casualty, executive products, medical professional liability, environmental, asbestos and mass-tort exposures. Management disclosed a $1.096 billion net reserve balance and meaningful sensitivity to changes in loss ratios and emergence patterns.
- Reinsurance reduces exposure but does not discharge RLI’s liability to policyholders. More than 93% of reinsurance recoverables were due from reinsurers rated A or better, but credit and collection risk remains.
- Holding-company liquidity depends substantially on dividends from regulated insurance subsidiaries. In 2018, the principal subsidiary paid $13.0 million of ordinary dividends and $110.0 million of approved extraordinary dividends. Certain subsidiary net assets were restricted through the fourth quarter of 2019 without regulatory approval.
- RLI had $63.1 million of unrestricted liquid holding-company assets, an undrawn $50 million revolving credit facility, and approximately $20 million of potential secured Federal Home Loan Bank borrowing capacity.
- The company has $150 million of senior notes due September 2023 at a 4.875% coupon and no borrowings outstanding under its revolving credit or Federal Home Loan Bank facilities.
- A South Carolina coverage dispute was settled confidentially in 2018 after a $21.7 million compensatory-damages ruling was issued and subsequently vacated; the settlement did not materially affect the financial statements.
- Operating leases, unfunded private-fund commitments and low-income-housing-tax-credit commitments totaled additional contractual or contingent funding obligations.
Most important facts for an investor to verify
- Whether the $50.0 million of favorable reserve development in 2018 is repeatable and how newer casualty products develop as claims mature.
- The sensitivity of earnings and statutory surplus to catastrophe losses above modeled or reinsurance-covered amounts.
- The effect of the Prime treaty reduction and business exits on 2019 premium volume, concentration risk and underwriting margins.
- The impact of equity-market volatility and interest-rate changes on comprehensive earnings, book value and liquidity.
- The availability of subsidiary dividends under Illinois insurance regulation and the adequacy of holding-company liquidity through 2019.
- The quality and collectability of the $365.0 million of reinsurance recoverables and the adequacy of related allowances.
- The effects of accounting adoption, including ASU 2016-01 and the expected 2019 lease standard adoption, on reported earnings, equity, assets and liabilities.