RLI Corp. 2016 Q3 10-Q Summary
Business context and reporting period
RLI Corp. is a specialty property and casualty insurer operating through casualty, property and surety segments in admitted and excess-and-surplus markets. This Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Consolidated revenue | $206.4 million | $200.9 million | $604.0 million | $587.3 million |
| Net premiums earned | $183.6 million | $179.4 million | $540.7 million | $520.8 million |
| Net investment income | $13.5 million | $14.0 million | $39.9 million | $40.9 million |
| Net earnings | $22.3 million | $35.9 million | $82.7 million | $103.7 million |
| Diluted EPS | $0.50 | $0.81 | $1.86 | $2.35 |
| Comprehensive earnings | $15.3 million | $19.8 million | $116.6 million | $55.0 million |
| Operating cash flow | Not separately reported | Not separately reported | $123.0 million | $121.4 million |
| GAAP combined ratio | 94.2 | 81.3 | 89.3 | 83.4 |
Q3 net earnings margin was approximately 10.8%, versus 17.9% in the prior-year quarter. Nine-month net earnings margin was approximately 13.7%, versus 17.7% in 2015. Underwriting income was $10.6 million in Q3 and $57.9 million for the first nine months, compared with $33.6 million and $86.1 million, respectively, in 2015.
At September 30, 2016, total assets were $2.91 billion, shareholders’ equity was $922.4 million and total liabilities were $1.99 billion. Investments and cash totaled $2.12 billion, including $1.69 billion of fixed income securities and $382.3 million of equity securities. Long-term debt was $148.7 million, representing 13.9% of total capital. Cash was $14.0 million, with $8.4 million of short-term investments.
Material changes versus the prior comparable period
- Revenue increased 3% in both Q3 and the first nine months, primarily from premium growth. Nine-month net premiums earned increased 4%.
- Gross premiums written increased 3% in Q3 and 2% for the first nine months. Casualty premiums grew 10% in Q3 and 8% for the nine months; property premiums declined 8% and 12%, respectively; surety premiums declined 2% in Q3 but increased 3% for the nine months.
- Underwriting income declined materially because 2016 had unfavorable development and reinstatement premiums in Q3, while 2015 benefited from $15.8 million of favorable prior-year development. For the first nine months, favorable prior-year development was $24.2 million in 2016 versus $52.9 million in 2015.
- The Q3 combined ratio increased to 94.2 from 81.3, and the nine-month ratio increased to 89.3 from 83.4. The nine-month loss ratio rose to 48.0 from 41.9, while the expense ratio improved modestly to 41.3 from 41.5.
- Net investment income decreased 3% in Q3 and 2% for the nine months because of the lower yield environment. Realized gains were $9.3 million in Q3 and $23.4 million for the nine months, compared with $7.5 million and $25.6 million in 2015.
- Comprehensive earnings improved for the nine months because 2016 included $33.9 million of unrealized investment gains, compared with $48.7 million of unrealized losses in 2015. Q3 comprehensive earnings declined because of a $6.9 million other comprehensive loss.
- The medical professional liability reporting unit recorded a $7.2 million non-cash goodwill impairment charge in Q2 2016. The related contingent earn-out was eliminated, reducing expenses by $1.5 million for the nine months.
Liquidity, capital and cash flow
- Operating activities generated $123.0 million during the first nine months, versus $121.4 million in 2015. Investing activities used $102.4 million and financing activities used $17.7 million, producing a $2.9 million increase in cash.
- The company had approximately $51.5 million of cash, short-term investments and investments maturing within one year, plus $365.9 million maturing within one to five years.
- RLI maintained a $40 million revolving credit facility, expandable to $65 million under certain conditions, with no borrowings outstanding. Its insurance subsidiaries also had no Federal Home Loan Bank borrowings.
- Management stated that operating cash flow and investments should provide sufficient liquidity for the next 12 to 24 months. The holding company had $57.6 million of unrestricted liquid assets versus estimated annual holding-company expenditures of approximately $45.0 million.
- RLI paid $25.8 million of dividends during the first nine months and declared a quarterly dividend of $0.20 per share. No shares were repurchased during 2016; $87.5 million remained under the repurchase authorization.
Guidance, outlook, commentary and risks
- No quantitative earnings or premium guidance was provided. Management emphasized underwriting profitability over general premium growth or market share.
- Management cited intense competition, new entrants, alternative capital and soft pricing, particularly in excess-and-surplus property markets.
- Property premiums and results were affected by the exits from crop and facultative reinsurance, continued price declines and re-underwriting of recreational vehicle business.
- Casualty results remain exposed to large claims, reserve development, inflation, legislative and judicial changes, and adverse medical professional liability experience.
- Property results are exposed to earthquakes, hurricanes, windstorms and other catastrophes. Q3 2016 storm losses totaled $4.0 million, and nine-month storm losses totaled $8.3 million.
- Investment risks include equity-price volatility, interest-rate changes, credit risk and lower reinvestment yields. The fixed-income portfolio had a 4.9-year duration, an average rating of AA-, and 82% rated A or better by at least two rating agencies.
- Insurance subsidiary dividends to the holding company are subject to Illinois regulatory limitations. RLI Insurance Company paid $39.6 million of ordinary dividends to RLI Corp. in the first nine months, with $53.6 million of net assets available for ordinary dividends at September 30.
- Management reported no material changes to legal proceedings or risk factors, and concluded that disclosure controls were effective.
Most important facts for investors to verify
- Whether the deterioration in combined ratios and reduced favorable reserve development persists, particularly in casualty and property.
- Future reserve development in transportation, umbrella, marine and medical professional liability lines.
- The effect of continued soft pricing and discontinued crop and facultative reinsurance operations on property premium volume and margins.
- The sustainability of investment income amid low yields and the sensitivity of comprehensive earnings and book value to interest rates and equity markets.
- The recoverability of medical professional liability goodwill and the potential for further impairment or adverse loss experience.
- Regulatory limits on insurance-subsidiary dividends and the adequacy of holding-company liquidity relative to debt service, expenses and shareholder dividends.