RLI Corp. 10-Q Summary
Business Context and Reporting Period
RLI Corp. is a specialty property and casualty insurance holding company operating through casualty, property and surety segments in admitted and excess-and-surplus markets. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the same period in 2018.
Financial Results and Key Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net premiums earned | $204.7 million | $190.0 million | Up 7.7% |
| Consolidated revenue | $263.8 million | $185.9 million | Up 42% |
| Underwriting income | $22.4 million | $17.5 million | Up 28% |
| Combined ratio | 89.0 | 90.8 | Improved 1.8 points |
| Net earnings | $65.5 million | $12.2 million | Up 436% |
| Diluted EPS | $1.46 | $0.27 | Up $1.19 |
| Comprehensive earnings | $94.8 million | $(14.2) million | Improved $109.0 million |
| Operating cash flow | $30.8 million | $15.4 million | Up $15.4 million |
Underwriting income represented approximately 11.0% of net premiums earned. Net earnings margin was approximately 24.8%, compared with approximately 6.4% in the prior-year quarter; the comparison was significantly affected by investment-market gains and losses.
- Investment results: Net investment income increased to $16.6 million from $14.2 million. Net realized gains were $9.1 million. Net unrealized gains on equity securities were $33.5 million, compared with $26.8 million of unrealized losses in Q1 2018.
- Segment underwriting: Casualty income was $5.3 million, property income was $8.2 million and surety income was $8.8 million. Combined ratios were 96.1, 78.7 and 69.5, respectively.
- Reserve development: Prior-year favorable loss-reserve development was $19.6 million, compared with $14.6 million in Q1 2018. Current-quarter catastrophe losses were $1.0 million, compared with $2.0 million.
- Balance sheet: Total assets were $3.24 billion and shareholders’ equity was $894.7 million at March 31, 2019, versus $3.11 billion and $806.8 million at December 31, 2018.
- Investments: Investments and cash totaled $2.31 billion, including $1.79 billion of fixed-income securities, $388.3 million of equity securities and $69.3 million of cash and short-term investments. Fixed income represented 77.8% of the portfolio and had a 4.7-year duration.
- Debt: Long-term debt was $149.2 million, consisting of senior notes bearing interest at 4.875% and maturing in 2023. Debt represented 14.3% of total capital.
- Liquidity: Cash declined to $25.2 million from $30.1 million at year-end, while short-term investments increased to $44.1 million from $11.6 million. The company had approximately $111.7 million maturing within one year and $395.8 million maturing within one to five years.
- Dividends: The quarterly dividend increased to $0.22 per share from $0.21 in the prior-year quarter. The company reported 171 consecutive quarters of dividends and 43 consecutive years of dividend increases.
Material Changes Versus the Prior Comparable Period
- Premium growth was driven by casualty and property. Gross premiums written increased 6.5% to $230.9 million, while net premiums earned increased 7.7%.
- Casualty gross premiums increased 8.3%; property increased 6.8%; surety declined 2.4% because of competitive conditions affecting miscellaneous and energy surety.
- RLI exited medical professional liability in 2019 because losses exceeded expectations and management did not expect near-term underwriting profitability. Medical professional liability net premiums earned declined 30.5%.
- Underwriting performance improved overall, primarily because of greater favorable prior-year reserve development and lower catastrophe losses. The expense ratio increased to 43.0 from 42.2, partly because of higher bonus and profit-sharing expenses and technology investment.
- Q1 2018 included a $4.4 million noncash impairment charge related to medical professional liability goodwill and intangible assets; no comparable impairment was recorded in Q1 2019.
- Other comprehensive earnings shifted from a $26.4 million loss to a $29.3 million gain, mainly because declining interest rates increased the fair value of fixed-income securities.
- The company adopted the new lease standard on January 1, 2019, recognizing $26.8 million of operating lease right-of-use assets and $29.1 million of lease liabilities. The adoption did not affect net earnings.
- Cash flow from investing activities was a $28.8 million use, compared with a $4.2 million use in Q1 2018, primarily reflecting investment purchases and increased short-term investments.
Guidance, Outlook, Risks, Contingencies and Unusual Items
The filing provides no formal earnings or revenue guidance. Management reiterated a strategy of underwriting for profit, emphasizing risk selection and underwriting discipline over general premium growth or market share.
- Management expects operating cash flows and investments to provide sufficient liquidity for the next 12 to 24 months and reported no liquidity issues.
- RLI has a $50.0 million revolving credit facility, expandable to $75.0 million under certain conditions, expiring May 24, 2020; no amounts were outstanding. Its insurance subsidiaries also had access to Federal Home Loan Bank liquidity, with no borrowings outstanding.
- Dividend payments from the principal insurance subsidiary are subject to Illinois insurance-law restrictions. Because of prior distributions, subsidiary net assets were restricted through the fourth quarter of 2019 absent regulatory approval. Management stated that holding-company unrestricted liquid assets of $50.8 million exceeded annual holding-company expenditures.
- Primary risks include reserve-estimation uncertainty, catastrophe exposure, adverse loss development, inflation, changing laws and court decisions, competition, interest-rate risk, equity-market volatility and credit risk.
- Property catastrophe exposure is concentrated primarily in West Coast earthquakes and windstorms affecting the Gulf and East Coasts and Hawaii. The company manages exposure through geographic limits, reinsurance, policy terms and catastrophe modeling.
- The fixed-income portfolio had $10.6 million of unrealized losses at March 31, 2019, but management reported no other-than-temporary impairment losses in Q1 2019 and stated that the portfolio was expected to recover its amortized cost.
- Unfunded commitments included $7.0 million for low-income housing tax-credit investments and $15.1 million for private funds. The company also reported $29.1 million of operating lease liabilities.
- No material changes were reported in legal proceedings or risk factors. Disclosure controls were assessed as effective, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Determine how much of the earnings increase is attributable to recurring underwriting and investment income versus volatile equity unrealized gains and favorable reserve development.
- Monitor whether the 89.0 combined ratio and $19.6 million of favorable prior-year reserve development are sustainable.
- Evaluate the effect of exiting medical professional liability and the remaining reserve exposure from that business.
- Track catastrophe losses, casualty reserve development and the changing expense ratio, particularly in casualty and surety.
- Review equity-market and interest-rate sensitivity given the $388.3 million equity portfolio and $1.79 billion fixed-income portfolio.
- Confirm liquidity available at the holding-company level while insurance-subsidiary dividends remain restricted.
- Assess the impact of the 2023 senior notes, lease liabilities and unfunded investment commitments on future liquidity.