RLI CORP quarterly report, Q1 FY2023

RLI Corp. 2023 First-Quarter 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 months ended March 31, 2023, compared with the three months ended March 31, 2022.

Key Financial Metrics

Metric	Q1 2023	Q1 2022	Change
Net premiums earned	$307.7 million	$269.2 million	14%
Consolidated revenue	$364.9 million	$264.8 million	38%
Net earnings	$98.8 million	$47.9 million	106%
Diluted EPS	$2.15	$1.05	105%
Net underwriting income	$67.9 million	$59.5 million	14%
Combined ratio	77.9%	77.9%	Flat
Net investment income	$27.1 million	$17.9 million	51%
Operating cash flow	$69.2 million	$39.0 million	77%

Net earnings represented approximately 27.1% of consolidated revenue, compared with approximately 18.1% in the prior-year quarter. The implied underwriting margin was approximately 22.1% in both periods, based on underwriting income divided by net premiums earned.

Segment net premiums earned were $186.0 million for casualty, $88.8 million for property and $32.9 million for surety.
Segment underwriting income was $31.8 million for casualty, $28.4 million for property and $7.7 million for surety.
Segment combined ratios were 82.9% for casualty, 68.0% for property and 76.7% for surety.
Other comprehensive earnings were $37.7 million, compared with a $115.6 million loss in Q1 2022, primarily reflecting improved fair values of available-for-sale fixed-income securities as interest rates declined.
Total assets were $4.84 billion and shareholders’ equity was $1.30 billion at March 31, 2023, compared with $4.77 billion and $1.18 billion, respectively, at December 31, 2022.

Cash Flow, Debt and Liquidity

Operating activities generated $69.2 million of cash. Investing activities used $57.8 million, and financing activities used $11.5 million, resulting in a $49 thousand decrease in cash.
Investments and cash totaled $3.42 billion at March 31, 2023, including $2.70 billion of fixed-income securities, $519.1 million of equity securities, $116.2 million of short-term investments and $22.8 million of cash.
Total debt was $200 million, consisting of $150 million of senior notes maturing September 15, 2023 and $50 million borrowed from the Federal Home Loan Bank of Chicago maturing November 10, 2023. Debt represented 13.3% of total capital.
Cash and investments maturing within one year totaled approximately $432 million; an additional $901 million was scheduled to mature within one to five years.
A new $100 million revolving credit facility with PNC Bank became effective in the first quarter and expires May 29, 2026. No amounts were outstanding under the facility at March 31, 2023.
Management stated that operating and investment cash flows should provide sufficient liquidity for anticipated needs over the next 12 to 24 months.

Material Changes Versus the Prior Comparable Period

Net premiums earned increased 14%, with gross premiums written increasing 16% to $415.0 million. Property gross premiums written increased 45%, casualty increased 1% and surety increased 14%.
Property growth was driven by commercial property rate increases, higher building valuations and market opportunities. Casualty growth reflected personal umbrella momentum and favorable rate movement, while certain excess energy, general liability and executive products business declined. Surety benefited from account expansion, new agency relationships and inflation-related construction pricing.
The combined ratio remained 77.9%, as a lower loss ratio of 37.2% offset a higher expense ratio of 40.7%. The expense ratio increased from 38.7% because of higher performance-related compensation and investments in personnel and technology.
Prior-year reserve releases increased to $51.8 million, or approximately $52 million, from $45.5 million. No products experienced significant adverse development.
Net unrealized gains on equity securities were $15.5 million versus a $27.8 million loss in Q1 2022. Net realized gains increased to $14.6 million from $5.6 million, including a $14 million gain from a working-capital escrow payout related to the 2022 sale of Maui Jim.
Equity in earnings of unconsolidated investees declined to $3.9 million from $8.8 million, primarily because Maui Jim was sold in September 2022.
The regular quarterly dividend increased to $0.26 per share from $0.25 per share in the year-earlier quarter. RLI reported 47 consecutive years of dividend increases.

Outlook, Commentary, Risks and Unusual Items

Management emphasized underwriting profitability over premium growth and stated that RLI intends to grow where it believes underwriting profit exists. The filing does not provide formal earnings or revenue guidance.

Q1 2023 underwriting results included approximately $4 million of pretax storm losses, compared with $2 million in Q1 2022.
RLI’s catastrophe reinsurance renewed January 1, 2023, with limits of $700 million excess of $25 million for California earthquakes, $700 million excess of $50 million for non-California earthquakes and $600 million excess of $50 million for other perils, including wind, subject to specified co-participations.
Inflation, rising interest rates, equity-market volatility and supply-chain disruption could increase loss costs, reduce insurance demand or negatively affect investment results.
Insurance reserves are inherently uncertain, particularly for casualty claims that may take several years to develop. Actual losses may differ materially from recorded estimates.
The fixed-income portfolio had $235.7 million of gross unrealized losses at March 31, 2023, including $217.6 million on securities held for at least 12 months. Management stated that securities continued to pay expected coupons and that amortized cost was expected to be recovered.
Approximately 81% of the fixed-income portfolio was rated A or better by at least two nationally recognized rating organizations, and the portfolio had an average rating of AA-.
RLI adopted ASU 2023-02 for tax-credit investments, resulting in a $1 million reduction to retained earnings and recognition of a $7 million unfunded commitment for a historic tax-credit investment. Management stated that the adoption would not materially affect net earnings.
The company had $87.5 million of remaining capacity under its share repurchase program and repurchased no shares during 2023.
Management reported no material changes to legal proceedings or risk factors and concluded that disclosure controls and procedures were effective.

Important Facts for Investors to Verify

Verify the sustainability of the 77.9% combined ratio after excluding favorable prior-year reserve development and considering catastrophe losses.
Monitor reserve development, especially the $51.8 million of prior-year releases and the long-tail casualty exposures.
Assess refinancing and liquidity plans for the $200 million of debt maturing in September and November 2023.
Evaluate sensitivity to interest rates and equity markets, including the $235.7 million of fixed-income unrealized losses and the equity portfolio’s effect on earnings.
Review catastrophe exposure, reinsurance recoverability and the $699.9 million of reinsurance recoverables at March 31, 2023.
Distinguish recurring operating performance from the $14 million realized gain related to the Maui Jim escrow payout and other investment-market gains.
Confirm regulatory restrictions on dividends from insurance subsidiaries and the availability of the reported $135 million of unrestricted subsidiary net assets.