RLI Corp. 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, 2017, compared with the corresponding 2016 periods.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net premiums earned | $182.0 million | $183.6 million | $549.6 million | $540.7 million |
| Consolidated revenue | $196.2 million | $206.4 million | $589.4 million | $604.0 million |
| Net investment income | $14.2 million | $13.5 million | $40.4 million | $39.9 million |
| Net earnings | $1.7 million | $22.3 million | $47.8 million | $82.7 million |
| Diluted EPS | $0.04 | $0.50 | $1.07 | $1.86 |
| Comprehensive earnings | $10.2 million | $15.3 million | $78.6 million | $116.6 million |
| Underwriting income | $(14.9) million | $10.6 million | $17.9 million | $57.9 million |
| Combined ratio | 108.2 | 94.2 | 96.7 | 89.3 |
For the nine months, gross premiums written declined 1.8% to $656.2 million. Net premiums earned increased 1.6%, reflecting casualty growth, while property and surety premiums declined. The reported nine-month net earnings margin was approximately 8.1%, versus approximately 13.7% in 2016; the third-quarter margin was approximately 0.9%, versus 10.8% in 2016.
- Casualty underwriting income was $5.3 million for the nine months, with a 98.5 combined ratio.
- Property produced a $15.9 million underwriting loss and a 115.3 combined ratio.
- Surety generated $28.4 million of underwriting income and a 68.8 combined ratio.
- Operating cash flow was $145.9 million for the nine months, compared with $123.0 million in 2016.
- Cash increased to $26.9 million from $18.3 million at December 31, 2016. Total investments and cash were $2.17 billion.
- Shareholders’ equity increased to $879.2 million from $823.6 million. The quarterly dividend was $0.21 per share; $0.62 per share was paid during the first nine months.
- Long-term debt was $148.9 million, consisting primarily of senior notes due in 2023. Debt represented 14.5% of total capital.
Material Changes Versus the Prior Comparable Period
- Third-quarter net earnings fell $20.5 million, primarily because Hurricanes Harvey, Irma and Maria generated approximately $36.0 million of losses, compared with $4.0 million of storm losses in the prior-year quarter.
- Nine-month catastrophe losses were $39.0 million versus $8.3 million in 2016. Net catastrophe impacts reduced underwriting earnings by $34.2 million for the nine months and $31.7 million in the third quarter, after related expense offsets.
- The property segment’s third-quarter combined ratio increased to 182.0 from 98.7, driven by hurricanes and large fire losses. Property gross premiums written declined 9.6% for the nine months, partly reflecting exits from recreational vehicle and treaty reinsurance businesses.
- Nine-month realized gains and losses declined to a $0.7 million loss from $23.4 million of gains in 2016, when portfolio rebalancing generated substantial equity gains.
- Prior-year reserve development remained favorable, improving underwriting results by $32.3 million for the nine months and $14.9 million in the third quarter. Management cautioned that transportation and certain casualty lines remain under close monitoring.
- Medical professional liability goodwill and related intangible assets recorded additional non-cash impairment charges of $3.4 million and $1.8 million, respectively, during 2017. Total goodwill and intangibles declined to $59.4 million from $64.4 million.
- The effective tax rate was 19.9% for the nine months, versus 30.5% in 2016. Adoption of ASU 2016-09 contributed a $3.7 million tax benefit from share-based compensation and shifted $3.7 million of cash flow classification to operating activities.
Outlook, Risks, Contingencies and Unusual Items
No specific earnings or premium guidance is provided in the filing. Management states that its priority remains underwriting profitability rather than premium or market-share growth, with emphasis on selective risk underwriting and disciplined pricing.
- Key risks include catastrophe activity, property market competition and rate declines, casualty reserve uncertainty, inflation, changing laws and court decisions, and adverse development in transportation and medical professional liability.
- The company limits catastrophe exposure through geographic concentration controls, reinsurance, policy terms and catastrophe modeling. Actual losses may differ materially from recorded reserves.
- Liquidity was described as sufficient for anticipated needs over the next 12 to 24 months. The company had a $40.0 million revolving credit facility, expandable to $65.0 million under certain conditions, with no borrowings outstanding, and access to Federal Home Loan Bank liquidity with no borrowings outstanding.
- Approximately $59.8 million of cash, short-term investments and investments mature within one year, with another $346.4 million maturing in one to five years.
- Unfunded commitments included $19.1 million related to a business development company investment and $15.0 million related to a global credit fund. A portion of the BDC investment is restricted from transfer.
- Ordinary dividends from the principal insurance subsidiary are subject to Illinois regulatory limits. Only approximately $0.3 million of that subsidiary’s net assets were unrestricted and distributable as ordinary dividends at September 30, 2017.
- The filing reports no material changes to legal proceedings or risk factors, and management concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether catastrophe losses and the 108.2 third-quarter combined ratio were an isolated event or indicate deterioration in property underwriting.
- Subsequent reserve development, especially in commercial transportation, medical professional liability and other casualty lines.
- Progress and profitability of the casualty growth initiatives, including Prime assumed reinsurance and general binding authority business.
- Future premium rate adequacy and the effect of continued competition in property and surety markets.
- Liquidity at the holding-company level, regulatory dividend capacity and the ability to fund debt service and shareholder dividends.
- Potential future impairment charges and the status of the $34.1 million of disclosed unfunded investment commitments.
- Implementation effects of pending accounting standards, particularly financial instruments, leases and credit losses.