RLI Corp. 10-Q Summary — Third Quarter 2015
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, 2015, compared with the corresponding 2014 periods. The interim financial statements are unaudited.
Financial performance and key metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net premiums earned | $179.4 million | $177.7 million | $520.8 million | $507.5 million |
| Consolidated revenue | $200.9 million | $197.7 million | $587.3 million | $571.9 million |
| Net earnings | $35.9 million | $33.3 million | $103.7 million | $97.9 million |
| Diluted EPS | $0.81 | $0.76 | $2.35 | $2.24 |
| Comprehensive earnings | $19.8 million | $20.9 million | $55.0 million | $123.3 million |
| Operating cash flow | Not separately presented | Not separately presented | $121.4 million | $85.9 million |
| Underwriting income | $33.6 million | $30.4 million | $86.1 million | $79.5 million |
| Combined ratio | 81.3 | 82.9 | 83.4 | 84.3 |
- Q3 consolidated revenue increased 2% and nine-month revenue increased 3%. Net earnings increased 8% in Q3 and 6% for the first nine months.
- Approximate net earnings margins were 17.9% in Q3 2015 and 17.7% for the first nine months. Underwriting income represented approximately 18.7% of Q3 net premiums earned and 16.5% for the first nine months.
- Net investment income declined 2% to $14.0 million in Q3 and to $40.9 million for the first nine months because of the lower-yield environment. Realized investment gains increased to $7.5 million in Q3 and $25.6 million for the first nine months.
- Operating cash flow increased $35.5 million year over year, primarily because of lower paid losses. Investing activities used $106.9 million, and financing activities used $16.9 million, resulting in a $2.4 million decrease in cash to $28.2 million.
- At September 30, 2015, investments and cash totaled $2.0 billion, including $1.5 billion of fixed-income securities and $369.0 million of equity securities. Shareholders’ equity was $883.2 million, compared with $845.1 million at December 31, 2014.
- Long-term debt was $149.7 million, consisting principally of senior notes maturing in 2023 with a 4.875% coupon. Debt represented 14.5% of total capital. No amounts were outstanding under the $40.0 million revolving credit facility.
- Cash, short-term investments and investments maturing within one year totaled approximately $99.6 million; an additional $320.0 million was scheduled to mature within one to five years. Management stated that available liquidity should meet anticipated needs over the next 12 to 24 months.
- The quarterly dividend was $0.19 per share. RLI reported 157 consecutive quarters of dividend payments and 40 consecutive years of dividend increases.
Material changes versus the prior comparable period
- Underwriting income increased 10% for the first nine months, while the combined ratio improved to 83.4 from 84.3. The loss ratio improved to 41.9 from 43.4, partly offset by an increase in the expense ratio to 41.5 from 40.9.
- Casualty net premiums earned increased 9% for the first nine months, and casualty gross written premiums increased 8%. Casualty underwriting income increased to $38.1 million, although its combined ratio deteriorated modestly to 87.6 from 87.1.
- Property gross written premiums declined 23% for the first nine months, primarily because crop reinsurance premiums declined 81%. Property underwriting income increased to $22.2 million, and its combined ratio improved to 82.6 from 86.7.
- Surety gross written premiums increased 6%, underwriting income increased to $25.7 million, and the combined ratio was broadly stable at 70.4 versus 70.2.
- Gross written premiums declined 2% for the first nine months to $653.0 million, despite growth in casualty and surety. Excluding crop, gross written premiums increased 4%.
- Other comprehensive earnings changed materially, from a $25.3 million gain in the first nine months of 2014 to a $48.7 million loss in 2015. The decline primarily reflected weaker equity-market performance and wider corporate credit spreads. The equity portfolio’s year-to-date total return was negative 7.6%.
- RLI increased its ownership in Prime Holdings Insurance Services to 27% through an additional $1.7 million investment and recognized $0.9 million of Prime earnings for the first nine months.
Outlook, management commentary, risks and unusual items
- Management emphasized underwriting profitability over volume growth, citing intense competition, alternative capital and soft pricing across the insurance market. No quantitative earnings or premium guidance was provided.
- The crop reinsurance share was reduced for 2015 and is expected to expire at the end of the crop year following the cedant’s acquisition. RLI also discontinued facultative reinsurance at the end of the third quarter because of challenging market conditions.
- RLI’s results benefited from favorable prior-year reserve development of $18.6 million in Q3 and $62.1 million for the first nine months. Storm losses were $2.9 million in Q3 and $10.3 million for the first nine months. These items may not recur at the same level.
- Property catastrophe exposure includes earthquakes, Gulf and East Coast windstorms, Hawaii storms and crop-related events. RLI uses underwriting limits, reinsurance and catastrophe modeling to manage concentrations.
- Insurance results depend on estimates of unpaid losses, incurred-but-not-reported claims and reinsurance recoveries. Actual claims development may differ materially from recorded reserves.
- Goodwill and intangible assets totaled $72.0 million. A third-quarter impairment review of Rockbridge-related goodwill was triggered by lower-than-expected premium production; no impairment was recorded, but the margin of fair value over carrying value narrowed and management plans further annual testing.
- The investment portfolio had $16.1 million of total unrealized losses at September 30, 2015, including $13.2 million on fixed-income securities and $2.9 million on equities. Management reported no other-than-temporary impairment losses for the periods presented.
- RLI entered into an agreement to sell RLI Indemnity Company for $7.5 million, subject to approval by the Illinois Department of Insurance. Closing would occur after regulatory approval, and RLI Insurance Company would reinsure remaining liabilities.
- Insurance-subsidiary dividends to the holding company are subject to Illinois regulatory limitations. RLI Insurance Company paid $35.0 million of ordinary dividends in the first nine months of 2015, and $68.4 million of its net assets were potentially available for ordinary dividends at September 30.
- Management reported no material changes in legal proceedings or risk factors, and concluded that disclosure controls were effective with no materially affecting changes to internal control over financial reporting.
Important facts for investors to verify
- Whether favorable prior-year reserve development continues and how current accident-year loss trends evolve, particularly in casualty and property.
- The sustainability of the 83.4 combined ratio after adjusting for reserve releases and catastrophe losses.
- The ongoing effect of crop reinsurance expiration, the facultative reinsurance exit and soft pricing on future premium growth.
- Investment portfolio sensitivity to equity prices, interest rates and corporate credit spreads, including the potential effect on accumulated other comprehensive income and book value.
- The outcome and timing of regulatory approval for the proposed RLI Indemnity Company sale.
- The results of the next impairment review for Rockbridge-related goodwill.
- Regulatory restrictions on insurance-subsidiary dividends and the adequacy of holding-company liquidity for debt service, corporate expenses and shareholder dividends.