RLI Corp. 2022 Third-Quarter Form 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 and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net premiums earned | $291.5 million | $253.4 million | $843.4 million | $723.0 million |
| Consolidated revenue | $859.5 million | $270.5 million | $1.337 billion | $855.9 million |
| Net investment income | $21.3 million | $17.8 million | $57.6 million | $50.9 million |
| Net realized gains | $573.2 million | $1.8 million | $591.6 million | $52.4 million |
| Net unrealized gains (losses) on equity securities | $(26.4) million | $(2.6) million | $(155.2) million | $29.5 million |
| Net earnings | $439.9 million | $29.2 million | $485.6 million | $184.1 million |
| Diluted EPS | $9.61 | $0.64 | $10.61 | $4.03 |
| Comprehensive earnings | $358.6 million | $17.0 million | $191.2 million | $142.3 million |
Net premiums earned increased 15% in the quarter and 17% year to date. Gross premiums written increased 13% in the quarter and 17% year to date, reaching $1.182 billion for the first nine months.
Underwriting income was $8.8 million in the third quarter, compared with $13.7 million in the prior-year quarter. The combined ratio was 97.0 versus 94.6. For the first nine months, underwriting income was $124.2 million versus $80.2 million, and the combined ratio improved to 85.3 from 88.9. The nine-month loss ratio was 46.1 versus 49.2, and the expense ratio was 39.2 versus 39.7.
- Q3 segment underwriting income: casualty $11.3 million, property $(8.3) million, and surety $5.8 million.
- 9M segment underwriting income: casualty $60.4 million, property $40.3 million, and surety $23.5 million.
- Q3 segment combined ratios: casualty 93.7, property 110.3, and surety 81.4.
- 9M segment combined ratios: casualty 88.6, property 81.9, and surety 74.4.
Cash Flow, Balance Sheet, Debt and Liquidity
- Operating cash flow was $282.9 million for the first nine months, compared with $280.4 million in 2021.
- Investing cash flow was $384.5 million, primarily reflecting $686.6 million of cash proceeds from the sale of Maui Jim.
- Financing cash flow was $(32.7) million, including $34.9 million of cash dividends paid.
- Cash increased to $723.5 million from $88.8 million at December 31, 2021.
- Total assets were $5.212 billion and shareholders’ equity was $1.394 billion at September 30, 2022.
- Total debt was approximately $199.8 million, consisting primarily of $149.8 million current debt and $50.0 million of Federal Home Loan Bank borrowings. Debt represented 12.5% of total capital.
- Cash and investments maturing within one year totaled approximately $929.9 million; an additional $851.5 million matured within one to five years.
- The company had an undrawn $60.0 million revolving credit facility, expandable to $120.0 million under certain conditions, expiring March 27, 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 Prior Comparable Period
- Net earnings increased substantially because RLI recognized a $574.5 million pretax, approximately $437.7 million after-tax, gain from selling its Maui Jim equity-method investment to Kering Eyewear on September 30, 2022.
- The Maui Jim transaction also generated $686.6 million of cash proceeds and reduced investments in unconsolidated investees to $58.1 million from $171.3 million at year-end.
- Equity market declines produced $155.2 million of year-to-date unrealized losses in 2022, compared with $29.5 million of unrealized gains in 2021.
- Higher interest rates caused $294.4 million of after-tax other comprehensive losses on the fixed-income portfolio for the first nine months, compared with $41.8 million of losses in 2021. The accumulated other comprehensive loss balance was $(244.6) million.
- Property underwriting improved materially year to date, moving from an $8.7 million loss to $40.3 million of income, primarily due to premium growth, lower storm losses and favorable reserve development.
- Third-quarter underwriting income declined despite premium growth, reflecting higher catastrophe losses and increased expense ratios, including a one-time bonus related to the Maui Jim sale.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific earnings or premium guidance. Management emphasized continued focus on underwriting profitability rather than general market-share growth and stated that the diversified portfolio and financial strength support the business through uncertain economic conditions.
- Q3 underwriting results included $40.0 million of pretax hurricane losses. Nine-month results included $40.0 million of hurricane losses and $5.0 million of other storm losses.
- Prior-period reserve development was favorable by $33.3 million in Q3 and $103.0 million for the first nine months. Management cautioned that reserve estimates remain subject to uncertainty, particularly due to inflation, litigation delays, changing settlement trends, COVID-19 effects, and potential legislative or judicial actions.
- Catastrophe reinsurance limits purchased effective 2022 included $750 million for California earthquakes, $775 million for earthquakes outside California, and $625 million for other perils, including wind, generally subject to $25 million retentions and co-participations.
- Key market risks include rising interest rates, equity-market volatility, inflation, credit risk, catastrophe events, supply-chain disruption and changes in economic conditions.
- The fixed-income portfolio had $301.7 million of gross unrealized losses at September 30, 2022. Management stated that securities continued to pay expected coupons and that it expected to recover the amortized cost basis of securities remaining in unrealized loss positions.
- Reinsurance recoverables were $770.9 million, with an $11.4 million allowance for unpaid-loss recoverables. Reinsurance does not relieve RLI of its obligations to policyholders.
- RLI paid a regular quarterly dividend of $0.26 per share and reported 47 consecutive years of dividend increases. No shares were repurchased during 2022; $87.5 million remained under the repurchase authorization.
- Ordinary dividends from the principal insurance subsidiary are subject to Illinois regulatory limits. At September 30, 2022, $83.1 million could be distributed without prior regulatory approval, subject to applicable restrictions.
Important Facts for Investors to Verify
- Determine the extent to which reported earnings and EPS depend on the nonrecurring Maui Jim sale gain rather than recurring underwriting and investment income.
- Monitor quarterly catastrophe losses, reserve releases and the sustainability of the 85.3 nine-month combined ratio.
- Assess the effect of higher interest rates on fixed-income fair values, accumulated other comprehensive losses and capital strength.
- Review equity-market exposure and the potential for additional realized or unrealized investment losses.
- Verify the timing and refinancing or repayment plan for approximately $149.8 million of current debt and the $50.0 million FHLB borrowing.
- Evaluate catastrophe exposures, reinsurance limits, retentions, co-participations and reinsurer credit quality.
- Consider regulatory restrictions on insurance-subsidiary dividends and the availability of holding-company liquidity.
- Review the filing’s forward-looking risk disclosures and the potential for inflation, litigation changes, COVID-19-related claim uncertainty and adverse reserve development to affect future results.