RLI Corp. 2021 First-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 months ended March 31, 2021, compared with the three months ended March 31, 2020. The company reported 45.2 million common shares outstanding as of April 15, 2021.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net premiums earned | $228.6 million | $215.6 million | 6.0% increase |
| Consolidated revenue | $287.3 million | $118.1 million | $169.2 million increase |
| Underwriting income | $29.9 million | $17.2 million | $12.7 million increase |
| Combined ratio | 86.9% | 92.0% | Improved 5.1 points |
| Earnings before income taxes | $89.8 million | $(79.4) million | Returned to profit |
| Net earnings | $73.0 million | $(61.3) million | Returned to profit |
| Diluted EPS | $1.60 | $(1.36) | Improved |
| Operating cash flow | $60.3 million | $(5.8) million | Improved $66.1 million |
Net premiums earned represented approximately 79.6% of consolidated revenue. Underwriting income represented approximately 13.1% of net premiums earned. The reported revenue and earnings comparison was heavily affected by equity-market results: Q1 2021 included $28.2 million of net unrealized equity gains, versus a $130.4 million loss in Q1 2020.
- Net investment income declined 7.6% to $16.4 million because of lower reinvestment rates.
- Net realized gains were $14.2 million, compared with $15.2 million in the prior-year quarter.
- The loss ratio improved to 45.9% from 51.5%; the expense ratio increased to 41.0% from 40.5%.
- Gross premiums written increased 20% to $294.9 million, while net premiums earned increased 6%.
- Segment underwriting income was $24.9 million for casualty, $(1.0) million for property and $6.1 million for surety.
- Segment combined ratios were 83.3% for casualty, 101.9% for property and 78.5% for surety.
Balance Sheet, Debt and Liquidity
- Total assets were $4.0 billion at March 31, 2021, compared with $3.9 billion at December 31, 2020.
- Shareholders’ equity was $1.155 billion, up from $1.136 billion at year-end 2020.
- Investments and cash totaled $2.876 billion, including $2.176 billion of fixed-income securities, $555.2 million of equity securities and $94.9 million of cash.
- Long-term debt was $149.5 million, consisting primarily of senior notes bearing interest at 4.875% and maturing in September 2023. Debt represented approximately 11.5% of total capital.
- Cash increased from $62.2 million to $94.9 million during the quarter. Cash flows were $60.3 million from operations, $(16.5) million from investing and $(11.0) million from financing.
- The company had approximately $201.8 million of cash and investments maturing within one year and $572.0 million maturing within one to five years.
- No borrowings were outstanding under the $60.0 million revolving credit facility or the Federal Home Loan Bank facility. The revolving facility may increase to $120.0 million under specified conditions.
- RLI paid a quarterly dividend of $0.24 per share and stated that it had increased dividends for 45 consecutive years.
Material Changes Versus the Prior Comparable Period
- Net earnings improved from a $61.3 million loss to $73.0 million of earnings, primarily because equity securities generated a $28.2 million unrealized gain versus a $130.4 million unrealized loss in Q1 2020.
- Underwriting income increased 74%, and the consolidated combined ratio improved from 92.0% to 86.9%.
- Casualty underwriting improved substantially, while property underwriting moved from $9.9 million of income to a $1.0 million loss.
- Property results were affected by $14.9 million of winter storm losses; total pretax storm losses were $16.0 million versus $0.5 million in Q1 2020.
- Prior-year reserve development was favorable by $37.1 million, compared with $15.2 million in Q1 2020. No products experienced significant adverse development.
- Other comprehensive loss increased to $44.7 million from $13.0 million, mainly because rising interest rates reduced the fair value of fixed-income securities.
- Premium growth was strongest in property, where gross premiums written increased 31%, and casualty, where they increased 19%. Transportation premium remained below pre-pandemic levels.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific quantitative earnings, revenue or combined-ratio guidance. Management stated that the primary focus remains underwriting profitability rather than general premium growth or market share.
- COVID-19 continued to affect public transportation, construction-related products and certain credit-sensitive casualty and surety exposures. Management expects transportation and construction-related premiums may remain challenged while economic disruptions continue.
- Management stated that the company does not offer event cancellation, travel, trade credit or pandemic-specific coverage, which limits direct pandemic exposure.
- COVID-19 may delay claims emergence, alter settlement trends, extend statutes of limitations and lead to adverse reserve development. Management noted that legislative, regulatory or judicial actions could reduce future earnings.
- Rising interest rates may reduce the fair value of the fixed-income portfolio and investment income. The portfolio had a 4.8-year duration and an average rating of AA-.
- Catastrophe exposure includes earthquakes, hurricanes, windstorms and other severe weather. The quarter’s property results were materially affected by winter storms.
- Reinsurance recoverables totaled $454.9 million, net of allowances, and remain subject to reinsurer credit risk. The company reported $9.0 million of allowances for uncollectible unpaid-loss recoverables.
- The company believes operating and investment cash flows will meet anticipated liquidity needs over the next 12 to 24 months.
- No material changes were reported in legal proceedings or risk factors. Management concluded that disclosure controls were effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Assess the sustainability of underwriting improvement after unusually favorable $37.1 million prior-year reserve development.
- Monitor property catastrophe losses and whether the 101.9% property combined ratio normalizes.
- Separate recurring operating performance from equity-market gains and other investment volatility.
- Evaluate the effect of lower reinvestment yields and rising interest rates on investment income, accumulated other comprehensive income and book value.
- Track COVID-19-related claims emergence, transportation and construction premium trends, and any adverse reserve development.
- Review the September 2023 senior-note maturity, insurance-subsidiary dividend restrictions and available holding-company liquidity.
- Consider reinsurance recoverability and the company’s exposure to reinsurer credit deterioration.