RLI Corp. 2021 Form 10-K Summary
Business Context and Reporting Period
RLI Corp. is a U.S.-based specialty property and casualty insurance holding company. Its principal insurance subsidiaries write admitted, excess and surplus, surety and reinsurance products throughout the United States and certain U.S. territories. Operations are organized into casualty, property and surety segments. This filing covers the fiscal year ended December 31, 2021; it is an annual report, not a quarterly filing.
RLI reported its 26th consecutive year of underwriting profitability. Gross premiums were concentrated in specialty admitted insurance, excess and surplus lines, and a smaller specialty reinsurance business.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Gross premiums written | $1.347 billion | $1.136 billion | 19% |
| Net premiums written | $1.058 billion | $892.1 million | 19% |
| Net premiums earned | $980.9 million | $865.7 million | 13% |
| Total revenue | $1.179 billion | $983.6 million | 20% |
| Underwriting income | $129.9 million | $69.6 million | 87% |
| Net earnings | $279.4 million | $157.1 million | 78% |
| Diluted EPS | $6.11 | $3.46 | 77% |
| Operating cash flow | $384.9 million | $263.3 million | 46% |
| Combined ratio | 86.8% | 92.0% | Improved 5.2 points |
| Shareholders’ equity | $1.229 billion | $1.136 billion | 8% |
Net earnings benefited from underwriting income, $68.9 million of net investment income, $64.2 million of net realized investment gains, $65.3 million of net unrealized gains on equity securities and $37.1 million of equity-method investee earnings. The effective tax rate increased to 18.9% from 17.3%.
The loss ratio improved to 46.5% from 51.2%, while the expense ratio improved modestly to 40.3% from 40.8%. Favorable prior-year reserve development contributed $125.5 million to pretax earnings in 2021, compared with $101.1 million in 2020.
Segments and Material Changes
- Casualty: Net premiums earned increased 11% to $633.6 million. Underwriting income rose to $95.5 million from $44.4 million, and the combined ratio improved to 84.9% from 92.2%. Transportation, commercial excess, personal umbrella and professional services contributed to growth.
- Property: Net premiums earned increased 26% to $231.8 million. The segment returned to $11.3 million of underwriting income from a $3.2 million loss, with the combined ratio improving to 95.1% from 101.7%. Growth was led by commercial property and marine.
- Surety: Net premiums earned increased 3% to $115.4 million. Underwriting income declined to $23.1 million from $28.4 million, and the combined ratio worsened to 80.0% from 74.8%, primarily because favorable reserve development was lower.
- Gross premiums written increased across all three segments, supported by rate increases, expanded distribution, market disruption and increased construction-related activity.
- Commercial transportation premiums recovered from pandemic-related declines in 2020 and exceeded pre-pandemic levels. RLI exited its excess cyber liability business on a runoff basis during 2021.
- 2021 underwriting results included $33.6 million of pretax hurricane losses, $25.0 million of other storm losses and $0.4 million of reinstatement premium. Comparable 2020 results included $51.5 million of hurricane losses, $6.5 million of other storm and civil unrest losses, and $18.3 million of COVID-19-related loss and defense reserves.
Investments, Debt, Liquidity and Capital
- Total investments and cash were $3.163 billion at year-end, including $2.410 billion of fixed-income securities, $613.8 million of equity securities, $50.5 million of other invested assets and $88.8 million of cash.
- Fixed income represented 76% of the investment portfolio and equities 19%. The equity portfolio returned 26.4% in 2021, while the tax-adjusted mark-to-market return on fixed income was negative 0.3%.
- Rising interest rates produced a $58.9 million after-tax other comprehensive loss. A hypothetical 100-basis-point rate increase would reduce the modeled fair value of fixed income by $126.9 million; a 10% equity-market decline would reduce equity fair value by approximately $56.4 million.
- Long-term debt was $199.7 million, consisting principally of $150.0 million of senior notes maturing in September 2023 and a $50.0 million Federal Home Loan Bank borrowing maturing in November 2023. Debt represented 14% of total capital.
- The company had no borrowings outstanding under its $60.0 million revolving credit facility, which may be increased to $120.0 million under certain conditions. Additional secured borrowing capacity through the Federal Home Loan Bank system was approximately $14.9 million at year-end.
- Cash and investments maturing within one year totaled approximately $146.9 million. Management stated that operating cash flow, investment cash flow and financing sources should satisfy anticipated needs for the next 12 to 24 months.
- Gross unpaid losses and settlement expenses increased to $2.044 billion from $1.750 billion, while net reserves increased to $1.435 billion from $1.306 billion. Reinsurance recoverables on unpaid losses increased to $608.1 million from $443.7 million.
- Statutory policyholders’ surplus was $1.241 billion, and the net-premiums-written-to-surplus ratio was 0.9 to 1. RLI Insurance Company’s actual statutory capital and surplus exceeded five times its authorized control level RBC.
Guidance, Outlook, Risks and Unusual Items
Management expects the specialty insurance hard market to continue into 2022, supported by inflation, catastrophe activity, higher reinsurance costs and constrained capacity in volatile segments. RLI expects continued rate momentum and growth across most casualty lines, although transportation and personal umbrella growth may moderate.
Property profitability remains particularly dependent on storm activity, catastrophe losses, reinsurance costs, materials and wage inflation, building valuations and climate-related loss trends. Surety growth is expected to continue, but construction labor and materials shortages remain constraints.
Management expects rising bond yields to support future investment income, while also anticipating equity-market volatility as monetary conditions tighten. Approximately one-third of RLI’s business relates to construction, creating exposure to economic weakness, supply-chain disruption, labor shortages and inflation.
- Loss reserves are inherently uncertain, particularly for long-tail casualty, environmental, asbestos and mass-tort exposures. A general liability sensitivity analysis indicated that combined adverse changes in selected assumptions could increase estimated ultimate losses by $27.4 million for the modeled portfolio.
- Catastrophe exposure remains significant. For 2022, RLI purchased limits of $600 million excess of $25 million for California earthquake, $625 million excess of $25 million for non-California earthquake and $475 million excess of $25 million for other perils, subject to co-participations and treaty terms.
- Reinsurance reduces volatility but does not relieve RLI of its primary obligations to policyholders. More than 89% of reinsurance recoverables were due from reinsurers rated A or better by AM Best and Standard & Poor’s.
- Standard & Poor’s downgraded the insurance group’s financial strength rating from A+ to A during 2021. AM Best affirmed A+ and Moody’s affirmed A2.
- COVID-19-related claims, delayed litigation, changing statutes of limitation and future legislative, regulatory or judicial decisions could increase claims or reserve deficiencies. RLI stated that it does not offer event cancellation, travel, trade credit or pandemic-specific coverage.
- RLI paid a $2.00 per-share special dividend in December 2021 and maintained its regular dividend program. Total dividends and dividend equivalents recognized in shareholders’ equity were $135.5 million.
- Management reported no material adverse legal proceedings, no off-balance-sheet arrangements and effective disclosure controls and internal control over financial reporting. Deloitte & Touche LLP issued unqualified audit opinions.
Most Important Facts for Investors to Verify
- Whether favorable reserve development of $125.5 million in 2021 is sustainable and how future loss emergence compares with management’s assumptions.
- The effect of inflation, social inflation, litigation trends, climate change and catastrophe activity on loss ratios and reinsurance costs.
- The impact of the Standard & Poor’s downgrade on policyholder retention, distribution relationships and future premium growth.
- Reinsurance recoverability, counterparty concentrations, treaty limits, co-participations and the adequacy of catastrophe protection.
- Refinancing or repayment plans for approximately $200 million of debt maturing in 2023 and the availability of holding-company liquidity.
- The sensitivity of book value and comprehensive income to interest-rate increases and equity-market declines.
- The extent to which 2021 earnings growth was driven by recurring underwriting performance versus favorable reserve development and investment gains.
- Regulatory restrictions on dividends from insurance subsidiaries, including the $26.1 million of principal-subsidiary net assets identified as available for ordinary distribution at year-end.