RLI Corp. 10-Q Summary: First Quarter 2018
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. The filing covers the three months ended March 31, 2018, compared with the same period in 2017. Financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change or context |
|---|---|---|---|
| Net premiums earned | $190.0 million | $183.3 million | Up 3.7% |
| Consolidated revenue | $185.9 million | $196.9 million | Down $11.0 million, primarily due to equity-market losses recognized in earnings |
| Net investment income | $14.2 million | $13.0 million | Up 9.4% |
| Net realized gains | $8.5 million | $2.7 million | Higher gains from equity portfolio rebalancing |
| Net earnings | $12.2 million | $19.8 million | Down $7.6 million |
| Diluted earnings per share | $0.27 | $0.45 | Down $0.18 |
| Underwriting income | $17.5 million | $13.1 million | Improved by $4.4 million |
| Combined ratio | 90.8 | 92.9 | Improved; loss ratio was 48.6 versus 51.0 |
| Operating cash flow | $15.4 million | $11.3 million | Higher receipts from increased written premiums |
| Cash dividends per share | $0.21 | $0.20 | Quarterly dividend increased year over year |
Comprehensive loss was $14.2 million, or $0.32 per diluted share, compared with comprehensive earnings of $31.6 million, or $0.71 per diluted share, in Q1 2017. The 2018 loss primarily reflected $26.4 million of after-tax unrealized losses on the fixed-income portfolio as interest rates increased.
Balance sheet, debt and liquidity
- Total assets were $2.89 billion at March 31, 2018, compared with $2.95 billion at December 31, 2017.
- Investments and cash totaled $2.10 billion, including $1.65 billion of fixed-income securities, $378.3 million of equity securities and $28.9 million of cash.
- Shareholders’ equity was $832.9 million, down from $853.6 million at year-end, primarily reflecting accumulated other comprehensive losses.
- Long-term debt was $149.0 million, consisting principally of senior notes due in 2023 with a 4.875% coupon. Debt represented 15.2% of total capital.
- Cash increased to $28.9 million from $24.3 million. Investing cash flow was negative $4.2 million and financing cash flow was negative $6.6 million, including $9.3 million of dividends.
- Approximately $64.4 million of cash and investments mature within one year, with another $330.1 million maturing within one to five years.
- The company reported no borrowings under its $40.0 million revolving credit facility or the Federal Home Loan Bank of Chicago facility. Management stated that operating cash flow, investments and financing sources should provide sufficient liquidity for the next 12 to 24 months.
Material changes versus the prior comparable period
- Gross premiums written increased 11.3% to $216.9 million. Casualty gross written premiums rose 10.7%, property rose 23.8%, and surety declined 1.5%.
- Casualty underwriting income improved to $1.6 million from a $6.9 million loss, supported by favorable prior-year reserve development. Its combined ratio improved to 98.8 from 105.8.
- Property underwriting income declined to $5.9 million from $8.8 million, with the combined ratio worsening to 83.3 from 75.5. Results included $2.0 million of winter storm losses.
- Surety underwriting income declined to $10.0 million from $11.1 million, and the combined ratio increased to 65.4 from 63.5.
- Prior accident-year reserve development was favorable by $14.6 million, compared with $5.9 million in Q1 2017.
- Adoption of ASU 2016-01 moved equity-security unrealized gains and losses from other comprehensive income to net earnings. RLI recognized $26.8 million of pretax unrealized equity losses in Q1 2018, or $21.1 million after tax, materially reducing reported earnings.
- Adoption of ASU 2016-01 also transferred $142.2 million of accumulated unrealized equity gains and losses to retained earnings at the beginning of 2018. Adoption of ASU 2018-02 transferred $3.7 million of stranded tax effects from accumulated other comprehensive earnings to retained earnings.
- Medical professional liability adverse loss experience triggered a $4.4 million non-cash impairment charge, including $3.6 million of goodwill and $0.8 million of definite-lived intangible assets. No goodwill or intangible assets remained for that reporting unit after the impairment.
- The effective tax rate declined to 15.0% from 25.0%, reflecting the Tax Cuts and Jobs Act reduction in the federal corporate tax rate to 21% and the effect of tax-favored income and deductions.
Outlook, management commentary, risks and unusual items
Management reiterated its strategy of prioritizing underwriting profitability over broad premium growth, emphasizing disciplined risk selection in competitive markets. No specific numerical earnings or premium guidance was provided in the filing.
- Key insurance risks include inaccurate loss-reserve estimates, inflation, litigation and legal changes, pricing competition, economic conditions and catastrophe events.
- Property catastrophe exposure includes earthquakes, hurricanes, windstorms and fires; the company manages exposure through geographic limits, reinsurance, underwriting terms and catastrophe modeling.
- Casualty claims may take years to develop, increasing reserve uncertainty. Medical professional liability experienced adverse development in the quarter.
- Investment risks include equity-price declines, rising interest rates, credit deterioration and fair-value volatility. The fixed-income portfolio had a 4.9-year duration, an average rating of AA-, and 84% rated A or better.
- Fixed-income unrealized losses were $24.4 million at March 31, 2018, and management concluded that the portfolio’s amortized cost basis was recoverable. One fixed-income security generated a $0.1 million OTTI charge.
- Unfunded investment commitments included $2.5 million for low-income housing tax credit investments, $15.7 million for a business development company and $7.2 million for a global credit fund.
- The revolving credit facility expired May 28, 2018; the filing states that no amounts were outstanding at March 31, 2018.
- Dividend capacity at the holding company depends substantially on distributions from insurance subsidiaries, which are subject to Illinois insurance-law restrictions. No dividends were paid by the principal insurance subsidiary to RLI Corp. in Q1 2018.
- The company reported no material changes in legal proceedings or risk factors and concluded that disclosure controls were effective.
Important facts for investors to verify
- Separate recurring underwriting performance from investment-market volatility caused by the ASU 2016-01 accounting change.
- Monitor medical professional liability loss experience, reserve development and any future impairment testing.
- Assess whether favorable prior-year reserve development remains sustainable and whether casualty and surety expense ratios continue to rise.
- Review catastrophe exposure, reinsurance protection and loss trends in the property segment.
- Confirm renewal or replacement terms for the revolving credit facility that expired in May 2018.
- Evaluate liquidity available at the holding-company level, including regulatory restrictions on insurance-subsidiary dividends.
- Track the effect of interest rates and equity-market performance on comprehensive income, book value and investment liquidity.