RLI Corp. 2011 First-Quarter 10-Q Summary
Business Context and Reporting Period
RLI Corp. is a specialty property and casualty insurer operating primarily through casualty, property and surety segments. The filing covers the three months ended March 31, 2011, compared with the three months ended March 31, 2010. Results are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net premiums earned | $116.1 million | $116.3 million | Flat |
| Consolidated revenue | $136.8 million | $139.3 million | Down 2% |
| Underwriting income | $19.0 million | $12.7 million | Up 50% |
| Net earnings | $26.5 million | $24.2 million | Up 9% |
| Diluted EPS | $1.24 | $1.13 | Up 10% |
| Comprehensive earnings | $31.7 million | $33.5 million | Down 5% |
| Operating cash flow | $17.9 million | $(2.4) million | Improved |
| Combined ratio | 83.6% | 89.1% | Improved 5.5 points |
The combined-ratio improvement reflected a lower loss ratio of 40.4% versus 46.7%, partially offset by a higher expense ratio of 43.2% versus 42.4%. The effective tax rate increased to 32% from 30%.
Segment underwriting income was $4.7 million for casualty, $9.4 million for property and $5.0 million for surety. Gross premiums written increased 1% to $143.3 million, with casualty down 6%, property up 12% and surety up 2%.
At March 31, 2011, total assets were $2.52 billion and shareholders’ equity was $819.9 million. Investments totaled $1.83 billion, including $1.38 billion of fixed income securities, $335.0 million of equities and $111.9 million of short-term investments. Long-term debt was $100.0 million, representing 12.2% of total capital. The quarterly dividend was $0.29 per share.
Material Changes Versus the Prior Comparable Period
- Net earnings and diluted EPS increased despite lower investment income and realized gains.
- Investment income declined 2% to $16.3 million, while net realized investment gains declined to $4.5 million from $6.5 million.
- Underwriting income increased primarily because of favorable prior-year reserve development and lower current accident-year loss ratios.
- Favorable prior-year reserve development contributed $12.2 million of pretax earnings in 2011, compared with $8.9 million in 2010.
- The casualty segment improved materially, with its combined ratio declining to 91.5% from 99.0%; casualty gross premiums written declined because of weak economic conditions, soft pricing and targeted underwriting actions.
- Property benefited from new products and growth in marine and facultative reinsurance, while surety benefited from favorable loss trends.
- The company increased short-term investments to prepare for the pending CBIC acquisition and did not repurchase shares during the quarter, compared with $11.3 million of repurchases in Q1 2010.
Outlook, Risks, Contingencies and Unusual Items
Management emphasized a strategy of underwriting for profit rather than pursuing premium growth or market share. No formal earnings or revenue guidance was provided.
- RLI agreed to acquire Contractors Bonding and Insurance Company through its holding company for approximately $136 million in cash. The transaction was in the final stages of regulatory approval and was expected to close in the second quarter of 2011.
- The company recorded approximately $1.0 million of reserves for losses associated with the Japan earthquake and tsunami, primarily affecting marine coverage.
- A catastrophe-model reevaluation increased modeled potential wind losses. RLI purchased additional 2011 wind reinsurance and began modifying underwriting guidelines to reduce continental wind exposure to within risk tolerances.
- Insurance reserves are inherently uncertain and may be affected by claims emergence, inflation, legal and regulatory developments, court decisions, catastrophe activity and changes in loss trends.
- The investment portfolio had $17.6 million of unrealized losses at March 31, 2011, primarily attributed to higher interest rates. Management recorded no other-than-temporary impairment losses and reported that the fixed-income portfolio remained high quality.
- The company had $100.0 million of senior notes bearing approximately 5.95% interest and maturing in January 2014. Its $25.0 million revolving credit facility, expandable to $50.0 million under certain conditions, was scheduled to expire May 31, 2011; renewal was in progress and no amounts were outstanding.
- Management stated that operating cash flow, investments, financing capacity and liquidity resources should be sufficient for anticipated needs over the next 12 to 24 months.
- The filing reported no material changes in legal proceedings or risk factors and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Completion, regulatory approval, purchase accounting and financing of the approximately $136 million CBIC acquisition.
- Whether favorable reserve development continues or reverses, particularly in casualty and surety lines.
- Actual losses from Japan-related marine claims and the effect of revised catastrophe models on wind exposure and reinsurance costs.
- Premium pricing, retention and growth trends in the soft casualty market.
- Renewal terms and availability of the revolving credit facility before its May 31, 2011 expiration.
- Interest-rate effects on fixed-income fair values, investment income and unrealized gains or losses.
- Regulatory restrictions on dividends from RLI Insurance Company and the company’s liquidity after the acquisition and shareholder distributions.