RLI Corp. 10-Q Summary
Business Context and Reporting Period
RLI Corp. is a U.S.-based specialty property, casualty and surety insurer focused on niche markets. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the same periods in 2022.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Net premiums earned | $322.3 million | $282.8 million | $630.0 million | $552.0 million |
| Consolidated revenue | $381.9 million | $213.1 million | $746.8 million | $477.9 million |
| Net earnings | $77.7 million | $(2.2) million | $176.5 million | $45.7 million |
| Diluted EPS | $1.69 | $(0.05) | $3.83 | $1.00 |
| Net investment income | $28.8 million | $18.5 million | $55.9 million | $36.4 million |
| Operating cash flow | Not separately provided | Not separately provided | $243.6 million | $170.6 million |
| Underwriting income | $41.2 million | $56.0 million | $109.1 million | $115.4 million |
| Combined ratio | 87.2% | 80.2% | 82.7% | 79.1% |
| Comprehensive earnings | $57.9 million | $(99.8) million | $194.4 million | $(167.5) million |
Q2 net earnings represented approximately 20.3% of consolidated revenue; six-month net earnings represented approximately 23.6%. Underwriting margins were approximately 12.8% in Q2 and 17.3% for the first six months, based on underwriting income divided by net premiums earned.
- Six-month gross premiums written increased 19% to $923.0 million, led by 55% growth in property, 7% growth in surety and 1% growth in casualty.
- Six-month net premiums earned increased 14%, with property up 34%, casualty up 7% and surety up 9%.
- Q2 storm losses were $18 million pretax versus $3 million in the prior-year quarter; six-month storm losses were $22 million versus $5 million.
- Prior-year reserve development was favorable by $20 million in Q2 and $72 million for the first six months, compared with $24 million and $70 million, respectively, in 2022.
- Total assets were $5.07 billion and shareholders’ equity was $1.35 billion at June 30, 2023, compared with $4.77 billion and $1.18 billion at December 31, 2022.
- Investments and cash totaled $3.59 billion, including $2.69 billion of fixed-income securities, $552.6 million of equity securities, $271.3 million of short-term investments and $16.7 million of cash.
- Total debt was $200 million, equal to approximately 13% of total capital. Debt consisted of $150 million of senior notes maturing September 15, 2023, and a $50 million FHLB borrowing maturing November 10, 2023.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially because equity securities produced $25.2 million of Q2 unrealized gains and $40.7 million of six-month unrealized gains, versus losses of $101.0 million and $128.8 million, respectively, in 2022.
- Net investment income increased 56% in Q2 and 54% for the first six months, reflecting higher interest rates and a larger average asset base.
- Underwriting income declined despite premium growth. The consolidated combined ratio increased to 87.2% in Q2 and 82.7% for the first six months, primarily because of higher storm losses, lower reserve releases in Q2 and increased expenses.
- Property premium growth was driven mainly by commercial property rate increases, particularly for wind exposures, with limited exposure growth and strengthened terms and conditions.
- Casualty underwriting income declined to $7.0 million in Q2 from $21.4 million, while six-month income declined to $38.8 million from $49.1 million. Property six-month underwriting income increased to $54.3 million from $48.6 million; surety declined to $16.0 million from $17.8 million.
- Operating cash flow increased to $243.6 million from $170.6 million, but investing activities used $226.1 million and financing activities used $23.6 million, resulting in a $6.1 million decrease in cash.
- RLI adopted ASU 2023-02 for tax-credit investments, reclassifying an approximately $11 million historic tax-credit investment and recognizing a $7 million unfunded commitment liability, with a $1 million reduction to retained earnings.
- The company sold its Maui Jim investment in 2022. A $14 million working-capital escrow gain was recognized in the first quarter of 2023, contributing to six-month realized gains.
Outlook, Risks, Liquidity and Unusual Items
The filing provides no specific earnings, premium or combined-ratio guidance. Management states that underwriting profitability remains the primary objective, with premium growth pursued selectively where underwriting profit is available.
- Management expects operating cash flows and investments to provide sufficient liquidity for the next 12 to 24 months. Cash and investments maturing within one year totaled approximately $482 million, with an additional $896 million maturing within one to five years.
- The company entered into a new $100 million revolving credit facility, expandable to $130 million under certain conditions, maturing May 29, 2026. No amounts were outstanding.
- RLI had $271 million of short-term investments at June 30, 2023, up from $36 million at year-end 2022, partly to enhance liquidity for potential second-half events.
- Catastrophe reinsurance purchased effective January 1, 2023 provided limits of $700 million to $600 million above specified retentions; an additional $150 million of protection purchased June 1 increased the limits to $850 million for earthquakes and $750 million for other perils, subject to co-participations.
- Key risks include catastrophe losses, inflation and claims-cost escalation, interest-rate and equity-market volatility, credit and reinsurance-counterparty risk, adverse loss-reserve development, competition, regulatory changes and evolving court decisions.
- The fixed-income portfolio had $260.9 million of gross unrealized losses at June 30, 2023, including 1,474 securities in unrealized-loss positions. Management stated that the securities continued to pay expected coupons and that it expected to recover amortized cost.
- Reserve estimates, investment valuations, reinsurance recoverability, deferred acquisition costs and deferred taxes remain significant areas of management judgment.
- The company paid a quarterly dividend of $0.27 per share and reported 48 consecutive years of dividend increases. No shares were repurchased during 2023; $87.5 million remained under the repurchase authorization.
- No material changes were reported to legal proceedings, risk factors, disclosure controls or internal control over financial reporting. Goodwill and indefinite-lived intangible assets were tested during Q2 with no impairment identified.
Important Facts for Investors to Verify
- Verify the September 2023 maturity and refinancing or repayment status of the $150 million senior notes, and the November 2023 maturity of the $50 million FHLB borrowing.
- Assess the sustainability of earnings excluding equity-market gains, Maui Jim-related gains and favorable prior-year reserve development.
- Monitor catastrophe losses, reserve development and combined ratios, particularly in the property and casualty segments.
- Review the $260.9 million of fixed-income unrealized losses, credit quality, duration and sensitivity to future interest-rate changes.
- Evaluate reinsurance recoverability, catastrophe limits, retentions and co-participations.
- Confirm the effect of higher compensation, technology and personnel investments on future expense ratios.
- Review regulatory restrictions on dividends from insurance subsidiaries and the availability of holding-company liquidity.