RLI Corp. 2020 Q3 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 and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net premiums earned | $216.6 million | $211.3 million | $640.9 million | $623.5 million |
| Consolidated revenue | $262.8 million | $236.9 million | $679.2 million | $738.8 million |
| Net earnings | $42.4 million | $32.3 million | $73.3 million | $138.3 million |
| Diluted EPS | $0.93 | $0.71 | $1.62 | $3.06 |
| Net underwriting income | $1.2 million | $13.7 million | $42.6 million | $51.1 million |
| Combined ratio | 99.5 | 93.5 | 93.4 | 91.8 |
| Net investment income | $16.5 million | $17.5 million | $51.2 million | $51.1 million |
| Operating cash flow | Not separately provided | Not separately provided | $163.2 million | $186.8 million |
Q3 net margin was approximately 16.1% of consolidated revenue, compared with 13.6% in Q3 2019. The nine-month net margin was approximately 10.8%, compared with 18.7% in 2019. The nine-month underwriting margin was approximately 6.6% of net premiums earned, compared with 8.2% in 2019.
- Premium growth was concentrated in casualty and property. Nine-month gross premiums written increased 6% to $835.8 million, while net premiums earned increased 3%.
- Q3 casualty, property and surety underwriting income was $14.0 million, a $20.0 million loss and $7.1 million, respectively. Nine-month amounts were $22.4 million, a $3.9 million loss and $24.0 million.
- At September 30, 2020, total assets were $3.79 billion, shareholders’ equity was $1.10 billion and total investments and cash were $2.75 billion.
- Cash was $70.6 million. Fixed-income securities were $2.16 billion and equity securities were $456.0 million.
- Long-term debt was $149.4 million, consisting primarily of senior notes maturing in 2023. Debt represented approximately 12% of total capital.
Material changes versus the prior comparable period
- Q3 net earnings increased 31% primarily because of $28.1 million of net unrealized equity-security gains, versus $4.9 million in Q3 2019.
- Nine-month net earnings declined 47% because 2020 included $27.6 million of net unrealized equity-security losses, versus $47.2 million of gains in 2019.
- Nine-month underwriting income declined despite higher premiums, reflecting greater catastrophe losses and COVID-19-related losses. The consolidated combined ratio increased to 93.4 from 91.8.
- Property underwriting deteriorated materially: the nine-month combined ratio increased to 102.9 from 88.3, and the Q3 combined ratio increased to 144.0 from 85.0, primarily because of hurricanes Hanna, Isaias, Laura and Sally.
- Transportation gross premiums written declined $35.9 million for the first nine months because of reduced public-transit activity. Surety premiums also declined as economic conditions reduced demand and increased credit risk.
- Net favorable prior-year reserve development increased to $70.0 million for the first nine months and $29.2 million in Q3, compared with $55.2 million and $14.4 million, respectively, in the prior-year periods.
- Net investment income was nearly flat for the nine months but declined 6% in Q3 as lower reinvestment yields offset growth in invested assets.
- RLI adopted ASU 2016-13 on January 1, 2020. The cumulative-effect adjustment increased retained earnings by approximately $1.1 million and had an immaterial ongoing impact.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $163.2 million, down from $186.8 million. Investing activities used $114.7 million and financing activities used $24.2 million, producing a $24.4 million increase in cash.
- Management reported approximately $157.6 million of cash and investments maturing within one year and $556.0 million maturing within one to five years.
- The company had no borrowings under its $60.0 million revolving credit facility, which can increase to $120.0 million under certain conditions, and no borrowings from the Federal Home Loan Bank facility with approximately $30.0 million of aggregate capacity.
- Management stated that operating cash flow, liquid investments and unused credit facilities should meet anticipated needs for the next 12 to 24 months.
- The regular quarterly dividend was $0.24 per share. No shares were repurchased in 2020; $87.5 million remained under the repurchase authorization.
Guidance, outlook, risks and unusual items
- No formal earnings or premium guidance was provided.
- COVID-19 created uncertainty around premium volume, claim frequency, reserve development, investment values and the timing of loss emergence. The company reported $14.9 million of COVID-19-related net losses for the first nine months, including $4.1 million in Q3.
- The company received business-interruption claims and stated that coverage would be evaluated individually. It does not offer event-cancellation, travel, trade-credit or pandemic-specific coverage.
- Hurricanes Hanna, Isaias, Laura and Sally generated $37.0 million of pretax losses and $2.0 million of reinstatement premium during the first nine months. Other storm and civil-unrest losses were $6.5 million.
- Catastrophe reinsurance limits, after additional coverage purchased March 1, 2020, were $500 million for California earthquakes, $525 million for earthquakes outside California and $375 million for other perils, subject to $25 million retentions and certain co-participations.
- Future results remain exposed to reserve-estimation uncertainty, legislative or judicial changes, delayed litigation, altered settlement trends, economic conditions, catastrophe activity, interest rates, equity-market volatility and reinsurer credit risk.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting. No material changes to previously disclosed risk factors or legal proceedings were reported.
Investor verification checklist
- Verify the sustainability of favorable prior-year reserve development and the adequacy of COVID-19 and catastrophe reserves.
- Assess whether property underwriting can return below a 100 combined ratio after the 2020 hurricane losses.
- Track transportation, construction-related general liability and surety premium trends as economic conditions evolve.
- Separate recurring underwriting performance from volatile equity-security gains and losses.
- Monitor declining fixed-income yields, equity-market exposure and the credit quality of the investment portfolio.
- Review regulatory limits on dividends from insurance subsidiaries and the holding company’s $58.2 million of liquid assets.
- Confirm debt maturity and refinancing requirements for the $149.4 million of senior notes due in 2023.