RLI Corp. 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 months ended March 31, 2020, compared with the three months ended March 31, 2019. The quarter included significant COVID-19-related economic and financial-market disruption.
Financial Performance and Key Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net premiums earned | $215.6 million | $204.7 million |
| Net investment income | $17.8 million | $16.6 million |
| Net realized gains | $15.2 million | $9.1 million |
| Net unrealized gains/(losses) on equity securities | $(130.4) million | $33.5 million |
| Consolidated revenue | $118.1 million | $263.8 million |
| Earnings/(loss) before income taxes | $(79.4) million | $81.7 million |
| Net earnings/(loss) | $(61.3) million | $65.5 million |
| Diluted EPS | $(1.36) | $1.46 |
| Comprehensive earnings/(loss) | $(74.3) million | $94.8 million |
| Operating cash flow | $(5.8) million | $30.8 million |
| Combined ratio | 92.0 | 89.0 |
- Gross premiums written increased 6.5% to $245.8 million; net premiums earned increased 5.3%.
- Underwriting income was $17.2 million, down from $22.4 million. Casualty generated a $1.3 million underwriting loss, while property produced $9.9 million and surety $8.7 million of underwriting income.
- The loss ratio increased to 51.5 from 46.0, primarily because of lower favorable reserve development and $5.0 million of COVID-19-related claim investigation and defense reserves. The expense ratio improved to 40.5 from 43.0.
- Equity-market declines produced $115.2 million of unrealized losses on equity securities still held and were the principal driver of the quarterly net loss.
- Fixed-income investments generated $13.0 million of after-tax other comprehensive loss, reflecting widening credit spreads that exceeded the benefit from lower interest rates.
- At March 31, 2020, total assets were $3.38 billion, shareholders’ equity was $915.7 million and total liabilities were $2.46 billion.
- Investments and cash totaled $2.42 billion, including $1.96 billion of fixed-income securities, $356.4 million of equity securities and $42.7 million of cash.
- Long-term debt was $149.3 million, consisting primarily of senior notes due in 2023. Debt represented approximately 14.0% of total capital. Interest expense was $1.9 million.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue fell $145.7 million because Q1 2020 included $130.4 million of unrealized equity losses versus $33.5 million of unrealized gains in Q1 2019.
- Net earnings declined by $126.7 million, from $65.5 million of earnings to a $61.3 million loss.
- Underwriting remained profitable, but underwriting income declined $5.2 million and the combined ratio deteriorated by three points.
- Casualty premiums increased 4.7% and property premiums increased 15.7%; surety premiums were broadly flat. Public transportation premium activity was materially affected by COVID-19-related service suspensions.
- Gross written premium for commercial transportation decreased by $21.5 million, including a $23.0 million reversal related to suspended public transportation coverage.
- Operating cash flow changed from $30.8 million provided to $5.8 million used, mainly due to higher claim payments and bonus and profit-sharing payments.
- Shareholders’ equity decreased from $995.4 million at December 31, 2019 to $915.7 million at March 31, 2020, reflecting the quarterly net loss, other comprehensive loss and dividends.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide quantitative earnings or revenue guidance. It stated that the ultimate effects of the COVID-19 economic shutdown on revenue and claims could not yet be reasonably estimated.
- The company recorded $5.0 million of net current accident-year reserves for COVID-19 claim investigation and defense costs, including $3.0 million in casualty and $2.0 million in property.
- Management identified potential COVID-19 effects on premium demand, premium collections, operating costs, claims, litigation, loss reserves, investment valuations and future investment income. Legislative, regulatory or judicial actions could require coverage, refunds or extended payment terms beyond current expectations.
- RLI stated that it does not offer event cancellation, travel, trade credit or pandemic-specific coverage, although it received claims, primarily business interruption claims, which were being reviewed individually.
- The catastrophe reinsurance program renewed January 1, 2020. Additional protection purchased March 1 increased limits to $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.
- Liquidity was described as strong. RLI had approximately $99.4 million of cash and investments maturing within one year, a $60.0 million revolving credit facility that may increase to $120.0 million under certain conditions, and approximately $30.0 million of potential Federal Home Loan Bank borrowing capacity. No amounts were outstanding under these facilities at March 31, 2020.
- Management believes operating cash flow, the liquid fixed-income portfolio and unused credit facilities are sufficient for anticipated needs over the next 12 to 24 months.
- RLI adopted ASU 2016-13 on January 1, 2020. The adoption increased beginning retained earnings by $1.1 million and had an immaterial overall effect. The company recorded a $0.9 million allowance for credit losses on 39 fixed-income securities at March 31, 2020.
- The company paid a quarterly dividend of $0.23 per share and did not repurchase shares during the quarter. The share repurchase program had $87.5 million of remaining capacity.
- Management stated that disclosure controls and procedures were effective and that no material changes affected internal control over financial reporting.
Important Facts for Investors to Verify
- Whether COVID-19 business interruption and other claims ultimately exceed the $5.0 million of reserves recorded at quarter-end.
- Changes in equity and fixed-income market values, including whether unrealized losses become realized or create additional credit-loss allowances.
- Future loss emergence, reserve development and combined-ratio performance, particularly in casualty and construction-related business.
- Premium retention, refunds and renewal trends following the $23.0 million public transportation premium reversal.
- Operating cash flow and the adequacy of liquidity if claims payments increase or premium collections weaken.
- Compliance with debt covenants, availability under the new revolving facility and regulatory limits on dividends from insurance subsidiaries.
- The sustainability of the quarterly dividend and the company’s ability to maintain capital strength under prolonged market or underwriting stress.