RLI Corp. 2020 Form 10-K Summary
Business context and reporting period
RLI Corp. is a U.S.-based specialty property and casualty insurance holding company. Its principal subsidiaries underwrite admitted, excess and surplus, surety and reinsurance products through three segments: casualty, property and surety. The filing covers the fiscal year ended December 31, 2020, with comparisons primarily to 2019.
RLI operates principally in the United States and had 875 associates at year-end. Management reported its 25th consecutive year of underwriting profitability.
Key financial metrics
| Metric | 2020 | 2019 | Change or context |
|---|---|---|---|
| Gross premiums written | $1.136 billion | $1.065 billion | Up 7% |
| Net premiums earned | $865.7 million | $839.1 million | Up 3% |
| Consolidated revenue | $983.6 million | $1.004 billion | Down $20.0 million |
| Net earnings | $157.1 million | $191.6 million | Down 18% |
| Diluted EPS | $3.46 | $4.23 | Down 18% |
| Underwriting income | $69.6 million | $67.6 million | Up 3% |
| Combined ratio | 92.0% | 91.9% | Underwriting profit in both years |
| Loss ratio | 51.2% | 49.3% | Higher catastrophe and COVID-19-related losses |
| Expense ratio | 40.8% | 42.6% | Improved by 1.8 percentage points |
| Net investment income | $67.9 million | $68.9 million | Down 1% |
| Net realized gains | $17.9 million | $17.5 million | Broadly stable |
| Net unrealized equity gains | $32.1 million | $78.1 million | Material decline |
| Operating cash flow | $263.3 million | $276.9 million | Positive but down 5% |
| Total investments and cash | $2.837 billion | $2.560 billion | Up 11% |
| Shareholders’ equity | $1.136 billion | $995.4 million | Up 14% |
| Long-term debt | $149.5 million | $149.3 million | $150 million senior notes due September 2023 |
Segment performance and material changes
- Casualty: Net premiums earned increased 2% to $569.5 million. Underwriting income rose to $44.4 million from $20.6 million, and the combined ratio improved to 92.2% from 96.3%. Favorable prior-year reserve development was $75.1 million.
- Property: Net premiums earned increased 12% to $183.7 million, but the segment reported a $3.2 million underwriting loss versus $18.1 million of income in 2019. The combined ratio deteriorated to 101.7% from 88.9%, primarily because of hurricanes, other storms and civil unrest.
- Surety: Net premiums earned declined 4% to $112.5 million. Underwriting income was $28.4 million versus $28.8 million, with a 74.8% combined ratio compared with 75.3%.
- Gross premiums written increased 7%; excluding commercial transportation, which was heavily affected by COVID-19, growth was 12%.
- Commercial transportation gross premiums written declined 40%, and transportation premium was down $42.2 million year over year because of reduced public transportation utilization.
- Prior-year reserve development improved to $101.1 million of favorable development from $75.3 million in 2019. Net unpaid loss and settlement expense reserves increased to $1.306 billion from $1.190 billion.
Cash flow, liquidity, capital and debt
- Operating cash inflows were $263.3 million. Investing activities used $168.0 million, and financing activities used $79.3 million, principally reflecting investment purchases and dividends.
- Year-end cash was $62.2 million. Cash, short-term investments and other investments maturing within one year totaled approximately $155.9 million.
- The company had no borrowings under its $60.0 million revolving credit facility, which may be increased to $120.0 million under certain conditions, and no borrowings under its approximately $30.0 million Federal Home Loan Bank facility.
- Debt consisted primarily of $150.0 million of senior notes bearing 4.875% interest and maturing in 2023. Debt represented approximately 12% of total capital.
- Insurance subsidiaries’ statutory surplus was $1.122 billion, up from $1.030 billion. RLI Insurance Company’s statutory capital and surplus was approximately $1.1 billion versus a $203.9 million authorized control level RBC amount.
- RLI paid a $1.00 per share special dividend in December 2020 and maintained its record of consecutive quarterly dividend payments. The regular quarterly dividend declared in February 2021 was $0.24 per share.
Guidance, outlook, risks and unusual items
- Management expects momentum for premium growth to continue in 2021, supported by broad-based rate increases, higher loss-cost inflation, elevated catastrophe activity, reinsurance pricing and reduced market capacity. No specific earnings or revenue guidance was provided.
- Management expects investment income to face pressure from prolonged low interest rates, although growth in invested assets may partly offset lower reinvestment yields.
- Property underwriting profit in 2021 will depend significantly on catastrophe activity. Management expects opportunities for growth in property, while remaining cautious about surety losses, bankruptcies and economic deterioration.
- COVID-19 caused declines in transportation and certain construction-related products. RLI recorded $18.3 million of net reserves for COVID-19-related loss and defense costs, including $12.9 million in casualty and $2.0 million in property investigative and defense costs, with additional surety reserves.
- The company has received business interruption and other COVID-19 claims. Future legislative, regulatory and judicial decisions could expand coverage obligations and produce additional losses.
- Catastrophe losses in 2020 included $51.5 million of pretax hurricane losses, $1.5 million of reinstatement premium and $6.5 million of other storm and civil unrest losses.
- Principal risks include reserve inadequacy, catastrophe exposure, reinsurance recoverability and availability, competition and pricing pressure, low interest rates, equity-market volatility, regulatory restrictions, litigation, cybersecurity and economic effects on transportation, construction and surety business.
- More than 88% of reinsurance recoverables were due from reinsurers rated A or better by AM Best and Standard & Poor’s. Reinsurance does not discharge RLI’s primary obligations to policyholders.
- Standard & Poor’s reaffirmed an A+ rating but maintained a negative outlook; AM Best reaffirmed A+ and Moody’s reaffirmed A2. A downgrade could reduce competitiveness and increase liquidity or capital pressures.
- The independent auditor issued an unqualified opinion and concluded that internal control over financial reporting was effective. The critical audit matter was valuation of unpaid losses and settlement expenses.
Most important facts for investors to verify
- Whether favorable reserve development of $101.1 million is sustainable and how much future earnings depend on reserve releases.
- The ultimate cost of COVID-19-related claims, business interruption litigation and any legislative or judicial expansion of coverage.
- Catastrophe exposure, modeled net retentions and the adequacy, pricing and credit quality of 2021 reinsurance protection.
- The effect of low interest rates on net investment income and the sensitivity of the $2.2 billion fixed-income portfolio to higher rates.
- Commercial transportation and construction-related premium recovery as economic activity normalizes.
- Regulatory restrictions on subsidiary dividends, including the $25.3 million of principal-subsidiary net assets identified as currently available for ordinary dividends.
- Future development of the $1.750 billion gross unpaid loss and settlement expense reserve balance and the $443.7 million reinsurance recoverable balance.