RLI Corp. 2014 Form 10-K Summary
Business context and reporting period
RLI Corp. is a specialty property and casualty insurer operating through four Illinois-domiciled insurance subsidiaries. It writes specialty admitted, excess and surplus, reinsurance, and surety products across the United States and selected territories. The filing covers the fiscal year ended December 31, 2014; fourth-quarter results are included in the annual financial statements.
- Business segments: casualty, property, and surety.
- Gross premiums written: $863.8 million; net premiums written: $703.2 million.
- 2014 catastrophe losses were $7.2 million, primarily from spring storms, compared with $10.0 million in 2013 and $35.0 million in 2012.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Consolidated revenue | $775.2 million | $705.6 million | Up 10% |
| Net premiums earned | $687.4 million | $630.8 million | Up 9% |
| Underwriting income | $107.0 million | $106.8 million | Essentially flat |
| Net investment income | $55.6 million | $52.8 million | Up 5% |
| Net realized investment gains | $32.2 million | $22.0 million | Up 46% |
| Pretax earnings | $189.5 million | $175.7 million | Up 8% |
| Net earnings | $135.4 million | $126.3 million | Up 7% |
| Diluted EPS | $3.09 | $2.90 | Up 7% |
| Comprehensive earnings | $170.8 million | $119.1 million | Up 43% |
| Net cash from operating activities | $123.1 million | $135.0 million | Down 9% |
| Total shareholders’ equity | $845.1 million | $829.0 million | Up 2% |
- GAAP combined ratio was 84.5%, compared with 83.1% in 2013. The loss ratio increased to 43.2% from 41.2%, while the expense ratio improved to 41.3% from 41.9%.
- Underwriting margins remained profitable in every segment: casualty combined ratio 88.0%, property 83.4%, and surety 73.8%.
- Net earnings margin was approximately 17.5% of consolidated revenue, based on reported figures.
- Net unpaid losses and loss adjustment expenses increased to $785.9 million from $774.5 million; gross reserves declined to $1.121 billion from $1.129 billion.
- Prior-year reserves developed favorably by $64.8 million, compared with $72.5 million in 2013. Favorable development was reported in all three segments.
Debt, liquidity, investments, and capital
- Long-term debt was $149.6 million at year-end, consisting principally of $150.0 million of senior notes due September 2023 with a 4.875% coupon. Debt represented approximately 15% of total capital.
- No borrowings were outstanding under the $40.0 million revolving credit facility, which may be increased to $65.0 million under specified conditions.
- RLI and two insurance subsidiaries also had approximately $40 million of potential secured borrowing capacity through the Federal Home Loan Bank of Chicago; no amounts were outstanding.
- Cash, short-term investments, and investments maturing within one year totaled approximately $66.3 million. The holding company had $46.7 million of liquid assets.
- Total investments and cash were $1.964 billion, including $1.495 billion of fixed income securities and $410.6 million of equity securities. Fixed income represented 76% of the portfolio and equities 21%.
- Approximately 84% of the fixed income portfolio was rated A or better and 62% was rated AA or better. A 100-basis-point increase in interest rates was estimated to reduce fixed income fair value by $68.4 million; a 10% equity-market decline was estimated to reduce equity fair value by $35.9 million.
- Statutory policyholders’ surplus was $849.3 million, down from $859.2 million, while the net premiums-written-to-surplus ratio remained conservative at 0.8 to 1.
- Insurance financial-strength ratings were affirmed at A+ by A.M. Best, A+ by Standard & Poor’s for RLI Insurance Company and Mt. Hawley, and A2 by Moody’s for the rated entities.
Material changes versus the prior comparable period
- Revenue and net premiums earned grew materially, led by casualty products such as professional services, umbrella, transportation, package business, medical professional liability, and other casualty lines.
- Gross premiums written rose 2% to $863.8 million. Casualty grew 6%, surety grew 4%, and property declined 4%.
- Net premium growth exceeded gross premium growth because 2014 reinsurance renewals reduced ceded premiums and increased retentions; management cited more than $16 million of annual reinsurance savings.
- Casualty underwriting income declined to $45.9 million from $55.6 million, while property increased to $32.9 million from $27.6 million and surety increased to $28.2 million from $23.6 million.
- Investment performance improved: net investment income increased, realized gains rose, and pretax unrealized investment gains increased substantially, producing $35.4 million of other comprehensive earnings versus a $7.1 million loss in 2013.
- The company invested $5.3 million for a 20% interest in Prime, a specialty excess and surplus insurer, and entered into a related quota-share reinsurance agreement that generated $10.2 million of gross premiums written and $5.3 million of net premiums earned.
- RLI paid a $3.00-per-share special dividend totaling $129.3 million, compared with $1.50 per share in 2013. Ordinary dividends declared increased to $0.71 per share from $0.67.
- The company did not repurchase shares during 2014 and had $87.5 million of remaining authorization.
Guidance, outlook, commentary, risks, and unusual items
- Management expects a crowded and competitive 2015 insurance market, stable to slightly softening rates, and continued pressure on property pricing from alternative capital and low catastrophe activity.
- RLI plans to prioritize underwriting profit, risk selection, expense control, and selective growth rather than market share. It expects moderate casualty growth, a flat surety top line, and property premiums down more than 10% in 2015.
- Crop reinsurance is expected to decline from approximately $50.3 million of gross premiums in 2014 to approximately $10 million in 2015 and then expire. Management expects minimal underwriting-income impact.
- Management expects approximately $7 million of additional reinsurance savings from the January 2015 renewals and anticipates little investment-income growth over the following 12 months.
- Key risks include catastrophe losses, reserve-estimation uncertainty, environmental/asbestos and mass-tort claims, reinsurance recoverability and pricing, insurance-cycle competition, interest-rate and equity-market volatility, regulatory restrictions, liquidity constraints, litigation, cyber risk, and energy-sector weakness.
- The company recorded a $1.3 million impairment of CBIC insurance licenses in 2014. No other-than-temporary investment impairments were recorded in 2014 or 2013.
- A shareholder class action and derivative lawsuit reached a proposed settlement subject to court approval; an objection was filed in February 2015. Management did not expect a material adverse effect, and proposed legal-fee payments were capped at $350,000.
- Management estimated that prior-year reserve development over the next year could range from approximately $79 million favorable to $24 million unfavorable, highlighting material reserve sensitivity.
- KPMG issued an unqualified audit opinion and concluded that internal control over financial reporting was effective as of December 31, 2014.
Most important facts for an investor to verify
- Whether favorable reserve development remains sustainable as newer, longer-tail casualty years mature.
- The effect of declining property rates, catastrophe activity, and the planned reduction and expiration of crop reinsurance on 2015 premiums and margins.
- Actual versus modeled catastrophe losses and the adequacy, cost, and collectability of reinsurance protection.
- The concentration and duration risk of the investment portfolio, particularly the 21% equity allocation and BBB-rated corporate debt exposure.
- Holding-company liquidity and the availability of dividends from regulated insurance subsidiaries, including the $53.4 million of distributable principal-subsidiary net assets.
- The impact of the $129.3 million special dividend on book value, capital flexibility, and future shareholder distributions.
- Progress and profitability of newer initiatives, including healthcare liability, Prime-related assumed business, professional services, package products, and specialty personal lines.