RLI Corp. 10-Q Summary: First Quarter 2013
Business Context and Reporting Period
RLI Corp. is a specialty property and casualty insurer operating through casualty, property and surety segments in admitted and excess-and-surplus markets. This unaudited Form 10-Q covers the three months ended March 31, 2013, compared primarily with the three months ended March 31, 2012.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net premiums earned | $144.2 million | $137.3 million | +5% |
| Consolidated revenue | $160.7 million | $164.0 million | -2% |
| Net earnings | $24.8 million | $28.0 million | -11% |
| Diluted EPS | $1.15 | $1.30 | -12% |
| Comprehensive earnings | $42.4 million | $38.8 million | +9% |
| Underwriting income | $19.8 million | $14.9 million | +33% |
| GAAP combined ratio | 86.2 | 89.1 | Improved 2.9 points |
| Net investment income | $12.9 million | $15.3 million | -16% |
| Net realized investment gains | $3.7 million | $11.4 million | Lower by $7.7 million |
Gross premiums written increased 10% to $193.8 million. Casualty premiums increased 23% to $103.5 million, while property premiums were essentially flat at $64.0 million and surety premiums declined 5% to $26.3 million. Segment combined ratios were 94.4 for casualty, 75.7 for property and 81.8 for surety.
The loss ratio improved to 42.6 from 45.1, and the expense ratio improved modestly to 43.6 from 44.0. Favorable prior-year reserve development contributed $10.8 million of pretax earnings in Q1 2013, compared with $7.7 million in Q1 2012.
At March 31, 2013, total assets were $2.62 billion, shareholders’ equity was $833.5 million and unpaid losses and settlement expenses were $1.11 billion. The investment portfolio and cash totaled approximately $1.85 billion, including $1.42 billion of fixed income securities, $407.7 million of equities and $25.8 million of cash and short-term investments. The fixed-income portfolio had an average rating of AA and a duration of 4.9 years.
Long-term debt was $100.0 million of senior notes bearing interest at 5.95% and maturing January 15, 2014. Debt represented 10.7% of total capital. Interest expense was $1.5 million in the quarter.
Operating cash flow was negative $6.3 million, compared with negative $3.2 million in the prior-year quarter. Investing cash flow was negative $10.4 million and financing cash flow was negative $5.2 million, including $6.8 million of dividends paid. Cash decreased by $21.9 million to $22.4 million. Management stated that operations, investments, financing resources and the available credit facility should provide sufficient liquidity for the next 12 to 24 months.
Material Changes Versus the Prior Comparable Period
- Underwriting performance strengthened, with underwriting income rising $4.9 million and the combined ratio improving to 86.2.
- Revenue and net earnings declined because lower investment income and substantially lower realized investment gains more than offset premium growth and better underwriting results.
- Casualty growth was driven by transportation, umbrella, executive products, professional services and medical professional liability. Rockbridge, acquired in November 2012, contributed $5.0 million of gross written premium and $0.8 million of net earned premium.
- Property underwriting income declined modestly, partly because Q1 2012 benefited from greater favorable catastrophe-related reserve development.
- Surety underwriting improved materially, benefiting from favorable reserve development and cost synergies from the CBIC integration, despite lower premium volume.
- Other comprehensive earnings increased primarily because of higher unrealized investment gains. Accumulated other comprehensive earnings rose to $160.7 million from $143.2 million at year-end 2012.
- Shareholders’ equity increased to $833.5 million from $796.4 million at December 31, 2012. The quarterly dividend increased to $0.32 per share from $0.30 in the year-ago quarter.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific quantitative earnings or premium guidance. Its stated priority remains underwriting profitability rather than growth for its own sake. Management noted that insurance markets remained generally competitive and soft, although pricing improved modestly on selected lines.
- Results remain sensitive to reserve estimation, claims inflation, legal and regulatory developments, loss emergence and changes in policy terms and business mix.
- Property results are exposed to earthquakes, hurricanes, fires and other catastrophes. Hurricane Sandy losses remained in line with initial reserves at quarter-end.
- Surety results may be affected by economic conditions and the financial condition of insured contractors and businesses.
- Investment income is pressured by lower reinvestment rates and the increased allocation to tax-exempt municipal securities. Equity market declines and interest-rate changes could affect earnings, liquidity and comprehensive income.
- Unrealized investment losses were $1.6 million at March 31, 2013, less than 1% of invested assets. No other-than-temporary impairment losses were recognized.
- Reinsurance recoverables totaled $338.6 million and remain subject to reinsurer credit risk and reserve-estimation uncertainty.
- The company’s $100 million senior notes mature in January 2014. No amounts were outstanding under the $25 million revolving credit facility, which could be increased to $50 million under specified conditions.
- Dividend payments from the principal insurance subsidiary were subject to regulatory approval restrictions following extraordinary dividends paid in 2012. No dividends were paid by that subsidiary to RLI Corp. during Q1 2013.
- The IRS began examinations of federal tax years 2010 and 2011 in March 2013; the 2009 tax year remains open. Management stated that no material tax uncertainties were expected to change significantly within the next 12 months.
- The Rockbridge acquisition includes a $1.2 million contingent earn-out tied to loss-ratio targets.
Important Facts for Investors to Verify
- Whether favorable reserve development remains sustainable and how subsequent accident-year loss emergence affects the combined ratio.
- The refinancing or repayment plan for the $100 million of senior notes maturing in January 2014.
- The effect of continued low interest rates, municipal-bond allocation and equity-market performance on investment income and book value.
- Casualty growth and profitability from Rockbridge, professional services and other newer products, including associated reserve adequacy.
- Catastrophe exposure, reinsurance protection and any changes in estimated losses from earthquakes, hurricanes, crop and marine business.
- Regulatory constraints on subsidiary dividends and the resulting liquidity available at the holding-company level.
- Future developments from the IRS examinations and the Rockbridge contingent earn-out.