RLI Corp. 2012 Form 10-K Summary
Business context and reporting period
RLI Corp. is an Illinois-based specialty property and casualty insurer operating primarily through RLI Insurance Company, Mt. Hawley Insurance Company, RLI Indemnity Company and Contractors Bonding and Insurance Company. The company underwrites casualty, property and surety products in the specialty admitted, excess and surplus, and specialty property reinsurance markets, with no material foreign operations.
The filing covers the fiscal year ended December 31, 2012, and was filed February 27, 2013. RLI employed 897 associates at year-end. The consolidated financial statements and detailed MD&A are incorporated by reference from the 2012 Annual Report to Shareholders; the provided filing text does not include a clear consolidated GAAP net income figure.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net premiums written | $593.1 million | $549.6 million | 8% increase |
| Net premiums earned | $576.6 million | $538.5 million | 7% increase |
| Gross premiums written | $784.8 million | $702.1 million | 12% increase |
| Net investment income | $58.8 million | $63.7 million | 8% decrease |
| Net realized investment gains | $25.4 million | $17.0 million | Increase |
| Pre-tax change in unrealized investment appreciation | $39.9 million | $32.9 million | Increase |
| GAAP combined ratio | 89.0% | 79.6% | 9.4 points worse |
| GAAP loss ratio | 47.1% | 37.2% | 9.9 points worse |
| GAAP expense ratio | 41.9% | 42.4% | 0.5 points better |
| Statutory policyholders' surplus | $684.1 million | $710.2 million | 4% decrease |
| Statutory net premiums written to surplus | 0.9 to 1 | 0.8 to 1 | Higher leverage |
| Net unpaid losses and LAE reserves | $798.6 million | $796.9 million | Flat overall |
Statutory combined ratio was 88.0% in 2012 versus 79.1% in 2011. The company reported a $64.6 million favorable development of prior-year reserves in 2012, compared with $110.1 million of favorable development in 2011.
At December 31, 2012, investments and cash totaled approximately $1.84 billion, including $1.39 billion of fixed-income securities, $375.8 million of equity securities and $74.8 million of cash and short-term investments. Approximately 91% of the fixed-income portfolio was rated A or better, and 62% was rated AA or better. Cash, short-term investments and fixed-income securities maturing within one year totaled $97.7 million.
The parent company reported $100.0 million of long-term debt and $2.7 million of interest payable. Parent-company cash was $14.0 million at year-end, compared with $0.3 million in 2011. Parent-company operating cash flow was negative $5.4 million, while investing cash flow was positive $157.2 million, principally due to $138.0 million of dividends received from subsidiaries. Parent-company dividends paid were $145.7 million.
Material changes versus the prior comparable period
- Net premiums written increased 8%, led by growth in casualty and surety operations and the continued contribution from CBIC, acquired in April 2011.
- Net premiums earned increased 7%, while gross premiums written rose 12%. Reinsurance ceded increased to $191.7 million from $152.5 million in 2011.
- The GAAP combined ratio deteriorated to 89.0% from 79.6%, primarily because the loss ratio increased to 47.1% from 37.2%. Management attributed the result partly to lower favorable prior-year reserve development and current accident-year loss activity.
- Prior-year reserve development remained favorable in all three segments but declined to $64.6 million from $110.1 million. Casualty contributed $40.4 million, property $16.8 million and surety $7.3 million of favorable development.
- Net loss and LAE reserves increased modestly to $798.6 million from $796.9 million. Gross reserves increased to $1.158 billion from $1.151 billion, while ceded recoverables increased to $359.9 million from $353.8 million.
- Statutory surplus declined to $684.1 million from $710.2 million, while the premiums-to-surplus ratio increased to 0.9-to-1 from 0.8-to-1, remaining below the general NAIC guideline of 3-to-1.
- The investment portfolio shifted toward municipal and corporate bonds. Municipal securities increased to approximately $434.0 million from $236.6 million, while agency debt declined substantially following security calls. Equity investments remained approximately 20% of cash and invested assets.
- CBIC received an upgrade from A to A+ from A.M. Best. Other disclosed financial strength ratings were affirmed, including A+ from A.M. Best for the principal insurance group, A+ from Standard & Poor's and A2 from Moody's.
Outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or premium guidance. Management emphasizes disciplined underwriting, selective participation in specialty markets and willingness to withdraw from markets when conditions become unfavorable. Growth initiatives included security guards, recreational vehicles and medical malpractice products, as well as continued expansion of CBIC package and surety business.
RLI's principal risks include catastrophic events, especially earthquakes, hurricanes and severe storms; adverse loss-reserve development; reinsurance availability and counterparty credit risk; competition and soft-market pricing; economic conditions affecting demand for insurance and surety products; investment-market and interest-rate volatility; regulatory restrictions; litigation; cybersecurity and systems interruptions; and the ability to attract underwriting talent.
The company reported that more than 95% of reinsurance recoverables were due from reinsurers rated A or better by A.M. Best and Standard & Poor's. Its 2013 catastrophe program provided limits of $300 million for California earthquake, $330 million for non-California earthquake and $230 million for other perils, each subject to specified retentions. Management estimated a 99.6% likelihood that a modeled single-event loss would be less than 13% of year-end 2012 policyholders' surplus, although actual catastrophe losses could vary materially.
Environmental, asbestos and mass-tort net unpaid losses and LAE declined to $33.6 million from $34.8 million. A 2007 marine environmental claim generated $9.3 million of gross payments but only $0.3 million of net payments after reinsurance.
The company recognized $1.2 million of investment impairment losses in 2012 versus $0.3 million in 2011. It adopted ASU 2010-26 retrospectively for insurance acquisition costs. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2012. No material adverse effect was expected from disclosed litigation matters.
The company did not repurchase shares in 2012 and had $87.5 million of remaining capacity under its $100 million repurchase authorization. The filing does not identify a separate new debt issuance or repayment during 2012.
Important facts for investors to verify
- Obtain the incorporated 2012 Annual Report to verify consolidated GAAP revenue, net income, earnings per share, shareholders' equity and operating cash flow, which are not clearly provided in the filing text.
- Assess whether the lower level of favorable reserve development and the higher current-year loss ratio represent normalization or the beginning of adverse loss trends.
- Review catastrophe exposure, modeled losses, retentions, reinstatement provisions and the adequacy and cost of the 2013 reinsurance program.
- Monitor statutory surplus, premiums-to-surplus leverage, dividend capacity from insurance subsidiaries and parent-company liquidity relative to debt and shareholder dividends.
- Evaluate the effect of continued premium growth, CBIC integration, newer product launches and economic stress on surety and long-tail casualty reserves.
- Review investment duration, equity exposure, municipal and corporate credit concentration, unrealized gains and the potential effect of interest-rate changes.
- Confirm the effect of ASU 2010-26 adoption and any related restatement on historical earnings, deferred acquisition costs and comparability.