RLI Corp. — 2010 Q3 Form 10-Q Summary
Business context and reporting period
RLI Corp. is a specialty property and casualty insurer operating primarily through casualty, property and surety segments. The filing covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net premiums earned | $128.3 million | $122.7 million | $366.4 million | $370.9 million |
| Consolidated revenue | $149.6 million | $146.0 million | $431.8 million | $400.6 million |
| Net earnings | $28.0 million | $31.0 million | $87.2 million | $63.3 million |
| Diluted EPS | $1.33 | $1.42 | $4.11 | $2.91 |
| Underwriting income | $21.7 million | $23.0 million | $65.2 million | $63.2 million |
| Combined ratio | 83.1 | 81.3 | 82.2 | 82.9 |
Q3 net earnings margin was approximately 18.7%, compared with 21.2% in Q3 2009. Nine-month net earnings margin was approximately 20.2%, compared with 15.8% in the prior-year period. The effective tax rate was 32% for both Q3 and the first nine months of 2010, versus 29% and 28%, respectively, in the comparable 2009 periods.
- Q3 net investment income increased to $16.8 million from $16.3 million, while realized investment gains declined to $4.5 million from $7.0 million.
- Nine-month net realized investment gains were $15.3 million, versus $20.8 million of net realized losses in 2009. The 2009 result included $45.2 million of investment impairment losses; no OTTI losses were recorded through the first nine months of 2010.
- Nine-month favorable prior-year reserve development contributed $53.8 million of pretax earnings, compared with $45.2 million in 2009. Q3 favorable development contributed $23.0 million, compared with $18.2 million.
- Gross premiums written were $157.4 million in Q3, down slightly from $159.9 million, and $489.7 million for nine months, up from $487.2 million.
- At September 30, total assets were $2.67 billion and shareholders’ equity was $912.2 million, compared with $2.54 billion and $832.3 million, respectively, at December 31, 2009.
- Total investments were $2.0 billion at September 30, including $1.54 billion of fixed income securities, $301.6 million of equities and $133.0 million of short-term investments. The fixed-income portfolio had a 3.5-year duration and an average rating of AA.
Material changes versus the prior comparable period
- Q3 revenue increased 3%, but net earnings declined 10% because of lower realized gains and weaker casualty underwriting, including higher current accident-year losses.
- Nine-month revenue increased 8% primarily because 2010 had investment gains rather than the substantial impairment-related losses recorded in 2009. Net earnings increased 38%.
- Nine-month underwriting income rose modestly, and the combined ratio improved to 82.2 from 82.9. However, Q3 underwriting income declined and the combined ratio deteriorated to 83.1 from 81.3.
- Casualty gross premiums written declined 9% year to date, and casualty underwriting income fell to $23.7 million from $37.4 million. Management cited rate reductions, weak construction activity and continued market softness.
- Property gross premiums written increased 15% year to date to $188.1 million, aided by the new crop reinsurance program, facultative reinsurance and industry loss warranty treaties. Property underwriting income increased to $22.7 million from $19.3 million.
- Surety gross premiums written increased 2%, while underwriting income increased to $18.9 million from $6.6 million, mainly because of favorable reserve development and low loss activity.
- The company reduced municipal-bond exposure and reallocated investments toward higher-quality, lower-duration fixed income securities. Unrealized gains included in comprehensive earnings were $28.0 million for nine months, down from $63.4 million.
- Operating cash flow declined to $87.9 million from $108.4 million. Financing cash use increased to $35.1 million, including $23.9 million for treasury-share purchases.
Liquidity, debt and capital actions
- RLI had $100.0 million of senior notes outstanding, maturing January 2014, with a 5.95% stated interest rate. Debt represented approximately 11% of total capital.
- No amounts were outstanding under the $25.0 million revolving credit facility, which could be increased to $50.0 million under specified conditions and expired May 31, 2011.
- Management stated that operating cash flow, investments and financing capacity were sufficient for anticipated needs over the next 12 to 24 months and that the company had experienced no liquidity issues.
- The company paid $58.0 million of dividends to shareholders during the first nine months and declared a quarterly dividend of $0.29 per share. State insurance laws restricted dividends from the principal insurance subsidiary without regulatory approval.
- During Q3, RLI repurchased 35,475 shares for approximately $2.0 million. Approximately $94.1 million remained available under the $100 million repurchase authorization.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management emphasized underwriting profitability over premium growth or market share in a soft insurance market.
- Key risks include rate competition, catastrophe losses, adverse casualty development, inflation, legal and regulatory changes, court interpretations of coverage, and uncertainty in loss-reserve estimates.
- Property catastrophe exposure is concentrated primarily in earthquakes and hurricanes. RLI limits exposure through geographic limits, reinsurance and catastrophe modeling.
- The new crop reinsurance business carries greater interim estimation uncertainty and reporting lags. It contributed materially to property premium growth and affects the segment’s loss and expense ratios.
- Q3 included $5.0 million of storm losses for the first nine months, including $1.5 million in Q3 property storm losses. Property results also included $1.6 million of charges to reinstate marine reinsurance coverage exhausted by prior loss activity.
- Management reported no material changes to legal proceedings or risk factors, no material changes to internal control over financial reporting, and no off-balance-sheet arrangements or special-purpose entities.
- RLI adopted enhanced fair-value disclosure guidance in 2010. The filing states that no recurring fair-value assets used Level 3 inputs.
Important facts for investors to verify
- Whether favorable reserve development remains sustainable, particularly in casualty and surety, and how current accident-year losses develop.
- The effect of continued rate softening and declining casualty premiums on future underwriting margins.
- Crop reinsurance performance, reporting lags and catastrophe-related exposure.
- Investment portfolio sensitivity to interest rates, municipal credit conditions and equity-market volatility.
- Liquidity and dividend capacity as the 2014 senior notes maturity approaches and as subsidiary dividend restrictions apply.
- The extent to which future earnings depend on realized investment gains, reserve releases and other unusual items rather than recurring underwriting performance.