RLI Corp. 10-Q Summary
Business Context and Reporting Period
RLI Corp. is a U.S.-based specialty property and casualty insurer focused on niche products. The filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Operating segments are casualty, property and surety.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net premiums earned | $253.4 million | $216.6 million | $723.0 million | $640.9 million |
| Consolidated revenue | $270.5 million | $262.8 million | $855.9 million | $679.2 million |
| Net earnings | $29.2 million | $42.4 million | $184.1 million | $73.3 million |
| Diluted EPS | $0.64 | $0.93 | $4.03 | $1.62 |
| Underwriting income | $13.7 million | $1.2 million | $80.2 million | $42.6 million |
| Combined ratio | 94.6 | 99.5 | 88.9 | 93.4 |
| Operating cash flow | Not separately provided | Not separately provided | $280.4 million | $163.2 million |
- Q3 net earnings margin was approximately 10.8%, compared with 16.1% in Q3 2020. Nine-month net earnings margin was approximately 21.5%, compared with 10.8% in the prior-year period.
- Q3 net investment income was $17.8 million, up from $16.5 million. Nine-month net investment income was $50.9 million, slightly below $51.2 million.
- Nine-month net realized gains were $52.4 million, including $50.6 million from equities. Net unrealized equity gains were $29.5 million, compared with a $27.6 million loss in 2020.
- Total assets were $4.43 billion and shareholders’ equity was $1.25 billion at September 30, 2021, compared with $3.94 billion and $1.14 billion, respectively, at December 31, 2020.
- Investments and cash totaled $3.10 billion, including $2.39 billion of fixed-income securities, $565.2 million of equities and $89.6 million of cash.
- Long-term debt was $149.6 million, consisting primarily of senior notes maturing in September 2023. Debt represented approximately 10.7% of total capital.
- Cash increased to $89.6 million from $62.2 million at year-end. Net cash increased $27.4 million during the first nine months.
- The company paid $33.5 million of cash dividends during the first nine months and paid a regular quarterly dividend of $0.25 per share in September 2021.
Material Changes Versus the Prior Comparable Period
- Nine-month net premiums earned increased 13%, with gross premiums written up 21% to $1.01 billion. Casualty gross premiums increased 19%, property 32% and surety 9%.
- Nine-month underwriting income increased to $80.2 million from $42.6 million, and the combined ratio improved to 88.9 from 93.4.
- Casualty underwriting income increased to $74.3 million from $22.4 million, with the combined ratio improving to 84.1 from 94.7.
- Property remained unprofitable, with an underwriting loss of $8.7 million versus a $3.9 million loss; its combined ratio worsened to 105.2 from 102.9, primarily because of higher storm losses.
- Surety underwriting income declined to $14.7 million from $24.0 million, and its combined ratio increased to 83.1 from 71.5 because of lower favorable reserve development and somewhat higher current-year losses.
- Q3 net earnings declined 31% despite higher premiums and underwriting income, primarily because 2021 included a $2.6 million unrealized equity loss versus a $28.1 million unrealized gain in Q3 2020.
- Nine-month favorable prior-year reserve development increased to $97.0 million from $70.0 million. No products experienced significant adverse development.
- Other comprehensive loss was $41.8 million for the nine months, versus a $50.1 million gain in 2020, reflecting higher interest rates and lower fixed-income fair values.
Outlook, Risks, Contingencies and Unusual Items
- Management did not provide formal earnings or premium guidance in the filing. It stated that the primary focus remains underwriting profitability rather than general premium growth or market share.
- Management believes operating cash flows and investments will provide sufficient liquidity for anticipated needs over the next 12 to 24 months.
- The company has a $60.0 million revolving credit facility, expandable to $120.0 million under certain conditions, and access to approximately $30.0 million of secured Federal Home Loan Bank capacity. No borrowings were outstanding under either facility at September 30, 2021.
- COVID-19 continues to create uncertainty regarding premium demand, claims emergence, court delays, statutes of limitation, settlement trends and future loss ratios. Public transportation and construction-related products remain areas of potential pressure.
- RLI does not offer event cancellation, travel, trade credit or pandemic-specific coverage, but pandemic-related economic effects may affect surety, executive and professional-services products.
- Property results remain exposed to hurricanes, earthquakes, windstorms, fires and other catastrophes. Q3 2021 included $34.0 million of hurricane losses and $1.0 million of other storm losses.
- Reserve estimates are subject to inflation, legislative, regulatory and judicial developments. Management cautioned that actual losses could differ materially from recorded reserves.
- Interest-rate increases reduced the value of the fixed-income portfolio and produced the nine-month other comprehensive loss. Fixed-income yields were lower than the prior year for taxable securities.
- Reinsurance recoverables were $602.2 million, with allowances for uncollectible paid and unpaid recoverables of $16.1 million and $10.1 million, respectively. Reinsurance does not relieve RLI of its obligations to policyholders.
- There were no material changes to reported legal proceedings or risk factors. Disclosure controls were assessed as effective, and no material changes to internal control over financial reporting were reported.
- No shares were repurchased during 2021; $87.5 million remained available under the repurchase program.
Facts Investors Should Verify
- Whether favorable reserve development of $97.0 million is sustainable and how COVID-19-related claims ultimately develop.
- The effect of catastrophe activity and reinsurance recoveries on future property combined ratios and capital.
- The amount and timing of the $149.6 million senior-note maturity in 2023 and available refinancing sources.
- The impact of rising interest rates on fixed-income fair values, book value and investment income.
- Whether premium growth in casualty and property can continue without deterioration in current accident-year loss ratios.
- The earnings contribution, valuation and unfunded commitments associated with Maui Jim, Prime and other unconsolidated investees.
- Regulatory restrictions on dividends from RLI Insurance Company; only $0.3 million of net assets were available for ordinary dividends without prior approval at September 30, 2021.
- The company’s continued dividend policy and the remaining $87.5 million share-repurchase authorization.