RLI Corp. 2018 Third-Quarter Form 10-Q Summary
Business context and reporting period
RLI Corp. is a specialty property and casualty insurance holding company operating through casualty, property and surety segments. The filing covers the three- and nine-month periods ended September 30, 2018, compared with the corresponding 2017 periods. RLI reincorporated from Illinois to Delaware on May 4, 2018; the transaction did not change its business, management, assets, liabilities or fiscal year.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net premiums earned | $200.8 million, versus $182.0 million | $587.4 million, versus $549.6 million |
| Consolidated revenue | $240.6 million, versus $196.2 million | $645.9 million, versus $589.4 million |
| Net earnings | $39.4 million, versus $1.7 million | $84.8 million, versus $47.8 million |
| Diluted EPS | $0.88, versus $0.04 | $1.90, versus $1.07 |
| Comprehensive earnings | $31.7 million, versus $10.2 million | $43.1 million, versus $78.6 million |
| Operating cash flow | Not separately reported for the quarter | $163.4 million, versus $145.9 million |
Net earnings increased despite a $34.5 million pretax net unrealized loss on equity securities during the first nine months, which was recognized in earnings under ASU 2016-01. The third quarter included a $4.8 million unrealized equity gain.
- Underwriting: Nine-month underwriting income was $39.4 million versus $17.9 million; the combined ratio improved to 93.3 from 96.7. Third-quarter underwriting income was $7.8 million versus a $14.9 million loss; the combined ratio improved to 96.1 from 108.2.
- Investment results: Nine-month net investment income increased to $45.1 million from $40.4 million. Net realized gains were $47.9 million versus a $0.7 million loss, primarily reflecting equity portfolio rebalancing.
- Capital and liquidity: September 30 assets were $3.07 billion and shareholders’ equity was $871.9 million. Cash and short-term investments totaled $78.0 million, and total investments and cash were $2.23 billion.
- Debt: Long-term debt was $149.1 million, consisting principally of senior notes maturing in September 2023 with a 4.875% coupon. Debt represented 14.6% of total capital. The $50 million revolving credit facility had no borrowings.
- Dividends: The quarterly dividend was $0.22 per share. Nine-month dividends paid were $28.8 million.
Material changes versus the prior comparable period
- Gross premiums written increased 10.6% to $725.8 million for the first nine months, led by casualty and property. Surety gross premiums grew 1.7%, while surety net premiums earned declined 2.5%.
- Casualty net premiums earned increased 9.1%, and property net premiums earned increased 7.3%; surety net premiums earned decreased 2.5%.
- Catastrophe losses were substantially lower: $17.5 million for the first nine months of 2018 versus $39.0 million in 2017. Third-quarter catastrophe losses were $7.5 million, primarily from Hurricane Florence, versus $36.0 million from Hurricanes Harvey, Irma and Maria in 2017.
- Property underwriting improved to $12.2 million of income from a $15.9 million loss, while casualty underwriting income declined to $2.4 million from $5.3 million and surety underwriting income declined to $24.8 million from $28.4 million.
- Favorable prior-year reserve development increased to $38.5 million from $36.6 million for the first nine months, although casualty and medical professional liability included adverse development in certain areas.
- Other comprehensive earnings declined to $43.1 million from $78.6 million because rising interest rates produced $41.8 million of after-tax unrealized fixed-income losses, versus $30.8 million of gains in 2017.
- The effective tax rate declined to 15.4% from 19.9% for the nine-month period, principally due to the Tax Cuts and Jobs Act lowering the federal corporate rate to 21% from 35%.
Guidance, outlook, commentary, risks and unusual items
- Management did not provide quantified earnings or premium guidance. It emphasized underwriting profitability, disciplined risk selection and premium growth only where underwriting profit is available.
- Management expects operating cash flows and investments to meet anticipated liquidity needs for the next 12 to 24 months.
- Insurance results remain exposed to catastrophe events, pricing competition, economic conditions, interest rates, regulatory changes, litigation, court decisions, inflation and uncertainty in loss-reserve estimates.
- The fixed-income portfolio had a fair value of $1.72 billion, a 4.7-year duration and an average rating of AA-; 83% was rated A or better. Rising rates caused substantial unrealized losses, although management believed the portfolio’s amortized cost would be recovered.
- Medical professional liability goodwill and intangible assets were fully impaired following adverse loss experience, including $4.4 million of non-cash impairment charges in 2018.
- The Carriage Hill coverage dispute was settled confidentially for an amount that did not materially affect the financial statements, following a court order that had awarded $21.7 million of compensatory damages plus potential fees and punitive damages.
- Hurricane Michael occurred in early October 2018. The filing states that losses could not yet be estimated and would be reflected in fourth-quarter 2018 results.
- RLI adopted accounting guidance that moved equity-security unrealized gains and losses into net earnings. It also expects approximately $33 million of undiscounted operating lease liabilities to be recognized upon adoption of the new lease standard, with no material change expected to annual rental expense.
- Insurance-subsidiary dividends to the holding company are subject to Illinois regulatory restrictions. RLI Insurance Company paid $13.0 million of ordinary dividends in the first nine months, and approximately $0.6 million of net assets were available for additional ordinary dividends at September 30.
Important facts for investors to verify
- Whether improved earnings and underwriting results persist after adjusting for lower catastrophe losses, favorable reserve development and investment gains.
- The effect of future equity-market volatility, interest-rate changes and realized investment rebalancing on earnings, comprehensive income and book value.
- Development of casualty, transportation, executive products and medical professional liability reserves, including adverse development noted by management.
- The eventual Hurricane Michael loss estimate and its impact on fourth-quarter and full-year 2018 results.
- Regulatory limits on dividends from insurance subsidiaries and the adequacy of holding-company liquidity relative to debt service, corporate expenses and shareholder dividends.
- Final accounting effects of the Tax Cuts and Jobs Act and adoption of lease and expected-credit-loss standards.