RLI Corp. 10-Q Summary
Business Context and Reporting Period
RLI Corp. is a U.S.-based specialty property and casualty insurer operating through casualty, property and surety segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Financial Performance and Key Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Net premiums earned | $282.8 million | $241.0 million | $552.0 million | $469.6 million |
| Consolidated revenue | $213.1 million | $298.1 million | $477.9 million | $585.4 million |
| Net earnings (loss) | $(2.2) million | $81.8 million | $45.7 million | $154.8 million |
| Diluted EPS | $(0.05) | $1.79 | $1.00 | $3.39 |
| Underwriting income | $56.0 million | $36.6 million | $115.4 million | $66.5 million |
| Combined ratio | 80.2% | 84.8% | 79.1% | 85.8% |
| Operating cash flow | Not provided | Not provided | $170.6 million | $164.5 million |
Premium growth was 17% in the second quarter and 18% for the first six months. Six-month gross premiums written increased 19% to $777.9 million, led by property growth of 47%, casualty growth of 9% and surety growth of 10%.
Underwriting profitability improved materially. The six-month loss ratio declined to 40.5% from 45.1%, and the expense ratio declined to 38.6% from 40.7%. Q2 underwriting income increased despite lower casualty earnings, reflecting strong property and surety results.
Net earnings were adversely affected by equity-market losses. Net unrealized losses on equity securities were $101.0 million in Q2 and $128.8 million for the first six months, compared with gains of $4.0 million and $32.1 million, respectively, in 2021. Net investment income increased 11% in Q2 and 10% for the first six months.
Comprehensive loss was $99.8 million in Q2 and $167.5 million for the first six months. Other comprehensive losses primarily reflected $213.1 million of after-tax unrealized losses on fixed-income securities caused by higher interest rates.
Balance Sheet, Debt and Liquidity
- Total assets were $4.40 billion at June 30, 2022, compared with $4.51 billion at December 31, 2021.
- Shareholders’ equity declined to $1.04 billion from $1.23 billion, primarily because of accumulated unrealized investment losses.
- Cash was $113.0 million, up from $88.8 million at year-end 2021. Total investments and cash were $2.93 billion.
- Long-term debt was $199.8 million, representing 16.1% of total capital. Debt included $150.0 million of senior notes due September 2023 and a $50.0 million FHLBC borrowing due November 2023, subject to an early repayment option.
- Cash and investments maturing within one year totaled approximately $161.6 million; an additional $798.5 million was scheduled to mature within one to five years.
- The company had a $60.0 million revolving credit facility, expandable to $120.0 million under certain conditions, with no borrowings outstanding. Management stated that operating and investment cash flows should provide sufficient liquidity for the next 12 to 24 months.
- RLI paid a quarterly dividend of $0.26 per share in June 2022 and reported 47 consecutive years of dividend increases. No shares were repurchased during 2022; $87.5 million remained available under the repurchase program.
Material Changes Versus the Prior Comparable Period
- Net premiums earned increased $82.4 million for the first six months, while consolidated revenue declined $107.5 million because investment-market gains in 2021 shifted to substantial equity losses in 2022.
- Six-month net earnings fell $109.1 million, from $154.8 million to $45.7 million. Q2 earnings shifted from $81.8 million of income to a $2.2 million loss.
- Underwriting income increased $48.9 million for the first six months, and the combined ratio improved 6.7 percentage points to 79.1%.
- Property underwriting income rose to $48.6 million from $7.9 million, while surety underwriting income rose to $17.8 million from $7.3 million. Casualty underwriting income declined to $49.1 million from $51.3 million.
- Storm losses declined to $5.0 million for the first six months from $24.0 million in 2021. Favorable prior-year reserve development was $69.7 million, compared with $67.5 million.
- Fixed-income fair value declined $129.0 million and equity securities declined $125.8 million during the first six months, principally because of higher interest rates, equity-market declines and portfolio rebalancing.
Outlook, Risks and Unusual Items
Management provided no specific earnings or revenue guidance. Its stated strategy remains focused on underwriting profitability rather than maximizing premium growth or market share. Management cited disciplined risk selection, pricing opportunities and favorable market conditions in commercial property and selected specialty lines.
- Management agreed to sell its minority interest in Maui Jim. Expected net after-tax proceeds were approximately $500 million, subject to closing adjustments for working capital and other items. Completion and final proceeds were not assured as of the filing date.
- Catastrophe reinsurance limits were increased effective May 1, 2022 by $150 million, to $750 million for California earthquakes, $775 million for non-California earthquakes and $625 million for other perils, subject to $25 million retentions and certain co-participations.
- Key risks include inflation, rising interest rates, volatile equity markets, supply-chain disruption, catastrophe losses, changing claims trends, reinsurance counterparty credit risk and regulatory or judicial developments.
- COVID-19 continued to create uncertainty around claims emergence, court delays, statutes of limitations and settlement trends. Management stated that reserves reflect these considerations, but future deficiencies remain possible.
- The fixed-income portfolio had $202.7 million of unrealized losses at June 30, 2022, including 1,341 securities in unrealized-loss positions. Management stated that securities continued to pay expected coupons and that it expected to recover amortized cost.
- The company purchased $600 million to $625 million of additional catastrophe protection described above and maintained $58.2 million of investments pledged to the FHLBC.
- Annual impairment testing found no impairment of goodwill or indefinite-lived insurance-license intangibles. The filing reported no material changes in legal proceedings or risk factors.
Most Important Facts for Investors to Verify
- Whether the Maui Jim transaction closes and whether proceeds approximate the stated $500 million after-tax estimate.
- Future equity-market performance and the effect of realized or unrealized investment gains and losses on earnings and book value.
- Interest-rate effects on the $2.28 billion fixed-income portfolio and the potential realization of its $202.7 million unrealized loss position.
- Sustainability of favorable prior-year reserve development and the adequacy of reserves under inflationary, litigation and post-pandemic claims conditions.
- Catastrophe losses relative to the $25 million retentions, co-participations and available reinsurance limits.
- Debt maturities in 2023, FHLBC borrowing terms and the availability of holding-company liquidity for dividends and corporate obligations.
- Growth and profitability trends in commercial property, casualty specialty products and surety, including the impact of exiting large-account cyber and representations-and-warranties programs.