RLI CORP quarterly report, Q2 FY2021

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 markets. Its operating segments are casualty, property and surety. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.

Key financial metrics

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Net premiums earned	$241.0 million	$208.7 million	$469.6 million	$424.3 million
Consolidated revenue	$298.1 million	$298.2 million	$585.4 million	$416.4 million
Net earnings	$81.8 million	$92.2 million	$154.8 million	$30.9 million
Diluted EPS	$1.79	$2.04	$3.39	$0.68
Underwriting income	$36.6 million	$24.2 million	$66.5 million	$41.4 million
Combined ratio	84.8	88.4	85.8	90.2
Net operating cash flow	Not separately provided	Not separately provided	$164.5 million	$83.8 million

For the six-month period, the implied net earnings margin was approximately 26.5%, compared with 7.4% in the prior-year period. The implied underwriting margin was approximately 14.2%, compared with 9.8% in 2020. For the second quarter, the implied net earnings margin was approximately 27.4%, compared with 30.9% in 2020.

Six-month gross premiums written increased 23% to $653.9 million; net premiums earned increased 11%.
Six-month underwriting income increased 61% to $66.5 million, supported by a combined ratio improvement to 85.8 from 90.2.
Investment income declined 4.6% to $33.1 million for the first half, reflecting lower reinvestment rates.
Six-month net realized gains were $50.6 million, including $48.9 million of equity-security gains. Net unrealized equity gains were $32.1 million, versus a $55.7 million loss in 2020.
Equity in earnings of unconsolidated investees increased to $20.4 million from $9.6 million, primarily reflecting improved results at Maui Jim and Prime.

Balance sheet, debt and liquidity

Total assets were $4.28 billion at June 30, 2021, compared with $3.94 billion at December 31, 2020.
Shareholders’ equity increased to $1.24 billion from $1.14 billion.
Investments and cash totaled $3.03 billion, including $2.32 billion of fixed-income securities, $566.9 million of equity securities and $95.5 million of cash.
Unpaid losses and settlement expenses were $1.92 billion gross, or $1.37 billion net of reinsurance recoverables.
Long-term debt was $149.6 million, consisting of senior notes maturing in 2023. Debt represented 10.8% of total capital, according to management.
The company had no borrowings under its $60 million revolving credit facility or its Federal Home Loan Bank facility. The revolving facility may be increased to $120 million under certain conditions.
Cash increased by $33.2 million during the first half to $95.5 million. Management stated that liquidity should be sufficient for anticipated needs over the next 12 to 24 months.
Operating cash inflows were $164.5 million; investing activities used $108.6 million and financing activities used $22.7 million, including $22.1 million of dividends.

Material changes versus the prior comparable period

Six-month net earnings rose by $123.9 million, primarily because 2021 included equity-security gains while 2020 included significant equity-market losses.
Premium growth was strongest in casualty and property. Six-month gross premiums written increased 22% in casualty, 32% in property and 8% in surety.
Casualty underwriting income increased to $51.3 million from $8.4 million, with the combined ratio improving to 83.2 from 97.0.
Property underwriting income declined to $7.9 million from $16.1 million; the combined ratio deteriorated to 92.7 from 82.1 because of higher storm losses.
Surety underwriting income declined to $7.3 million from $16.9 million, and the combined ratio increased to 87.2 from 69.8 because of lower reserve releases and higher current accident-year losses.
Prior-year reserve development was favorable by $67.5 million in the first half of 2021, compared with $40.8 million in 2020. The company reported no significant adverse development by product.
Storm losses increased to $24.0 million pretax for the first half from $6.5 million of storm and civil-unrest losses in 2020.
Other comprehensive loss was $29.6 million for the first half, compared with $40.5 million of other comprehensive income in 2020, primarily because rising interest rates reduced the fair value of fixed-income securities.

Guidance, outlook, commentary and risks

The filing does not provide formal earnings or premium guidance. Management expects continued emphasis on underwriting profitability rather than growth for its own sake.
Management described the financial position as strong and expects operating cash flow, investments and available financing sources to meet anticipated liquidity needs.
COVID-19 continues to create uncertainty around premium demand, claims emergence, court delays, statutes of limitations, settlement trends and insured exposures. Public transportation remains below normal, while construction-related products may be affected if disruption persists.
Management stated that reserves incorporate available COVID-19 information, but future legislative, regulatory or judicial actions and changes in loss emergence could produce reserve deficiencies and reduce earnings.
Major catastrophe exposures include earthquakes, hurricanes, windstorms, fires and other storms. The property segment’s results were adversely affected by 2021 storm losses.
Surety results remain exposed to deterioration in contractors’ and other principals’ financial condition. Second-quarter 2021 results included unfavorable development related in part to energy-sector bankruptcies.
Investment risks include equity-price volatility, credit risk and interest-rate risk. The fixed-income portfolio had a 4.9-year duration and an average rating of AA-. Rising rates may reduce fair values and other comprehensive income, while low reinvestment rates may constrain investment income.
Reinsurance recoverables were $545.1 million, subject to reinsurer credit risk. Allowances for uncollectible reinsurance recoverables totaled $25.3 million at June 30, 2021.
Insurance-subsidiary dividends to the holding company are subject to state regulatory restrictions. RLI Insurance Company paid $47.0 million of ordinary dividends to RLI Corp. during the first half, while only $0.3 million remained distributable as ordinary dividends without prior approval at June 30.
The company paid a quarterly dividend of $0.25 per share and stated that it had increased dividends for 46 consecutive years. No shares were repurchased in 2021; $87.5 million remained under the repurchase authorization.

Important facts for investors to verify

Whether favorable reserve development remains sustainable and how COVID-19-related claims ultimately emerge.
Future catastrophe losses, particularly earthquake and windstorm exposure, and the adequacy and cost of reinsurance.
The impact of interest rates on fixed-income fair values, capital, liquidity and investment income.
The durability of premium growth and rate increases in casualty and property, including the recovery of public transportation business.
Surety loss trends, including additional claims associated with energy-sector bankruptcies and broader economic conditions.
Regulatory limits on dividends from insurance subsidiaries and the availability of holding-company liquidity.
Debt maturity and refinancing requirements for the $149.6 million of senior notes due in 2023.
The filing reports effective disclosure controls and no material changes to risk factors or legal proceedings, but investors should review subsequent filings for developments after July 23, 2021.