RLI Corp. 10-Q Summary
Business Context and Reporting Period
RLI Corp. is a U.S.-based specialty property, casualty and surety insurer serving niche markets through its principal insurance subsidiaries. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net premiums earned | $318.4 million | $291.5 million | $948.4 million | $843.4 million |
| Consolidated revenue | $331.7 million | $859.5 million | $1,078.5 million | $1,337.4 million |
| Net investment income | $32.0 million | $21.3 million | $87.8 million | $57.6 million |
| Net earnings | $13.5 million | $439.9 million | $190.0 million | $485.6 million |
| Diluted EPS | $0.29 | $9.61 | $4.12 | $10.61 |
| Underwriting income | $4.2 million | $8.8 million | $113.3 million | $124.2 million |
| Combined ratio | 98.7% | 97.0% | 88.0% | 85.3% |
| Operating cash flow | Not separately provided | Not separately provided | $342.2 million | $282.9 million |
Approximate underwriting margins were 1.3% in Q3 and 11.9% for the first nine months. Net earnings were heavily affected by investment gains and losses, including the prior-year Maui Jim disposal gain.
- Gross premiums written increased 16% to $1.372 billion in the first nine months, led by 45% growth in property, 3% growth in casualty and 4% growth in surety.
- Net premiums earned increased 12% for the first nine months and 9% in the third quarter.
- Investment income increased 52% for the first nine months and 50% in the third quarter, reflecting higher interest rates and a larger average asset base.
- Shareholders’ equity was $1.299 billion at September 30, 2023, compared with $1.177 billion at December 31, 2022. Total assets were $5.084 billion.
- Investments and cash totaled $3.455 billion, including $2.718 billion of fixed-income securities, $534.4 million of equity securities, $125.0 million of short-term investments and $18.4 million of cash.
- Total debt was $100 million, or approximately 7% of total capital. The company retired $150 million of senior notes and drew $50 million under a revolving facility during September.
- The company paid $36.5 million of dividends during the first nine months and paid a quarterly dividend of $0.27 per share in September. The company reported 48 consecutive years of dividend increases.
Material Changes Versus Prior Comparable Period
- Net earnings declined substantially because 2022 included approximately $437.7 million of after-tax earnings from the sale of the Maui Jim investment. The 2023 period included a $14 million gain from a working-capital escrow related to that sale.
- Underwriting income declined to $113.3 million from $124.2 million, and the nine-month combined ratio deteriorated to 88.0% from 85.3%.
- Catastrophe activity was higher in 2023. The company recorded $52 million of pretax Hawaiian wildfire losses, $14 million of related reinstatement premium and $27 million of storm losses during the first nine months. The prior-year period included $40 million of hurricane losses and $5 million of storm losses.
- Prior-year reserve development remained favorable but decreased to $94 million from $103 million in the first nine months. No products experienced significant adverse development.
- Property underwriting income fell to $33.6 million from $40.3 million, with the property combined ratio increasing to 88.2% from 81.9%. Third-quarter property underwriting produced a $20.7 million loss and a 121.8% combined ratio.
- Casualty underwriting income declined modestly to $57.5 million from $60.4 million, while surety underwriting income declined to $22.3 million from $23.5 million.
- Other comprehensive loss improved to $38.8 million from $294.4 million, although higher interest rates still reduced the fair value of fixed-income securities.
- The fixed-income portfolio had $329.6 million of gross unrealized losses at September 30, 2023. Management attributed the losses primarily to higher interest rates and stated that securities continued to pay expected coupons and that amortized cost was expected to be recovered.
- The company adopted ASU 2023-02 for tax-credit investments, resulting in a $1 million reduction to retained earnings, recognition of a $7 million unfunded-commitment liability and reclassification of a historic tax-credit investment.
- The $100 million share repurchase program was terminated in 2023; no shares were repurchased during the year.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide explicit quantitative earnings or premium guidance. Management states that its primary focus is underwriting profitability rather than general premium growth or market share. The company expects cash generated from operations and investments to meet anticipated liquidity needs over the next 12 to 24 months.
- Key risks include inflation, rising interest rates, equity-market volatility, supply-chain disruption, catastrophe losses, insurance pricing competition, reserve-estimation uncertainty, changing laws and court decisions, and reinsurer credit risk.
- Catastrophe reinsurance purchased for 2023 provides limits of $850 million excess of $25 million for California earthquakes, $850 million excess of $50 million for non-California earthquakes and $750 million excess of $50 million for other perils, including wind, subject to stated co-participations.
- As of September 30, approximately $318 million of cash and investments matured within one year and $892 million matured within one to five years. Holding-company liquid assets totaled $156 million.
- A $50 million Federal Home Loan Bank of Chicago borrowing was scheduled to mature on November 10, 2023 and carried a 0.84% annual interest rate. The $50 million PNC revolving borrowing carried a floating rate of 7.07% and the facility expires May 29, 2026.
- Reinsurance recoverables were $821.0 million, net of an $11.1 million allowance for uncollectible amounts; ceded balances remain subject to reinsurer credit risk.
- The filing reports no material changes in legal proceedings or risk factors, and management concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Assess whether premium growth, particularly in commercial property, can continue without a disproportionate increase in catastrophe losses and the combined ratio.
- Monitor Hawaiian wildfire claims, storm losses, reinstatement premiums and the adequacy of related reserves and reinsurance recoveries.
- Evaluate the effect of interest rates on the $2.718 billion fixed-income portfolio, including the $329.6 million unrealized loss position and potential realized losses if securities are sold.
- Confirm repayment or refinancing of the $50 million FHLBC borrowing that was scheduled to mature in November 2023.
- Track reserve development, especially because favorable prior-year development contributed materially to underwriting profitability.
- Review regulatory restrictions on dividends from the principal insurance subsidiary; $105 million of net assets was available for ordinary dividends without prior approval as of September 30, 2023.
- Separate recurring underwriting and investment income from unusual items, particularly the 2022 Maui Jim gain and the 2023 escrow-related gain.