RLI CORP annual report, FY2022

RLI Corp. 2022 Form 10-K Summary

Business context and reporting period

RLI Corp. is a U.S.-based specialty property, casualty and surety insurer operating primarily through RLI Insurance Company, Mt. Hawley Insurance Company and Contractors Bonding and Insurance Company. The filing covers the fiscal year ended December 31, 2022, with comparisons to 2021. Operations are principally domestic, with no material foreign operations.

Net premiums earned consisted of casualty, property and surety products. Casualty represented 62% of net premiums earned, property 27% and surety 11%.

Key financial metrics

Metric	2022	2021	Change
Net premiums earned	$1.144 billion	$980.9 million	17% increase
Total consolidated revenue	$1.698 billion	$1.179 billion	44% increase
Underwriting income	$178.2 million	$129.9 million	37% increase
Combined ratio	84.4%	86.8%	240-basis-point improvement
Net investment income	$86.1 million	$68.9 million	25% increase
Net realized gains	$588.5 million	$64.2 million	Material increase
Net unrealized gains/(losses) on equity securities	$(121.0) million	$65.3 million	Shift to loss
Net earnings	$583.4 million	$279.4 million	109% increase
Diluted EPS	$12.74	$6.11	108% increase
Net cash provided by operating activities	$250.4 million	$384.9 million	Decrease
Shareholders’ equity	$1.177 billion	$1.229 billion	Decrease

The 2022 net earnings increase was heavily influenced by a $571.0 million realized gain from the sale of RLI’s 40% interest in Maui Jim. The filing states that consolidated revenue increased by $518.7 million.

Underwriting and operating performance

RLI achieved its 27th consecutive year of underwriting profitability.
Gross premiums written increased 16% to $1.565 billion; net premiums written increased 17% to $1.242 billion.
Casualty underwriting income declined to $73.8 million from $95.5 million, and its combined ratio worsened to 89.6% from 84.9%, primarily because favorable prior-year reserve development declined.
Property underwriting income increased to $72.5 million from $11.3 million, while the combined ratio improved to 76.4% from 95.1%.
Surety underwriting income increased to $31.9 million from $23.1 million, and the combined ratio improved to 74.4% from 80.0%.
Prior-year favorable reserve development contributed $122.6 million of pretax earnings in 2022, compared with $125.5 million in 2021.
2022 underwriting results included $38.0 million of pretax Hurricane Ian losses and $13.0 million of other storm losses.

Balance sheet, investments, debt and liquidity

Total assets were $4.767 billion and total liabilities were $3.590 billion at December 31, 2022.
Gross unpaid losses and settlement expenses increased to $2.316 billion from $2.044 billion; net reserves increased to $1.576 billion from $1.435 billion.
Reinsurance recoverables on unpaid losses increased to $740.1 million from $608.1 million. More than 93% of reinsurance recoverables were due from reinsurers rated A or better by AM Best and S&P.
The investment portfolio had fair value of $3.272 billion, comprising 81.5% fixed income, 15.2% equities, 1.5% other invested assets, 1.1% short-term investments and 0.7% cash.
The fixed-income portfolio had fair value of $2.667 billion and unrealized losses of approximately $280.2 million, primarily reflecting higher interest rates. Management stated it expected to recover the amortized cost basis of securities and did not intend to sell them before recovery.
Total debt was $199.9 million, consisting primarily of $150.0 million of senior notes maturing September 15, 2023, and a $50.0 million Federal Home Loan Bank borrowing maturing November 10, 2023.
Cash, short-term investments and investments maturing within one year totaled approximately $390.9 million. RLI also had an undrawn revolving credit facility with aggregate availability of $60.0 million, subject to stated conditions and an increase option.
Management stated that operating cash flow, investment cash flow and financing sources should provide sufficient liquidity for anticipated needs over the following 12 to 24 months.

Material changes versus the prior comparable period

Premium growth was broad-based, with property net premiums earned increasing 33%, casualty increasing 12% and surety increasing 8%.
Commercial property gross premiums written increased 61%, driven by rate increases, higher building valuations and favorable market disruption.
Executive products gross premiums written declined 24% because of increased competition and the exit from large-account cyber and representations-and-warranties programs.
Net investment income benefited from a larger asset base and higher interest rates.
Equity market declines produced a $121.0 million unrealized loss in 2022 versus a $65.3 million unrealized gain in 2021.
RLI sold its Maui Jim investment for $686.6 million of cash proceeds and recognized a $571.0 million realized gain.
Financing cash outflows increased to $365.3 million, primarily because of regular dividends and a $7.00 per share special dividend.
Other comprehensive earnings declined by $278.9 million, primarily because of unrealized losses on available-for-sale fixed-income securities.

Guidance, outlook, risks and unusual items

Management expected continued rate increases and further market disruption to create opportunities for profitable growth in 2023, assuming competitive conditions remain rational. Management also indicated that investment income could increase in 2023 if current yields remain elevated, although lower short-term rates could limit growth.

For 2023 reinsurance renewals, RLI increased property retentions, changed most layers from prepaid to paid reinstatements and incurred mid-double-digit risk-adjusted rate increases. Casualty treaty co-participations increased, with risk-adjusted rate changes ranging from flat to low double digits. RLI stated that higher reinsurance prices made retaining more gross risk an efficient use of capital.

Key risks include catastrophe losses, particularly earthquakes, hurricanes, severe storms and Hawaii exposures.
Loss reserves are estimates subject to inflation, social inflation, litigation, judicial and regulatory changes, claim emergence and other uncertainties. The auditor identified unpaid losses and settlement expenses as a critical audit matter.
RLI faces reinsurance availability, pricing and counterparty-credit risks. Reinsurance does not discharge RLI’s primary obligations to policyholders.
Investment results remain exposed to interest-rate, credit-spread, equity-market and liquidity risks. A modeled 100-basis-point rate increase would reduce fixed-income fair value by approximately $111.1 million; a 10% S&P 500 decline would reduce equity fair value by approximately $46.3 million.
Insurance regulation may restrict underwriting activity, policy cancellations, investment allocations and dividends from subsidiaries to the holding company.
RLI disclosed environmental, asbestos and mass-tort exposures, including $21.1 million of net unpaid loss and settlement expense reserves at year-end 2022.
COVID-19-related litigation, delayed claims emergence, changing statutes of limitation and possible legislative or judicial actions could result in future reserve deficiencies.
RLI paid a $7.00 per share special dividend in December 2022 and had paid dividends for 186 consecutive quarters. A $0.26 per share regular dividend was declared in February 2023.
The company reported no material unresolved staff comments, no material off-balance-sheet arrangements and no legal proceedings expected to have a material adverse effect.

Most important facts for investors to verify

How much of 2022 earnings was attributable to the nonrecurring $571.0 million Maui Jim gain versus recurring underwriting and investment operations.
Whether favorable reserve development continues, particularly given the $122.6 million benefit recognized in 2022 and the subjectivity of long-tail casualty reserves.
The effect of higher 2023 reinsurance retentions, co-participations and pricing on future catastrophe volatility and underwriting margins.
RLI’s refinancing or repayment plan for approximately $199.9 million of debt maturing in 2023.
Changes in catastrophe exposure, modeled net losses and reinsurance limits relative to policyholders’ statutory surplus.
The extent to which higher interest rates support investment income while creating unrealized fixed-income losses and potential capital volatility.
Regulatory capacity to upstream dividends from insurance subsidiaries, including the $136.9 million of unrestricted net assets identified at the principal insurance subsidiary at year-end.
Future development of environmental, asbestos, mass-tort and COVID-19-related claims and litigation.