RLI Corp. 2013 Q3 Form 10-Q Summary
Business context and reporting period
RLI Corp. is a specialty property and casualty insurer operating through casualty, property and surety segments in admitted and excess-and-surplus markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net premiums earned | $163.7 million | $149.9 million | $462.4 million | $428.8 million |
| Consolidated revenue | $188.3 million | $169.6 million | $520.2 million | $489.4 million |
| Net earnings | $37.6 million | $25.5 million | $92.4 million | $78.2 million |
| Diluted EPS | $1.73 | $1.19 | $4.26 | $3.64 |
| Comprehensive earnings | $35.7 million | $46.5 million | $74.5 million | $116.0 million |
| Underwriting income | $31.8 million | $18.5 million | $77.2 million | $55.1 million |
| Combined ratio | 80.5 | 87.7 | 83.3 | 87.1 |
| Operating cash flow | Not separately provided | Not separately provided | $81.7 million | $13.2 million |
Calculated net margin was approximately 20.0% in Q3 and 17.8% for the first nine months. The nine-month underwriting margin was approximately 16.7% of net premiums earned. The effective tax rate was 32% in Q3 and 31% for the nine-month period.
At September 30, 2013, total assets were $2.89 billion, shareholders’ equity was $854.6 million, cash was $87.4 million, and short-term investments were $23.0 million. Total investments and cash were $1.88 billion. Debt totaled $250.0 million, consisting of $100.0 million due in 2014 and $150.0 million of notes due in 2023. Debt represented 22.6% of total capital.
Material changes versus the prior comparable period
- Q3 revenue increased 11%, net premiums earned increased 9%, and net earnings increased 48% year over year. Nine-month revenue increased 6%, net premiums earned increased 8%, and net earnings increased 18%.
- Underwriting performance improved materially: the nine-month combined ratio declined to 83.3 from 87.1, and Q3 declined to 80.5 from 87.7.
- Gross premiums written increased 8% for the first nine months and 3% in Q3. Casualty drove growth, while property and surety premiums declined or were broadly flat.
- Nine-month gross premiums written increased 19% in casualty, declined 2% in property, and were essentially flat in surety. Casualty underwriting income rose to $39.5 million from $22.4 million; property rose to $19.6 million from $11.3 million; surety declined to $18.0 million from $21.4 million.
- Net investment income declined 11% for the first nine months and 4% in Q3 because of lower reinvestment rates and a greater allocation to lower-yielding tax-exempt municipals. Net realized investment gains increased to $18.4 million for nine months and $11.0 million in Q3.
- Other comprehensive earnings declined substantially because of unrealized investment losses of $17.9 million for the first nine months, compared with gains of $37.7 million in 2012. Management attributed the losses largely to rising interest rates.
- Operating cash flow increased to $81.7 million from $13.2 million, partly because 2012 included a $50.0 million collateral return related to a commercial surety account.
Guidance, outlook, commentary, risks and unusual items
- No quantitative earnings or premium guidance was provided. Management emphasized underwriting profitability over general premium growth or market share and stated that rates had increased modestly on most coverages, although competition remained intense.
- Management reported 17 consecutive years of underwriting profitability and continued to prioritize risk selection, pricing discipline, capital preservation and diversified investments.
- Results benefited from favorable prior-year reserve development of $63.4 million for the first nine months and $23.4 million in Q3. These benefits are estimates and may not recur.
- 2013 catastrophe losses included approximately $10.0 million of spring storm losses for the first nine months and no significant catastrophe event in Q3. The prior-year periods included materially higher storm, Hurricane Isaac and crop losses.
- Loss reserves totaled $1.14 billion before reinsurance recoverables. Reserve estimates are highly judgmental and exposed to claims inflation, legal and regulatory changes, reporting and payment patterns, catastrophe activity, and changes in loss severity.
- The investment portfolio contained $23.2 million of unrealized losses at September 30, 2013, up from $1.3 million at December 31, 2012. Management recorded no other-than-temporary impairment losses in the first nine months of 2013 and stated that the fixed-income portfolio remained high quality.
- On October 2, 2013, RLI completed a $150.0 million senior unsecured note offering at a 4.875% coupon, maturing in 2023. The September 30 balance sheet reflects the debt, but the related cash proceeds were received after quarter end and are excluded from nine-month financing cash flows.
- Liquidity was described as sufficient for anticipated needs over the next 12 to 24 months. The company had approximately $123.4 million of investments maturing within one year, an undrawn $25.0 million revolving credit facility, and additional liquidity from its investment portfolio and reverse-repurchase capacity.
- Holding-company liquidity is constrained because insurance-subsidiary dividends are subject to Illinois regulatory limits. No dividends were paid by RLI Insurance Company to RLI Corp. during the first nine months of 2013, and prior extraordinary dividends continue to require regulatory approval.
- The IRS was examining federal income tax years 2010 and 2011. Management stated that unrecognized tax benefits were not material and that no significant changes were expected over the following 12 months.
Important facts for investors to verify
- Whether favorable reserve development and benign catastrophe experience are sustainable and how current accident-year loss trends develop.
- The adequacy of casualty reserves, particularly for newer or longer-tail products such as medical professional liability and professional services.
- The effect of rising interest rates on fixed-income fair values, investment income and accumulated other comprehensive earnings.
- The timing and cash-flow impact of the October 2013 debt issuance and the refinancing or repayment of the $100.0 million notes due in January 2014.
- Regulatory restrictions on dividends from insurance subsidiaries and the amount of unrestricted holding-company liquidity.
- Competitive pricing pressure, premium declines in selected property and surety lines, and the impact of underwriting exits or re-underwriting actions.