RLI Corp. 2010 Form 10-K Summary
Business context and reporting period
RLI Corp. is an Illinois-based specialty property and casualty insurer reporting for the fiscal year ended December 31, 2010. Its principal insurance subsidiaries operate in casualty, property and surety markets across the United States and selected territories, with no material foreign operations. The filing is an annual report, although the request metadata identifies 2010 Q4.
RLI focuses on niche and hard-to-place risks through excess and surplus, specialty admitted, and specialty property reinsurance businesses. Gross written premiums consisted approximately of 36% excess and surplus, 56% specialty admitted, and 8% specialty property reinsurance business.
Financial metrics and condition
| Metric | 2010 | 2009 | Change or commentary |
|---|---|---|---|
| Net premiums earned | $493.4 million | $492.0 million | Up slightly |
| Net premiums written | $485.1 million | $469.9 million | Up 3.2% |
| Direct premiums earned | $599.7 million | Not clearly provided in the filing text | California, New York, Florida and Texas represented 53.0% of 2010 direct premiums earned |
| GAAP loss ratio | 40.8% | 41.3% | Improved 0.5 percentage points |
| GAAP expense ratio | 39.9% | 41.0% | Improved 1.1 percentage points |
| GAAP combined ratio | 80.7% | 82.3% | Improved 1.6 percentage points |
| Statutory combined ratio | 81.4% | 83.9% | Improved 2.5 percentage points |
| Net loss and LAE reserves | $819.8 million | $810.1 million | Increased $9.7 million |
| Statutory policyholders’ surplus | $732.4 million | $784.2 million | Decreased $51.8 million |
| Net premiums written to surplus | 0.7 to 1 | 0.6 to 1 | Remained well below the NAIC guideline of generally 3 to 1 |
| Net investment income | $66.8 million | $67.3 million | Down modestly |
| Net realized investment gains | $23.2 million | $(12.8) million | Improved substantially |
| Annualized return on average invested assets | 6.5% | 8.5% | Declined, primarily reflecting lower investment gains |
The filing text does not provide a clear consolidated GAAP revenue, net income, operating cash flow, or earnings-per-share value; those amounts are incorporated by reference to the 2010 Financial Report to Shareholders. Parent-company net earnings were $127.4 million in 2010 versus $93.8 million in 2009, but this is not a substitute for consolidated net income.
At December 31, 2010, RLI held approximately $1.4 billion of fixed-income securities, $321.9 million of equity securities, and $39.8 million of short-term investments. Total investments in Schedule I were $1.803 billion at carrying value. The fixed-income portfolio was 91% rated A or better and had a 4.6-year duration. No Level 3 recurring fair-value assets were reported, and no investment impairment losses were recorded in 2010.
The parent company had $100.0 million of long-term debt, $2.7 million of accrued interest, and $26 thousand of cash at year-end. Parent-company operating cash flow was $1.7 million, while $208.1 million of investing cash flow was primarily supported by $208.0 million of dividends from subsidiaries. Parent-company financing cash flow was $(209.9) million, including $193.8 million of dividends paid and $23.9 million of share repurchases.
Material changes versus the prior comparable period
- Net premiums written increased 3.2%, while net premiums earned were essentially flat.
- Underwriting performance improved, with the GAAP combined ratio declining to 80.7% from 82.3%. Favorable prior-year reserve development increased to $83.2 million from $66.6 million.
- Favorable reserve development occurred in all three segments: casualty $65.3 million, property $8.3 million, and surety $9.7 million.
- Statutory surplus declined to $732.4 million from $784.2 million, and RLI Group moved from A.M. Best financial size category XI to category X based on year-end surplus.
- The property segment added crop reinsurance through a two-year quota-share agreement with Producers Agricultural Insurance Company, contributing $27.1 million of 2010 net premiums earned.
- RLI expanded property reinsurance into industry loss warranty treaties and increased catastrophe coverage for certain property exposures while reducing marine reinsurance limits.
- Equity securities increased to $321.9 million from $262.7 million. Municipal bond exposure declined by $170.1 million, while corporate and agency holdings increased.
- RLI completed its prior $200 million repurchase authorization, initiated a new $100 million authorization, repurchased 438,783 shares for $23.9 million, and ended the year with $94.1 million of remaining authorization. No shares were repurchased in the fourth quarter.
- RLI paid a $146.7 million special dividend to shareholders, funded in part by a $150.0 million extraordinary dividend from RLI Insurance Company approved by Illinois regulators.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management emphasizes underwriting discipline, selective participation in specialty markets, withdrawal from markets that become overly adverse, and development of new products where profitable opportunities exist.
- Management estimates that prior-year reserve development over the following calendar year could reasonably range from approximately $82 million favorable to $25 million unfavorable. This is an estimate of reserve variability, not guidance.
- General liability reserve sensitivity was significant: a combined adverse change in expected loss ratio, emergence patterns, and actual loss emergence could increase estimated ultimate losses by approximately $48.4 million; the corresponding favorable scenario would reduce them by approximately $46.5 million.
- Catastrophe risk remains material, particularly from California earthquakes, other earthquakes, hurricanes, windstorms, terrorism and other natural or man-made events. Based on the January 1, 2011 catastrophe treaty, management estimated a 99.6% likelihood that loss from the modeled event would be less than 9.5% of year-end 2010 policyholders’ surplus.
- Environmental, asbestos and mass-tort exposures remain subject to substantial estimation uncertainty. Net unpaid losses and LAE for these exposures were $35.3 million at year-end 2010, down from $48.1 million in 2009, partly because of significant claim payments and settlements.
- Reinsurance reduces exposure but creates reinsurer credit and availability risk. More than 91% of reinsurance recoverables were due from reinsurers rated A or better by A.M. Best and Standard & Poor’s.
- Key risks include reserve inadequacy, catastrophe losses exceeding modeled or reinsured amounts, adverse litigation and legal interpretations, reinsurance non-collectibility or cost increases, competition and soft pricing, investment-market volatility, regulatory restrictions, limited holding-company liquidity, employee retention, cyber incidents, and difficulty launching new products.
- Insurance financial-strength ratings were affirmed at A+ Superior by A.M. Best, A+ Strong by Standard & Poor’s for the rated entities, and A2 Good by Moody’s.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2010. KPMG audited the controls and financial statement schedules.
Most important facts for investors to verify
- Verify consolidated net income, operating cash flow, book value per share, diluted EPS, and total shareholders’ equity in the incorporated 2010 Financial Report to Shareholders.
- Assess whether the $83.2 million of favorable prior-year reserve development is sustainable or reflects unusually favorable loss emergence.
- Review the decline in statutory surplus and the effect of the special dividend, ordinary dividends, and share repurchases on holding-company liquidity and capital.
- Evaluate catastrophe exposure after the 2011 reinsurance renewals, including retentions, limits, reinstatement premiums and modeled losses exceeding treaty limits.
- Monitor crop reinsurance, property reinsurance and other newer businesses for reserve-estimation risk and exposure growth.
- Review the adequacy and collectibility of reinsurance recoverables, particularly in stressed catastrophe or mass-tort scenarios.
- Confirm debt-service capacity at the parent company, given $100 million of debt, limited parent cash, and reliance on regulated subsidiary dividends.
- Assess investment-market, interest-rate and municipal-credit risks despite the portfolio’s reported high credit quality and absence of 2010 impairment losses.