RLI Corp. 2019 Form 10-K Summary
Business context and reporting period
RLI Corp. is a U.S.-based specialty property and casualty insurer operating principally through RLI Insurance Company, Mt. Hawley Insurance Company and Contractors Bonding and Insurance Company. Its three reporting segments are casualty, property and surety. The filing covers the fiscal year ended December 31, 2019; the request’s “2019 Q4” reference is not a separate quarterly filing. The company has no material foreign operations and employed 905 associates at year-end.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Gross premiums written | $1,065.0 million | $983.2 million | 8% increase |
| Net premiums earned | $839.1 million | $791.4 million | 6% increase |
| Consolidated revenue | $1,003.6 million | $818.1 million | 23% increase |
| Net earnings | $191.6 million | $64.2 million | 199% increase |
| Diluted earnings per share | $4.23 | $1.43 | Increase |
| Operating cash flow | $276.9 million | $217.1 million | 28% increase |
| Combined ratio | 91.9 | 94.7 | Improved 2.8 points |
| Underwriting income | $67.6 million | $41.6 million | 62% increase |
| Total investments and cash | $2,560.4 million | $2,194.2 million | 17% increase |
| Shareholders’ equity | $995.4 million | $806.8 million | 23% increase |
| Total debt | $149.3 million | $149.1 million | Essentially unchanged |
Net earnings benefited from improved underwriting, higher net investment income, equity-method investee earnings and favorable investment-market performance. Net investment income was $68.9 million, up from $62.1 million. Net realized gains were $17.5 million, compared with $63.4 million in 2018, while net unrealized gains on equity securities were $78.1 million versus a $98.7 million loss in 2018.
Comprehensive earnings were $258.7 million, compared with $30.2 million in 2018. Book value per share increased to $22.18 from $18.13. Regular dividends declared were $0.91 per share and the company paid a $1.00 per-share special dividend in December 2019.
Material changes versus the prior comparable period
- RLI recorded its 24th consecutive year of underwriting profitability.
- Catastrophe losses declined to $9.5 million, adding 1.1 points to the combined ratio, from $40.5 million and 5.1 points in 2018.
- Favorable prior-year reserve development increased to $75.3 million from $50.0 million. Casualty contributed $62.5 million, property $4.5 million and surety $8.3 million of favorable development.
- Casualty gross premiums written increased 8% to $704.2 million; property increased 19% to $241.4 million; surety declined 5% to $119.4 million.
- The company reduced its quota-share participation with Prime from 25% to 6% and exited medical professional liability business on a runoff basis.
- Property underwriting income increased to $18.1 million from $0.9 million, primarily because of lower catastrophe losses. Casualty underwriting income increased to $20.6 million from $11.1 million, while surety underwriting income declined modestly to $28.8 million from $29.6 million.
- Gross loss and LAE reserves increased to $1.574 billion from $1.461 billion. Net loss and LAE reserves increased to $1.190 billion from $1.096 billion.
- Fixed-income fair value increased to $1.983 billion from $1.761 billion, and equity securities increased to $460.6 million from $340.5 million.
Liquidity, capital and debt
Cash, short-term investments and fixed-income securities maturing within one year totaled approximately $96.4 million at year-end, with an additional $407.0 million maturing within one to five years. The company had $46.2 million of cash and no outstanding borrowings under its $50.0 million revolving credit facility or the Federal Home Loan Bank of Chicago facility.
Long-term debt consisted primarily of $150.0 million of senior notes bearing 4.875% interest and maturing September 15, 2023; carrying value was $149.3 million and 2019 interest expense was $7.6 million. Debt represented approximately 13% of total capital.
Insurance-group statutory surplus was $1.030 billion, up from $829.8 million. RLI Insurance Company’s statutory capital and surplus substantially exceeded its $191.0 million authorized control level RBC. Ordinary dividends from the principal insurance subsidiary are subject to Illinois regulatory limits; $65.3 million of its net assets were available for ordinary dividends at year-end.
Guidance, outlook, risks and unusual items
Management expected continued growth opportunities in 2020 from rate increases, market disruption, tighter underwriting standards and reduced capacity among some competitors and reinsurers. The casualty outlook was positive but cautious because of social inflation, rising severity, longer-tail exposures and adverse industry auto-loss trends. Property opportunities were supported by improving catastrophe and marine pricing, while surety premium growth remained challenged by competition and selective exits from deteriorating credit risks.
- Key risks include inadequate loss reserves, catastrophe losses, adverse loss-cost trends, litigation and changing judicial interpretations of coverage.
- Reinsurance reduces catastrophe and large-loss volatility but exposes RLI to reinsurer credit risk and renewal availability. More than 94% of recoverables were due from reinsurers rated A or better by AM Best and S&P.
- 2019 catastrophe protection included $400 million above a $25 million retention for California earthquakes, $425 million above a $25 million retention for non-California earthquakes and $275 million above a $25 million retention for other perils. The 2020 program retained the same stated limits and retentions, subject to co-participations.
- Management estimates reserves using actuarial methodologies and judgment. The filing identifies unpaid losses and LAE as a critical accounting estimate; a simultaneous adverse sensitivity scenario for general liability could increase estimated ultimate loss and ALAE by approximately $30.1 million.
- Investment results were unusually strong: the equity portfolio’s 2019 total return was 28.7%, and the portfolio recorded substantial unrealized gains. A 100-basis-point increase in rates was modeled to reduce fixed-income fair value by $97.9 million, while a 10% equity-market decline was modeled to reduce equity fair value by $39.4 million.
- The company adopted lease accounting in 2019, recognizing $22.3 million of operating lease right-of-use assets and $24.5 million of lease liabilities; the filing states that adoption did not materially affect net earnings.
- KPMG issued an unqualified audit opinion and concluded that internal control over financial reporting was effective. Deloitte was appointed to audit the 2020 fiscal year; the filing reports no disagreements or reportable events with KPMG.
Most important facts for investors to verify
- Whether favorable reserve development remains sustainable as newer casualty and management-liability business matures.
- The effect of social inflation, claims severity, litigation and adverse auto trends on future loss ratios and reserves.
- Actual catastrophe experience and net retentions relative to modeled exposures and reinsurance limits.
- The availability, pricing and credit quality of reinsurance at future renewals.
- The sensitivity of book value and earnings to equity-market declines, interest-rate changes and credit-spread movements.
- Regulatory limits on dividends from insurance subsidiaries and the holding company’s ability to fund debt service and shareholder distributions.
- Progress in the 2020 outlook for casualty, property and surety premium growth, including the impact of product exits and the reduced Prime quota-share participation.