RLI Corp. 2015 Form 10-K Summary
Business context and reporting period
RLI Corp. is a specialty property and casualty insurer operating primarily through RLI Insurance Company, Mt. Hawley Insurance Company and Contractors Bonding and Insurance Company. Its principal markets are specialty admitted insurance, excess and surplus lines, reinsurance and surety. The filing covers the fiscal year ended December 31, 2015; quarterly information identifies fourth-quarter 2015 net earnings of $33.9 million and diluted EPS of $0.76.
- Operations are predominantly domestic, covering all 50 states and certain U.S. territories, with no material foreign operations.
- Business segments are casualty, property and surety.
- RLI employed 902 associates at year-end and held A+ Superior ratings from A.M. Best, A+ Strong ratings from Standard & Poor’s and A2 Good ratings from Moody’s for applicable insurance subsidiaries.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Gross premiums written | $853.6 million | $863.8 million | Down 1% |
| Net premiums earned | $700.2 million | $687.4 million | Up 2% |
| Consolidated revenue | $794.6 million | $775.2 million | Up 3% |
| Underwriting income | $108.6 million | $107.0 million | Up 1% |
| Net earnings | $137.5 million | $135.4 million | Up 2% |
| Diluted EPS | $3.12 | $3.09 | Up 1% |
| Operating cash flow | $152.6 million | $123.1 million | Up 24% |
| GAAP combined ratio | 84.5% | 84.5% | Flat |
| Statutory surplus | $865.3 million | $849.3 million | Up 2% |
- GAAP loss ratio was 42.7% and expense ratio was 41.8%.
- Segment underwriting income was $46.3 million for casualty, $29.0 million for property and $33.3 million for surety. Combined ratios were 88.8%, 83.1% and 71.5%, respectively.
- Net investment income was $54.6 million, down from $55.6 million. Net realized investment gains increased to $39.8 million from $32.2 million, including a $6.7 million gain related to the sale of RLI Indemnity Company.
- Net loss and loss adjustment expense reserves increased to $805.9 million from $785.9 million, while gross reserves declined to $1.104 billion from $1.121 billion. Reinsurance recoverables declined to $297.8 million from $335.1 million.
- Total investments and cash were $2.0 billion; the portfolio was approximately 79% fixed income and 19% equities. Net unrealized investment appreciation declined to $192.9 million from $264.0 million.
- Total debt was $149.7 million, consisting principally of 4.875% senior notes maturing in 2023. Debt represented approximately 15% of total capital. No amounts were outstanding under the $40 million revolving credit facility or the approximately $35 million Federal Home Loan Bank capacity.
- Total shareholders’ equity was $823.5 million, compared with $845.1 million in 2014, primarily reflecting the decline in accumulated other comprehensive earnings after market-related investment losses.
Material changes versus the prior comparable period
- Gross premiums written decreased 1%, primarily because crop reinsurance premiums declined to $9.4 million from $50.3 million. Excluding crop, gross premiums written increased 4%.
- Casualty gross premiums written increased 8% and surety increased 6%; property gross premiums written decreased 21%, largely because of crop runoff and continued pressure in catastrophe-exposed property markets.
- Net premiums written increased 3%, helped by lower reinsurance costs and increased retentions. Ceded premiums written declined to $131.6 million from $160.7 million.
- Favorable prior-year reserve development was $65.4 million, compared with $64.8 million in 2014 and $72.5 million in 2013. Favorable development supported the combined ratio and underwriting income.
- RLI discontinued its facultative property reinsurance business during the third quarter and expects crop reinsurance to end after the 2015 crop year.
- RLI sold RLI Indemnity Company on November 3, 2015, for $7.5 million of net proceeds. The transaction primarily transferred insurance licenses; the existing business and cash flows remained within the RLI Insurance Group.
- RLI increased its ownership in Prime Holdings Insurance Services from 20% to 27% through a $1.7 million additional investment. Prime contributed $1.0 million of equity-method earnings in 2015.
- The company paid a $2.00-per-share special dividend totaling $87.1 million, compared with a $3.00-per-share special dividend totaling $129.3 million in 2014. Ordinary dividends declared increased to $0.75 per share from $0.71.
- No shares were repurchased during 2015; $87.5 million remained available under the repurchase authorization.
Guidance, outlook, risks and unusual items
Management did not provide specific earnings or premium guidance. For 2016, management expects the competitive insurance environment and soft pricing to continue, particularly in property catastrophe coverage. Casualty is expected to achieve moderate growth, property premiums are expected to decline but remain profitable assuming normal catastrophe activity, and surety is expected to achieve modest growth.
- Industry profitability has attracted traditional and alternative capital, increasing competition and pressuring rates, terms and conditions.
- Catastrophe exposure remains concentrated in California earthquakes, other earthquakes, windstorms, hurricanes, floods and severe weather. The 2016 catastrophe program provided $300 million of California earthquake limit above a $25 million retention, $325 million for non-California earthquake and $225 million for other perils.
- Reserve estimates are highly judgmental, particularly for long-tail casualty, environmental, asbestos and mass-tort exposures. Management estimated that prior-year reserve development over the following year could range from approximately $80 million favorable to $24 million unfavorable.
- Reinsurance reduces net exposure but does not relieve RLI of its obligations to policyholders. Reinsurance recoverables, reinsurer credit quality and the availability and cost of renewals remain important risks; more than 96% of recoverables were due from reinsurers rated A or better by A.M. Best and S&P.
- Investment results are exposed to interest-rate, credit-spread and equity-market risk. A hypothetical 100-basis-point increase in rates would reduce fixed-income fair value by approximately $87.1 million; a 10% equity-market decline would reduce equity fair value by approximately $32.3 million.
- Holding-company liquidity depends substantially on dividends from insurance subsidiaries. At year-end, approximately $45.2 million of liquid assets were unrestricted at the holding company, and $58.2 million of principal-subsidiary net assets were available for ordinary dividends subject to statutory restrictions.
- Other risks include state insurance regulation, litigation, cyber and systems interruptions, economic weakness affecting insureds, energy-sector stress, rating downgrades and the ability to retain specialized underwriting talent.
- Management reported no material adverse legal proceedings, no unresolved SEC staff comments and effective disclosure controls and internal control over financial reporting. KPMG issued an unqualified audit opinion.
Important facts for investors to verify
- Whether favorable reserve development and unusually low catastrophe losses remain sustainable, and the resulting current-accident-year loss ratios excluding prior-year releases.
- The impact of continued soft pricing, alternative capital and competition on renewal rates, premium volume and underwriting margins.
- The runoff of crop and facultative reinsurance, including the effect on property-segment revenue and expense leverage.
- The adequacy and collectability of the $297.8 million of reinsurance recoverables and the credit quality of major reinsurers.
- Exposure to long-tail casualty, environmental, asbestos and mass-tort claims relative to the $805.9 million net loss and LAE reserve balance.
- Liquidity at the parent company, statutory dividend capacity and the ability to fund debt service, ordinary dividends and future special dividends.
- Portfolio sensitivity to interest rates, credit spreads and equity prices, given $1.538 billion of fixed-income securities and $375.4 million of equities.
- The extent to which 2015 net earnings benefited from $39.8 million of realized investment gains, including the RLI Indemnity sale gain, versus recurring underwriting and investment income.