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RLI Reports Second Quarter 2018 Results
[July 18, 2018]

RLI Reports Second Quarter 2018 Results


RLI Corp. (NYSE: RLI) - RLI Corp. reported second quarter 2018 net earnings of $33.3 million ($0.74 per share), compared to $26.2 million ($0.59 per share) for the second quarter of 2017. Operating earnings(1) for the second quarter of 2018 were $26.7 million ($0.60 per share) compared to $27.1 million ($0.61 per share) for the same period in 2017.





           
      Second Quarter   Year to Date
Earnings Per Diluted Share   2018     2017     2018     2017
Net earnings (2) $ 0.74 $ 0.59     $ 1.01     $ 1.03
Operating earnings (1)   $ 0.60     $ 0.61     $ 1.19     $ 1.04
 
(1) See discussion below: Non-GAAP and Performance Measures.
(2) Unrealized losses on equity securities and the related taxes were included in net earnings in 2018. See discussion below: Recently Adopted Accounting Standard and Tax Reform.
 

Highlights for the quarter included:

  • Underwriting income(1) of $14.1 million, resulting in a combined ratio(1) of 92.8.
  • 12% increase in gross premiums written and 10% increase in investment income.
  • Favorable development in prior years' loss reserves resulting in a $12.4 million net increase in underwriting income.
  • Losses from volcanic activity in Hawaii resulting in a $5.5 million net decrease to underwriting income.
  • Book value per share of $19.17, an increase of 1% from year-end 2017, inclusive of dividends.

"We are pleased to report profitable underwriting results and strong premium growth in the second quarter," said RLI Corp. Chairman & CEO Jonathan E. Michael. "We achieved a 93 combined ratio, which was driven by profitable underwriting in all segments. Although volcanic activity in Hawaii impacted our property results, I am proud of our team's ongoing efforts to provide outstanding service and support to our policyholders living in affected areas. In addition, we posted 12% top line growth with contributions from multiple products across our diverse portfolio, marking our third consecutive quarter of double-digit growth. Because of the combined strength of our underwriting and investment performance, we were able to deliver $0.60 of operating earnings per share."

Underwriting Income

RLI achieved $14.1 million of underwriting income in the second quarter of 2018 on a 92.8 combined ratio, compared to $19.7 million of underwriting income on an 89.3 combined ratio in the same quarter for 2017. Results for both years include favorable development in prior years' loss reserves which totaled $12.4 million and $12.8 million for 2018 and 2017, respectively.

The following table highlights underwriting income and combined ratios by segment.

                   
Underwriting Income(1) Second Quarter Combined Ratio(1) Second Quarter
(in millions)       2018       2017       2018     2017
Casualty $ 2.9 $ 8.6 Casualty 97.8 92.8
Property 3.6 2.9 Property 90.2 91.7
Surety       7.6       8.2 Surety     74.3     73.1
Total     $ 14.1     $ 19.7 Total     92.8     89.3
 
(1) See discussion below: Non-GAAP and Performance Measures.
 

Other Income

RLI's net investment income for the quarter increased 10.1% to $14.6 million, compared to the same period in 2017. For the six-month period ended June 30, 2018, investment income was $28.8 million versus $26.2 million for the same period in 2017. The investment portfolio's total return was 0.8% for the quarter and -0.7% through the six-month period.

Comprehensive earnings were $25.6 million for the quarter ($0.57 per share) compared to $36.8 million ($0.83 per share) for the same quarter in 2017. In addition to net earnings, comprehensive earnings included after-tax unrealized gains/losses from the fixed income portfolio in 2018 and after-tax unrealized gains/losses from the fixed income and equity portfolios in 2017. See Recently Adopted Accounting Standard and Tax Reform discussion below.

Equity in earnings of unconsolidated investees was $7.1 million for the quarter compared to $6.8 million from the same period last year. These results are related to Maui Jim, Inc. ($6.6 million), a producer of premium sunglasses, and Prime Holdings Insurance Services, Inc. ($0.5 million), a specialty insurance company. For the second quarter of 2017, equity in earnings of unconsolidated investees from Maui Jim and Prime was $6.2 million and $0.6 million, respectively. For the six-month period ended June 30, 2018, equity in earnings of unconsolidated investees was $12.3 million versus $11.7 million in 2017.

Dividends Paid in the Second Quarter of 2018

On June 20, 2018, the company paid an ordinary dividend of $0.22 per share, a $0.01 increase over the prior quarter. RLI's cumulative dividends total more than $613 million paid over the last five years.

Recently Adopted Accounting Standard and Tax Reform

As disclosed in RLI's Annual Report on Form 10-K for the year ended December 31, 2017, accounting guidance for financial instruments changed in 2018 under ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. We adopted this accounting standard update, effective January 1, 2018, using a cumulative-effect adjustment. This adjustment moved the historical unrealized gains and losses, net of tax, on the equity portfolio from accumulated other comprehensive earnings to retained earnings, but had no impact on overall shareholders' equity. In addition, for 2018 and forward, the change in fair value for equity securities is required to be recognized through net earnings rather than through other comprehensive income. As defined below, we exclude these unrealized gains and losses in arriving at operating earnings and earnings per share from operations. For the second quarter of 2018, $12.6 million of unrealized losses, gross of tax, were recognized within pre-tax earnings and the income tax expense was reduced by $2.6 million. The impact to our income statement will vary depending upon the level of volatility in the performance of the securities held in our equity portfolio and the overall market.

The change in the federal corporate tax rate from 35% to 21% commencing January 1, 2018, as enacted by the Tax Cuts and Jobs Act of 2017 (TCJA), contributed to a lower effective tax rate for 2018 as compared to 2017.

Non-GAAP and Performance Measures

Management has included certain non-generally accepted accounting principles ("non-GAAP") financial measures in presenting the Company's results. Management believes that these non-GAAP measures better explain the Company's results of operations and allow for a more complete understanding of the underlying trends in the Company's business. These measures should not be viewed as a substitute for those determined in accordance with generally accepted accounting principles ("GAAP"). In addition, our definitions of these items may not be comparable to the definitions used by other companies.

Operating earnings and earnings per share (EPS) from operations consist of our GAAP net earnings adjusted by the net realized gains/(losses), net unrealized gains/(losses) on equity securities for 2018 only and taxes related thereto. The adjustment for net unrealized gains/(losses) on equity securities is only applicable for 2018 due to the adoption of the above mentioned accounting standard update. Net earnings and net earnings per share are the GAAP financial measures that are most directly comparable to operating earnings and EPS from operations. A reconciliation of the operating earnings and EPS from operations to the comparable GAAP financial measures is included in the 2018 financial highlights below.

Underwriting income or profit represents the pretax profitability of our insurance operations and is derived by subtracting loss and settlement expenses, policy acquisition costs and insurance operating expenses from net premium earned, which are all GAAP financial measures. The combined ratio, which is derived from components of underwriting income, is a performance measure commonly used by property and casualty insurance companies and is calculated as the sum of loss and settlement expenses, policy acquisition costs and insurance operating expenses, divided by net premiums earned, which are all GAAP measures.

Other News

At 10 a.m. central daylight time (CDT) tomorrow, July 19, 2018, RLI management will hold a conference call to discuss quarterly results with insurance industry analysts. Interested parties may listen to the discussion through the Internet at https://edge.media-server.com/m6/p/2judher6.

Except for historical information, this news release may include forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) including, without limitation, statements reflecting our current expectations about the future performance of our company or our business segments or about future market conditions. These statements are subject to certain risk factors that could cause actual results to differ materially. Various risk factors that could affect future results are listed in the company's filings with the Securities and Exchange Commission, including the Form 10-K Annual Report for the year ended December 31, 2017.

About RLI

RLI Corp. (NYSE: RLI) is a specialty insurer serving diverse, niche property, casualty and surety markets. The company provides deep underwriting expertise and superior service to commercial and personal lines customers nationwide. RLI's products are offered through its insurance subsidiaries RLI Insurance Company, Mt. Hawley Insurance Company and Contractors Bonding and Insurance Company. All of RLI's insurance subsidiaries are rated A+ (Superior) by A.M. Best Company. RLI has paid and increased regular dividends for 43 consecutive years and delivered underwriting profits for 22 consecutive years. To learn more about RLI, visit www.rlicorp.com.

Supplemental disclosure regarding the earnings impact of specific items:

               

 

 

Operating Earnings Per Share

2018

2017

2018 2017
2nd Qtr 2nd Qtr 6 Mos. 6 Mos.
Operating Earnings Per Share(1) $ 0.60 $ 0.61 $ 1.19 $ 1.04
 
Specific items included in operating earnings per share:(2) (3)

•

Favorable development in casualty prior years' reserves $ 0.12 $ 0.13 $ 0.24 $ 0.08

•

Favorable development in property prior years' reserves $ 0.05 $ 0.01 $ 0.06 $ 0.04

•

Favorable development in surety prior years' reserves $ 0.05 $ 0.04 $ 0.14 $ 0.12

•

Catastrophe impact

?

2018 Hawaii volcanic activity $ (0.10 ) - (0.10 ) -
? 2018 storms $ (0.02 ) $ - $ (0.05 ) $ -
? 2017 and prior events $ - $ (0.03 ) $ - $ (0.03 )
 
(1) See discussion above: Non-GAAP and Performance Measures.
(2) Includes incentive and profit sharing-related impacts which affected policy acquisition, insurance operating and general corporate expenses.
(3) Reserve development reflects changes from previously estimated losses.
           
RLI CORP.
2018 FINANCIAL HIGHLIGHTS
(Unaudited)
(Dollars in thousands, except per share amounts)
 
Three Months Ended June 30, Six Months Ended June 30,

SUMMARIZED INCOME STATEMENT DATA:

2018 2017 % Change 2018 2017 % Change
Net premiums earned $ 196,522 $ 184,331 6.6 % $ 386,549 $ 367,616 5.2 %
Net investment income 14,577 13,238 10.1 % 28,809 26,243 9.8 %
Net realized gains (losses) 20,849 (1,359 ) - 29,253 (735 ) -
Net unrealized losses on equity securities   (12,611 )   -   -       (39,383 )   -   -    
Consolidated revenue $ 219,337 $ 196,210 11.8 % $ 405,228 $ 393,124 3.1 %
 
Loss and settlement expenses $ 101,653 $ 90,347 12.5 % $ 194,074 $ 183,737 5.6 %
Policy acquisition costs 66,325 60,695 9.3 % 133,059 124,198 7.1 %
Insurance operating expenses 14,398 13,546 6.3 % 27,783 26,881 3.4 %
Interest expense on debt 1,858 1,857 0.1 % 3,714 3,713 0.0 %
General corporate expenses   2,641     2,535   4.2   %   4,924     5,860   (16.0 ) %
Total expenses $ 186,875 $ 168,980 10.6 % $ 363,554 $ 344,389 5.6 %
 
Equity in earnings of unconsolidated investees   7,100     6,806   4.3   %   12,266     11,744   4.4   %
 
Earnings before income taxes $ 39,562 $ 34,036 16.2 % $ 53,940 $ 60,479 (10.8 ) %
Income tax expense   6,311     7,828   (19.4 ) %   8,473     14,443   (41.3 ) %
Net earnings $ 33,251   $ 26,208   26.9   % $ 45,467   $ 46,036   (1.2 ) %
 
Other comprehensive earnings (loss), net of tax   (7,675 )   10,599   -       (34,073 )   22,368   -    
 
Comprehensive earnings $ 25,576   $ 36,807   (30.5 ) % $ 11,394   $ 68,404   (83.3 ) %
 
Operating earnings(1):
 
Net earnings $ 33,251 $ 26,208 26.9 % $ 45,467 $ 46,036 (1.2 ) %
Less:
Realized (gains) losses (20,849 ) 1,359 - (29,253 ) 735 -
Income tax on realized gains (losses) 4,378 (477 ) - 6,143 (257 ) -
Unrealized losses on equity securities 12,611 - - 39,383 - -
Income tax on unrealized losses on equity securities   (2,648 )   -   -       (8,270 )   -   -    
Operating earnings $ 26,743   $ 27,090   (1.3 ) % $ 53,470   $ 46,514   15.0   %
 
Return on Equity:
Net earnings (trailing four quarters)   12.2   %   11.5   %
Comprehensive earnings (trailing four quarters)   9.7   %   9.2   %
 
Per Share Data:

Diluted:

Weighted average shares outstanding (in 000's) 44,742 44,519 44,853 44,517
 
Net earnings per share $ 0.74 $ 0.59 25.4 % $ 1.01 $ 1.03 (1.9 ) %
Less:
Realized (gains) losses (0.46 ) 0.03 - (0.65 ) 0.02 -
Income tax on realized gains (losses) 0.10 (0.01 ) - 0.14 (0.01 ) -
Unrealized losses on equity securities 0.28 - - 0.88 - -
Income tax on unrealized losses on equity securities   (0.06 )   -   -       (0.19 )   -   -    
EPS from operations(1) $ 0.60   $ 0.61   (1.6 ) % $ 1.19   $ 1.04   14.4   %
 
Comprehensive earnings per share $ 0.57   $ 0.83   (31.3 ) % $ 0.25   $ 1.54   (83.8 ) %
 
Cash dividends per share - ordinary $ 0.22 $ 0.21 4.8 % $ 0.43 $ 0.41 4.9 %
 
Net Cash Flow provided by Operations $ 84,607   $ 63,305   33.6   % $ 100,000   $ 74,570   34.1   %
 
(1) See discussion above: Non-GAAP and Performance Measures.
 
     
RLI CORP.
2018 FINANCIAL HIGHLIGHTS
(Unaudited)
(Dollars in thousands, except per share amounts)
 
 
June 30, December 31,
2018 2017 % Change

SUMMARIZED BALANCE SHEET DATA:

Fixed income $ 1,710,612 $ 1,672,239 2.3 %
(amortized cost - $1,727,075 at 6/30/18)
(amortized cost - $1,646,411 at 12/31/17)
Equity securities 386,603 400,492 (3.5 ) %
(cost - $207,214 at 6/30/18)
(cost - $182,002 at 12/31/17)
Other invested assets 36,562 33,808 8.1 %
Cash and cash equivalents 34,102 34,251 (0.4 ) %
Total investments and cash $ 2,167,879 $ 2,140,790 1.3 %
 
Premiums and reinsurance balances receivable 143,442 134,351 6.8 %
Ceded unearned premiums 65,007 57,928 12.2 %
Reinsurance balances recoverable on unpaid losses 315,117 301,991 4.3 %
Deferred policy acquisition costs 83,624 77,716 7.6 %
Property and equipment 56,019 55,849 0.3 %
Investment in unconsolidated investees 91,594 90,067 1.7 %
Goodwill and intangibles 54,693 59,302 (7.8 ) %
Other assets 30,430 29,250 4.0   %
Total assets $ 3,007,805 $ 2,947,244 2.1   %
 
Unpaid losses and settlement expenses $ 1,343,248 $ 1,271,503 5.6 %
Unearned premiums 482,156 451,449 6.8 %
Reinsurance balances payable 18,938 21,624 (12.4 ) %
Funds held 68,795 74,560 (7.7 ) %
Income taxes - deferred 36,432 53,768 (32.2 ) %
Bonds payable, long-term debt 149,022 148,928 0.1 %
Accrued expenses 38,384 52,848 (27.4 ) %
Other liabilities 21,033 18,966 10.9   %
Total liabilities $ 2,158,008 $ 2,093,646 3.1 %
Shareholders' equity 849,797 853,598 (0.4 ) %
Total liabilities & shareholders' equity $ 3,007,805 $ 2,947,244 2.1   %
 
 

OTHER DATA:

 
Common shares outstanding (in 000's) 44,340 44,148
 
Book value per share $ 19.17 $ 19.33 (0.8 ) %
Closing stock price per share $ 66.19 $ 60.66 9.1 %
Cash dividends per share - ordinary (annualized) $ 0.87 $ 0.83 4.8 %
Cash dividends per share - special $ - $ 1.75 -
 
Statutory surplus $ 927,892 $ 864,554 7.3 %
 
               
RLI CORP.
2018 FINANCIAL HIGHLIGHTS
UNDERWRITING SEGMENT DATA
(Unaudited)
(Dollars in thousands, except per share amounts)
 

Three Months Ended June 30,

GAAP GAAP GAAP GAAP
Casualty Ratios Property Ratios Surety Ratios Total Ratios

2018

 
Gross premiums written $ 178,521 $ 58,255 $ 33,039 $ 269,815
Net premiums written 149,635 45,395 31,701 226,731
Net premiums earned 129,613 37,190 29,719 196,522
Net loss & settlement expenses 81,430 62.8 % 17,149 46.1 % 3,074 10.3 % 101,653 51.7 %
Net operating expenses 45,329 35.0 % 16,394 44.1 % 19,000 64.0 % 80,723 41.1 %
Underwriting income(1) $ 2,854 97.8 % $ 3,647 90.2 % $ 7,645 74.3 % $ 14,146 92.8 %
 

2017

 
Gross premiums written $ 160,024 $ 50,099 $ 30,815 $ 240,938
Net premiums written 136,041 38,810 29,246 204,097
Net premiums earned 119,259 34,485 30,587 184,331
Net loss & settlement expenses 70,807 59.4 % 15,680 45.5 % 3,860 12.6 % 90,347 49.0 %
Net operating expenses 39,804 33.4 % 15,942 46.2 % 18,495 60.5 % 74,241 40.3 %
Underwriting income(1) $ 8,648 92.8 % $ 2,863 91.7 % $ 8,232 73.1 % $ 19,743 89.3 %
 

Six Months Ended June 30,

GAAP GAAP GAAP GAAP
Casualty Ratios Property Ratios Surety Ratios Total Ratios

2018

 
Gross premiums written $ 318,976 $ 104,162 $ 63,541 $ 486,679
Net premiums written 267,951 81,285 60,941 410,177
Net premiums earned 255,463 72,372 58,714 386,549
Net loss & settlement expenses 160,399 62.8 % 30,249 41.8 % 3,426 5.8 % 194,074 50.2 %
Net operating expenses 90,649 35.5 % 32,594 45.0 % 37,599 64.0 % 160,842 41.6 %
Underwriting income(1) $ 4,415 98.3 % $ 9,529 86.8 % $ 17,689 69.8 % $ 31,633 91.8 %
 

2017

 
Gross premiums written $ 286,858 $ 87,178 $ 61,778 $ 435,814
Net premiums written 243,232 67,809 58,794 369,835
Net premiums earned 236,243 70,290 61,083 367,616
Net loss & settlement expenses 153,208 64.9 % 26,013 37.0 % 4,516 7.4 % 183,737 50.0 %
Net operating expenses 81,268 34.4 % 32,610 46.4 % 37,201 60.9 % 151,079 41.1 %
Underwriting income(1) $ 1,767 99.3 % $ 11,667 83.4 % $ 19,366 68.3 % $ 32,800 91.1 %
 
(1) See discussion above: Non-GAAP and Performance Measures.


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