RLI CORP [RLI] Filings

10-Q 1 rli-20220930x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2022

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-09463

RLI Corp.

(Exact name of registrant as specified in its charter)

Delaware		37-0889946
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

9025 North Lindbergh Drive, Peoria, IL		61615
(Address of principal executive offices)		(Zip Code)

(309) 692-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock $0.01 par value	RLI	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐
			Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of October 12, 2022, the number of shares outstanding of the registrant’s Common Stock was 45,378,171.

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Table of Contents


		Page
Part I - Financial Information		3
Item 1.	Financial Statements	3
	Condensed Consolidated Statements of Earnings and Comprehensive Earnings for the Three and Nine-Month Periods Ended September 30, 2022 and 2021 (unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (unaudited)	4
	Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine-Month Periods Ended September 30, 2022 and 2021 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2022 and 2021 (unaudited)	6
	Notes to Unaudited Condensed Consolidated Interim Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4.	Controls and Procedures	37
Part II - Other Information		38
Item 1.	Legal Proceedings	38
Item 1a.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
Signatures		39

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PART I - FINANCIAL INFORMATION

Item 1.Financial Statements

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Earnings

(Unaudited)


	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
(in thousands, except per share data)	2022		2021		2022		2021
Net premiums earned	$	291,468	$	253,389	$	843,430	$	722,984
Net investment income		21,270		17,844		57,625		50,929
Net realized gains		573,170		1,829		591,562		52,442
Net unrealized gains (losses) on equity securities		(26,414)		(2,592)		(155,218)		29,526
Consolidated revenue	$	859,494	$	270,470	$	1,337,399	$	855,881
Losses and settlement expenses		165,089		143,656		388,527		355,574
Policy acquisition costs		96,977		80,449		271,879		232,674
Insurance operating expenses		20,606		15,560		58,794		54,504
Interest expense on debt		2,013		1,906		6,034		5,711
General corporate expenses		2,755		2,505		8,553		9,533
Total expenses	$	287,440	$	244,076	$	733,787	$	657,996
Equity in earnings (loss) of unconsolidated investees		(17,352)		9,043		3,061		29,407
Earnings before income taxes	$	554,702	$	35,437	$	606,673	$	227,292
Income tax expense		114,809		6,194		121,096		43,222
Net earnings	$	439,893	$	29,243	$	485,577	$	184,070

Other comprehensive earnings (loss), net of tax		(81,248)		(12,240)		(294,392)		(41,810)
Comprehensive earnings	$	358,645	$	17,003	$	191,185	$	142,260

Basic net earnings per share	$	9.69	$	0.65	$	10.71	$	4.07
Diluted net earnings per share	$	9.61	$	0.64	$	10.61	$	4.03

Weighted average number of common shares outstanding:
Basic		45,379		45,243		45,347		45,216
Diluted		45,775		45,689		45,775		45,714

See accompanying notes to the unaudited condensed consolidated interim financial statements.

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RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)


	September 30,		December 31,
(in thousands, except share and per share data)	2022		2021
ASSETS
Investments and cash:
Fixed income:
Available-for-sale, at fair value	$	2,452,039	$	2,409,887
(amortized cost of $2,753,631 and allowance for credit losses of $327 at 9/30/22)
(amortized cost of $2,346,267 and allowance for credit losses of $441 at 12/31/21)
Equity securities, at fair value (cost - $327,964 at 9/30/22 and $324,501 at 12/31/21)		462,988		613,776
Other invested assets		48,837		50,501
Cash		723,511		88,804
Total investments and cash	$	3,687,375	$	3,162,968
Accrued investment income		19,355		17,505
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $18,478 at 9/30/22 and $18,067 at 12/31/21		201,781		167,279
Ceded unearned premium		137,346		130,916
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $11,400 at 9/30/22 and $11,188 at 12/31/21		770,858		608,086
Deferred policy acquisition costs		128,979		103,553
Property and equipment, at cost, net of accumulated depreciation of $67,911 at 9/30/22 and $75,236 at 12/31/21		50,385		52,161
Investment in unconsolidated investees		58,105		171,311
Goodwill and intangibles		53,562		53,562
Income taxes-deferred		51,791		—
Other assets		52,128		40,961
TOTAL ASSETS	$	5,211,665	$	4,508,302

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Unpaid losses and settlement expenses	$	2,322,737	$	2,043,555
Unearned premiums		786,485		680,444
Reinsurance balances payable		50,349		42,851
Funds held		100,547		89,773
Income taxes-current		132,446		3,092
Income taxes-deferred		—		83,509
Current portion of long-term debt		149,816		—
Long-term debt		50,000		199,676
Accrued expenses		81,066		98,274
Other liabilities		144,226		37,767
TOTAL LIABILITIES	$	3,817,672	$	3,278,941

Shareholders’ Equity
Common stock ($0.01 par value)
(Shares authorized - 200,000,000)
(68,308,385 shares issued, 45,378,171 shares outstanding at 9/30/22)
(68,219,551 shares issued, 45,289,337 shares outstanding at 12/31/21)	$	683	$	682
Paid-in capital		352,129		343,742
Accumulated other comprehensive earnings (loss)		(244,566)		49,826
Retained earnings		1,678,746		1,228,110
Deferred compensation		9,047		9,642
Less: Treasury shares, at cost (22,930,214 shares at 9/30/22 and 12/31/21)		(402,046)		(402,641)
TOTAL SHAREHOLDERS’ EQUITY	$	1,393,993	$	1,229,361
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,211,665	$	4,508,302

See accompanying notes to the unaudited condensed consolidated interim financial statements.

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RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)


									Accumulated
									Other
			Total						Comprehensive						Treasury
	Common		Shareholders’		Common		Paid-in		Earnings		Retained		Deferred		Shares
(in thousands, except share and per share data)	Shares		Equity		Stock		Capital		(Loss)		Earnings		Compensation		at Cost
Balance, January 1, 2021		45,142,580	$	1,135,978	$	681	$	335,365	$	108,714	$	1,084,217	$	8,292	$	(401,291)
Net earnings		—		73,012		—		—		—		73,012		—		—
Other comprehensive earnings (loss), net of tax		—		(44,747)		—		—		(44,747)		—		—		—
Deferred compensation		—		—		—		—		—		—		(366)		366
Share-based compensation		60,858		1,392		—		1,392		—		—		—		—
Dividends and dividend equivalents ($0.24 per share)		—		(10,849)		—		—		—		(10,849)		—		—
Balance, March 31, 2021		45,203,438	$	1,154,786	$	681	$	336,757	$	63,967	$	1,146,380	$	7,926	$	(400,925)
Net earnings		—		81,815		—		—		—		81,815		—		—
Other comprehensive earnings (loss), net of tax		—		15,177		—		—		15,177		—		—		—
Deferred compensation		—		—		—		—		—		—		325		(325)
Share-based compensation		19,905		1,343		1		1,342		—		—		—		—
Dividends and dividend equivalents ($0.25 per share)		—		(11,318)		—		—		—		(11,318)		—		—
Balance, June 30, 2021		45,223,343	$	1,241,803	$	682	$	338,099	$	79,144	$	1,216,877	$	8,251	$	(401,250)
Net earnings		—		29,243		—		—		—		29,243		—		—
Other comprehensive earnings (loss), net of tax		—		(12,240)		—		—		(12,240)		—		—		—
Deferred compensation		—		—		—		—		—		—		79		(79)
Share-based compensation		21,162		2,769		—		2,769		—		—		—		—
Dividends and dividend equivalents ($0.25 per share)		—		(11,319)		—		—		—		(11,319)		—		—
Balance, September 30, 2021		45,244,505	$	1,250,256	$	682	$	340,868	$	66,904	$	1,234,801	$	8,330	$	(401,329)

									Accumulated
									Other
			Total						Comprehensive						Treasury
	Common		Shareholders’		Common		Paid-in		Earnings		Retained		Deferred		Shares
(in thousands, except share and per share data)	Shares		Equity		Stock		Capital		(Loss)		Earnings		Compensation		at Cost
Balance, January 1, 2022		45,289,337	$	1,229,361	$	682	$	343,742	$	49,826	$	1,228,110	$	9,642	$	(402,641)
Net earnings		—		47,923		—		—		—		47,923		—		—
Other comprehensive earnings (loss), net of tax		—		(115,581)		—		—		(115,581)		—		—		—
Deferred compensation		—		—		—		—		—		—		(973)		973
Share-based compensation		26,605		3,049		—		3,049		—		—		—		—
Dividends and dividend equivalents ($0.25 per share)		—		(11,330)		—		—		—		(11,330)		—		—
Balance, March 31, 2022		45,315,942	$	1,153,422	$	682	$	346,791	$	(65,755)	$	1,264,703	$	8,669	$	(401,668)
Net earnings		—		(2,239)		—		—		—		(2,239)		—		—
Other comprehensive earnings (loss), net of tax		—		(97,563)		—		—		(97,563)		—		—		—
Deferred compensation		—		—		—		—		—		—		276		(276)
Share-based compensation		52,862		2,371		1		2,370		—		—		—		—
Dividends and dividend equivalents ($0.26 per share)		—		(11,803)		—		—		—		(11,803)		—		—
Balance, June 30, 2022		45,368,804	$	1,044,188	$	683	$	349,161	$	(163,318)	$	1,250,661	$	8,945	$	(401,944)
Net earnings		—		439,893		—		—		—		439,893		—		—
Other comprehensive earnings (loss), net of tax		—		(81,248)		—		—		(81,248)		—		—		—
Deferred compensation		—		—		—		—		—		—		102		(102)
Share-based compensation		9,367		2,968		—		2,968		—		—		—		—
Dividends and dividend equivalents ($0.26 per share)		—		(11,808)		—		—		—		(11,808)		—		—
Balance, September 30, 2022		45,378,171	$	1,393,993	$	683	$	352,129	$	(244,566)	$	1,678,746	$	9,047	$	(402,046)

See accompanying notes to the unaudited condensed consolidated interim financial statements.

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RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	For the Nine Months
	Ended September 30,
(in thousands)	2022		2021
Net cash provided by operating activities	$	282,886	$	280,441
Cash Flows from Investing Activities
Purchase of:
Fixed income securities, available-for-sale	$	(531,894)	$	(587,910)
Equity securities		(42,490)		(117,218)
Property and equipment		(4,432)		(5,005)
Other		(7,940)		(11,938)
Proceeds from sale of:
Fixed income securities, available-for-sale		46,448		42,776
Equity securities		59,264		157,973
Equity method investments		686,666		—
Other		2,298		4,496
Proceeds from call or maturity of:
Fixed income securities, available-for-sale		176,616		296,561
Net cash provided by (used in) investing activities	$	384,536	$	(220,265)
Cash Flows from Financing Activities
Cash dividends paid	$	(34,913)	$	(33,454)
Proceeds from stock option exercises		2,198		679
Net cash used in financing activities	$	(32,715)	$	(32,775)
Net increase in cash	$	634,707	$	27,401
Cash at the beginning of the period		88,804		62,217
Cash at September 30,	$	723,511	$	89,618

See accompanying notes to the unaudited condensed consolidated interim financial statements.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF PRESENTATION

The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the disclosures required by GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our 2021 Annual Report on Form 10-K. Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at September 30, 2022 and the results of operations of RLI Corp. (the Company) and subsidiaries for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year. Certain reclassifications were made to 2021 to conform to the classifications used in the current year.

The preparation of the unaudited condensed consolidated interim financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements and the reported amounts of revenue and expenses during the period. These estimates are inherently subject to change and actual results could differ significantly from these estimates.

B. ADOPTED ACCOUNTING STANDARDS

No new accounting standards applicable in 2022 materially impact our financial statements.

C. PROSPECTIVE ACCOUNTING STANDARDS

There are no prospective accounting standards which would have a material impact on our financial statements as of September 30, 2022.

D. REINSURANCE

Ceded unearned premiums and reinsurance balances recoverable on unpaid losses and settlement expenses are reported separately as an asset, rather than being netted with the related liability, since reinsurance does not relieve the Company of our liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. We continually monitor the financial condition of our reinsurers and actively follow up on any past due or disputed amounts. As part of our monitoring efforts, we review reinsurers’ annual financial statements and Securities and Exchange Commission filings for those that are publicly traded. We also review insurance industry developments that may impact the financial condition of our reinsurers. We analyze the credit risk associated with our reinsurance balances recoverable by monitoring the AM Best and Standard & Poor’s (S&P) ratings of our reinsurers. In addition, we subject our reinsurance recoverables to detailed recoverability tests, including a segment-based analysis using the average default rating percentage by S&P rating, which assists the Company in assessing the sufficiency of its allowance. Additionally, we perform an in-depth reinsurer financial condition analysis prior to the renewal of each of our reinsurance placements.

Our policy is to charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers. This allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that we may be unable to recover. Once regulatory action (such as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverable for the reinsurer are specifically identified and written off through use of our allowance for estimated unrecoverable amounts from reinsurers. When we write-off such a balance, it is done in full. We then re-evaluate the overall allowance and determine whether the balance is sufficient and, if needed, an additional allowance is recognized.

The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $16.1 million and $11.4 million, respectively, at September 30, 2022. At December 31, 2021, the amounts were $16.1 million and $11.2 million, respectively. Changes in the allowances were due to changes in the amount of reinsurance balances outstanding, the composition of reinsurers from whom the balances were recoverable and their associated S&P default ratings. No write-offs

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were applied to the allowances in the first nine months of 2022 and less than $0.1 million was recovered. We have no receivables with a due date that extends beyond one year that are not included in our allowance for uncollectible amounts.

E. INTANGIBLE ASSETS

The composition of goodwill and intangible assets at September 30, 2022 and December 31, 2021 is detailed in the following table:


	September 30,		December 31,
(in thousands)	2022		2021
Goodwill
Surety	$	40,816	$	40,816
Casualty		5,246		5,246
Total goodwill	$	46,062	$	46,062
Intangibles
Indefinite-lived intangibles - state insurance licenses		7,500		7,500
Total goodwill and intangibles	$	53,562	$	53,562

Annual impairment assessments were performed on our goodwill and state insurance license indefinite-lived intangible asset during the second quarter of 2022. Based upon these reviews, none of the assets were impaired. In addition, there were no triggering events as of September 30, 2022 that would suggest an updated impairment test would be needed for our goodwill and intangible assets.

F. EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of these items increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding these items. The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements:


	For the Three Months						For the Three Months
	Ended September 30, 2022						Ended September 30, 2021
	Income		Shares		Per Share		Income		Shares		Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount
Basic EPS
Earnings available to common shareholders	$	439,893		45,379	$	9.69	$	29,243		45,243	$	0.65
Effect of Dilutive Securities
Stock options and restricted stock units		—		396				—		446
Diluted EPS
Earnings available to common shareholders	$	439,893		45,775	$	9.61	$	29,243		45,689	$	0.64
Anti-dilutive securities excluded from diluted EPS				435						191

	For the Nine Months						For the Nine Months
	Ended September 30, 2022						Ended September 30, 2021
	Income		Shares		Per Share		Income		Shares		Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount
Basic EPS
Earnings available to common shareholders	$	485,577		45,347	$	10.71	$	184,070		45,216	$	4.07
Effect of Dilutive Securities