10-Q 1 rli-10q_20220331.htm 10-Q rli-10q_20220331.htm
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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 March 31, 2022

 

or

 

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, PeoriaIL

 

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 April 14, 2022, the number of shares outstanding of the registrant’s Common Stock was 45,316,042.

 

 

 


 

 

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-Month Periods Ended March 31, 2022 and 2021 (unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 (unaudited)

4

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Three-Month Periods Ended March 31, 2022 and 2021 (unaudited)

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 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

21

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

 

 

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

 

Part II - Other Information

31

 

 

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

 

 

Item 1a.

Risk Factors

31

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

 

 

Item 3.

Defaults upon Senior Securities

31

 

 

 

 

 

Item 4.

Mine Safety Disclosures

31

 

 

 

 

 

Item 5.

Other Information

31

 

 

 

 

 

Item 6.

Exhibits

31

 

 

 

 

Signatures

 

32

 


Table of Contents

 

 

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

 

 

 

Ended March 31,

 

(in thousands, except per share data)

 

2022

 

 

2021

 

Net premiums earned

 

$

269,152

 

 

$

228,595

 

Net investment income

 

 

17,883

 

 

 

16,424

 

Net realized gains

 

 

5,588

 

 

 

14,150

 

Net unrealized gains (losses) on equity securities

 

 

(27,810

)

 

 

28,162

 

Consolidated revenue

 

$

264,813

 

 

$

287,331

 

Losses and settlement expenses

 

 

105,524

 

 

 

104,892

 

Policy acquisition costs

 

 

85,287

 

 

 

74,990

 

Insurance operating expenses

 

 

18,863

 

 

 

18,796

 

Interest expense on debt

 

 

2,010

 

 

 

1,901

 

General corporate expenses

 

 

3,363

 

 

 

3,342

 

Total expenses

 

$

215,047

 

 

$

203,921

 

Equity in earnings of unconsolidated investees

 

 

8,759

 

 

 

6,424

 

Earnings before income taxes

 

$

58,525

 

 

$

89,834

 

Income tax expense

 

 

10,602

 

 

 

16,822

 

Net earnings

 

$

47,923

 

 

$

73,012

 

 

 

 

 

 

 

 

 

 

Other comprehensive earnings (loss), net of tax

 

 

(115,581

)

 

 

(44,747

)

Comprehensive earnings (loss)

 

$

(67,658

)

 

$

28,265

 

 

 

 

 

 

 

 

 

 

Basic net earnings per share

 

$

1.06

 

 

$

1.62

 

Diluted net earnings per share

 

$

1.05

 

 

$

1.60

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

45,306

 

 

 

45,178

 

Diluted

 

 

45,714

 

 

 

45,674

 

 

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

3


Table of Contents

 

RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

(in thousands, except share and per share data)

 

2022

 

 

2021

 

ASSETS

 

 

 

 

 

 

 

 

Investments and cash:

 

 

 

 

 

 

 

 

Fixed income:

 

 

 

 

 

 

 

 

Available-for-sale, at fair value

 

$

2,292,378

 

 

$

2,409,887

 

(amortized cost of $2,374,256 and allowance for credit losses of $594 at 3/31/22)

 

 

 

 

 

 

 

 

(amortized cost of $2,346,267 and allowance for credit losses of $441 at 12/31/21)

 

 

 

 

 

 

 

 

Equity securities, at fair value (cost - $347,354 at 3/31/22 and $324,501 at 12/31/21)

 

 

608,180

 

 

 

613,776

 

Other invested assets

 

 

52,406

 

 

 

50,501

 

Cash

 

 

72,148

 

 

 

88,804

 

Total investments and cash

 

$

3,025,112

 

 

$

3,162,968

 

Accrued investment income

 

 

17,477

 

 

 

17,505

 

Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $18,381 at 3/31/22 and $18,067 at 12/31/21

 

 

170,501

 

 

 

167,279

 

Ceded unearned premium

 

 

126,311

 

 

 

130,916

 

Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $10,983 at 3/31/22 and $11,188 at 12/31/21

 

 

631,445

 

 

 

608,086

 

Deferred policy acquisition costs

 

 

112,004

 

 

 

103,553

 

Property and equipment, at cost, net of accumulated depreciation of $77,131 at 3/31/22 and $75,236 at 12/31/21

 

 

52,124

 

 

 

52,161

 

Investment in unconsolidated investees

 

 

179,351

 

 

 

171,311

 

Goodwill and intangibles

 

 

53,562

 

 

 

53,562

 

Other assets

 

 

39,748

 

 

 

40,961

 

TOTAL ASSETS

 

$

4,407,635

 

 

$

4,508,302

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Unpaid losses and settlement expenses

 

$

2,081,712

 

 

$

2,043,555

 

Unearned premiums

 

 

696,577

 

 

 

680,444

 

Reinsurance balances payable

 

 

26,264

 

 

 

42,851

 

Funds held

 

 

89,735

 

 

 

89,773

 

Income taxes-deferred

 

 

47,412

 

 

 

83,509

 

Bonds payable, long-term debt

 

 

199,723

 

 

 

199,676

 

Accrued expenses

 

 

57,101

 

 

 

98,274

 

Other liabilities

 

 

55,689

 

 

 

40,859

 

TOTAL LIABILITIES

 

$

3,254,213

 

 

$

3,278,941

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Common stock ($0.01 par value)

 

 

 

 

 

 

 

 

(Shares authorized - 200,000,000)

 

 

 

 

 

 

 

 

(68,246,156 shares issued, 45,315,942 shares outstanding at 3/31/22)

 

 

 

 

 

 

 

 

(68,219,551 shares issued, 45,289,337 shares outstanding at 12/31/21)

 

$

682

 

 

$

682

 

Paid-in capital

 

 

346,791

 

 

 

343,742

 

Accumulated other comprehensive earnings (loss)

 

 

(65,755

)

 

 

49,826

 

Retained earnings

 

 

1,264,703

 

 

 

1,228,110

 

Deferred compensation

 

 

8,669

 

 

 

9,642

 

Less: Treasury shares, at cost (22,930,214 shares at 3/31/22 and 12/31/21)

 

 

(401,668

)

 

 

(402,641

)

TOTAL SHAREHOLDERS’ EQUITY

 

$

1,153,422

 

 

$

1,229,361

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

4,407,635

 

 

$

4,508,302

 

 

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

4


Table of Contents

 

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

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

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

 

 

5


Table of Contents

 

 

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

(in thousands)

 

2022

 

 

2021

 

Net cash provided by operating activities

 

$

39,014

 

 

$

60,287

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of:

 

 

 

 

 

 

 

 

Fixed income securities, available-for-sale

 

$

(107,283

)

 

$

(145,121

)

Equity securities

 

 

(32,678

)

 

 

(31,957

)

Property and equipment

 

 

(1,944

)

 

 

(887

)

Other

 

 

(3,137

)

 

 

(4,323

)

Proceeds from sale of:

 

 

 

 

 

 

 

 

Fixed income securities, available-for-sale

 

 

10,779

 

 

 

21,300

 

Equity securities

 

 

15,726

 

 

 

47,638

 

Other

 

 

669

 

 

 

521

 

Proceeds from call or maturity of:

 

 

 

 

 

 

 

 

Fixed income securities, available-for-sale

 

 

71,971

 

 

 

96,285

 

Net cash used in investing activities

 

$

(45,897

)

 

$

(16,544

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Cash dividends paid

 

$

(11,322

)

 

$

(10,838

)

Proceeds from (payments related to) stock option exercises

 

 

1,549

 

 

 

(187

)

Net cash used in financing activities

 

$

(9,773

)

 

$

(11,025

)

Net increase (decrease) in cash

 

$

(16,656

)

 

$

32,718

 

Cash at the beginning of the period

 

 

88,804

 

 

 

62,217

 

Cash at March 31

 

$

72,148

 

 

$

94,935

 

 

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

 

6


Table of Contents

 

 

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 March 31, 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.

 

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 March 31, 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 $11.0 million, respectively, at March 31, 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 were applied to the allowances in the first three 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.

 

7


Table of Contents

 

 

E. INTANGIBLE ASSETS

 

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

 

 

 

March 31,

 

 

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 2021. Based upon these reviews, none of the assets were impaired. In addition, there were no triggering events as of March 31, 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 March 31, 2022

 

 

Ended March 31, 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

 

$

47,923

 

 

 

45,306

 

 

$

1.06

 

 

$

73,012

 

 

 

45,178

 

 

$

1.62

 

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted stock units

 

 

 

 

 

408

 

 

 

 

 

 

 

 

 

 

496

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings available to common shareholders

 

$

47,923

 

 

 

45,714

 

 

$

1.05

 

 

$

73,012

 

 

 

45,674

 

 

$

1.60