RLI Earnings 2020-06-30

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

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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 June 30, 2020

☐

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 July 16, 2020, the number of shares outstanding of the registrant’s Common Stock was 44,952,602.

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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 Six-Month Periods Ended June 30, 2020 and 2019 (unaudited)	3

		Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 (unaudited)	4

		Condensed Consolidated Statements of Shareholders’ Equity For the Three and Six-Month Periods Ended June 30, 2020 and 2019 (unaudited)	5

		Condensed Consolidated Statements of Cash Flows For the Six-Month Periods Ended June 30, 2020 and 2019 (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	22

	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

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-Month Periods				For the Six-Month Periods
	Ended June 30,				Ended June 30,
(in thousands, except per share data)	2020		2019		2020		2019

Net premiums earned	$	208,734	$	207,541	$	424,316	$	412,230
Net investment income		16,917		16,998		34,695		33,563
Net realized gains (losses)		(2,109)		4,764		13,043		13,832
Net unrealized gains (losses) on equity securities		74,705		8,810		(55,690)		42,308
Consolidated revenue	$	298,247	$	238,113	$	416,364	$	501,933
Losses and settlement expenses		101,202		103,919		212,223		198,216
Policy acquisition costs		69,463		71,742		142,404		143,034
Insurance operating expenses		13,906		16,948		28,287		33,615
Interest expense on debt		1,903		1,861		3,800		3,722
General corporate expenses		1,994		3,283		3,749		6,559
Total expenses	$	188,468	$	197,753	$	390,463	$	385,146
Equity in earnings of unconsolidated investees		5,100		8,468		9,614		13,782
Earnings before income taxes	$	114,879	$	48,828	$	35,515	$	130,569
Income tax expense		22,713		8,361		4,616		24,629
Net earnings	$	92,166	$	40,467	$	30,899	$	105,940

Other comprehensive earnings, net of tax		53,571		27,864		40,540		57,165
Comprehensive earnings	$	145,737	$	68,331	$	71,439	$	163,105

Earnings per share:
Basic:
Basic net earnings per share	$	2.05	$	0.91	$	0.69	$	2.37
Basic comprehensive earnings per share	$	3.24	$	1.53	$	1.59	$	3.66

Diluted:
Diluted net earnings per share	$	2.04	$	0.89	$	0.68	$	2.35
Diluted comprehensive earnings per share	$	3.22	$	1.51	$	1.58	$	3.62

Weighted average number of common shares outstanding:
Basic		44,951		44,704		44,936		44,620
Diluted		45,274		45,219		45,311		45,056

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

Table of Contents

RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)



	June 30,		December 31,
(in thousands, except share and per share data)	2020		2019

ASSETS
Investments and cash:
Fixed income:
Available-for-sale, at fair value	$	2,075,093	$	1,983,086
(amortized cost of $1,956,137 and allowance for credit losses of $985 at 6/30/20)
(amortized cost of $1,915,278 and allowance for credit losses of $0 at 12/31/19)
Equity securities, at fair value (cost - $270,987 at 6/30/20 and $262,131 at 12/31/19)		422,198		460,630
Other invested assets		63,440		70,441
Cash		84,797		46,203
Total investments and cash	$	2,645,528	$	2,560,360
Accrued investment income		15,142		14,587
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $17,139 at 6/30/20 and $16,682 at 12/31/19		154,941		160,369
Ceded unearned premium		93,679		93,656
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $8,035 at 6/30/20 and $9,402 at 12/31/19		364,756		384,517
Deferred policy acquisition costs		87,560		85,044
Property and equipment, at cost, net of accumulated depreciation of $65,762 at 6/30/20 and $62,703 at 12/31/19		52,350		53,121
Investment in unconsolidated investees		112,662		103,836
Goodwill and intangibles		53,923		54,127
Other assets		38,738		36,104
TOTAL ASSETS	$	3,619,279	$	3,545,721

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Unpaid losses and settlement expenses	$	1,590,996	$	1,574,352
Unearned premiums		543,113		540,213
Reinsurance balances payable		24,777		25,691
Funds held		84,430		83,358
Income taxes-deferred		57,421		56,727
Bonds payable, long-term debt		149,395		149,302
Accrued expenses		35,998		66,626
Other liabilities		81,691		54,064
TOTAL LIABILITIES	$	2,567,821	$	2,550,333

Shareholders’ Equity
Common stock ($0.01 par value)
(Shares authorized - 200,000,000 at 6/30/20 and 100,000,000 at 12/31/19)
(67,882,816 shares issued, 44,952,602 shares outstanding at 6/30/20)
(67,799,229 shares issued, 44,869,015 shares outstanding at 12/31/19)	$	679	$	678
Paid-in capital		325,862		321,190
Accumulated other comprehensive earnings		93,035		52,473
Retained earnings		1,024,881		1,014,046
Deferred compensation		7,600		7,980
Less: Treasury shares at cost
(22,930,214 shares at 6/30/20 and 12/31/19)		(400,599)		(400,979)
TOTAL SHAREHOLDERS’ EQUITY	$	1,051,458	$	995,388
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	3,619,279	$	3,545,721

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

Table of Contents

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)


								Accumulated
		Total						Other
	Common	Shareholders’		Common		Paid-in		Comprehensive		Retained		Deferred		Treasury
(in thousands, except share and per share data)	Shares	Equity		Stock		Capital		Earnings (Loss)		Earnings		Compensation		Shares at Cost
Balance, January 1, 2019	44,504,043	$	806,842	$	674	$	305,660	$	(14,572)	$	908,079	$	8,354	$	(401,353)
Net earnings (loss)	—		65,473		—		—		—		65,473		—		—
Other comprehensive earnings (loss), net of tax	—		29,301		—		—		29,301		—		—		—
Deferred compensation	—		—		—		—		—		—		(1,039)		1,039
Share-based compensation	50,213		2,892		1		2,891		—		—		—		—
Dividends and dividend equivalents ($0.22 per share)	—		(9,803)		—		—		—		(9,803)		—		—
Balance, March 31, 2019	44,554,256	$	894,705	$	675	$	308,551	$	14,729	$	963,749	$	7,315	$	(400,314)
Net earnings (loss)	—		40,467		—		—		—		40,467		—		—
Other comprehensive earnings (loss), net of tax	—		27,864		—		—		27,864		—		—		—
Deferred compensation	—		—		—		—		—		—		215		(215)
Share-based compensation	232,941		7,217		2		7,215		—		—		—		—
Dividends and dividend equivalents ($0.23 per share)	—		(10,305)		—		—		—		(10,305)		—		—
Balance, June 30, 2019	44,787,197	$	959,948	$	677	$	315,766	$	42,593	$	993,911	$	7,530	$	(400,529)

								Accumulated
		Total						Other
	Common	Shareholders’		Common		Paid-in		Comprehensive		Retained		Deferred		Treasury
(in thousands, except share and per share data)	Shares	Equity		Stock		Capital		Earnings (Loss)		Earnings		Compensation		Shares at Cost
Balance, January 1, 2020	44,869,015	$	995,388	$	678	$	321,190	$	52,473	$	1,014,046	$	7,980	$	(400,979)
Cumulative-effect adjustment from ASU 2016-13			1,095						22		1,073
Net earnings (loss)	—		(61,267)		—		—		—		(61,267)		—		—
Other comprehensive earnings (loss), net of tax	—		(13,031)		—		—		(13,031)		—		—		—
Deferred compensation	—		—		—		—		—		—		(1,010)		1,010
Share-based compensation	53,641		3,863		1		3,862		—		—		—		—
Dividends and dividend equivalents ($0.23 per share)	—		(10,343)		—		—		—		(10,343)		—		—
Balance, March 31, 2020	44,922,656	$	915,705	$	679	$	325,052	$	39,464	$	943,509	$	6,970	$	(399,969)
Net earnings (loss)	—		92,166		—		—		—		92,166		—		—
Other comprehensive earnings (loss), net of tax	—		53,571		—		—		53,571		—		—		—
Deferred compensation	—		—		—		—		—		—		630		(630)
Share-based compensation	29,946		810		—		810		—		—		—		—
Dividends and dividend equivalents ($0.24 per share)	—		(10,794)		—		—		—		(10,794)		—		—
Balance, June 30, 2020	44,952,602	$	1,051,458	$	679	$	325,862	$	93,035	$	1,024,881	$	7,600	$	(400,599)

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 Six-Month Periods
	Ended June 30,
(in thousands)	2020		2019

Net cash provided by operating activities	$	83,773	$	105,347
Cash Flows from Investing Activities
Purchase of:
Fixed income securities, available-for-sale	$	(185,502)	$	(214,332)
Equity securities		(48,473)		(59,861)
Property and equipment		(3,413)		(3,004)
Other		(6,651)		(7,122)
Proceeds from sale of:
Fixed income securities, available-for-sale		40,333		132,153
Equity securities		52,533		33,360
Other		2,596		1,842
Proceeds from call or maturity of:
Fixed income securities, available-for-sale		121,911		52,113
Net proceeds from sale (purchase) of short-term investments		-		(35,803)
Net cash used in investing activities	$	(26,666)	$	(100,654)

Cash Flows from Financing Activities
Cash dividends paid	$	(21,119)	$	(20,092)
Proceeds from stock option exercises		2,606		10,093
Net cash used in financing activities	$	(18,513)	$	(9,999)

Net increase (decrease) in cash	$	38,594	$	(5,306)

Cash at the beginning of the period		46,203		30,140
Cash at June 30	$	84,797	$	24,834

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 of 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 2019 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 June 30, 2020 and the results of operations of RLI Corp. 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 2019 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

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments. Previous guidance delayed the recognition of credit losses until it was probable a loss had been incurred. This update requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that is included in net earnings. Credit losses relating to available-for-sale debt securities are also required to be recorded through a reversible allowance for credit losses, but is limited to the amount by which fair value is less than amortized cost.

We adopted ASU 2016-13 on January 1, 2020 using the modified-retrospective approach. The standard applied to three of the Company’s balance sheet accounts: available-for-sale fixed income securities, premiums receivable and reinsurance balances recoverable. The impact of this standard was and is expected to continue to be immaterial, as our fixed income portfolio is weighted towards higher rated bonds (84 percent rated A or better at June 30, 2020 and 85 percent at December 31, 2019), we purchase reinsurance from financially strong reinsurers, we have a long history of collecting premium receivables through various economic cycles and we had previously maintained an allowance for uncollectible premium and reinsurance balances. In total, the cumulative-effect adjustment made to the balance sheet as of the beginning of the year resulted in a $1.1 million increase to retained earnings and an increase to accumulated other comprehensive earnings of less than $0.1 million.

C. REINSURANCE

Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets, instead of being netted with the related liabilities, since reinsurance does not relieve the Company of our legal liability to our policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. We continuously 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 their annual financial statements, quarterly disclosures and Securities and Exchange Commission (SEC) filings for those reinsurers 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. Additionally, we perform an in depth reinsurer financial condition analysis prior to the renewal of our reinsurance placements.

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 balances recoverable from the reinsurer are specifically identified and charged to earnings in the form of an allowance for uncollectible amounts. We subject our remaining reinsurance balances receivable to detailed recoverability tests, including a segment-based analysis using the average default rating percentage by S&P rating, and

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record an additional allowance for unrecoverable amounts from reinsurers. This credit 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.

The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $15.9 million and $8.0 million, respectively, at June 30, 2020. At December 31, 2019, the amounts were $15.7 million and $9.4 million, respectively. Adoption of ASU 2016-03 resulted in a $1.3 million decrease to the allowance for uncollectible amounts on reinsurance recoverables in 2020, while other 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 or recoveries were applied to the allowances in the first six months of 2020.

D. INTANGIBLE ASSETS

Goodwill and intangible assets totaled $53.9 million and $54.1 million at June 30, 2020 and December 31, 2019, respectively, as detailed in the following table:


Goodwill and Intangible Assets		June 30,		December 31,
(in thousands)		2020		2019
Goodwill
Energy surety	$	25,706	$	25,706
Miscellaneous and contract surety		15,110		15,110
Small commercial		5,246		5,246
Total goodwill	$	46,062	$	46,062

Intangibles

Price	93.81	EPS	3
Shares	45	P/E	36
MCap	4,254	P/FCF	23
Net Debt	85	EBIT	149
TEV	4,339	TEV/EBIT	29
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-06-30	Filed 2020-07-24
10-Q	2020-03-31	Filed 2020-04-28
10-K	2019-12-31	Filed 2020-02-21
10-Q	2019-09-30	Filed 2019-10-24
10-Q	2019-06-30	Filed 2019-07-25
10-Q	2019-03-31	Filed 2019-04-24
10-K	2018-12-31	Filed 2019-02-22
10-Q	2018-09-30	Filed 2018-10-24
10-Q	2018-06-30	Filed 2018-07-20
10-Q	2018-03-31	Filed 2018-04-25
10-K	2017-12-31	Filed 2018-02-23
10-Q	2017-09-30	Filed 2017-10-25
10-Q	2017-06-30	Filed 2017-07-26
10-Q	2017-03-31	Filed 2017-04-27
10-K	2016-12-31	Filed 2017-02-24
10-Q	2016-09-30	Filed 2016-10-24
10-Q	2016-06-30	Filed 2016-07-25
10-Q	2016-03-31	Filed 2016-04-25
10-K	2015-12-31	Filed 2016-02-26
10-Q	2015-09-30	Filed 2015-10-23
10-Q	2015-06-30	Filed 2015-07-24
10-Q	2015-03-31	Filed 2015-04-24
10-K	2014-12-31	Filed 2015-02-26
10-Q	2014-09-30	Filed 2014-10-27
10-Q	2014-06-30	Filed 2014-07-28
10-Q	2014-03-31	Filed 2014-04-28
10-K	2013-12-31	Filed 2014-02-27
10-Q	2013-09-30	Filed 2013-10-28
10-Q	2013-06-30	Filed 2013-07-29
10-Q	2013-03-31	Filed 2013-04-29
10-Q	2012-06-30	Filed 2012-07-30
10-Q	2012-03-31	Filed 2012-04-30
10-K	2012-01-31	Filed 2012-02-28
10-Q	2011-09-30	Filed 2011-10-31
10-Q	2011-06-30	Filed 2011-08-05
10-Q	2011-03-31	Filed 2011-04-28
10-K	2010-12-31	Filed 2011-02-25
10-Q	2010-09-30	Filed 2010-10-26
10-Q	2010-06-30	Filed 2010-07-28
10-Q	2010-03-31	Filed 2010-04-26
10-K	2009-12-31	Filed 2010-02-24

8-K	2020-07-23	Regulation FD, Exhibits
8-K	2020-07-22	Earnings, Exhibits
8-K	2020-05-07
8-K	2020-05-07
8-K	2020-05-07
8-K	2020-04-22
8-K	2020-04-21
8-K	2020-03-26
8-K	2020-02-13
8-K	2020-01-23
8-K	2020-01-22
8-K	2019-11-13
8-K	2019-10-17
8-K	2019-10-16
8-K	2019-08-21
8-K	2019-08-14
8-K	2019-07-18
8-K	2019-07-17
8-K	2019-06-10
8-K	2019-05-02
8-K	2019-05-02
8-K	2019-04-18
8-K	2019-04-17
8-K	2019-02-07
8-K	2019-01-24
8-K	2019-01-23
8-K	2018-11-08
8-K	2018-11-08
8-K	2018-10-18
8-K	2018-10-17
8-K	2018-08-15
8-K	2018-08-15
8-K	2018-08-14
8-K	2018-07-19
8-K	2018-07-18
8-K	2018-05-24
8-K	2018-05-03
8-K	2018-05-03
8-K	2018-04-19
8-K	2018-04-18
8-K	2018-02-08
8-K	2018-01-25
8-K	2018-01-24

EX-10.1	rli-20200630ex1010e5946.htm
EX-10.2	rli-20200630ex10282e72d.htm
EX-31.1	rli-20200630ex311f9fbeb.htm
EX-31.2	rli-20200630ex31274de08.htm
EX-32.1	rli-20200630ex321402078.htm
EX-32.2	rli-20200630ex32236e912.htm

RLI 10Q Quarterly Report

RLI Earnings 2020-06-30