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RLI Reports Fourth Quarter and Year-End 2018 Results

PEORIA, Ill.--(BUSINESS WIRE)--

RLI Corp. (RLI) – RLI Corp. reported fourth quarter 2018 net losses of $20.7 million (-$0.46 per share), compared to net earnings of $57.3 million ($1.29 per share) for the fourth quarter of 2017. Operating earnings(1) for the fourth quarter of 2018 were $17.8 million ($0.40 per share) compared to $53.9 million ($1.21 per share) for the same period in 2017.

         
    Fourth Quarter   Year to Date
Earnings Per Diluted Share   2018     2017   2018     2017
Net earnings (loss) (2) $ (0.46 ) $ 1.29 $ 1.43 $ 2.36
Operating earnings (1)   $ 0.40     $ 1.21   $ 2.05     $ 2.30
 
(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: Adopted Accounting Standard and Tax Reform.
 

Highlights for the quarter included:

  • Underwriting income(1) of $2.2 million, resulting in a combined ratio(1) of 98.9.
  • 12% increase in gross premiums written and 17% increase in investment income.
  • Favorable development in prior years’ loss reserves resulting in a $9.6 million net increase in underwriting income.
  • Losses from Hurricane Michael resulting in a $19.6 million net decrease to underwriting income.
  • Special dividend of $1.00 per share, representing $44.5 million returned to shareholders.

Highlights for the year included:

  • Underwriting income(1) of $41.6 million, resulting in a combined ratio(1) of 94.7.
  • 11% increase in gross premiums written and 13% increase in investment income.
  • Favorable development in prior years’ loss reserves resulting in a $44.3 million net increase in underwriting income.
  • Losses from accumulated catastrophe activity resulting in a $34.4 million net decrease to underwriting income.
  • 23rd consecutive year of a combined ratio(1) below 100.
  • Book value per share of $18.13, an increase of 3% from year-end 2017, inclusive of dividends.

“The industry experienced another active year of natural catastrophes, but RLI’s underwriting discipline and product diversification once again distinguished our company,” said RLI Corp. Chairman & CEO Jonathan E. Michael. “I'm proud to report that we ended the year with a 94.7 combined ratio and increased gross premiums written by 11%, as products across our portfolio grew through enhanced marketing, product development and technology initiatives. While the investment portfolio’s total return declined compared to last year, operating income benefited from investment income growth of 17% for the quarter and 13% for the year. As a result, we were able to share our success with shareholders by paying and increasing our regular quarterly dividend for the 43rd consecutive year and issuing a $1.00 special dividend in the fourth quarter. We remain focused on delivering value to our customers, partners and shareholders in 2019.”

Underwriting Income

RLI had $2.2 million of underwriting income in the fourth quarter of 2018 on a 98.9 combined ratio, compared to $9.0 million of underwriting income on a 95.2 combined ratio in the same quarter for 2017.

For the year, RLI achieved $41.6 million of underwriting income on a 94.7 combined ratio, compared to $26.8 million on a 96.4 combined ratio in 2017. Results for both years include favorable development in prior years’ loss reserves which totaled $44.3 million and $37.5 million for 2018 and 2017, respectively.

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

           
Underwriting Income(1) Combined Ratio(1)
(in millions)     2018     2017       2018   2017
Casualty $ 11.1 $ 3.9 Casualty 97.9 99.2
Property 0.9 (11.9 ) Property 99.4 108.6
Surety     29.6     34.8   Surety   75.0   71.2
Total   $ 41.6   $ 26.8   Total   94.7   96.4
 
(1)   See discussion below: Non-GAAP and Performance Measures.
 

Other Income

RLI’s net investment income for the quarter increased 17.4% to $17.0 million, compared to the same period in 2017. For the year ended December 31, 2018, investment income was $62.1 million versus $54.9 million for the same period in 2017. The investment portfolio’s total return was -0.9% for the quarter and -0.2% for the year.

Comprehensive earnings were -$12.9 million for the quarter (-$0.29 per share) compared to $61.8 million ($1.39 per share) for the same quarter in 2017. Full-year comprehensive earnings were $30.2 million ($0.67 per share), compared to $140.3 million ($3.15 per share) 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 Adopted Accounting Standard and Tax Reform discussion below.

Equity in earnings of Maui Jim, Inc., a producer of premium sunglasses, was -$0.8 million (reflecting seasonal sales results) for the quarter. Equity in earnings of Prime Holdings Insurance Services, Inc., a specialty E&S insurance company, was $1.0 million. Comparatively, for the fourth quarter of 2017, equity in earnings of unconsolidated investees from Maui Jim and Prime was $0.8 million and $1.0 million, respectively. For the year ended December 31, 2018, equity in earnings of unconsolidated investees was $12.5 million from Maui Jim and $3.6 million from Prime, compared to $14.4 million and $2.8 million, respectively, for the prior year.

Special and Regular Dividends

On December 27, 2018, RLI paid a special cash dividend of $1.00 per share, resulting in a tax benefit of $0.6 million ($0.01 per share) as dividends to the ESOP are fully deductible, and a regular quarterly dividend of $0.22 per share for a combined total of $54.3 million. RLI has paid dividends for 170 consecutive quarters and increased regular dividends in each of the last 43 years. Over the last 10 years, the company has returned $1.2 billion to shareholders and the regular quarterly dividend has grown an average of 5.4% per year.

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 fourth quarter of 2018, $64.2 million of unrealized losses, gross of tax, were recognized within pre-tax earnings and the income tax expense was decreased by $13.5 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

During the fourth quarter, the company’s A+ (Superior) financial strength rating was affirmed by A.M. Best Company for the company’s insurance subsidiaries – RLI Insurance Company, Mt. Hawley Insurance Company and Contractors Bonding and Insurance Company.

At 10 a.m. central standard time (CST) tomorrow, January 24, 2019, 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/it8skmtv.

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. (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 23 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
4th Qtr 4th Qtr 12 Mos. 12 Mos.
Operating Earnings Per Share(1) $ 0.40 $ 1.21 $ 2.05 $ 2.30
 
Specific items included in operating earnings per share:(2) (3)

Favorable development in casualty prior years' reserves $ 0.20 $ 0.05 $ 0.55 $ 0.28

Favorable development in property prior years' reserves $ - $ 0.02 $ 0.07 $ 0.08

Favorable (unfavorable) development in surety prior years' reserves $ (0.04 ) $ - $ 0.12 $ 0.16

Catastrophe impact
Hurricane Michael $ (0.35 ) $ - $ (0.34 ) $ -
Hurricane Florence $ - $ - $ (0.11 ) $ -
2018 Hawaii volcanic activity $ 0.01 $ - $ (0.09 ) $ -
2018 storms $ (0.01 ) $ - $ (0.06 ) $ -
Hurricanes Harvey, Irma and Maria $ - $ - $ - $ (0.46 )
2017 and prior events $ 0.01 $ - $ 0.03 $ (0.02 )

Gain from tax benefit of special dividend to ESOP(4) $ 0.01 $ 0.04 $ 0.01 $ 0.04

Gain from tax benefit applicable to Maui Jim dividend(5) $ - $ 0.03 $ - $ 0.03

Gain from tax benefit of change in corporate tax law(6) $ 0.05 $ 0.63 $ 0.05 $ 0.63
 
(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.
(4) Dividends paid on employer securities in an ESOP are fully deductible from taxable income and resulted in a 21% tax benefit in 2018 and 35% tax benefit in 2017. See Adopted Accounting Standard and Tax Reform discussion above.
(5) As required under the accounting standard for income taxes, the gain reflects the tax benefit of applying the lower tax rate applicable to dividends received from an affiliate (7.35%) as compared to the corporate capital gains tax rate (21%) on which tax estimates were based.
(6) The gain reflects the tax benefit of applying the rules enacted under the TCJA of 2017.
 
 
RLI CORP
2018 FINANCIAL HIGHLIGHTS

(Unaudited)

(Dollars in thousands, except per share amounts)

           
Three Months Ended December 31, Twelve Months Ended December 31,

SUMMARIZED INCOME STATEMENT DATA:

2018 2017 % Change 2018 2017 % Change
Net premiums earned $ 204,002 $ 188,296 8.3 % $ 791,366 $ 737,937 7.2 %
Net investment income 16,962 14,446 17.4 % 62,085 54,876 13.1 %
Net realized gains 15,507 5,111 203.4 % 63,407 4,411 -
Net unrealized losses on equity securities   (64,200 )     -   -       (98,735 )   -   -    
Consolidated revenue $ 172,271 $ 207,853 (17.1 ) % $ 818,123 $ 797,224 2.6 %
 
Loss and settlement expenses $ 123,888 $ 94,657 30.9 % $ 428,193 $ 401,584 6.6 %
Policy acquisition costs 66,265 66,251 0.0 % 267,738 252,515 6.0 %
Insurance operating expenses 11,612 18,412 (36.9 ) % 53,803 56,994 (5.6 ) %
Interest expense on debt 1,861 1,857 0.2 % 7,437 7,426 0.1 %
General corporate expenses   1,556       3,524   (55.8 ) %   9,427     11,340   (16.9 ) %
Total expenses $ 205,182 $ 184,701 11.1 % $ 766,598 $ 729,859 5.0 %
 
Equity in earnings of unconsolidated investees   203       1,820   (88.8 ) %   16,056     17,224   (6.8 ) %
Earnings (loss) before income taxes $ (32,708 ) $ 24,972 - $ 67,581 $ 84,589 (20.1 ) %
Income tax expense (benefit)   (12,048 )     (32,286 ) (62.7 ) %   3,402     (20,439 ) -    
Net earnings (loss) $ (20,660 ) $   57,258   -     $ 64,179   $ 105,028   (38.9 ) %
 
Other comprehensive earnings (loss), net of tax   7,772       4,497   72.8   %   (33,997 )   35,309   -    
Comprehensive earnings (loss) $ (12,888 ) $   61,755   -     $ 30,182   $ 140,337   (78.5 ) %
 
Operating earnings(1):
 
Net earnings (loss) $ (20,660 ) $ 57,258 - $ 64,179 $ 105,028 (38.9 ) %
Less:
Realized gains (15,507 ) (5,111 ) 203.4 % (63,407 ) (4,411 ) -
Income tax on realized gains 3,256 1,789 82.0 % 13,315 1,544 -
Unrealized losses on equity securities 64,200 - - 98,735 - -
Income tax on unrealized losses on equity securities   (13,482 )     -   -       (20,734 )   -   -    
Operating earnings $ 17,807   $   53,936   (67.0 ) % $ 92,088   $ 102,161   (9.9 ) %
 

Return on Equity:

Net earnings   7.6   %   12.3   %
Comprehensive earnings   3.6   %   16.4   %
 
Per Share Data:

Diluted:

Weighted average shares outstanding (in 000's) 44,497 44,549 44,835 44,500
 
Net earnings per share $ (0.46 ) $ 1.29 - $ 1.43 $ 2.36 (39.4 ) %
Less:
Realized gains (0.35 ) (0.12 ) 191.7 % (1.42 ) (0.09 ) -
Income tax on realized gains 0.07 0.04 75.0 % 0.30 0.03 -
Unrealized losses on equity securities 1.44 - - 2.20 - -
Income tax on unrealized losses on equity securities   (0.30 )     -   -       (0.46 )   -   -    
EPS from operations(1) $ 0.40   $   1.21   (66.9 ) % $ 2.05   $ 2.30   (10.9 ) %
 
Comprehensive earnings (loss) per share $ (0.29 ) $   1.39   -     $ 0.67   $ 3.15   (78.7 ) %
 
Cash dividends per share - ordinary $ 0.22 $ $ 0.21 4.8 % $ 0.87 $ 0.83 4.8 %
Cash dividends per share - special $ 1.00 $ 1.75 (42.9 ) % $ 1.00 $ 1.75 (42.9 ) %
 
Net Cash Flow provided by Operations $ 53,733   $   51,592   4.1   % $ 217,102   $ 197,525   9.9   %
 
(1)   See discussion above: Non-GAAP and Performance Measures.
 
 
RLI CORP
2018 FINANCIAL HIGHLIGHTS

(Unaudited)

(Dollars in thousands, except per share amounts)

     
December 31, December 31,
2018 2017 % Change

SUMMARIZED BALANCE SHEET DATA:

Fixed income $ 1,760,515 $ 1,672,239 5.3 %
(amortized cost - $1,776,465 at 12/31/18)
(amortized cost - $1,646,411 at 12/31/17)
Equity securities 340,483 400,492 (15.0 ) %
(cost - $220,373 at 12/31/18)
(cost - $182,002 at 12/31/17)
Other invested assets 51,542 33,808 52.5 %
Cash and cash equivalents 41,690 34,251 21.7   %
Total investments and cash $ 2,194,230 $ 2,140,790 2.5 %
 
Premiums and reinsurance balances receivable 152,576 134,351 13.6 %
Ceded unearned premiums 71,174 57,928 22.9 %
Reinsurance balances recoverable on unpaid losses 364,999 301,991 20.9 %
Deferred policy acquisition costs 84,934 77,716 9.3 %
Property and equipment 54,692 55,849 (2.1 ) %
Investment in unconsolidated investees 94,967 90,067 5.4 %
Goodwill and intangibles 54,534 59,302 (8.0 ) %
Other assets 32,959 29,250 12.7   %
Total assets $ 3,105,065 $ 2,947,244 5.4   %
 
Unpaid losses and settlement expenses $ 1,461,348 $ 1,271,503 14.9 %
Unearned premiums 496,505 451,449 10.0 %
Reinsurance balances payable 22,591 21,624 4.5 %
Funds held 72,309 74,560 (3.0 ) %
Income taxes - deferred 24,238 53,768 (54.9 ) %
Bonds payable, long-term debt 149,115 148,928 0.1 %
Accrued expenses 45,124 52,848 (14.6 ) %
Other liabilities 26,993 18,966 42.3   %
Total liabilities $ 2,298,223 $ 2,093,646 9.8 %
Shareholders' equity 806,842 853,598 (5.5 ) %
Total liabilities & shareholders' equity $ 3,105,065 $ 2,947,244 5.4   %
 
 

OTHER DATA:

 
Common shares outstanding (in 000's) 44,504 44,148
 
Book value per share $ 18.13 $ 19.33 (6.2 ) %
Closing stock price per share $ 68.99 $ 60.66 13.7 %
Cash dividends per share - ordinary $ 0.87 $ 0.83 4.8 %
Cash dividends per share - special $ 1.00 $ 1.75 (42.9 ) %
 
Statutory surplus $ 829,775 $ 864,554 (4.0 ) %
 
 
RLI CORP
2018 FINANCIAL HIGHLIGHTS

UNDERWRITING SEGMENT DATA

(Unaudited)

(Dollars in thousands, except per share amounts)

               

Three Months Ended December 31,

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

2018

 
Gross premiums written $ 177,665 $ 47,822 $ 31,916 $ 257,403
Net premiums written 147,615 34,710 30,103 212,428
Net premiums earned 136,404 37,822 29,776 204,002
Net loss & settlement expenses 83,372 61.1 % 33,429 88.4 % 7,087 23.8 % 123,888 60.7 %
Net operating expenses 44,333   32.5 % 15,659   41.4 % 17,885 60.1 % 77,877 38.2 %
Underwriting income (loss) (1) $ 8,699 93.6 % $ (11,266 ) 129.8 % $ 4,804 83.9 % $ 2,237 98.9 %
 

2017

 
Gross premiums written $ 153,575 $ 43,747 $ 31,743 $ 229,065
Net premiums written 128,996 34,015 29,881 192,892
Net premiums earned 123,967 34,497 29,832 188,296
Net loss & settlement expenses 78,576 63.4 % 12,977 37.6 % 3,104 10.4 % 94,657 50.3 %
Net operating expenses 46,808   37.8 % 17,527   50.8 % 20,328 68.1 % 84,663 44.9 %
Underwriting income (loss) (1) $ (1,417 ) 101.2 % $ 3,993 88.4 % $ 6,400 78.5 % $ 8,976 95.2 %
 

Twelve Months Ended December 31,

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

2018

 
Gross premiums written $ 654,194 $ 202,917 $ 126,105 $ 983,216
Net premiums written 547,177 155,601 120,397 823,175
Net premiums earned 523,472 149,261 118,633 791,366
Net loss & settlement expenses 329,763 63.0 % 83,822 56.2 % 14,608 12.3 % 428,193 54.1 %
Net operating expenses 182,569   34.9 % 64,555   43.2 % 74,417 62.7 % 321,541 40.6 %
Underwriting income (loss) (1) $ 11,140 97.9 % $ 884 99.4 % $ 29,608 75.0 % $ 41,632 94.7 %
 

2017

 
Gross premiums written $ 585,449 $ 175,538 $ 124,325 $ 885,312
Net premiums written 494,649 137,031 118,174 749,854
Net premiums earned 478,603 138,346 120,988 737,937
Net loss & settlement expenses 305,679 63.9 % 85,027 61.5 % 10,878 9.0 % 401,584 54.4 %
Net operating expenses 169,020   35.3 % 65,178   47.1 % 75,311 62.2 % 309,509 42.0 %
Underwriting income (loss) (1) $ 3,904 99.2 % $ (11,859 ) 108.6 % $ 34,799 71.2 % $ 26,844 96.4 %
 
(1)   See discussion above: Non-GAAP and Performance Measures.

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