UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the period ended March 31, 1995
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 0-6612
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RLI Corp.
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(Exact name of registrant as specified in its charter)
ILLINOIS 37-0889946
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9025 North Lindbergh Drive, Peoria, IL 61615
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(Address of principal executive offices) (Zip Code)
(309) 692-1000
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(Registrant's telephone number, including area code)
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 [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 10, 1995 the number of shares outstanding of the registrant's
Common Stock was 6,028,892.
Exhibit index is located on page 13 of this document
Page 1 of 13
PART I
Item 1. Financial Statements
RLI Corp. and Subsidiaries
Condensed Consolidated Statement Of Earnings
(Unaudited)
For the Three-Month Period
Ended March 31,
1994 1995
----------- -----------
Net premiums earned $21,949,965 $35,562,960
RLI Professional Tech. revenue 3,637,156 3,809,384
Net investment income 4,696,248 5,400,021
Net realized investment gains (losses) 11,634 (29,391)
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$30,295,003 $44,742,974
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Losses and settlement expenses $36,770,677 $16,052,261
Policy acquisition costs 8,164,814 12,922,619
Insurance operating expenses 3,725,836 3,588,199
RLI Professional Tech. operating expenses 3,545,125 3,596,818
Interest expense on debt 864,526 843,144
General corporate expenses 1,068,671 693,750
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$54,139,649 $37,696,791
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Earnings (loss) before income taxes (23,844,646) 7,046,183
Income tax expense (benefit) (8,878,564) 1,829,275
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Net earnings (loss) ($14,966,082) $5,216,908
============ ============
Net earnings (loss) per share:
Primary ($2.52) $0.87
Fully diluted ($2.52) $0.76
Weighted average number of
common shares outstanding
Primary 5,930,481 6,028,892
Fully diluted 5,930,481 7,444,277
Cash dividends declared per common share $0.14 $0.15
The accompanying notes are an integral part of the financial statements.
2
RLI Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
December 31, March 31,
ASSETS 1994 1995
Investments ----------- -----------
Fixed maturities
Held-to-maturity, at amortized cost $246,796,658 $250,718,207
Available-for-sale, at fair value 13,338,669 11,650,672
Equity securities, at fair value 104,067,362 128,356,893
Short-term investments, at cost which
approximates fair value 52,329,819 16,239,304
----------- -----------
Total investments 416,532,508 406,965,076
Cash 8,534,232 6,471,940
Accrued investment income 5,166,083 4,891,967
Premiums and reinsurance balances receivable 26,082,932 43,994,400
Ceded unearned premium 40,978,088 43,509,444
Reinsurance balances recoverable on unpaid losses 199,736,796 196,162,935
Deferred policy acquisition costs 19,208,212 16,705,978
Property and equipment 14,905,884 14,414,071
Income taxes - current 3,424,698 1,593,370
Income taxes - deferred 6,801,829 4,014,629
Other assets 10,929,872 9,226,563
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TOTAL ASSETS $752,301,134 $747,950,373
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and settlement expenses $394,966,040 $393,501,487
Unearned premiums 119,817,542 113,204,863
Reinsurance balances payable 39,859,746 37,588,051
Long-term debt:
Convertible debentures 46,000,000 46,000,000
Industrial development bonds 6,255,000 6,255,000
Other liabilities 15,805,333 12,328,362
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TOTAL LIABILITIES 622,703,661 608,877,763
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Shareholders' Equity:
Common stock (6,512,105 shares
issued and outstanding) 6,512,105 6,512,105
Other shareholders' equity 126,486,117 135,961,254
Less: Treasury shares at cost
(483,213 - 12/31/94; 483,213 - 3/31/95) (3,400,749) (3,400,749)
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TOTAL SHAREHOLDERS' EQUITY 129,597,473 139,072,610
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $752,301,134 $747,950,373
============ ============
The accompanying notes are an integral part of the financial statements.
3
RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three-Month Period
Ended March 31,
--------------------------
1994 1995
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Net cash used in operating activities ($21,720,301) ($18,045,559)
Cash Flows from Investing Activities
Investments purchased (21,483,665) (27,749,451)
Investments sold or matured 9,308,436 8,975,000
Net decrease in short-term investments 32,442,053 36,090,515
Net property and equipment purchased (910,984) (428,463)
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Net cash provided by investing activities 19,355,840 16,887,601
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Cash Flows from Financing Activities
Cash dividends paid (828,532) (904,334)
Treasury shares reissued 727,651 0
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Net cash used in financing activities (100,881) (904,334)
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Net decrease in cash (2,465,342) (2,062,292)
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Cash at the beginning of the year 9,246,768 8,534,232
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Cash as of March 31 $ 6,781,426 $ 6,471,940
============ ============
The accompanying notes are an integral part of the financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The financial information is
prepared in conformity with generally accepted accounting principles and
such principles are applied on a basis consistent with those reflected in
the 1994 annual report filed with the Securities and Exchange Commission.
The financial information included herein other than the condensed
consolidated balance sheet as of December 31, 1994 has been prepared by
management without audit by independent certified public accountants who
do not express an opinion thereon. The condensed consolidated balance
sheet as of December 31, 1994 has been derived from, and does not include
all the disclosures contained in the audited consolidated financial
statements for the year ended December 31, 1994.
The information furnished includes all adjustments and normal recurring
accrual adjustments which are, in the opinion of management, necessary for
a fair statement of results for the interim periods. Results of
operations for the three month periods ended March 31, 1994 and 1995 are
not necessarily indicative of the results of a full year.
Primary earnings per share are computed using the weighted average number
of shares of common stock outstanding during the period.
Fully diluted earnings per share calculations are based on the weighted
average number of shares of common stock outstanding for the period,
assuming full conversion of all Convertible Debentures into common stock.
Net earnings are adjusted for purposes of this calculation to eliminate
interest and amortization of debt issuance costs on the Convertible
Debentures net of related taxes. When the conversion of Convertible
Debentures increases the earnings per share or reduces the loss per share,
the effect on earnings is antidilutive. Under these circumstances, the
fully diluted net earnings or net loss per share is computed assuming no
conversion of the Convertible Debentures.
The accompanying financial data should be read in conjunction with the
notes to the financial statements contained in the 1994 10-K Annual
Report.
5
2. INDUSTRY SEGMENT INFORMATION - Selected information by industry segment
for the three months ended March 31, 1994 and 1995.
SEGMENT DATA - (in thousands) EARNINGS
BEFORE
REV. TAXES ASSETS
1994 ------- -------- ------
RLI Insurance Group $ 21,950 ($26,712) $758,661
RLI Professional Technologies 3,637 92 7,370
Net investment income 4,696 4,696
Net realized investment gains 12 12
General corporate & interest expense 0 ( 1,933) 11,871
-------- --------- --------
Consolidated $ 30,295 ($23,845) $777,902
======== ========= ========
1995
RLI Insurance Group $35,563 $ 3,000 $724,880
RLI Professional Technologies 3,809 212 9,683
Net investment income 5,400 5,400
Net realized investment losses (29) (29)
General corporate & interest expense - (1,537) 13,387
--------- --------- --------
Consolidated $ 44,743 $ 7,046 $747,950
========= ========= ========
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
RLI Corp. (the Company) is a holding company that, through its subsidiaries,
underwrites specialty property and casualty insurance and provides a wide
range of services and products to the ophthalmic industry.
The most significant segment is the RLI Insurance Group (the Group), which
provides specialty property and casualty coverages for primarily commercial
risks. This segment accounted for 80% of the Company's total revenue for the
three months ended March 31, 1995.
THREE MONTHS ENDED MARCH 31, 1995, COMPARED TO THREE MONTHS ENDED MARCH 31,
1994
Consolidated gross sales, which consists of gross premiums written, non-
insurance sales revenue, net investment income and realized investment gains
(losses) totaled $71.9 million for the first three months of 1995, up 3.3%
over the same period in 1994. The increase was due primarily to a 15% rise in
net investment income. The insurance and ophthalmic segments also posted
increased gross sales of 2% and 6% respectively. Consolidated revenue for the
first three months of 1995 increased $14.4 million (47.7%) from the same
period in 1994. Net premiums earned in the first quarter of 1995 soared
upward 62% over the first quarter of 1994. Net premiums earned in the first
quarter of 1994 were reduced by $13.3 million of reinsurance reinstatement
premiums.
The net after-tax earnings for the first three months of 1995 totaled $5.2
million, $.87 per share, compared to a net loss of ($15.0) million, ($2.52)
per share, for the same period in 1994. The increase in net earnings is
attributable to improved underwriting results and net investment income in the
first quarter of 1995. In the first quarter of 1994, the effects of the
Northridge Earthquake reduced earnings after tax by $20.2 million or $3.40 per
share.
7
RLI INSURANCE GROUP
Gross premiums written for the first quarter of 1995 increased to $62.7
million, a 2.3% increase over the first quarter of 1994. Gross premium
writings on casualty and other non-property business during the first quarter
of 1995 improved 22% over 1994 first quarter levels. Partially offsetting
this increase was a 20% reduction in 1995 first quarter gross property premium
writings. Rates on the Company's DIC (Difference in Conditions) book of
business have improved by over 40% since the end of 1993. However, the
Company has recorded lower gross premium writings in 1995 as a result of
efforts to reduce the Company's catastrophe exposure by reducing policy
limits, reducing the number of heavily exposed policies and attaching at
higher levels on large risks. The Company anticipates that gross premium
writings on property business during 1995 will approximate 1994 levels,
despite the reduction in exposure.
Net premiums written for first three months of 1995 grew 14% over the same
period in 1994. In February 1995, the Company sold its Aviation Underwriting
Specialist (AUS) division to AVEMCO Corporation. AVEMCO immediately assumed
all of the Groups' aviation business through a reinsurance arrangement between
AVEMCO and RLI Insurance Company. The Group ceded its unearned premium
reserves on the aviation business as of January 1, 1995 to AVEMCO. This
cession resulted in $3.2 million of negative net premiums written on the
aviation business in the first quarter of 1995. Compared to the first quarter
of 1994, aviation net premium writings were down $5.0 million. First quarter
1994 net premiums written were reduced by an $11.5 million increase in ceded
premiums written to reinstate reinsurance coverage on catastrophe treaties
affected by the earthquake.
Net premiums earned of $35.6 million in the first quarter of 1995 represented
a 62.0% increase from the first quarter of 1994. This is largely the result
of the $13.3 million increase in ceded premiums earned to reinstate
reinsurance coverage in 1994. Excluding the reinstatement premiums, net
premiums earned on property business for the first quarter of 1995 increased
10% over the same period in 1994. Rate increases achieved on property
business throughout 1994 continue to enhance earnings, the result of the
normal insurance earning patterns. Net premiums earned from casualty and
other non-property business in the first quarter of 1995 declined 4% from the
same period in 1994. This decline resulted from the sale of AUS and the
runoff of contact lens business. First quarter net premiums earned for 1995
were reduced by $2 million as a result of the sale of AUS while net premiums
earned on the discontinued contact lens insurance product dropped $1.6 million
from 1994 first quarter levels. Partially offsetting these declines were
increases in the Directors & Officers (D&O) and Employers Excess
Indemnification (EEI) products. Net premiums earned in the first quarter of
1995 from the D&O and EEI products increased 61% and 32%, respectively, from
the same period in 1994.
The Group's pretax earnings totaled $3.0 million for the first three months of
1995 compared a pretax loss of ($26.7 million) for the same period in 1994.
The combined effects of the earthquake including losses, expenses and the
reduction of revenue due to the reinstatement of reinsurance coverages reduced
1994 first quarter pretax earnings by $30.5 million.
8
The GAAP combined ratio dropped to 91.5 in 1995, down from 221.7 in the first
three months of 1994. The loss and settlement expense component of the
combined ratio decreased to 45.1 in 1995 from 167.5 for the first three months
of 1994. This decrease was primarily the result of earthquake losses in
California during January 1994. Net pretax catastrophe losses incurred in the
first quarter of 1995 from floods in California totaled $1.9 million compared
to $18.6 million of earthquake losses incurred during the same period in 1994.
The operating expense component of the combined ratio decreased to 46.4 in
1995 from 54.2 in the first three months of 1994. The expense ratio in first
quarter of 1994 increased due to the $13.3 million reduction of net premiums
earned related to the reinstatement of reinsurance coverage. First quarter
1995 policy acquisition costs increased $4.8 million over 1994 first quarter
levels as a result of increased commissions and other deferred acquisition
costs. Commission expenses in the first quarter of 1995 grew $2.1 million
over 1994 first quarter levels, which included a $1.3 million reduction in
contingent commission expense as a result of the earthquake.
RLI PROFESSIONAL TECHNOLOGIES
RLI Professional Technologies (Protech) revenue during the first three months
of 1995 was $3.8 million, 4.7% greater than that attained in 1994. Revenues
from Total Lens Care (TLC) and the Practice Automation Software during the
first three months of 1995 rose $173,000 and $104,000 respectively over the
same period in 1994. Reduced TLC sales incentives and increased license fees
for the Practice Automation Software are the main reasons for the increases.
These increases were partially offset by a drop in sales for the remaining
products, primarily Extended Service programs which have declined in recent
years due to reduced market demand.
Net pretax segment earnings for the first quarter of 1995 totaled $212,000, up
130.4% over the first quarter of 1994. The increase is the net result of a
4.7% increase in revenue offset slightly by a 1.5% increase in operating
expenses. The rise in operating expenses was due primarily to increased
marketing and advertising costs for TLC.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $5.4 million during the first three months of 1995, an increase of 15% over
that reported for the same period in 1994. The increase is the result of two
key factors: rising interest rates which began in late February 1994 and
continued throughout the year, and the reinvestment of maturing non-taxable
securities into higher yielding taxable investments.
Invested assets at March 31, 1995 declined by $9.6 million (2.3%) from
December 31, 1994. Short-term investments declined by $36.1 million from
December 31, 1994 due primarily to the funding of reinsurance obligations and
the first quarter 1995 reinvestment of funds generated from the fourth quarter
1994 sale of equity securities. In addition, the Company recognized realized
investment losses of $29,000 in the first quarter of 1995 compared to realized
investment gains of $12,000 in the first quarter of 1994.
9
The Company's fixed income portfolio consisted of all securities rated A or
better and over 98% were rated AA or better. The year-to-date yields on the
Company's fixed income investments for the three month periods ended March 31,
1994 and 1995 are as follows:
1994 1995
---- ----
Taxable 6.78% 7.04%
Non-taxable 5.34% 5.21%
Yields on taxable securities increased in the first quarter of 1995 due to a
rise in interest rates during 1994. Available cash flows from operations and
funds from maturing securities during 1994 were invested in securities
carrying higher yields. Yields on non-taxable securities for the first
quarter of 1995 declined from the same period in 1994. Non-taxable securities
carrying higher yields matured during 1994 and the Company reinvested these
funds in taxable securities.
The Company's available-for-sale portfolio of debt and equity securities had
net unrealized gains before tax of $7.9 million in the first three months of
1995 compared to net unrealized losses before tax of $7.8 million for the same
period in 1994. Rising interest rates and an overall decline in the stock
market during the first three months of 1994 caused the Company to record
unrealized losses on its debt and equity holdings. During the first quarter
of 1995, the Company's debt and equity securities rebounded as long-term
interest rates declined and the stock market flourished. Unrealized
appreciation on securities, net of tax is reflected in a separate component of
shareholders' equity. The Company's net unrealized gain before tax was $24.4
million and $16.5 million at March 31, 1995 and December 31, 1994,
respectively.
Interest expense on debt obligations decreased to $843,000 for the first three
months of 1995, a $22,000 drop from the same period in 1994. This reduction
is due to the December 1, 1994 principal repayment of $745,000 on the City of
Peoria industrial development bonds.
10
INCOME TAXES
The Company's effective tax rate for the first three months 1995 was 26%
compared to 37% for the first three months 1994. Income tax expense
attributable to income from operations differed from the amounts computed by
applying the U.S. federal tax rate of 35% to pretax income for the first three
months of 1994 and 1995 as a result of the following:
1994 1995
Amount % Amount %
------ --- ------ ---
Provision for income taxes at
the statutory rate of 35% (8,345,626) 35% 2,466,164 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income (421,526) 2% (351,788) (5%)
Dividends received deduction (279,316) 1% (264,501) (4%)
Dividends paid deduction (63,390) -- (85,762) (1%)
Other items, net 231,296 (1%) 65,162 --
---------- ---- ---------- ----
Total tax expense (benefit) (8,878,564) 37% 1,829,275 26%
The Company has filed with the Internal Revenue Service an application for
refund for the 1991, 1992 and 1993 tax years, the result of carrying back the
1994 operating and realized capital losses.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the primary sources of the Company's liquidity have been funds
generated from insurance premiums (operating activities) and investment income
and maturing investments (investing activities). In addition, the Company has
occasionally received proceeds from financing activities such as the sale of
common stock to the employee stock ownership plan, sale of convertible
debentures, and small, short-term borrowings.
At March 31, 1995 the Company had short-term investments, cash and other
investments maturing within one year, of approximately $38.0 million and
additional investments of $106.7 million maturing within five years. The
Company maintains four major sources of credit from two financial
institutions: one $10.0 million committed line of credit that cannot be
canceled during its annual term, one $10.0 million line of credit that cannot
be canceled during its annual term, yet must be secured if the Company's total
shareholders' equity falls below $100.0 million, and two $20.0 million secured
lines of credit that cannot be canceled during their annual terms. All lines
are unused at May 1, 1995.
Management believes that cash generated by operations, cash generated by
investments and cash available from financing activities will provide
sufficient sources of liquidity to meet its anticipated needs over the next
twelve to twenty-four months, including settlement of accrued but unpaid costs
related to the Northridge Earthquake.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Change in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not
applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Not Applicable
(b) The Company did not file any reports on Form 8-K during the
three months ended March 31, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RLI Corp.
/s/Joseph E. Dondanville
Joseph E. Dondanville
Vice President, Chief Financial Officer
(Duly authorized and Principal
Financial and Accounting Officer)
Date: May 10, 1995
12
RLI Corp. and Subsidiaries
INDEX TO EXHIBITS
Exhibit Number Item
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27.0 Financial Data Schedule (Electronic Filing Only)
13