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, 1997
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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 6, 1997 the number of shares outstanding of the registrant's
Common Stock was 7,625,456.
Page 1 of 12
PART I
Item 1. Financial Statements
RLI Corp. and Subsidiaries
Condensed Consolidated Statement Of Earnings
(Unaudited)
For the Three-Month Period
Ended March 31,
1997 1996
(Restated)
----------- -----------
Net premiums earned $33,065,635 $32,166,978
Net investment income 6,021,551 5,727,445
Net realized investment gains 560,024 141,310
----------- -----------
39,647,210 38,035,733
----------- -----------
Losses and settlement expenses 15,703,162 18,030,652
Policy acquisition costs 9,963,019 8,001,329
Insurance operating expenses 3,784,403 3,335,955
Interest expense on debt 690,552 721,344
General corporate expenses 880,469 735,042
----------- -----------
31,021,605 30,824,322
----------- -----------
Equity in earnings of
unconsolidated investee 243,673 124,688
----------- -----------
Earnings before income taxes 8,869,278 7,336,099
Income tax expense 2,313,493 1,820,202
----------- -----------
Net earnings $ 6,555,785 $5,515,897
============ =============
Net earnings per share:
Primary $0.85 $ .70
Fully diluted $0.74 $ .62
Weighted average number of
common shares outstanding
Primary 7,698,716 7,906,856
Fully diluted 9,467,947 9,676,087
Cash dividends declared per common share $0.14 $0.13
The accompanying notes are an integral part of the financial statements.
2
RLI Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
March 31, December 31,
ASSETS 1997 1996
Investments ------------ -------------
Fixed maturities
Held-to-maturity, at amortized cost $270,405,516 $263,282,430
Available-for-sale, at fair value 44,809,885 44,904,303
Equity securities, at fair value 192,129,440 188,935,360
Short-term investments, at cost which
approximates fair value 6,318,798 40,823,967
----------- -------------
Total investments 513,663,639 537,946,060
Cash 0 0
Accrued investment income 5,731,012 5,835,885
Premiums and reinsurance balances receivable 51,686,121 37,166,516
Ceded unearned premiums 50,064,453 53,705,078
Reinsurance balances recoverable on unpaid losses 159,630,955 165,017,149
Deferred policy acquisition costs 22,497,925 16,663,603
Property and equipment 11,527,193 12,126,552
Investment in unconsolidated investee 12,908,483 8,970,691
Other assets 11,305,210 8,042,250
----------- ------------
TOTAL ASSETS $839,014,991 $845,473,784
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and settlement expenses $402,636,838 $405,801,220
Unearned premiums 130,272,565 129,781,639
Reinsurance balances payable 23,117,327 23,699,837
Long-term debt:
Convertible debentures 46,000,000 46,000,000
Income taxes-current 2,453,906 2,134,692
Income taxes-deferred 19,514,687 17,170,687
Other liabilities 15,009,227 20,846,348
----------- ------------
TOTAL LIABILITIES 639,004,550 645,434,423
----------- ------------
Shareholders' Equity:
Common stock ($1 par value, authorized
50,000,000 shares, issued 8,453,499 shares
at 12/31/96 and 8,453,724 shares at 3/31/97) 8,453,724 8,453,449
Other shareholders' equity 204,384,061 197,464,904
Less: Treasury shares at cost
(631,719 shares at 12/31/96)
(828,268 shares at 3/31/97) (12,827,344) (5,878,992)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 200,010,441 200,039,361
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $839,014,991 $845,473,784
============ ============
The accompanying notes are an integral part of the financial statements.
3
RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three-Month Period
Ended March 31,
--------------------------
1997 1996
(Restated)
------------ ------------
Net cash used in operating activities ($ 18,264,826) ($ 19,753,215)
------------ ------------
Cash Flows from Investing Activities
Investments purchased (29,226,370) ( 6,730,266)
Investments sold 5,423,220 2,216,171
Investments called or matured 15,761,592 6,495,000
Net decrease in
short-term investments 34,505,170 20,884,451
Net property and equipment purchased ( 188,535) ( 1,018,350)
------------ ------------
Net cash from investing activities 26,275,077 21,847,006
------------ ------------
Cash Flows from Financing Activities
Cash dividends paid (1,067,564) ( 1,031,790)
Payments on debt 0 ( 2,800,000)
Change in contributed capital 5,665 1,615,396
Treasury shares reissued 0 538,789
Treasury shares purchased (6,948,352) 0
------------ ------------
Net cash (used in)
financing activities (8,010,251) ( 1,677,605)
------------ ------------
Net increase (decrease) in cash 0 416,186
------------ ------------
Cash at the beginning of the year 0 3,506,945
------------ ------------
Cash as of March 31 $ 0 $ 3,923,131
============ ============
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 1996 annual report filed with the Securities and Exchange Commission.
The financial information included herein 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, 1996 has been derived from, and does not include all the
disclosures contained in the audited consolidated financial statements for
the year ended December 31, 1996.
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, 1997 and 1996 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.
As previously reported in RLI Corp.'s Form 10-K filed for the period ended
December 31, 1996, on December 1, 1996, RLI Vision Corp., the Company's
wholly-owned optical goods distributor, merged with Hester Enterprises,
Inc., the manufacturer of Maui Jim sunglasses. The Company retained a 34%
minority interest in the combined entity, renamed Maui Jim, Inc. The
Company accounted for this merger as a non-monetary exchange of ownership
interests with no gain or loss recognized.
As a result of the merger, the Company has presented its minority interest
in Maui Jim, Inc. under the equity method of accounting beginning December
1, 1996. Additionally, for comparative purposes, the Company has restated
prior period financial information to present its 100% ownership in RLI
Vision Corp. under the equity method. This restatement is a change in
presentation only and has no impact on earnings. In January 1997, the
Company paid $3,694,119 for an additional 10% ownership interest in Maui
Jim, Inc., bringing the Company's total minority interest in Maui Jim,
Inc. to 44%.
The accompanying financial data should be read in conjunction with the
notes to the financial statements contained in the 1996 10-K Annual
Report.
5
2. INDUSTRY SEGMENT INFORMATION - Selected information by industry segment
for the three months ended March 31, 1997 and 1996 is presented below.
SEGMENT DATA - (in thousands) EARNINGS
(LOSS)
BEFORE
REV. TAXES ASSETS
1997 ------- -------- ------
RLI Insurance Group $ 33,065 $ 3,614 $809,384
Net investment income 6,022 6,022
Net realized investment gains 560 560
General corporate & interest expense -- (1,571) 29,631
Equity in Earnings of unconsolidated
investee -- 244
-------- --------- --------
Consolidated $ 39,647 $ 8,869 $839,015
======== ========= ========
1996
RLI Insurance Group $ 32,168 $ 2,799 $786,461
Net investment income 5,727 5,727
Net realized investment gains 141 141
General corporate & interest expense -- (1,456) 22,663
Equity in Earnings of unconsolidated
investee -- 125
-------- --------- --------
Consolidated $ 38,036 $ 7,336 $809,124
======== ========= ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This discussion and analysis may contain 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 which are not historical facts, and
involve risks and uncertainties that could cause actual results to differ
materially from those expected and projected.
OVERVIEW
RLI Corp. (the Company) is a holding company that, through its subsidiaries,
underwrites selected property and casualty insurance products.
The most significant operation is RLI Insurance Group (the Group), which
provides specialty property and casualty coverages for primarily commercial
risks. The Group accounted for 83% of the Company's total revenue for the
three months ended March 31, 1997.
6
THREE MONTHS ENDED MARCH 31, 1997, COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
Consolidated gross sales, which consist of gross premiums written, net
investment income and realized investment gains (losses) totaled $76.9 million
for the first three months of 1997, up 10.9% from the same period in 1996.
This increase was the result of a 10.8% increase in gross sales of the
insurance group, as detailed in the discussion of RLI Insurance Group that
follows. Net investment income grew, as well, posting a 5.2% improvement over
first quarter 1996. Consolidated revenue for the first three months of 1997
increased $1.6 million, or 4.2%, from the same period in 1996. Net premiums
earned in the first three months of 1997 were up 2.8% compared to the first
three months of 1996, as surety writings showed marked improvement.
The net after-tax earnings for the first three months of 1997 totaled $6.6
million, $.85 per share, compared to $5.5 million, $.70 per share, for the
same period in 1996. The increase in net earnings is attributable to
continued strong property underwriting results and increased net investment
income.
RLI INSURANCE GROUP
Gross premiums written for the first three months of 1997 totaled $70.3
million, compared to $63.4 million reported for the same period in 1996.
Property premiums increased to $39.0 million for the first quarter of 1997
compared to $30.8 million for the first quarter of 1996. The addition of the
Hawaiian Homeowners business in March of 1997 fueled this growth. As part of
the purchase agreement with the Hawaii Property Insurance Association, RLI
Insurance Group assumed $10.7 million in written premium. It is anticipated
that this new book of business will provide an additional $10.0 to $12.0
million in gross written premium on an annual basis. The Company's surety
book of business also posted substantial growth in the first quarter of 1997.
Direct writings for surety grew five-fold to $4.9 million versus $900,000 for
the same period in 1996. This increase is primarily the result of the
implementation of two new programs in the second quarter of 1996--Universal
Bonding and Surety America. The increased writings on the property and surety
books were partially offset by declines in the Company's casualty book. Gross
written premium on the casualty book declined $5.4 million to $26.3 million
when compared to the same period in 1996. General Liability and Directors and
Officers Liability accounted for $2.3 and $1.0 million, respectively, of this
decline, as continued unfavorable pricing and soft market conditions have
resulted in the non-renewal of certain accounts which cannot be underwritten
profitably. Additionally, the Company's Deductible Buy-Back Program accounted
for $1.6 million of the decline in casualty writings, as two major purchasing
group contracts that were new in March of 1996 did not renew in 1997.
Net premiums written for the first three months of 1997 increased $3.1 million
or 9.2% from the same period in 1996. Of this increase, $4.4 million was
related to the property book. Net property writings increased $10.7 million
with the assumption of the Hawaiian Homeowners business. This increase,
however, was offset by a $6.4 million decrease in Difference-In-Conditions net
writings. This decline was primarily due to the change in booking ceded
premium from a written premium basis to an earned premium basis on California
7
Excess of Loss treaties in 1996. Ceded premiums and unearned premiums were
adjusted proportionally downward causing net premiums to be higher in 1996
compared to 1997. The Company's surety book posted net premium written of
$2.9 million, a $2.0 million improvement over the same period in 1996. The
improvements experienced in property and surety, however, were offset by a
$3.1 million decline in net casualty writings related to the unfavorable
pricing and market conditions as mentioned previously.
Net premiums earned of $33.1 million in the first quarter of 1997 represent a
2.8% increase from the same period in 1996. Earned premiums associated with
the Hawaiian Homeowners business caused property to improve $1.1 million over
first quarter 1996 levels. With the addition of the two new programs, as
mentioned previously, the surety book improved, as well, posting a $1.3
million increase over 1996 levels. Earned premiums on the casualty book,
however, declined by $1.5 million due to the decline in writings as mentioned
previously.
The Group's pretax earnings totaled $3.6 million for the first three months of
1997 compared to pretax earnings of $2.8 million for the same period in 1996.
The property book was responsible for the majority of this improvement posting
$4.1 million in pretax earnings compared to $2.7 million for the first quarter
of 1996. First quarter 1996 property earnings were reduced by $2.5 million,
or $.20 per share, due to winter storm losses on the east coast. For the
first quarter of 1997, however, only $300,000, or $.03 per share, were
reported from eastern winter storm losses. Surety showed improvement, as
well, reporting a pretax profit of $77,000 compared to a pretax loss of
$256,000 for the same period in 1996. This represents surety's first quarter
of operating profits and is directly in line with the original business plan
for this division. The improvement experienced in property and surety was
partially offset by a decline in earnings on the casualty book. Casualty
posted a pretax loss of $523,000 for the first quarter of 1997 compared to a
pretax profit of $346,000 for the same period in 1996. Despite relatively
stable loss activity and only a slight increase in total operating expenses,
the decline in earned premiums experienced in casualty business has caused
operating profits to decline.
The GAAP combined ratio through the first three months of 1997 was 89.1
compared to 91.3 for the same period in 1996. The loss ratio decreased from
56.1 for the first quarter of 1996 to 47.5 in the first quarter of 1997. This
decrease was mainly the result of the improved property loss ratio. The
property book reported a loss ratio of 18.7% for the first quarter of 1997
compared to 35.4% for the same period in 1996. The decline in losses reported
from eastern winter storms, as mentioned previously, was the primary driver of
this improvement. The Company's expense ratio increased from 35.2% for the
first quarter of 1996 to 41.6% for the first quarter of 1997. This increase
was primarily related to commissions associated with the acquisition of the
Hawaiian Homeowners business. Additionally, first quarter 1997 includes
approximately $244,000 in expense associated with the CatEPut Program. This
catastrophe financing program was initiated in the fourth quarter of 1996.
These two items contributed to the increase in property's expense ratio from
41.2% in the first quarter of 1996 to 49.3% in the first quarter of 1997. The
casualty book, as well, showed an increase in expense ratio from 29.2% in 1996
to 32.4% in 1997. Despite only a $139,000 increase in total expense between
periods, the $1.5 million decline in earned premiums in 1997 compared to 1996
8
contributed to the increase in the expense ratio. The surety book, however,
posted a significant improvement in expense ratio, decreasing from 98.1% in
1996 to 75.1% in 1997. The tremendous growth in surety earned premiums, as
discussed previously, coupled with expense control measures, contributed to
this improvement.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $6.0 million during the first three months of 1997, an increase of 5.2%
over that reported for the same period in 1996. This increase is the result
of a higher invested asset base for the three months ended March 31, 1997
compared to the same period in 1996.
Invested assets at March 31, 1997 decreased by $24.2 million, or 4.5%, from
December 31, 1996. Short-term investments declined by $34.5 million from
December 31, 1996 due primarily to the funding of reinsurance obligations and
other first quarter operating needs. In addition, the Company recognized
realized investment gains of $560,000 in the first three months of 1997
compared to $141,000 in the first three months of 1996.
The Company's fixed income portfolio consisted entirely of securities rated A
or better and 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,
1997 and 1996 are as follows:
1997 1996
---- ----
Taxable 6.95% 6.93%
Non-taxable 5.06% 5.00%
Yields on taxable and non-taxable securities improved slightly through the
first three months of 1997 due to the maturity of lower yielding securities
from the portfolio. These securities have been replaced with slightly higher
yielding securities.
The Company's available-for-sale portfolio of debt and equity securities had
net unrealized gains before tax of $2.2 million in the first three months of
1997 compared to net unrealized gains before tax of $6.9 million for the same
period in 1996. Unlike the first quarter of 1996, where the stock market
flourished, the first quarter of 1997 saw the stock market correction in the
month of March, giving back a significant portion of the gains experienced for
the first two months of the year. 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 $79.7 million and $77.5 million
at March 31, 1997 and December 31, 1996, respectively.
Interest expense on debt obligations decreased to $691,000 for the first three
months of 1997, a $30,000 drop from the same period in 1996. This reduction
is related to the repayment of $2.8 million in short-term borrowings in the
first quarter of 1996.
9
INCOME TAXES
The Company's effective tax rate for the first three months of 1997 and 1996
was 26% and 25%, respectively. 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 1997 and 1996 as a
result of the following:
1997 1996
Amount % Amount %
------ --- ------ ---
Provision for income taxes at
the statutory rate of 35% $ 3,104,248 35% $ 2,567,635 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income ( 443,036) ( 5%) ( 380,214) ( 5%)
Dividends received deduction ( 331,772) ( 4%) ( 299,150) ( 4%)
Dividends paid deduction ( 62,678) ( 1%) ( 64,168) ( 1%)
Other items, net 46,731 1% ( 3,901) --
---------- ---- ---------- ----
Total tax expense $ 2,313,493 26% $ 1,820,202 25%
LIQUIDITY AND CAPITAL RESOURCES
Historically, the primary sources of the Company's liquidity have been funds
generated from insurance premiums and investment income (operating activities)
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.
During the first quarter of 1997, the Company repurchased 196,549 of its
outstanding shares at a cost of $6.9 million. These treasury shares are
reflected as a separate component of equity.
The Company's 6% convertible debentures due July 15, 2003 (of which $46
million principal amount was outstanding at March 31, 1997) become redeemable
at the option of the Company beginning July 15, 1997 for 103% of the principal
amount thereof. The debentures are also convertible into common stock at the
option of the holders at a conversion price of $26 per share. The Company may
call the debentures for redemption when they become redeemable, with the funds
necessary to fund any such redemption being provided by cash, investments and
available lines of credit. However, if the trading price for the Company's
common stock remains in excess of the conversion price, the Company would
expect substantially all of the debentures to be converted prior to the
effective date of any redemption. If a significant amount of common stock is
issued in connection with any such redemption, the Company may engage in a
stock repurchase program to re-acquire some or all of the stock so issued.
10
At March 31, 1997 the Company had short-term investments, cash and other
investments maturing within one year, of approximately $23.1 million and
additional investments of $128.1 million maturing within five years. The
Company maintains three sources of credit from two financial institutions: one
$10.0 million secured and committed line of credit that cannot be canceled
during its annual term; a $30.0 million secured line of credit that cannot be
canceled during its annual term; and a $3.0 million secured line of credit
available for the issuance of letters of credit. All lines were unused at
March 31, 1997.
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.
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, 1997.
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 9, 1997
12