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 June 30, 1997
-------------------------------------------
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: 0-6612
-----------------------------------------
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 August 8, 1997 the number of shares outstanding of the registrant's
Common Stock was 9,394,655.
Page 1 of 16
PART I
Item 1. Financial Statements
RLI Corp. and Subsidiaries
Condensed Consolidated Statement Of Earnings
(Unaudited)
For the Three-Month Period
Ended June 30,
1997 1996
(Restated)
----------- -----------
Net premiums earned $35,974,352 $32,390,263
Net investment income 5,999,346 6,091,854
Net realized investment gains(losses) 1,734,460 ( 36,190)
----------- -----------
43,708,158 38,445,927
----------- -----------
Losses and settlement expenses 15,650,578 16,907,372
Policy acquisition costs 10,931,140 7,505,677
Insurance operating expenses 4,762,090 3,862,271
Interest expense on debt 690,532 690,570
General corporate expenses 964,240 853,523
----------- -----------
32,998,580 29,819,413
----------- -----------
Equity in earnings of
unconsolidated investee 296,783 235,723
----------- -----------
Earnings before income taxes 11,006,361 8,862,237
Income tax expense 3,022,692 2,481,575
----------- -----------
Net earnings $ 7,983,669 $6,380,662
============ =============
Net earnings per share:
Primary $1.05 $0.80
Fully diluted $0.90 $0.71
Weighted average number of
common shares outstanding
Primary 7,625,456 7,935,776
Fully diluted 9,394,687 9,705,007
Cash dividends declared per common share $0.15 $0.14
The accompanying notes are an integral part of the financial statements.
2
RLI Corp. and Subsidiaries
Condensed Consolidated Statement Of Earnings (Continued)
(Unaudited)
For the Six-Month Period
Ended June 30,
1997 1996
(Restated)
----------- -----------
Net premiums earned $69,039,987 $64,557,241
Net investment income 12,020,897 11,819,299
Net realized investment gains 2,294,484 105,120
----------- -----------
83,355,368 76,481,660
----------- -----------
Losses and settlement expenses 31,353,740 34,938,024
Policy acquisition costs 20,894,159 15,507,006
Insurance operating expenses 8,546,493 7,198,226
Interest expense on debt 1,381,084 1,411,914
General corporate expenses 1,844,709 1,588,565
----------- -----------
64,020,185 60,643,735
----------- -----------
Equity in earnings of
unconsolidated investee 540,456 360,411
----------- -----------
Earnings before income taxes 19,875,639 16,198,336
Income tax expense 5,336,185 4,301,777
----------- -----------
Net earnings $14,539,454 $11,896,559
============ =============
Net earnings per share:
Primary $1.90 $1.50
Fully diluted $1.64 $1.32
Weighted average number of
common shares outstanding
Primary 7,661,884 7,921,316
Fully diluted 9,431,115 9,690,547
Cash dividends declared per common share $0.29 $0.27
The accompanying notes are an integral part of the financial statements.
3
RLI Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
June 30, December 31,
ASSETS 1997 1996
Investments ------------ -------------
Fixed maturities (Unaudited)
Held-to-maturity, at amortized cost $271,852,314 $263,282,430
Trading, at fair value 9,341,423 0
Available-for-sale, at fair value 35,871,552 44,904,303
Equity securities, at fair value 220,430,101 188,935,360
Short-term investments, at cost which
approximates fair value 13,641,393 40,823,967
----------- -------------
Total investments 551,136,783 537,946,060
Cash 0 0
Accrued investment income 5,921,377 5,835,885
Premiums and reinsurance balances receivable 56,229,272 37,166,516
Ceded unearned premiums 50,499,192 53,705,078
Reinsurance balances recoverable on unpaid losses 165,048,161 165,017,149
Deferred policy acquisition costs 24,484,881 16,663,603
Property and equipment 12,154,354 12,126,552
Investment in unconsolidated investee 13,205,265 8,970,691
Other assets 11,953,805 8,042,250
----------- ------------
TOTAL ASSETS $890,633,090 $845,473,784
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and settlement expenses $408,986,876 $405,801,220
Unearned premiums 135,435,750 129,781,639
Reinsurance balances payable 27,132,237 23,699,837
Long-term debt:
Convertible debentures 46,000,000 46,000,000
Income taxes-current 3,096,541 2,134,692
Income taxes-deferred 29,430,287 17,170,687
Other liabilities 16,484,617 20,846,348
----------- ------------
TOTAL LIABILITIES 666,566,308 645,434,423
----------- ------------
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 6/30/97) 8,453,724 8,453,449
Other shareholders' equity 228,440,402 197,464,904
Less: Treasury shares at cost
(631,719 shares at 12/31/96)
(828,268 shares at 6/30/97) (12,827,344) (5,878,992)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 224,066,782 200,039,361
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $890,633,090 $845,473,784
============ ============
The accompanying notes are an integral part of the financial statements.
4
RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six-Month Period
Ended June 30,
--------------------------
1997 1996
(Restated)
------------ ------------
Net cash used in operating activities ($ 5,983,352) ($ 5,054,319)
------------ ------------
Cash Flows from Investing Activities
Investments purchased (42,608,387) (18,247,840)
Investments sold 9,926,806 4,683,628
Investments called or matured 21,701,592 10,200,000
Net decrease in
short-term investments 27,182,573 9,134,602
Net property and equipment purchased ( 1,296,163) ( 1,434,402)
------------ ------------
Net cash from investing activities 14,906,421 4,335,988
------------ ------------
Cash Flows from Financing Activities
Cash dividends paid (2,211,382) ( 2,142,799)
Payments on debt 0 ( 2,800,000)
Change in contributed capital 236,665 1,615,396
Treasury shares reissued 0 538,789
Treasury shares purchased (6,948,352) 0
------------ ------------
Net cash (used in)
financing activities (8,923,069) ( 2,788,614)
------------ ------------
Net increase (decrease) in cash 0 ( 3,506,945)
------------ ------------
Cash at the beginning of the year 0 3,506,945
------------ ------------
Cash as of June 30 $ 0 $ 0
============ ============
The accompanying notes are an integral part of the financial statements.
5
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 six month periods ended June 30, 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.
6
2. INDUSTRY SEGMENT INFORMATION - Selected information by industry segment
for the six months ended June 30, 1997 and 1996 is presented below.
SEGMENT DATA - (in thousands) EARNINGS
(LOSS)
BEFORE
REV. TAXES ASSETS
1997 ------- -------- ------
RLI Insurance Group $ 69,040 $ 8,246 $849,128
Net investment income 12,021 12,021
Net realized investment gains 2,294 2,294
General corporate & interest expense -- (3,226) 41,505
Equity in earnings of unconsolidated
investee -- 540
-------- --------- --------
Consolidated $ 83,355 $ 19,875 $890,633
======== ========= ========
1996
RLI Insurance Group $ 64,557 $ 6,914 $800,548
Net investment income 11,819 11,819
Net realized investment gains 105 105
General corporate & interest expense -- (3,000) 22,495
Equity in earnings of unconsolidated
investee -- 360
-------- --------- --------
Consolidated $ 76,481 $ 16,198 $823,043
======== ========= ========
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 six
months ended June 30, 1997.
7
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS
ENDED JUNE 30, 1996
Consolidated gross sales, which consist of gross premiums written, net
investment income and realized investment gains (losses) totaled $160.9
million for the first six months of 1997, up 7.5% from the same period in
1996. This increase was the result of a 6.4% 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 1.7% improvement over
1996 levels. Consolidated revenue increased $6.9 million, or 9.0%, from the
same period in 1996. Net premiums earned for the first six months of 1997
were up $4.5 million, or 6.9%, compared to the same period in 1996, as surety
writings showed marked improvement. Additionally, realized investment gains
were $2.2 million higher than 1996. The sale of certain equity securities and
real estate during the first six months of 1997 accounted for this increase.
The net after-tax earnings for the first six months of 1997 totaled $14.5
million, $1.90 per share, compared to $11.9 million, $1.50 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 and investment gains.
RLI INSURANCE GROUP
Gross premiums written for the first six months of 1997 totaled $146.6
million, compared to $137.8 million reported for the same period in 1996.
Property premiums increased to $78.8 million for the first six months of 1997
compared to $70.5 million for the same period in 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. Since March, an
additional $2.3 million in premium has been assumed and $1.4 million has been
written directly by the Group, for total premium writings of $14.4 million
from this book as of June 30, 1997. It is anticipated that the Hawaiian book
will provide an additional $10.0 to $12.0 million in gross written premium on
an annual basis. The Company's surety book also posted substantial growth in
the first half of 1997. Direct writings for surety improved to $12.4 million
versus $3.1 million for the same period in 1996. This increase is primarily
the result of the implementation of two new contract surety programs in the
second quarter of 1996. 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 $8.8 million to $55.4 million
when compared to the same period in 1996. General Liability, Employers
Indemnity, and Directors and Officers Liability accounted for $5.4, $1.8 and
$1.4 million, respectively, of this decline, as continued less favorable
pricing and soft market conditions have resulted in the non-renewal of certain
accounts which cannot be underwritten profitably.
Net premiums written for the first six months of 1997 increased $10.1 million,
or 14.9%, from the same period in 1996. Of this increase, $10.8 million was
related to the property book. Net property writings increased $14.0 million
with the addition of the Hawaiian Homeowners business. This increase,
however, was offset by a $3.9 million decrease in Difference-In-Conditions net
8
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
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
$6.9 million, a $4.5 million improvement over the same period in 1996. The
improvements experienced in property and surety, however, were offset by a
$5.2 million decline in net casualty writings related to the unfavorable
pricing and market conditions as mentioned previously.
Net premiums earned of $69.0 million in the first half of 1997 represents a
6.9% increase from the same period in 1996. Earned premiums associated with
the Hawaiian Homeowners business caused property to improve $4.5 million over
first half 1996 levels. With the addition of the two new programs, as
mentioned previously, the surety book improved, as well, posting a $3.1
million increase over 1996 levels. Earned premiums on the casualty book,
however, declined by $3.2 million due to the decline in writings as mentioned
previously.
The Group's pretax earnings totaled $8.2 million for the first six months of
1997 compared to pretax earnings of $6.9 million for the same period in 1996.
The property book contributed to this improvement posting $9.3 million in
pretax earnings in 1997 compared to $8.5 million for the first half of 1996.
1996 property earnings were reduced by $2.2 million, or $.18 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 $278,000 compared to a pretax loss of $365,000 for the same period in 1996.
This translates into surety's second consecutive 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
$1.3 million for the first half of 1997 compared to a pretax loss of $1.2
million for the same period in 1996.
The GAAP combined ratio through the first six months of 1997 was 88.0 compared
to 89.3 for the same period in 1996. The loss ratio decreased from 54.1 for
the first half of 1996 to 45.4 in the first half of 1997. This decrease was
mainly the result of the improved property and casualty loss ratios. The
property book reported a loss ratio of 19.2 for the first half of 1997
compared to 25.0 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 casualty book reported a loss ratio of 69.7 in 1997
compared to 73.2 in 1996. The higher loss ratio in 1996 was the result of
$2.2 million in General Liability reserve strengthening on the 1994 through
1996 accident years. The Company's expense ratio increased from 35.2 for the
first half of 1996 to 42.6 for the first half of 1997. This increase was
primarily related to commissions associated with the acquisition of the
Hawaiian Homeowners business. The $13.0 million in assumed premium on the
Hawaiian book was purchased at a commission rate of 65.4. New business,
directly written by the Company, however, will carry a commission rate between
17% and 20%. These two items contributed to the increase in property's
expense ratio from 39.8 in the first half of 1996 to 48.4 in the first half of
1997. The casualty book, as well, showed an increase in expense ratio from
9
29.9 in 1996 to 34.0 in 1997. Despite only a $533,000 increase in total
expense between periods, the $3.2 million decline in earned premiums in 1997
compared to 1996 contributed to the increase in casualty's expense ratio. The
surety book, however, posted a significant improvement in expense ratio,
decreasing from 93.8 in 1996 to 72.7 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 $12.0 million during the first six months of 1997, an increase of 1.7% over
that reported for the same period in 1996. This increase is the result of a
higher invested asset base for the six months ended June 30, 1997 compared to
the same period in 1996.
Invested assets at June 30, 1997 increased by $13.2 million, or 2.5%, from
December 31, 1996. Short-term investments, however, declined by $27.2 million
from December 31, 1996 due primarily to the funding of reinsurance obligations
and other operating needs. In addition, the Company recognized realized
investment gains of $2.3 million in the first six months of 1997 compared to
$105,000 in the first six months of 1996. Capital gains have increased over
1996 levels due to the sale of real estate and certain equity securities.
Capital gains associated with sale of real estate amounted to $775,000. The
remaining gains related to the sale of certain equity securities deemed to
have reached their full potential.
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 six month periods ended June 30,
1997 and 1996 have remained relatively flat and are as follows:
1997 1996
---- ----
Taxable 6.92% 6.94%
Non-taxable 5.03% 5.00%
The Company's available-for-sale portfolio of debt and equity securities had
net unrealized gains before tax of $28.3 million in the first six months of
1997 compared to net unrealized gains before tax of $9.0 million for the same
period in 1996. During the second quarter of 1997, the stock market rallied
from the correction experienced in March of 1997. This rally resulted in the
Company recording $26.1 million in net unrealized gains before tax for the
three months ended June 30, 1997. 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 $105.9 million and $77.5 million
at June 30, 1997 and December 31, 1996, respectively.
Interest expense on debt obligations remained flat at $1.4 million for the
first six months of 1997 and 1996.
10
INCOME TAXES
The Company's effective tax rate for the first six months of 1997 and 1996 was
27%. 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 six 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% $ 6,956,474 35% $ 5,669,418 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income ( 891,015) ( 4%) ( 750,458) ( 4%)
Dividends received deduction ( 661,571) ( 3%) ( 592,993) ( 4%)
Dividends paid deduction ( 119,497) ( 1%) ( 128,844) ( 1%)
Other items, net 51,794 -- 104,654 1%
---------- ---- ---------- ----
Total tax expense $ 5,336,185 27% $ 4,301,777 27%
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 half 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.
On June 20, 1997, the Company announced that it was calling for redemption all
of its outstanding 6% convertible debentures that were to mature July 15,
2003. The $46.0 million bond issue was to be redeemed for cash on July 22,
1997 at 103% of its principal amount, plus accrued interest. Holders of the
debenture had the option to convert, at any time prior to the close of
business on July 21, 1997, the debentures at an exchange rate of 38.4615
shares of RLI common stock for each $1,000 principal amount of convertible
debt ($26.00 per share conversion price). On July 24, 1997, the Company
announced that the entire $46.0 million had been converted into RLI common
stock. This conversion created an additional 1,769,199 new shares of RLI
common stock.
At June 30, 1997 the Company had short-term investments, cash and other
investments maturing within one year, of approximately $31.6 million and
additional investments of $122.7 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
11
available for the issuance of letters of credit. All lines were unused at
June 30, 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.
THREE MONTHS ENDED JUNE 30, 1997, COMPARED TO THREE MONTHS
ENDED JUNE 30, 1996
Consolidated gross sales, totaled $84.0 million for the second quarter of
1997, up 4.5% from the same period in 1996. This increase was the result of a
2.6% increase in gross sales of the insurance group, as well as a $1.8 million
increase in realized capital gains. Consolidated revenue for the second
quarter of 1997 increased $7.2 million, or 13.7%, from the same period in
1996. Net premiums earned in the second quarter of 1997 were up 11.1%
compared to 1996, as surety writings showed marked improvement, and the
Hawaiian homeowner's book provided additional earned premium.
The net after-tax earnings for the second quarter of 1997 totaled $8.0
million, $1.05 per share, compared to $6.4 million, $.80 per share, for the
same period in 1996. The increase in net earnings is attributable to
continued strong property and surety underwriting results and increased net
investment gains.
RLI INSURANCE GROUP
Gross premiums written in the second quarter of 1997 totaled $76.3 million,
compared to $74.4 million reported for the same period in 1996. Property
premiums remained flat at $39.8 million for the second quarter of 1997 and
1996. Hawaiian Homeowners business added $3.7 million in written premium.
This increase, however, was offset by modest declines in both Difference-In-
Condition and Property-Fire. The Company's surety book posted substantial
growth in the second quarter of 1997. Direct writings for surety improved to
$7.5 million compared to $2.1 million for the same period in 1996. The
Company's casualty book, however, posted a $3.4 million decline in writings,
as soft market conditions have resulted in the non-renewal of certain accounts
which cannot be underwritten profitably.
Net premiums written for the second quarter of 1997 increased $7.0 million or
20.6% from the same period in 1996. Of this increase, $6.4 million was
related to the property book. Net property writings increased $3.4 million
with the addition of the Hawaiian Homeowners business. The Company's surety
book posted net premium written of $4.1 million, a $2.5 million improvement
over the same period in 1996. The improvements experienced in property and
surety, however, were offset by a $1.9 million decline in net casualty
writings related to the less favorable pricing and market conditions mentioned
previously.
Net premiums earned of $36.0 million in the second quarter of 1997 represents
a $3.6 million, or 11.0%, increase over the same period in 1996. Earned
12
premiums associated with the Hawaiian Homeowners business caused property to
improve $3.4 million over second quarter 1996 levels. The surety book
improved, as well, posting a $1.9 million increase over 1996 levels. Earned
premiums on the casualty book, however, declined by $1.7 million due to the
decline in writings mentioned previously.
The Group's pretax earnings totaled $4.6 million for the second quarter of
1997 compared to pretax earnings of $4.1 million for the same period in 1996.
The GAAP combined ratio for the second quarter of 1997 was 87.1 compared to
87.3 for the same period in 1996. The loss ratio decreased from 52.2 for the
second quarter of 1996 to 43.5 in the second quarter of 1997. The casualty
book accounted for the majority of this improvement as the loss ratio declined
to 68.8 in second quarter 1997 compared to 77.6 for the same period in 1996.
Second quarter 1996 included $2.2 million in General Liability reserve
strengthening. The Company's expense ratio increased from 35.1 for the second
quarter of 1996 to 43.6 for the second quarter of 1997. This increase was
primarily related to commissions associated with the acquisition of the
Hawaiian Homeowners business. These commissions contributed to the increase
in property's expense ratio from 38.4 in the second quarter of 1996 to 47.7 in
the second quarter of 1997. The casualty book, as well, showed an increase in
expense ratio from 30.5 in 1996 to 35.7 in 1997. Despite only a $390,000
increase in total expense between periods, the $1.7 million decline in earned
premiums in 1997 compared to 1996 contributed to the increase in the expense
ratio. The surety book, however, posted a significant improvement in expense
ratio, decreasing from 89.8 in 1996 to 70.9 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 second quarter of 1997, compared to $6.1 million
reported for the same period in 1996. Second quarter 1996 included a
$300,000, one-time, increase to investment income from the booking of interest
income on funds held. Net of this one-time adjustment, investment income
tracks favorably in 1997 compared to 1996.
In addition, the Company recognized realized investment gains of $1.7 million
in the second quarter of 1997 compared to a realized loss of $36,000 in the
second quarter of 1996. Second quarter 1997 included the sale of real estate
and certain equity securities, as discussed previously.
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INCOME TAXES
The Company's effective tax rate for the second quarter of 1997 and 1996 was
27% and 28%, 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% $ 3,852,226 35% $ 3,102,147 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income ( 447,978) ( 4%) ( 370,244) ( 4%)
Dividends received deduction ( 329,798) ( 3%) ( 293,844) ( 3%)
Dividends paid deduction ( 56,819) ( 1%) ( 64,676) ( 1%)
Other items, net 5,061 -- 108,192 1%
---------- ---- ---------- ----
Total tax expense $ 3,022,692 27% $ 2,481,575 28%
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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
On May 1, 1997, at the Company's Annual Meeting of Shareholders, the following
members were elected to the Board of Directors:
Bernard J. Daenzer Jonathan E. Michael
Richard J. Haayen Edward F. Sutkowski
The following proposals were approved at the Company's Annual Meeting:
Affirmative Negative Votes
Votes Votes Withheld
1. Amendment to the Articles of 5,905,473 707,122 38,736
Incorporation to authorize a new class
of preferred stock.
2. Amendment to the Articles of 6,503,291 125,716 22,324
Incorporation to reqiure affirmative
vote of at least a majority of the
outstanding shares entitled to vote
on subsequent amendments to the Articles.
3. Approve the Market Value Potential 6,654,695 548,138 72,959
Performance Incentive Plan.
4. Approve the Stock Option Plan for 5,471,215 1,523,274 281,303
Outside Directors.
5. Ratify the action of the Board of 7,110,409 145,350 20,033
Directors appointing KPMG Peat
Marwick LLP as independent public
accountants for 1997.
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PART II - OTHER INFORMATION (Continued)
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3.1 Amended Articles of Incorporation
Exhibit 3.2 By-Laws
Exhibit 10.1 Market Value Potential Performance Incentive Plan
Exhibit 10.6 RLI Corp. Director's Option Plan
(b) The Company did not file any reports on Form 8-K during the six
months ended June 30, 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: August 8, 1997
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