UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended DECEMBER 31, 1999
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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_____________________________
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 Identification No.)
incorporation or organization)
9025 North Lindbergh Drive, Peoria, Illinois 61615
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (309) 692-1000
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock $1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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.
X Yes No
-- --- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
29, 2000 as reported on the New York Stock Exchange, was $228,813,650. Shares of
Common Stock held directly or indirectly by each officer and director along with
shares held by the Company ESOP have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant's Common Stock, $1.00 par
value, on February 29, 2000 was 9,873,346.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Annual Report to Shareholders for the past year ended December
31, 1999, are incorporated by reference into Parts I and II of this document.
Portions of the Registrant's definitive Proxy Statement for the 2000 annual
meeting of security holders to be held May 4, 2000, are incorporated herein by
reference into Part III of this document.
Exhibit index is located on pages 34-35 of this document.
PART I
Item 1. BUSINESS
(a) General Development of Business
As used in this Form 10-K, the term "Company" refers to RLI Corp. and its
subsidiaries and affiliates, unless the context otherwise indicates.
RLI Corp., which was incorporated in Illinois in 1965, merged into and
became a Delaware corporation in 1984. In May of 1993, RLI Corp. changed its
state of incorporation back to Illinois through a merger. RLI Corp. is a holding
company, which, through its subsidiaries, underwrites selected property and
casualty insurance.
(b) Financial Information about Industry Segments
Selected information about industry segments is included herein as Item I.
(c) Narrative Description of Business
RLI INSURANCE GROUP
RLI Insurance Group is composed primarily of four main insurance companies.
RLI Insurance Company, the principal subsidiary, writes multiple lines insurance
on an admitted basis in all 50 states, the District of Columbia and Puerto Rico.
Mt. Hawley Insurance Company, a subsidiary of RLI Insurance Company, writes
surplus lines insurance in all 50 states, the District of Columbia, Puerto Rico,
the Virgin Islands and Guam. Underwriters Indemnity Company ("UIC"), a
subsidiary of RLI Insurance Company, writes multiple lines insurance on an
admitted basis in Alabama, Arkansas, Delaware, District of Columbia, Georgia,
Idaho, Illinois, Kansas, Kentucky, Mississippi, Missouri, Nebraska, Nevada, New
Mexico, North Carolina, North Dakota, Oregon, South Carolina, South Dakota,
Tennessee, Texas, Utah, West Virginia and Wyoming and surplus lines in
California, Colorado, Hawaii, Indiana, Louisiana, Montana, Nevada, Ohio,
Oklahoma, Pennsylvania, Washington and Wisconsin. Planet Indemnity Company
("PIC"), a subsidiary of UIC, writes multiple lines insurance on an admitted
basis in Colorado, Florida, Idaho, Illinois, Michigan, North Dakota and
Pennsylvania and surplus lines in Alabama, California, District of Columbia,
Georgia, Hawaii, Indiana, Kansas, Kentucky, Missouri, Nebraska, Ohio, Oregon,
South Dakota, Texas, Washington, West Virginia and Wyoming. Other companies in
the RLI Insurance Group include: Replacement Lens Inc., RLI Insurance Agency,
Ltd., RLI Insurance Ltd. and Underwriters Indemnity General Agency, Inc.
Since 1977, when the Company first began underwriting specialty property
and casualty coverages for commercial risks, highly cyclical market conditions
and a number of other factors have influenced the Company's growth and
underwriting profits. The Company, as a "niche" company rather than an "all
lines" company, seeks to develop expertise and large homogeneous books of
business in areas generally overlooked by traditional markets.
In response to the soft market conditions of the 1980's, which were
characterized by severe rate competition and excess underwriting capacity, the
Company limited its writings in specialty property and casualty lines and
terminated certain lines and sources of production.
2
Significant rate increases resulted when the insurance market hardened in
late 1984. The Company responded by expanding its premium volume in targeted
lines. Since 1987, the industry has experienced generally soft market conditions
featuring intensified competition for admitted and surplus lines insurers,
resulting in rate decreases. The Company has continually monitored its rates and
controlled its costs in an effort to maximize profits during this entrenched
soft market condition. As a result of catastrophic losses, such as Hurricane
Andrew and the Northridge Earthquake, property rates hardened in California,
Florida and the wind belt, but remained soft in other areas of the country. In
1994 and 1995, rates hardened and premium growth was achieved in the commercial
property book of business. Otherwise, rates for property and casualty lines have
declined over time. To maintain profitability, underwriters have tightened
selection criteria, broadened their focus to other market segments and given up
business where rates dropped too low. At the end of 1999, a trend emerged of
modest firming in the pricing of branch office business which may indicate an
improvement in industry underwriting discipline.
The Company initially wrote specialty property and casualty insurance
through independent underwriting agents. The Company opened its first branch
office in 1984, and began to shift from independent underwriting agents to
wholly-owned branch offices which market to wholesale producers. The Company
also markets certain products to retail producers from its Specialty Markets
Division and the Surety Division. The Company produces business under agreements
with underwriting general agents. Additional underwriting agents are accepted
under the auspices of Company product vice presidents. The majority of the
specialty property and casualty business is marketed through the Specialty
Markets and Surety divisions and branch offices located in Los Angeles,
California; San Francisco, California; Glastonbury, Connecticut; Atlanta,
Georgia; Alpharetta, Georgia; Honolulu, Hawaii; Chicago, Illinois; Overland
Park, Kansas; Boston, Massachusetts; St. Paul, Minnesota; New York City, New
York; Dallas, Texas; Houston, Texas; and Seattle, Washington.
The following table provides for the year ended December 31, 1999 the
geographic distribution of the Company's risks insured as represented by direct
premiums earned for all product lines. For the year ended December 31, 1999, no
other state accounted for more than 2% of total direct premiums earned for all
product lines.
Direct Premiums
State Earned Percent of Total
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California $105,965,001 33.73%
Florida 28,442,387 9.05
Texas 27,151,684 8.64
New York 22,643,181 7.21
Hawaii 12,284,316 3.91
Ohio 9,145,312 2.91
Illinois 7,832,312 2.49
Georgia 7,327,841 2.33
New Jersey 7,111,305 2.26
All Other 86,207,438 27.47
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Total direct premiums $314,110,777 100.00%
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The Company presently underwrites selected property and casualty insurance
primarily in the following lines:
3
A. PROPERTY SEGMENT
1. COMMERCIAL PROPERTY. The Company's commercial property coverage
consists primarily of excess and surplus lines and specialty insurance such as
fire and difference in conditions which includes earthquake, flood and collapse
coverages written in the United States and abroad. The Company writes coverage
for a wide range of commercial and industrial classes such as office buildings,
apartments, condominiums, certain industrial and mercantile structures,
buildings under construction and movable equipment. The Company also writes
boiler and machinery and ocean marine insurance under the same management as
commercial property. The Alpharetta, Boston, Chicago, Dallas, Houston, Los
Angeles and San Francisco branch offices are responsible for underwriting this
coverage. In 1999, 1998 and 1997 net earned premiums totaled $43,918,000,
$42,281,000 and $48,799,000, or 19%, 25% and 29%, respectively, of the Company's
consolidated revenues.
2. HOMEOWNERS/RESIDENTIAL PROPERTY. In 1997, the Company assumed a
highly profitable book of homeowners and dwelling fire business for Hawaii
homeowners from the Hawaii Property Insurance Association. In the aftermath of
Hurricane Iniki in 1992, this business was available at reasonable rates and
terms. Net earned premiums totaled $6,850,000, $9,689,000 and $13,229,000, or
3%, 6% and 8% of the Company's consolidated revenues for 1999, 1998 and 1997,
respectively.
3. OTHER. The Company acquired property business as a part of the
acquisition of Underwriters Indemnity Holdings on January 29, 1999. All property
coverages associated with this business are being non-renewed in accordance with
allowed policy provisions. In 1999, net earned premiums totaled $622,000 or less
than 1% of the Company's consolidated revenue.
B. SURETY SEGMENT
4. SURETY. The Company underwrites this product line from the Home
Office in Peoria and through our branch facilities in Dallas, Houston, New York
and Seattle. The division focuses on writing contract bonds for small size
contractors, energy-related business for oil and gas operators and a wide range
of commercial surety bonds through the independent agency system. Net earned
premiums totaled $25,412,000, $18,307,000 and $11,491,000, or 11%, 11% and 8% of
the Company's consolidated revenues for 1999, 1998 and 1997, respectively.
C. CASUALTY SEGMENT
5. GENERAL LIABILITY. The Company writes general liability
coverages through its Los Angeles, Glastonbury, Chicago, Alpharetta and
Dallas branch offices. The Company's general liability business consists
primarily of coverage for third party liability of commercial insureds
including manufacturers, contractors, apartments and mercantile risks. Net
earned premiums totaled $31,149,000, $23,726,000 and $26,332,000, or 14%, 14%
and 16% of the Company's consolidated revenues for the years 1999, 1998 and
1997, respectively.
6. COMMERCIAL AND PERSONAL UMBRELLA LIABILITY. The Company's
commercial umbrella coverage is produced through its Overland Park, St. Paul,
Alpharetta, Glastonbury, Los Angeles and Dallas branch offices, and through
an underwriting general agency in San Francisco. The coverage is principally
written in excess of primary liability insurance provided by other carriers
and, to a small degree, in excess of primary liability written by the
Company. The personal umbrella coverage, which is produced through the
Specialty Markets Division, is written in excess of the homeowners and
automobile liability coverage provided by other carriers. Net earned premiums
totaled $58,956,000, $29,086,000 and $22,566,000, or 26%, 17% and 12% of the
Company's consolidated revenues for the years 1999, 1998 and 1997,
respectively.
7. EXECUTIVE PRODUCTS. The Company produces financial products
such as Directors' and Officers' Liability through underwriting facilities in
Dallas, Los Angeles and New York City. The Company offers Miscellaneous
Professional Liability for a variety of low to moderate classes of risks. D&O
is a relatively small component of the overall P&C market, which has been
subject to severe competition. Underwriters have relinquished market share
rather than accept inadequate pricing. The package of coverages offered has
been expanded to include a variety of coverages of interest to corporations
and executives, such as Employment Practices Liability and Fiduciary
4
Liability. This is designed to give the product broader appeal. Net earned
premiums totaled $2,647,000, $3,054,000 and $4,430,000, or 1%, 2% and 3% of the
Company's consolidated revenues for the years 1999, 1998 and 1997, respectively.
8. PROGRAM BUSINESS. The Company began writing Program Business
in 1998 with one Habitational Program offered through a broker in Parsippany,
New Jersey. In 1999 offerings were expanded to include Farmowners coverage in
three states written through a broker in Omaha, Nebraska. Primary package
policies are the primary offerings in both programs. Expansion of these
current programs and the introduction of new programs is planned for 2000.
Program underwriting is headquartered in the Dallas branch office. Net earned
premiums totaled $456,000 and $21,000 for 1999 and 1998, respectively.
9. TRANSPORTATION. In 1997, the Company opened a transportation
insurance facility in Atlanta to offer automobile liability and physical
damage insurance to local, intermediate and long haul truckers, public
transportation risks and equipment dealers. Incidental, related insurance
coverages are also offered, including general liability, commercial umbrella
and excess liability, and motor truck cargo. The facility is staffed by
highly experienced transportation underwriters who produce business through
independent agents and brokers nationwide. Net earned premiums totaled
$9,647,000 and $3,806,000, or 4% and 2% of the Company's consolidated
revenues for 1999 and 1998, respectively.
10. OTHER. Smaller programs offered by the Company include:
excess medical, deductible buy-back, in-home business, personal automobile
(Hawaii only), and employer's excess indemnity. Net earned premiums from
these lines totaled $15,617,000, $12,354,000 and $9,907,000, or 6%, 6% and 5%
of the Company's consolidated revenues for the years, 1999, 1998 and 1997,
respectively.
COMPETITION
The Company's specialty property and casualty insurance subsidiaries
are part of an extremely competitive industry which is cyclical and
historically characterized by periods of high premium rates and shortages of
underwriting capacity followed by periods of severe competition and excess
underwriting capacity. Within the United States alone, approximately 2,500
companies, both stock and mutual, actively market property and casualty
products. The combination of products, service, pricing and other methods of
competition vary from line to line. The Company's principal methods of
meeting this competition are innovative products, marketing structure and
quality service to the agents and policyholders at a fair price. The Company
is a leader in using the internet to conduct e-business for products that
lend themselves to that approach. The Company competes favorably in part
because of its sound financial base and reputation, as well as its broad
geographic penetration into all 50 states, the District of Columbia, Puerto
Rico, the Virgin Islands and Guam. In the property and casualty area, the
Company has acquired experienced underwriting specialists in its branch and
home offices. In 1987, the insurance industry, in general, entered into a
"soft" or highly competitive period during which insurance rates generally
decreased. The specialty property and casualty market continues to be soft
with some rate increases experienced in the property lines in California,
Florida and the wind belt from 1993 through 1995. Since 1996, competition
reasserted itself and the Company reduced rates somewhat. Towards the end of
1999, a favorable trend emerged of price firming on commercial business,
driven in part by the reinsurance market. The Company has continued to
maintain its underwriting and marketing standards by not seeking market share
at the expense of earnings. New products and new programs are offered where
the opportunity exists to provide needed insurance coverage with exceptional
service on a profitable basis.
RATINGS
During 1992, the A.M. Best rating for RLI Insurance Company, the
principal subsidiary of the Company, was upgraded to "A" (Excellent). During
1993, Mt. Hawley Insurance Company's (an indirect subsidiary of the Company)
A.M. Best rating was upgraded to "A" (Excellent). During 1999, A.M. Best
reaffirmed "A" ratings for both RLI Insurance Company and Mt. Hawley Insurance
Company. Underwriters Indemnity Company's (an indirect subsidiary of the
Company) A.M. Best rating for 1999 was "A-" (Excellent). Planet Indemnity
Company's (an indirect subsidiary of the Company) A.M. Best rating for 1999 was
"A-" (Excellent).
5
During 1997, the Company, for the first time, applied for and
received a claims-paying rating from Standard & Poor's. As a result, a rating
of "A" (Good) was received for the combined insurance operation. In 1999, the
"A" rating was upgraded to "A+", as Standard & Poor's cited the Company's
strong operating performance, capitalization and risk management.
A.M. Best ratings for the industry range from "A++" (Superior) to
"F" (In Liquidation) with some companies not being rated. Standard & Poor's
ratings for the industry range from "AAA" (Superior) to "CC" (Default
Expected). Publications of both A.M. Best and Standard & Poor's indicate that
"A" and "A+" ratings are assigned to those companies that, in their opinion,
have achieved excellent overall performance when compared to the standards
established by these firms and have a strong ability to meet their
obligations to policyholders over a long period of time. In evaluating a
company's financial and operating performance, both firms review the
company's profitability, leverage and liquidity, as well as the company's
spread of risk, the quality and appropriateness of its reinsurance, the
quality and diversification of its assets, the adequacy of its policy and
loss reserves, the adequacy of its surplus, its capital structure and the
experience and objectives of its management. These ratings are based on
factors relevant to policyholders, agents, insurance brokers and
intermediaries and are not directed to the protection of investors.
As of December 31, 1999, the Company had no public debt outstanding;
therefore, no debt rating existed.
REINSURANCE
The Company reinsures a significant portion of its property and
casualty insurance exposure, paying to the reinsurer a portion of the
premiums received on such policies. Earned premiums ceded to non-affiliated
reinsurers totaled $129,886,000, $135,269,000 and $138,198,000 in 1999, 1998
and 1997, respectively. Insurance is ceded principally to reduce net
liability on individual risks and to protect against catastrophic losses.
Although reinsurance does not legally discharge an insurer from its primary
liability for the full amount of the policies, it does make the assuming
reinsurer liable to the insurer to the extent of the insurance ceded.
The Company attempts to purchase reinsurance from a number of
financially strong reinsurers. Retention levels are adjusted each year to
maintain a balance between the growth in surplus and the cost of reinsurance.
At December 31, 1999, the Company had reinsurance recoverables on paid and
unpaid losses and settlement expenses of $66,274,000 with American
Re-Insurance Co. and $30,984,000 with Transatlantic Reinsurance Company (both
companies rated "A++" (Superior) by A.M. Best Company). All other reinsurance
balances recoverable, when considered by individual reinsurer, are less than
10% of shareholders' equity.
The following table sets forth the largest reinsurers in terms of
amounts recoverable before reinsurance payables from such reinsurers as of
December 31, 1999. Also shown are the amounts of written premium ceded by the
Company to such reinsurers during 1999.
GROSS REINSURER CEDED
EXPOSURE AS OF PERCENT PREMIUMS PERCENT
DECEMBER 31, 1999 OF TOTAL WRITTEN OF TOTAL
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American Re-Insurance Co. $66,274,000 21.75% $5,946,000 5.31%
Transatlantic Reinsurance 30,984,000 10.17 9,656,000 8.63
General Reins Corp. 22,815,000 7.49 6,878,000 6.14
St. Paul Fire & Marine UK 20,634,000 6.77 470,000 .42
Employer's Re 14,948,000 4.91 4,140,000 3.70
Lloyd's Syndicates 13,050,000 4.28 13,805,000 12.33
Houston Casualty Co 8,539,000 2.80 10,000 .01
St. Paul Fire & Marine 8,519,000 2.80 6,764,000 6.04
NAC Reinsurance Corporation 8,013,000 2.63 3,981,000 3.56
Reliance Insurance 6,920,000 2.27 454,000 .40
All other reinsurers 104,026,000 34.13 59,847,000 53.46
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Total ceded exposure $304,722,000 100.00% $111,951,000 100.00%
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6
As of December 31, 1999, the Company held $17,851,000 in irrevocable
letters of credit, $7,645,000 undertrust agreements and $1,930,574 in cash to
collateralize a portion of the total amount recoverable.
Since 1992, the Company has purchased non-proportional contracts.
This allows the Company to retain a larger percentage of the premium and a
larger portion of the initial loss risk. Under non-proportional reinsurance,
the ceding company retains losses on a risk up to a specified amount and the
reinsurers assume any losses above that amount. Since 1989, through its
various reinsurance programs, the Company has generally limited its maximum
retained exposure on any one risk to $1,000,000. In 1999, the Company limited
its maximum retained exposure on any one risk to $700,000. The Company seeks
to limit its net aggregate exposure to a single catastrophic event to less
than 10% of shareholders' equity by purchasing various types of reinsurance.
In 1999, the Company's underwriting was supported by up to
$250,000,000 in traditional catastrophe reinsurance protection. The Company
continuously monitors and quantifies its exposure to earthquake risk, the
most significant catastrophe exposure to the Company, by means of catastrophe
exposure models developed by independent experts in that field. For the
application of the catastrophe exposure models, exposure and coverage detail
is recorded at each risk location. The model results are used both in the
underwriting analysis of individual risks, and at a corporate level for the
aggregate book of catastrophe exposed business. From both perspectives we
consider the potential loss produced by events with a Richter magnitude (a
measure of the energy released by an earthquake event) equivalent to the
earthquake on those faults which represent the greatest loss potential to the
Company, which are expected to recur at average intervals of 100 years, or
6.5 magnitude, whichever is greater. The probability that an earthquake event
would exceed our reinsurance cover (including facultative, excess of loss,
surplus, and cat treaty) is 2.18%. In addition, we examine the portfolio
exposure considering all possible earthquake events of all magnitudes and
return periods, on all faults represented in the model. The probability that
an earthquake event would exceed our reinsurance cover and 100% of our
surplus is 0.39%. The total exposure of the Company, as measured by the
catastrophe model output, is managed on a net of reinsurance basis to conform
to the operating risk constraint adopted by the Company's Board of Directors.
In 1999, the Company continued its innovative catastrophe
reinsurance and loss financing program with Zurich Reinsurance NA (Zurich
Re). The program, called Catastrophe Equity Puts (CatEPuts)SM, augments the
Company's traditional reinsurance by integrating its loss financing needs
with a pre-negotiated sale of securities linked to exchange-traded shares.
CatEPuts allows the Company to put up to $50.0 million of its convertible
preferred shares to Zurich Re at a pre-negotiated rate in the event of a
catastrophic loss, provided the loss does not reduce GAAP equity to less than
$55.0 million. CatEPuts began as a multi-year program and is designed to
enable the Company to continue operating after a loss of such magnitude that
its reinsurance capacity is exhausted. If the Company exercises its option to
put preferred shares to Zurich Re, then Zurich Re, in turn, has the option to
reinsure certain business written by the Company on a prospective basis.
FACTORS AFFECTING SPECIALTY PROPERTY AND CASUALTY PROFITABILITY
The profitability of the specialty property and casualty insurance
business is generally subject to many factors, including rate competition,
the severity and frequency of claims, natural disasters, state regulation of
premium rates, default of reinsurers, interest rates, general business
conditions, regulatory measures and court decisions that define and expand
the extent of coverage and the amount of compensation due for injuries or
losses. One of the distinguishing features of the property and casualty
insurance business is that its product must be priced before the ultimate
claims costs can be known. In addition, underwriting profitability has tended
to fluctuate over cycles of several years' duration. Insurers generally had
profitable underwriting results in the late 1970s, substantial underwriting
losses in the early 1980s and somewhat smaller underwriting losses in 1986
and 1987. During the years 1988 through 1992, underwriting losses increased
due to increased rate competition and the frequency and severity of
catastrophic losses, although pre-tax operating income remained profitable
due to investment income gains. Since 1993, the industry experienced
improvement in underwriting losses, particularly in years with fewer
catastrophe losses. The trends experienced during the late 1980s, however,
have continued; and companies continue to post underwriting losses but remain
profitable through investment income gains. For 1999, the industry's
statutory combined ratio is estimated to be 107.0, which represents a
deteriorating trend. The Company believes that certain other factors affect
its ability to underwrite specialty lines successfully, including:
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SPECIALIZED UNDERWRITING EXPERTISE. The Company employs experienced
professionals in its branch offices. Each office restricts its production and
underwriting of business to certain classes of insurance reflecting the
particular areas of expertise of its key underwriters. In accepting risks,
all independent and affiliated underwriters are required to comply with risk
parameters, retention limits and rates prescribed by the Company's home
office underwriting group, which reviews submissions and periodically audits
and monitors underwriting files and reports on losses over $100,000.
Compensation of senior underwriters is substantially dependent on the
profitability of the business for which they are responsible. The loss of any
of these professionals could have an adverse effect on the Company's
underwriting abilities and earnings in these lines.
The Company's product distribution falls into distinct categories,
with binding authority following the categorization.
BROKER BUSINESS. The largest volume of broker generated premium is
Commercial Property, General Liability, Commercial Umbrella and Commercial
Automobile. This business is produced through wholesale and retail brokers
who are not affiliated with the Company.
INDEPENDENT AGENT BUSINESS. The Surety Division offers its business
through a variety of independent agents. Additionally, the Specialty Markets
Division writes program business, such as Personal Umbrella and the In-Home
Business Policy, through independent agents. Homeowners Dwelling Fire and
Personal Auto are produced through independent agents in Hawaii. Each of
these programs involves detailed eligibility criteria which are incorporated
into strict underwriting guidelines. The programs involve prequalification of
each risk using the "smart" system accessible by the independent agent. The
independent agent cannot bind the risk unless they receive approval through
the Company's "smart" system.
UNDERWRITING AGENTS. The Surety Division has authorized an
underwriting general agency to underwrite contract surety business on behalf
of RLI, primarily in Eastern states. An underwriting agency in San Francisco
is authorized to underwrite commercial umbrella business in select Western
states. An underwriting agency in New York is authorized to underwrite and
handle claims for low limit deductible buy-backs on program business,
primarily in the East. Other underwriting agencies have been designated to
underwrite programs involving various selected commercial insurance products.
These underwriting general agencies may receive some compensation
through contingent profit commission. Otherwise, producers of business who
are not Company employees are generally compensated on the basis of direct
commissions with no provision for any contingent profit commission. There are
a few volume incentives for producers handling association business, with the
increased commission involved being tied to the program's underwriting
profit. This represents less than 5% of the business.
RETENTION LIMITS. The Company limits its net retention of single and
aggregate risks through the purchase of reinsurance (see "Business -- RLI
Insurance Group Segment -- Reinsurance"). The amount of reinsurance available
fluctuates according to market conditions. Reinsurance arrangements are
subject to annual renewal. Any significant reduction in the availability of
reinsurance or increase in the cost of reinsurance could adversely affect the
Company's ability to insure specialty property and casualty risks at current
levels or to add to the amount thereof.
CLAIMS ADJUSTMENT ABILITY. The Company has a professional claims
management team with proven experience in all areas of multi-line claims
work. This team supervises the handling and resolution of all claims and
directs all outside legal and adjustment specialists on an individual claim
and/or audit basis. Whether a claim is being handled by the Company's claim
specialist or has been assigned to a local attorney or adjuster, detailed
attention is given to each claim to minimize loss expenses while providing
for loss payments in a fair and equitable manner.
8
EXPENSE CONTROL. Management continues to review all areas of the
Company's operations to streamline the organization, emphasizing quality and
customer service, while minimizing expenses. These strategies will help to
contain the growth of future costs. Maintaining and improving underwriting
and other key organizational systems continues to be paramount as a means of
supporting the Company's orderly growth in anticipation of a market rebound,
as it is the Company's philosophy to retain its talented insurance
professionals and to build infrastructure in spite of the soft market. Other
insurance operating expenses as a percent of gross written premiums for the
years 1999, 1998 and 1997 were 4%, 6% and 7%, respectively.
ENVIRONMENTAL EXPOSURES. The Company is subject to environmental
claims and exposures through its commercial umbrella, general liability and
discontinued assumed reinsurance lines of business. Within these lines the
Company's environmental exposures include environmental site cleanup,
asbestos removal and mass tort liability. The majority of the exposure is in
the excess layers of the Company's commercial umbrella and assumed
reinsurance books of business.
The following table represents inception-to-date paid and unpaid
environmental claims data (including incurred but not reported losses) for
the periods ended 1999, 1998 and 1997:
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Inception-to-date December 31
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------
Loss and Loss Adjustment
Expense (LAE) payments
Gross $22,565 $15,269 $11,570
Ceded (13,671) (9,354) (7,646)
- ----------------------------------------------------------------------------------------------
Net $8,894 $5,915 $3,924
==============================================================================================
Unpaid losses and LAE at end of year
Gross $16,125 $18,226 $14,880
Ceded (8,566) (9,391) (8,842)
- ----------------------------------------------------------------------------------------------
Net $7,559 $8,835 $6,038
==============================================================================================
Although the Company's environmental exposure is limited as a result
of entering liability lines after the industry had already recognized it as a
problem, management cannot determine the Company's ultimate liability with
any reasonable degree of certainty. This ultimate liability is difficult to
assess due to evolving legislation on such issues as joint and several
liability, retroactive liability and standards of cleanup. Additionally, the
Company participates primarily in the excess layers, making it even more
difficult to assess the ultimate impact.
LOSSES AND SETTLEMENT EXPENSES
Many years may elapse between the occurrence of an insured loss, the
reporting of the loss to the insurer and the insurer's payment of that loss.
To recognize liabilities for unpaid losses insurers establish reserves, which
are balance sheet liabilities. The reserves represent estimates of future
amounts needed to pay claims and related expenses with respect to insured
events which have occurred.
9
When a claim is reported the claims department establishes a "case
reserve" for the estimated amount of the ultimate payment. The estimate
reflects the informed judgment of professional claims personnel, based on the
Company's reserving practices and the experience and knowledge of such
personnel regarding the nature and value of the specific type of claim.
Estimates for losses incurred but not yet reported are determined on the
basis of statistical information, including the Company's past experience.
The Company does not use discounting (recognition of the time value of money)
in reporting its estimated reserves for losses and settlement expenses.
The reserves are closely monitored and reviewed by management, with
changes reflected as a component of earnings in the current accounting
period. For lines of business without sufficiently large numbers of policies
or that have not accumulated sufficient development statistics, industry
average development patterns are used. To the extent that the industry
average development experience improves or deteriorates, the Company adjusts
prior accident years' reserves for the change in development patterns.
Additionally, there may be future adjustments to reserves should the
Company's actual experience prove to be better or worse than industry
averages.
As part of the reserving process historical data is reviewed and
consideration is given to the anticipated impact of various factors, such as
legal developments and economic conditions, including the effects of
inflation. The reserving process provides implicit recognition of the impact
of inflation and other factors affecting claims payments by taking into
account changes in historic payment patterns and perceived probable trends.
Changes in reserves from the prior years' estimates are calculated based on
experience as of the end of each succeeding year (loss and settlement expense
development). The estimate is increased or decreased as more information
becomes known about the frequency and severity of losses for individual
years. A redundancy means the original estimate was higher than the current
estimate; a deficiency means that the current estimate is higher than the
original estimate.
Due to the inherent uncertainty in estimating reserves for losses
and settlement expenses, there can be no assurance that the ultimate
liability will not exceed amounts reserved, with a resulting adverse effect
on the Company. Based on the current assumptions used in calculating
reserves, management believes the Company's overall reserve levels at
December 31, 1999 are adequate to meet its future obligations.
10
The table which follows is a reconciliation of the Company's unpaid
losses and settlement expenses for the years 1999, 1998 and 1997.
Year Ended December 31,
--------------------------------------------
(Dollars in thousands) 1999 1998 1997
Unpaid losses and settlement
expenses at beginning of year:
Gross $415,523 $404,263 $405,801
Ceded (168,261) (155,711) (157,995)
-------- -------- --------
Net 247,262 248,552 247,806
------- ------- -------
Unpaid losses and settlement expenses:
UIH, Inc. - Acquisition Date:
Gross 74,979
Ceded (67,642)
-------
Net 7,337
-----
Increase (decrease) in incurred losses and
settlements expenses:
Current accident year 101,053 68,131 61,771
Prior accident year (4,596) (3,403) (520)
------ ------- ----
Total incurred 96,457 64,728 61,251
------ ------ ------
Loss and settlement expense payments for
claims incurred:
Current accident year (21,675) (14,762) (11,284)
Prior accident year (53,892) (54,927) (49,023)
------- ------- -------
Total paid (75,567) (69,689) (60,307)
------- ------- -------
Insolvent reinsurer charged off (recovered) (1,000) 7,911 (627)
Loss reserves commuted 425 (4,240) 429
--- ------ ---
Unpaid losses and settlement
expenses at end of year: $274,914 $247,262 $248,552
======== ======== ========
Unpaid losses and settlement
expenses at end of year:
Gross $520,494 $415,523 $404,263
Ceded (245,580) (168,261) (155,711)
-------- -------- --------
Net $274,914 $247,262 $248,552
======== ======== ========
11
Explanation of significant components of reserve development by
calendar year are as follows:
1997 During 1997, the Company experienced approximately $520,000 of
favorable development on loss reserves. The development results from
loss reserve adjustments in various lines of business. Reserve
strengthening was necessary on the property line of business due to
development on the Lender's Single Interest program. As a result, an
increase of $1,465,000 was made to IBNR reserves. This increase,
however, was offset by $1,985,000 of favorable development on the
Company's other casualty, in-home business and surety bonding programs.
1998 During 1998, the Company experienced $3,403,000 of favorable
development on loss reserves. This development was the net result of
several reserve adjustments among various programs. Reserve
strengthening of $2,600,000 to the surety line of business in the third
quarter was offset by favorable development in, primarily, the personal
umbrella product. Favorable development of approximately $3,000,000 on
a deductible buy-back program resulted in a corresponding increase in
contingent commissions and subsequently no impact on earnings.
1999 During 1999, the Company experienced $4,596,000 of favorable
development on loss reserves. This development resulted from
approximately $2,917,000 of favorable development in the property lines
of business and approximately $1,679,000 of favorable development in
the casualty lines of business. The favorable property development is a
continuing result of the Northridge Earthquake claims from the 1994
accident year settling for less than the open reserves. Favorable
development of $1.1 million on casualty claims resulted from claim
settlements and reevaluations of case reserves during the accounting
period which were, in the aggregate, less than the IBNR and case
reserves established at the beginning of the period. The remaining
$579,000 of casualty favorable development resulted from balances due
from insolvent reinsurers that had previously been written off.
The table on the following page presents the development under
generally accepted accounting principles of the Company's balance sheet
reserves from 1990 through 1999. The top line of the table shows the
reserves at the balance sheet date for each of the indicated periods.
This represents the estimated amount of losses and settlement expenses
arising in all prior years that are unpaid at the balance sheet date,
including losses that had been incurred but not yet reported to the
Company. The lower portion of the table shows the re-estimated amount
of the previously recorded reserves based on experience as of the end
of each succeeding year. The estimate changes as more information
becomes known about the frequency and severity of claims for individual
periods.
12
Year Ended December 31,
----------------------------------------------------------------
(Dollars in thousands) 1990 1991 1992 1993 1994
---- ---- ---- ---- ----
& prior
Net Liability for unpaid losses
and Settlement expenses at
end of year $111,152 $119,411 $ 140,248 $175,491 $204,771
Paid (cumulative) as of:
One year later 18,579 22,332 24,589 36,416 46,905
Two years later 35,963 37,763 46,342 63,675 73,972
Three years later 44,088 49,462 64,364 84,614 100,936
Four years later 52,322 57,085 78,994 96,741 121,834
Five years later 56,413 65,318 85,746 106,631 135,524
Six years later 62,989 70,270 92,689 114,777
Seven years later 66,254 75,668 97,164
Eight years later 71,373 80,700
Nine years later 76,602
Liability re-estimated as of:
One year later 101,251 108,249 128,600 166,666 218,499
Two years later 98,505 105,747 132,850 164,218 214,352
Three years later 95,690 107,777 132,376 157,286 212,964
Four years later 97,041 106,326 127,426 168,782 217,790
Five years later 96,490 100,968 140,536 163,127 207,355
Six years later 93,159 117,529 134,950 156,210
Seven years later 96,973 107,103 127,738
Eight years later 99,622 100,518
Nine years later 94,002
Net cumulative redundancy
(deficiency) $17,150 $ 18,893 $ 12,510 $ 19,281 $ (2,584)
Gross liability $ 268,043 $ 310,767 $ 394,966
Reinsurance recoverable (127,795) (135,276) (190,195)
-------- -------- --------
Net liability $ 140,248 $ 175,491 $ 204,771
Gross re-estimated liability $ 412,014
Re-estimated recoverable (204,659)
--------
Net re-estimated liability $ 207,355
Gross cumulative redundancy
(deficiency) $ (17,048)
Year Ended December 31,
---------------------------------------------------------------------------
(Dollars in thousands) 1995 1996 1997 1998 1999* 1999
---- ---- ---- ---- ---- ----
Net Liability for unpaid losses
and Settlement expenses at
end of year $232,308 $247,806 $248,552 $247,262 7,337 $274,914
Paid (cumulative) as of:
One year later 37,505 47,999 54,927 52,536 1,356
Two years later 75,485 85,342 98,188
Three years later 103,482 112,083
Four years later 121,312
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Liability re-estimated as of:
One year later 220,185 240,264 245,150 243,270 8,165
Two years later 228,636 242,865 248,762
Three years later 222,761 233,084
Four years later 210,876
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Net cumulative redundancy
(deficiency) $ 21,432 $ 14,722 $ (210) $ 3,992 (828)
Gross liability $418,986 $405,801 $404,263 $415,523 $74,979 520,494
Reinsurance recoverable (186,678) (157,995) (155,711) (168,261) (67,642) (245,580)
-------- -------- -------- -------- ------- --------
Net liability $232,308 $247,806 $248,552 $247,262 $7,337 274,914
Gross re-estimated liability $404,361 $411,280 $451,323 $424,884 81,972
Re-estimated recoverable (193,485) (178,196) (202,561) (181,614) (73,807)
------- ------- ------- ------- -------
Net re-estimated liability $210,876 $233,084 $248,762 $243,270 8,165
Gross cumulative redundancy
(deficiency) $ 14,625 $ (5,479) $(47,060) $(9,361) (6,993)
*Represents Underwriter's Indemnity's reserves acquired on January 29, 1999 and
subsequent development thereon through December 31, 1999.
13
OPERATING RATIO
PREMIUMS TO SURPLUS RATIO
The following table shows, for the periods indicated, the Company's
insurance subsidiaries' statutory ratios of net premiums written to
policyholders' surplus. While there is no statutory requirement applicable to
the Company which establishes a permissible net premiums written to surplus
ratio, guidelines established by the National Association of Insurance
Commissioners provide that this ratio should generally be no greater than 3
to 1.
Year Ended December 31,
------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
---- ---- ---- --- ----
Statutory net premiums written $227,624 $145,701 $144,674 $130,908 $130,453
Policyholders' surplus $286,247 $314,484 $265,526 $207,787 $172,313
Ratio .8 to 1 .5 to 1 .5 to 1 .6 to 1 .8 to 1
GAAP AND STATUTORY COMBINED RATIOS
The underwriting experience of the Company is best indicated by its GAAP
combined ratio, which is the sum of (a) the ratio of incurred losses and
settlement expenses to net premiums earned (loss ratio) and (b) the ratio of
policy acquisition costs and other operating expenses to net premiums earned
(expense ratio).
Year Ended December 31,
------------------------------------------------------------------------------
GAAP 1999 1998 1997 1996 1995
---- ---- ---- --- ----
Loss ratio 49.4 45.4 43.2 52.2 64.4
Expense ratio 41.8 42.8 43.6 35.2 43.1
---- ---- ---- ---- ----
Combined ratio 91.2 88.2 86.8 87.4 107.5(1)
==== ==== ==== ==== =====
(1) Excluding the effects of the Northridge Earthquake, the GAAP combined ratio
for the year ended 1995 would have been 86.2.
14
The Company also calculates the statutory combined ratio, which is not
indicative of GAAP underwriting profits due to accounting for policy
acquisition costs differently for statutory accounting purposes compared to
GAAP. The statutory combined ratio is the sum of (a) the ratio of statutory
loss and settlement expenses incurred to statutory net premiums earned (loss
ratio) and (b) the ratio of statutory policy acquisition costs and other
underwriting expenses to statutory net premiums written.
Year Ended December 31,
---------------------------------------------------------------------------
Statutory 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loss ratio 47.6 (4) 48.0 43.0 52.3 63.6
Expense ratio 42.5 (4) 40.4 47.4 36.8 42.9
-------- ---- ---- ---- ----
Combined ratio 90.1 (4) 88.4 90.4 89.1 106.5 (3)
======== ==== ==== ==== ======
Industry combined ratio 106.7 (1) 106.0 (2) 101.9 (2) 106.1 (2) 106.5 (2)
----- ----- ----- -----
(1) Source: Insurance Information Institute. Estimated for the year ended
December 31, 1999.
(2) Source: A.M. Best Aggregate & Averages -- Property-Casualty (1999 Edition).
(3) Excluding the effects of the Northridge Earthquake, the statutory combined
ratio for the year ended 1995 would have been 85.3.
(4) The ratios presented include the results of UIC and PIC only from the date
of acquisition, January 29, 1999.
INVESTMENTS
The investment portfolios of the Company are managed by an Investment
Committee of the Board of Directors. The Company follows an investment policy
that is reviewed quarterly and revised periodically.
The investment portfolio serves primarily as the funding source for loss
reserves and secondly as a source of income and appreciation. For these
reasons, RLI's primary investment criteria are quality and liquidity,
followed by yield and potential for appreciation. Investments of the highest
quality and marketability are critical for preserving the Company's claims
paying ability. Virtually all of RLI's fixed income investments are U.S.
Government or AA rated or better taxable and tax-exempt securities. Common
stock investments are limited to securities listed on national exchanges and
by the Securities Valuation Office of the National Association of Insurance
Commissioners.
During 1999, operating cash flows were used to acquire fixed income
instruments composed primarily of intermediate-term municipal and U.S.
Government and agency securities. RLI's mix of tax-exempt and taxable
instruments within the portfolio is decided at the time of purchase on the
basis of available after-tax returns and overall taxability of all invested
assets. Almost all securities reviewed for purchase are either high grade
municipal or U.S. Government or agency debt instruments. As part of its
investment philosophy, the Company attempts to avoid exposure to default risk
by holding, almost exclusively, instruments ranked in the top two grades of
investment security quality by Standard & Poor's and Moody's (i.e. AAA and
AA). As of December 31, 1999, 98% of the fixed income portfolio was rated AA
or better. Interest rate risk is limited by restricting and managing
acceptable call provisions among new security purchases.
The municipal bond component of the fixed maturity portfolio increased
$16.0 million, to $188.1 million; and comprised 54.9% of the Company's total
fixed maturity portfolio, up 2.6 percentage points from year-end 1998. The
taxable U.S. Government and agency portion of the fixed income portfolio
increased by $7.3 million to $151.0 million, or 44.1% of the total versus
43.7% at year-end 1998. Investment grade corporate securities totaled $3.4
million compared to $4.2 million at
15
year-end 1998. The $8.9 million convertible debenture portfolio carried
at year-end 1998 was liquidated in 1999 with proceeds directed to the fixed
income portfolio.
The Company follows a program of matching assets to anticipated
liabilities to ensure its ability to hold securities until maturity. These
anticipated liabilities are then factored against ultimate payout patterns
and the resulting payout streams are fully funded with the purchase of
fixed-income securities of like maturity. Management believes that both
liquidity and interest rate risk can best be minimized by such
asset/liability matching.
Aggregate maturities for the fixed maturity securities are as follows:
MATURITY PAR AMORTIZED FAIR CARRYING
YEAR VALUE COST VALUE VALUE
---- ----- ---- ----- -----
2000 $ 34,530,000 $ 34,743,195 $ 34,919,444 $ 34,749,396
2001 22,205,000 22,565,491 22,604,337 22,527,407
2002 25,830,000 26,573,497 26,420,125 26,455,114
2003 38,285,000 38,665,708 37,701,560 38,539,076
2004 27,350,000 27,183,541 26,945,987 27,032,875
2005 33,800,000 34,095,710 34,047,352 33,992,017
2006 27,915,000 27,821,539 27,575,241 27,801,650
2007 24,480,000 24,442,956 23,894,149 24,359,352
2008 22,835,000 23,107,471 22,472,274 23,068,194
2009 27,855,000 27,814,396 27,579,013 27,808,512
2010 28,860,000 29,038,674 28,363,839 29,035,324
2011 12,700,000 12,555,108 12,146,215 12,530,076
2012 7,440,000 7,428,074 7,059,008 7,427,698
2013 6,095,000 6,124,747 5,640,032 6,021,769
2014 500,901 490,395 476,203 476,203
2015 0 0 0 0
2016 0 0 0 0
2017 35,000 37,383 36,726 36,726
2018 0 0 0 0
2019 0 0 0 0
2020 0 0 0 0
2021 0 0 0 0
2022 0 0 0 0
2023 0 0 0 0
2024 0 0 0 0
2025 50,000 51,796 48,988 48,988
2026 0 0 0 0
2027 40,000 42,934 41,092 41,092
2028 237,536 241,088 229,369 229,369
2029 347,005 338,995 331,666 331,666
------- ------- ------- -------
$341,390,442 $343,362,698 $338,532,620 $342,512,504
------------ ------------ ------------ ------------
At December 31, 1999, the Company's equity securities were valued at
$284.6 million, a decrease of $11.9 million from the $296.5 million held at
the end of 1998. During 1999, net common equity investments totaling $2.8
million were sold and pretax unrealized depreciation of equity securities
totaled $15.3 million. Equity securities represented 41.2% of cash and
invested assets at the end of 1999, a decrease from the 43.8% at year-end
1998. As of the year-end, total equity investments held at the operating
companies represented 93.1% of the combined statutory surplus of the
insurance subsidiaries.
Combined cash and short-term investments totaling $64.1 million at
year-end 1999 represented 9.3% of cash and invested assets versus 7.7% last
year. The Company's short-term investments consist of U.S. Government and
agency backed money market funds and the highest rated commercial paper.
16
Under generally accepted accounting principles, equity and fixed
income securities are carried at fair market value. However, a company that
can demonstrate its ability to hold fixed income securities until their
originally scheduled maturity is permitted to carry such securities at
amortized cost. RLI Corp. has chosen to carry most of its fixed income
securities at amortized cost as it believes it has constructed its fixed
income portfolios to match expected liability payouts and thus has the
ability and intention to hold such securities until their originally
scheduled maturity dates. Consequently, fluctuations in the market value of
most bonds are not reflected in the financial statements and do not affect
shareholders' equity.
The Company's investment results are summarized in the following
table:
Year Ended December 31,
-------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Average invested assets (1) $684,269 $640,576 $570,971 $504,773 $442,717
Investment income (2)(3) 26,015 23,937 24,558 23,681 22,029
Realized gains/(losses) (3) 4,467 1,853 2,982 1,017 457
Change in unrealized
appreciation/(depreciation) (3)(4) (16,263) 36,183 55,760 25,033 36,037
Annualized return on average
invested assets 2.1% 9.7% 14.6% 9.9% 13.2%
(1) Average of amounts at beginning and end of each year.
(2) Investment income, net of investment expenses, including
non-debt interest expense.
(3) Before income taxes.
(4) Relates to available-for-sale fixed maturity and equity securities.
REGULATION
STATE REGULATION
As an insurance holding company, RLI Corp., as well as its insurance
subsidiaries, are subject to regulation by the states in which the insurance
subsidiaries are domiciled or transact business. Holding company registration in
each insurer's state of domicile requires reporting to the state regulatory
authority the financial, operational and management data of the insurers within
the holding company system. All transactions within a holding company system
affecting insurers must be fair, and the insurer's policyholder surplus
following any transaction must be both reasonable in relation to its outstanding
liabilities and adequate for its needs. Notice to regulators is required prior
to the consummation of certain transactions affecting insurance subsidiaries of
the holding company system.
Other regulations limit the amount of dividends and other
distributions the subsidiaries can pay without prior approval of the
insurance department in the states in which they are physically and/or
commercially domiciled, and impose restrictions on the amount and type of
investments they may have. Regulations designed to ensure financial solvency
of insurers and to require fair and adequate treatment and service for
policyholders are enforced by filing, reporting and examination requirements.
Market oversight is conducted by monitoring trade practices, approving policy
forms, licensing of agents and brokers, and requiring fair and equitable
premiums and commission rates. Financial solvency is monitored by minimum
reserve and capital requirements, periodic reporting procedures (annually,
quarterly, or more frequently if necessary), and periodic examinations.
17
The quarterly and annual financial reports to the states utilize
accounting principles which are different from the generally accepted
accounting principles that show the business as a going concern. The
statutory accounting principles used by regulators, in keeping with the
intent to assure policyholder protection, are generally based on a
liquidation concept. The National Association of Insurance Commissioners
(NAIC) has recently developed a codified version of these statutory
accounting principles, and its deployment in the near future will foster more
consistency among the states for accounting guidelines and reporting.
State regulatory authorities have relatively broad discretion with
respect to granting, renewing and revoking brokers' and agents' licenses to
transact business in the state. The manner of operating in particular states
may vary according to the licensing requirements of the particular state,
which may, among other things, require a firm to operate in the state through
a corporation. In a few states, licenses are issued only to individual
residents.
COMMERCIAL LINES DEREGULATION -- The NAIC and several state
legislatures have taken up the issue of commercial lines deregulation in an
attempt to streamline specific areas of insurance regulation. A growing
contingent in the regulatory community has acknowledged that some regulatory
procedures and practices may be cumbersome and inappropriate for commercial
buyers of insurance. Specifically, the large, sophisticated, multi-state or
multinational businesses that employ their own teams of risk managers to
evaluate, reduce and finance their loss exposures are less likely to need the
form and rate protections that regulators provide consumers and small to
medium business endeavors. And, while these large businesses may receive some
benefit from the state financial regulation of licensed insurers, it has long
been acknowledged that they do not need the protections addressed by the
barriers to the surplus lines market and other nontraditional markets.
Indisputably, deregulation of the licensed market will have an impact on the
surplus lines insurance carriers, which have been free from form and rate
requirements.
USE OF CREDIT REPORTS IN UNDERWRITING -- Gains in access to
electronic commerce, and the means to gather information more rapidly, have
spurred regulators to take a second look at the use of consumer credit
reports in underwriting and rate making. In some states, regulators charged
with protecting insurance consumers from unfair trade practices are concerned
that some consumers' risks may be underwritten based solely on their credit
standing, and have sought to strengthen their laws and regulations to address
this. This trend comes on the heels of Congress' re-tooling of the Fair
Credit Reporting Act in 1997, which specifically addresses this issue, and
permits the use of consumer credit reports in underwriting. The issue of
federal preemption of state action in this arena has not been judicially
addressed.
FEDERAL REGULATION
Although the federal government generally does not directly regulate
the insurance business, federal initiatives often have an impact on the
business in a variety of ways. Current and proposed federal measures which
may significantly affect the insurance business include federal preemption of
state auto liability laws, tax reform measures, product liability and
electronic commerce. The Company is also monitoring the following federal
proposals:
NATURAL DISASTER ACT--Recent natural disasters, including Atlantic
Coast hurricanes, continue to fuel concern regarding the best way to provide
affordable insurance coverage for such events. Congress has yet to pass
legislation, but proposals to set up a system for federal relief to the
industry continue to be discussed. Two Initiatives, "The Natural Disaster
Protection and Insurance Act of 1997" (S.1361), and "The Homeowners Insurance
Availability Act of 1997" (H.R. 21), focus on excess federal reinsurance. In
1999, both the House and Senate introduced versions of the "Policyholder
Disaster Protection Act", which would permit insurers to build tax deferred
catastrophe reserves. The Company will continue to monitor the progress of
this issue.
18
FINANCIAL SERVICES MODERNIZATION -- The Gramm-Leach-Bliley Act was
signed into law by President Clinton on November 12, 1999. The principal
focus of the Act is to facilitate affiliations among banks, securities firms
and insurance companies. The Act amends the Federal Bank Holding Company Act
by creating a new category of bank holding company known as a "financial
holding company" to engage in activities that are "financial in nature," such
as securities and insurance. The Act repealed the Glass-Steagall Act, which
prohibited a Federal Reserve System member bank from being affiliated with a
securities firm; repealed the Garn-St. Germain Act, which prohibited a bank
holding company and its subsidiaries from selling or underwriting insurance;
and repealed the Federal Bank Holding Company Act provisions that prohibited
a director, officer or employee of a securities firm from serving as a
director, officer or employee of a bank.
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
The National Association of Insurance Commissioners (NAIC)
facilitates the regulation of multi-state companies through uniform reporting
requirements, standardized procedures for financial examinations and uniform
regulatory procedures embodied in model acts and regulations. Current
developments address the reporting and regulation of the adequacy of capital
and surplus.
The NAIC has developed Property-Casualty Risk-Based Capital (RBC)
standards that relate an insurer's reported statutory surplus to the risks
inherent in its overall operations. The RBC formula uses the statutory annual
statement to calculate the minimum indicated capital level to support asset
(investment and credit) risk and underwriting (loss reserves, premiums
written and unearned premium) risk. The NAIC model law calls for various
levels of regulatory action based on the magnitude of an indicated RBC
capital deficiency, if any. The Company continues to monitor its
subsidiaries' internal capital requirements and the NAIC's RBC developments.
The Company has determined that its subsidiaries' capital levels are well in
excess of the minimum capital requirements for all RBC action levels.
Management believes that its capital levels are sufficient to support the
level of risk inherent in its operations.
CORPORATE COMPLIANCE
The Company has developed a Code of Conduct and Compliance Manual
which provides employees with guidance on complying with a variety of federal
and state laws.
AGENCY LICENSES AND TRADEMARKS
Replacement Lens Inc., or its designated employees, must be licensed
to act as resident or non-resident producers by regulatory authorities in the
states in which it operates.
RLI Insurance Company obtained service mark registration of the
letters "RLI" in 1998 in the U.S. Patent and Trademark Office. Such
registration protects the mark nationwide from deceptively similar use by the
Company's competitors. The duration of this registration is ten years unless
renewed.
CLIENTELE
No significant part of the Company's or its subsidiaries' business is
dependent upon a single client or upon a very few clients, the loss of any one
of which would have a material adverse effect on the Company.
19
EMPLOYEES
The Company employs a total of 458 associates. Of the 458 total
associates, 64 are part-time and 394 are full-time.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales.
For purposes of this discussion, foreign operations are not
considered material to the Company's overall operations.
Item 2. PROPERTIES
The Company owns a two-story, 80,000 square foot building in Peoria,
Illinois, which serves as the Corporate Headquarters for RLI Corp., RLI
Insurance Company, Mt. Hawley Insurance Company, Underwriters Indemnity
Company and Planet Indemnity Company. One RLI Insurance Company Branch Office
also leases office space in this building.
Located on the same 15.0 acre campus is a 12,800 square foot
building. Nearly 9,800 square feet of this building are used as warehouse
storage for records and equipment. The remaining 3,000 square feet are used
as office/conference space.
Additionally, the Company owns two other buildings located near the
headquarter building. One, a 19,000 square foot building, is leased to a RLI
Insurance Company Branch office, with the remaining 11,000 square feet being
used for record storage.
All other operations of RLI Corp. lease the office space which they
need in various locations throughout the country.
Item 3. LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings and disputes
considered by management to be ordinary and incidental to the business or
which have no foundation in fact. Management believes that valid defenses
exist as to all such litigation and disputes, and is of the opinion that
these will not have a material effect on the Company's consolidated financial
statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by the Company to a vote of security
holders during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Refer to the Corporate Data on page 53 of the Annual Report to
Shareholders for the year ended December 31, 1999 attached in Exhibit 13.
Item 6. SELECTED FINANCIAL DATA
Refer to the Selected Financial Data on pages 52 through 53 of the
Annual Report to Shareholders for the year ended December 31, 1999 attached
in Exhibit 13.
20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Refer to the Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 16 through 25 of the Annual
Report to Shareholders for the year ended December 31, 1999 attached in
Exhibit 13.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Refer to the Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 16 through 25 of the Annual
Report to Shareholders for the year ended December 31, 1999 attached in
Exhibit 13.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the consolidated financial statements and supplementary
data included on pages 26 through 48 of the Annual Report to Shareholders for
the year ended December 31, 1999 attached in Exhibit 13. (See Index to
Financial Statements and Schedules attached on page 24.)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants or disagreements with
accountants on any matters of accounting principles or practices or financial
statement disclosure.
PART III
Items 10 to 13.
Pursuant to General Instructions G(3) of Form 10-K, Items 10 to 13,
inclusive, have not been restated or answered since the Company intends to
file within 120 days after the close of its fiscal year with the Securities
and Exchange Commission a definitive proxy statement pursuant to Regulation
14A under the Securities Exchange Act of 1934, which proxy statement involves
the election of directors. The information required in these items 10 to 13,
inclusive, is incorporated by reference to that proxy statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (l-2) Consolidated Financial Statements and Schedules. See Index to
Financial Statements and Schedules attached.
(3) Exhibits. See Exhibit Index on pages 34-35.
(b) No reports on Form 8-K were filed during the last quarter of 1999.
(c) Exhibits. See Exhibit Index on pages 34-35.
(d) Financial Statement Schedules. The schedules included on attached pages
24-33 as required by Regulation S-X are excluded from the Company's
Annual Report to Shareholders. See Index to Financial Statements and
Schedules on page 24. There is no other financial information required
by Regulation S-X which is excluded from the Company's Annual Report to
Shareholders.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
By: /s/Joseph E. Dondanville
----------------------------------------------------------
J. E. Dondanville
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 8, 2000
----------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By: /s/Gerald D. Stephens
----------------------------------------------------------
G. D. Stephens, President
(Principal Executive Officer)
Date: March 8, 2000
----------------------------------------------------------
********
By: /s/Joseph E. Dondanville
----------------------------------------------------------
J. E. Dondanville, Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 8, 2000
----------------------------------------------------------
********
By: /s/Gerald D. Stephens
----------------------------------------------------------
G. D. Stephens, Director
Date: March 8, 2000
----------------------------------------------------------
********
By: /s/Bernard J. Daenzer
----------------------------------------------------------
B. J. Daenzer, Director
Date: March 8, 2000
----------------------------------------------------------
********
By: /s/William R. Keane
----------------------------------------------------------
W. R. Keane, Director
Date: March 8, 2000
----------------------------------------------------------
********
22
By: /s/Gerald I. Lenrow
----------------------------------------------------------
G. I. Lenrow, Director
Date: March 8, 2000
----------------------------------------------------------
* * * * *
By: /s/Jonathan E. Michael
----------------------------------------------------------
J.E. Michael, Director
Date: March 8, 2000
----------------------------------------------------------
* * * * *
By: /s/Edwin S. Overman
----------------------------------------------------------
E. S. Overman, Director
Date: March 8, 2000
----------------------------------------------------------
* * * * *
By: /s/Edward F. Sutkowski
----------------------------------------------------------
E. F. Sutkowski, Director
Date: March 8, 2000
----------------------------------------------------------
* * * * *
By: /s/Robert O. Viets
----------------------------------------------------------
R. O. Viets, Director
Date: March 8, 2000
----------------------------------------------------------
* * * * *
23
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Reference (Page)
DATA SUBMITTED HEREWITH:
Report of Independent Auditors 25
Schedules:
I. Summary of Investments - Other than Investments in Related Parties
at December 31, 1999. 26
II. Condensed Financial Information of Registrant for the three years
ended December 31, 1999. 27 - 29
III. Supplementary Insurance Information for the three years ended
December 31, 1999. 30 - 31
IV. Reinsurance for the three years ended December 31, 1999. 32
V. Valuation and Qualifying Accounts 33
Schedules other than those listed are omitted for the reason that they are
not required, are not applicable or that equivalent information has been
included in the financial statements, and notes thereto, or elsewhere herein.
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
RLI Corp.:
Under date of January 18, 2000, we reported on the consolidated balance sheets
of RLI Corp. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings and comprehensive earnings, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999, as contained in the 1999 annual report to shareholders. These
consolidated financial statements and our report thereon are incorporated by
reference in the annual report on Form 10-K for the year 1999. In connection
with our audits of the aforementioned consolidated financial statements, we also
have audited the related financial statement schedules as listed in the
accompanying index. These financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statement schedules based on our audits.
In our opinion, the financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG LLP
Chicago, Illinois
January 18, 2000
25
RLI CORP. AND SUBSIDIARIES
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS
IN RELATED PARTIES
DECEMBER 31, 1999
Column A Column B Column C Column D
Amount
at Which
Shown in
Fair the Balance
Type of Investment Cost(1) Value Sheet
- ----------------------------------------------------------------------------------------------------------------------------
Fixed maturities:
Bonds:
Held-to-maturity
U. S. government $121,788,065 $120,073,780 $121,788,065
States, political subdivisions, and revenues 172,410,560 170,144,961 172,410,560
- ----------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity 294,198,625 290,218,741 294,198,625
- ----------------------------------------------------------------------------------------------------------------------------
Trading
U.S. government 4,240,279 4,081,055 4,081,055
Corporate 3,446,449 3,369,400 3,369,400
States, political subdivisions & revenues 200,229 200,446 200,446
- ----------------------------------------------------------------------------------------------------------------------------
Total trading 7,886,957 7,650,901 7,650,901
- ----------------------------------------------------------------------------------------------------------------------------
Available-for-sale
U.S. government 25,471,698 25,153,153 25,153,153
States, political subdivisions, and revenues 15,805,418 15,509,825 15,509,825
- ----------------------------------------------------------------------------------------------------------------------------
Total available-for-sale 41,277,116 40,662,978 40,662,978
- ----------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 343,362,698 338,532,620 342,512,504
- ----------------------------------------------------------------------------------------------------------------------------
Equity securities, available-for-sale:
Common stock:
Public utilities 40,108,529 69,415,496 69,415,496
Banks, trusts and insurance companies 12,951,028 31,663,176 31,663,176
Industrial, miscellaneous and all other 77,488,177 183,080,422 183,080,422
Preferred stock 260,495 479,950 479,950
- ---------------------------------------------------------------------------------------------------------------------------
Total equity securities 130,808,229 284,639,044 284,639,044
- ---------------------------------------------------------------------------------------------------------------------------
Short-term investments 64,092,009 64,092,009 64,092,009
- ---------------------------------------------------------------------------------------------------------------------------
Total investments $538,262,936 $687,263,673 $691,243,557
- ---------------------------------------------------------------------------------------------------------------------------
Note: See notes 1C and 2 of Notes to Consolidated Financial Statements, as
attached in Exhibit 13.
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or accrual
of discounts.
26
RLI CORP. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
DECEMBER 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ (23,389) $258,436
Investments in subsidiaries/investees, at equity 303,763,329 304,713,805
Equity securities available-for-sale, at fair value
(Cost--$6,709,665 in 1999 and $6,528,441 in 1998) 13,810,951 13,823,699
Property and equipment 0 998,780
Other assets 116,198 736,815
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $317,667,089 $320,531,535
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, current $ 1,058,556 $ 4,249,318
Notes payable, short-term 19,640,568 19,575,000
Income taxes payable--current 1,046,258 465,203
Income taxes payable--deferred 2,624,172 2,229,622
Other liabilities 228,259 53,738
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 24,597,813 26,572,881
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($1 par value, authorized 50,000,000 shares,
issued 12,804,558 shares in 1999 and 12,790,428 shares in 1998) 12,804,558 12,790,428
Paid in Capital 70,531,201 71,092,631
Accumulated other comprehensive earnings, net of tax 99,800,109 110,371,461
Retained earnings 189,250,013 163,324,161
Deferred compensation 4,705,536 3,460,606
Unearned ESOP shares 0 (2,500,999)
Treasury shares at cost ( 2,931,212 shares in 1999 and
2,384,736 shares in 1998 (84,022,141) (64,579,634)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 293,069,276 293,958,654
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $317,667,089 $320,531,535
===========================================================================================================================
See Notes to Consolidated Financial Statements, as attached in Exhibit 13.
27
RLI CORP. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)--(CONTINUED)
CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
YEARS ENDED DECEMBER 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income $ 490,468 $ 453,843 $ 454,906
Selling, general and administrative expenses (2,090,512) (3,914,954) (4,118,010)
Interest expense on debt (1,048,395) (1,122,358) (1,547,542)
- ---------------------------------------------------------------------------------------------------------------------------
(2,648,439) (4,583,469) (5,210,646)
Income tax benefit (724,948) (1,383,099) (1,675,135)
- ---------------------------------------------------------------------------------------------------------------------------
Net loss before equity
in net earnings of subsidiaries (1,923,491) (3,200,370) (3,535,511)
Equity in net earnings of subsidiaries/investees 33,374,544 31,438,961 33,706,994
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $31,451,053 $28,238,591 $30,171,483
===========================================================================================================================
Other Comprehensive Earnings, net of tax
Unrealized gains on securities:
Unrealized holding gains arising
during the period $ 18,443 $ 1,217,174 $ 1,859,712
Less: Reclassification adjustment for
(gains) losses included in
Net Earnings (144,514) (122,659) (81,383)
- ---------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Earnings--parent only (126,071) 1,094,515 1,778,329
Equity in Other Comprehensive
Earnings of Subsidiaries/Investees (10,445,281) 22,424,283 34,465,638
- ---------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Earnings (10,571,352) 23,518,798 36,243,967
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive Earnings $20,879,701 $51,757,389 $66,415,450
===========================================================================================================================
See Notes to Consolidated Financial Statements, as attached in Exhibit 13
28
RLI CORP. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Losses before equity in net earnings of $(1,923,491) $(3,200,370) $(3,535,511)
subsidiaries/investees
Adjustments to reconcile net losses to net
cash provided by operating activities:
Other items, net 193,245 (576,103) (1,304,715)
Change in:
Affiliate balances payable (3,226,757) 2,187,132 451,029
Interest Payable (1,265,000)
Federal income taxes 1,041,305 97,641 140,485
Deferred debt costs 805,701
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (3,915,698) (1,491,700) (4,708,011)
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of:
Equity securities, available-for-sale (675,182) (31,122) (135,001)
Property and equipment (37,210)
Unconsolidated investee ownership interest (88,750) (3,694,118)
Sale of:
Equity securities, available-for-sale 716,288 368,672 383,838
Cash dividends received-subsidiaries/investees 24,926,533 13,384,443 16,998,248
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 24,967,639 13,633,243 13,515,757
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of debt 65,568 12,075,000 7,500,000
Fractional share paid (16,099) (1,211)
CatEPut Payment (210,616) (1,212,500) (487,500)
Shares issued under stock option plan 302,696 60,638 161,356
Unearned ESOP shares 2,500,999 (2,500,999)
Treasury shares purchased (18,197,576) (14,858,394) (20,738,547)
Cash dividends paid (5,794,837) (5,566,416) (4,704,015)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (21,333,766) (12,018,770) (18,269,917)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (281,825) 122,773 (9,462,171)
Cash at beginning of year 258,436 135,663 9,597,834
- ---------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ (23,389) $ 258,436 $ 135,663
===========================================================================================================================
Interest paid on outstanding debt for 1999, 1998 and 1997 amounted to
$3,483,174, $2,327,113 and $2,809,903, respectively.
See Notes to Consolidated Financial Statements, as attached in Exhibit 13.
29
RLI CORP. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE VI--SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Column A Column B Column C (1) Column E (1) Column F Column H
Incurred
Deferred Unpaid Losses and
policy losses and settlement
acquisition settlement Unearned Premiums expenses
Segment costs expenses, net premiums, net earned Current year
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended
December 31, 1999
Property segment $ 9,444,841 $ 33,182,976 $ 35,899,659 $ 51,390,298 $ 20,068,671
Surety segment 8,036,389 6,059,534 16,724,125 25,412,355 4,539,480
Casualty segment 16,876,401 235,671,799 65,744,130 118,471,537 76,444,745
RLI Insurance Group $ 34,357,631 $274,914,309 $118,367,914 $195,274,190 $101,052,896
====================================================================================================================================
Year ended
December 31, 1998
Property segment $ 8,783,705 $ 29,634,175 $34,977,862 $ 52,281,163 $ 12,050,748
Surety segment 5,263,476 5,397,144 8,944,616 18,307,259 4,198,692
Casualty segment 8,462,960 212,230,257 38,320,680 71,735,513 51,882,019
RLI Insurance Group $ 22,510,141 $247,261,576 $82,243,158 $142,323,935 $ 68,131,459
====================================================================================================================================
Year ended
December 31, 1997
Property segment $ 10,484,486 $ 35,794,786 $41,230,427 $ 62,028,216 $ 11,998,750
Surety segment 4,818,957 2,214,233 8,119,275 11,491,172 2,507,153
Casualty segment 6,681,142 210,543,568 29,516,110 68,365,057 47,265,353
RLI Insurance Group $ 21,984,585 $248,552,587 $78,865,812 $141,884,445 $ 61,771,256
====================================================================================================================================
NOTE 1: Investment income is not allocated to the segments, therefore net
investment income (column G) has not been provided.
30
RLI CORP. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE VI--SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Column A Column H Column I Column J Column K
Incurred
Losses and
settlement Policy Other Net
expenses acquisition operating Premiums
Segment Prior year costs expenses written
- -----------------------------------------------------------------------------------------------------------------
Year ended
December 31, 1999
Property segment $ (4,313,840) $ 14,088,564 $ 4,482,798 $ 51,126,413
Surety segment 426,439 16,099,457 1,948,194 30,887,434
Casualty segment (708,214) 36,363,806 8,698,923 145,609,854
RLI Insurance Group $ (4,595,615) $ 66,551,827 $ 15,129,915 $ 227,623,701
=================================================================================================================
Year ended
December 31, 1998
Property segment $ (300,799) $ 14,394,458 $ 6,335,787 $ 46,029,088
Surety segment 2,430,308 10,990,793 1,406,353 19,133,037
Casualty segment (5,532,667) 18,895,582 8,783,745 80,539,155
RLI Insurance Group $ (3,403,158) $ 44,280,833 $ 16,525,885 $ 145,701,280
=================================================================================================================
Year ended
December 31, 1997
Property segment $ (95,228) $ 20,366,636 $ 8,347,252 $ 65,482,315
Surety segment (19,898) 7,304,618 1,173,349 14,127,068
Casualty segment (404,696) 15,469,127 9,220,776 65,064,313
RLI Insurance Group $ (519,822) $ 43,140,381 $ 18,741,377 $ 144,673,696
=================================================================================================================
31
RLI CORP. AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
FOR THE YEARS ENDED 1999, 1998 AND 1997
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of Amount
Direct Other From Other Net Assumed to
Amount Companies Companies Amount Net
- ------------------------------------------------------------------------------------------------------------------------------
1999
Property $116,594,261 $ 75,114,048 $ 9,910,085 $ 51,390,298 19.28%
Surety 29,604,063 4,730,231 538,523 25,412,355 2.12%
Casualty 167,912,453 50,041,820 600,904 118,471,537 .51%
RLI Insurance Group
premiums earned $314,110,777 $129,886,099 $ 11,049,512 $195,274,190 5.66%
===============================================================================================================================
1998
Property $115,926,412 $ 65,712,932 $ 2,067,683 $ 52,281,163 3.95%
Surety 29,149,915 11,157,925 315,269 18,307,259 1.72%
Casualty 129,919,370 58,398,009 214,152 71,735,513 .30%
RLI Insurance Group
premiums earned $274,995,697 $135,268,866 $ 2,597,104 $142,323,935 1.82%
===============================================================================================================================
1997
Property $132,599,094 $ 81,810,126 $11,239,248 $ 62,028,216 18.12%
Surety 20,311,217 9,079,051 259,006 11,491,172 2.25%
Casualty 115,658,960 47,308,406 14,503 68,365,057 .02%
RLI Insurance Group
premiums earned $268,569,271 $138,197,583 $11,512,757 $141,884,445 8.11%
===============================================================================================================================
NOTES: Column B, "Gross Amount" includes only direct premiums earned.
32
RLI CORP. AND SUBSIDIARIES
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Column A Column B Column C Column D Column E
Balance at Amounts Amounts Balance
beginning of charged to recovered Amounts at end
period expense (written-off) commuted of period
- ------------------------------------------------------------------------------------------------------------------------------
1999
Allowance for insolvent reinsurers $ 9,642,947 -- $ 571,814 $ 22,205 $10,236,966
1998
Allowance for insolvent reinsurers $17,057,194 -- $(574,934) $(6,839,313) $ 9,642,947
1997
Allowance for insolvent reinsurers $16,897,798 -- $ 159,396 -- $17,057,194
33
EXHIBIT INDEX
Exhibit No. Description of Document Reference (Page)
- ----------- ----------------------- ----------------
3.1 Articles of incorporation Incorporated by reference to the Company's
Quarterly Form 10-Q for the Second Quarter
ended June 30, 1997.
3.2 By-Laws Incorporated by reference to the Company's
Quarterly Form 10-Q for the Second Quarter
ended June 30, 1997.
10.1 Market Value Potential Plan* Incorporated by reference to the Company's
Quarterly Form 10-Q for the Second Quarter
ended June 30, 1997.
10.2 RLI Corp. Director Deferred Incorporated by reference to the Company's
Compensation Plan* Quarterly Form 10-Q for the Second Quarter
ended June 30, 1993.
10.3 The RLI Corp. Directors' Irrevocable Incorporated by reference to the Company's
Trust Agreement* Quarterly Form 10-Q for the Second Quarter
ended June 30, 1993.
10.4 Key Employee Excess Benefit Plan* Incorporated by reference to the Company's
Annual Form 10-K/A for the year ended
December 31, 1992.
10.5 RLI Corp. Incentive Stock Incorporated by reference to Company's
Option Plan* Registration Statement on Form S-8 filed on
March 11, 1996, File No. 333-1637
10.6 Directors' Stock Option Plan* Incorporated by reference to the Company's
Registration Statement on Form S-8 filed on
June 6, 1997, File No. 333-28625.
10.7 RLI Corp. Executive Deferred Incorporated by reference to the Company's
Compensation Agreement* Annual Form 10-K for the year ended December 31,
1998.
10.9 Reinsurance Agreements between the Incorporated by reference to the Company's
Company and American Re-Insurance Annual Form 10-K/A for the year ended
Company December 31, 1992.
10.10 Reinsurance Agreements between the Incorporated by reference to the Company's
Company and Lloyd's of London Annual Form 10-K/A
for the year ended December 31, 1992
34
EXHIBIT INDEX
Exhibit No. Description of Document Reference (Page)
- ----------- ----------------------- ----------------
11.0 Statement re computation of per Refer to the Notes to Consolidated Financial
share earnings Statements--Note 1K
"Earnings per share", on page 35 of the Annual
Report to Shareholders attached in Exhibit 13.
13.1 Refer to the Annual Report to Attached Exhibit 13.
Shareholders for the year ended
December 31, 1999, pages 16-48
and 52-53.
21.1 Subsidiaries of the Registrant Attached page 36.
23.1 Consent of KPMG LLP Attached page 37.
27 Financial Data Schedule Attached Exhibit 27.
*Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K.
35