UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 2000
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 0-6612
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RLI Corp.
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(Exact name of registrant as specified in its charter)
ILLINOIS 37-0889946
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9025 North Lindbergh Drive, Peoria, IL 61615
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(Address of principal executive offices) (Zip Code)
(309) 692-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 5, 2000 the number of shares outstanding of the registrant's Common
Stock was 9,802,074.
Page 1 of 12
PART I
ITEM 1. FINANCIAL STATEMENTS
RLI Corp. & Subsidiaries
Condensed Consolidated Statement of Earnings and Comprehensive Earnings
For the Three-Month Period Ended March 31,
(Unaudited) 2000 1999
------------- -----------
Net premiums earned $ 53,186,419 $ 45,789,478
Net investment income 6,936,832 6,234,223
Net realized investment gains (120,505) 23,333
------------ ------------
60,002,746 52,047,034
------------ ------------
Losses and settlement expenses 27,882,921 21,072,462
Policy acquisition costs 17,249,913 17,322,607
Insurance operating expenses 4,338,905 3,662,168
Interest expense on debt 1,238,498 889,295
General corporate expenses 858,477 895,374
------------ ------------
51,568,714 43,841,906
------------ ------------
Equity in earnings of uncons. investee 561,633 454,053
------------ ------------
Earnings before income taxes 8,995,665 8,659,181
Income tax expense 2,455,816 2,081,400
------------ ------------
Net earnings $ 6,539,849 $ 6,577,781
============ ============
Other compre. (loss) earnings, net of tax (4,939,890) (4,959,241)
------------ ------------
Comprehensive earnings $ 1,599,959 $ 1,618,540
============ ============
Earnings per share:
Basic:
Net earnings per share from operations $ 0.67 $ 0.63
Realized gains, net of tax ($ 0.01) $ 0.00
------------ ------------
Basic net earnings per share $ 0.66 $ 0.63
============ ============
Basic compre. earnings per share $ 0.16 $ 0.16
============ ============
Diluted:
Net earnings per share from operations $ 0.67 $ 0.63
Realized gains, net of tax ($ 0.01) $ 0.00
------------ ------------
Diluted net earnings per share $ 0.66 $ 0.63
============ ============
Diluted compre. earnings per share $ 0.16 $ 0.15
============ ============
Weighted average number of common shares outstanding
Basic 9,859,149 10,394,709
Diluted 9,938,498 10,480,013
Cash dividends declared per common share $ 0.14 $ 0.13
The accompanying notes are an integral part of the financial statements.
2
RLI Corp. and Subsidiaries Condensed Consolidated Balance Sheet
March 31, 2000 December 31, 1999
(Unaudited)
--------------- --------------
ASSETS
Investments
Fixed maturities
Held-to-maturity, at amortized cost $ 289,370,068 $ 294,198,626
Trading, at market value 7,694,772 7,650,901
Available-for-sale, at market value 52,551,656 40,662,978
Equity securities, at fair value 276,651,914 284,639,044
Short-term investments, at cost 42,788,159 64,092,009
--------------- ---------------
Total investments 669,056,568 691,243,558
Accrued investment income 5,856,784 6,999,134
Premiums and reinsurance balances receivable 89,381,131 65,476,876
Ceded unearned premium 52,894,872 48,676,411
Reinsurance balances recoverable on unpaid losses 240,331,957 245,580,145
Federal income tax receivable 0 2,061,958
Deferred policy acquisition costs 37,252,004 34,357,631
Property and equipment 15,365,412 15,440,784
Investment in unconsolidated investee 15,623,278 15,070,277
Goodwill 33,617,799 34,140,327
Other assets 13,193,891 11,315,728
--------------- ---------------
TOTAL ASSETS $ 1,172,573,696 $ 1,170,362,828
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and settlement expenses $ 521,125,664 $ 520,494,454
Unearned premiums 179,545,543 167,044,325
Reinsurance balances payable 49,579,006 44,278,883
Short-term debt, LOC and notes payable 77,822,568 78,396,568
Income taxes-current 2,845,939 0
Income taxes-deferred 38,875,196 41,662,396
Other liabilities 11,668,800 25,416,744
--------------- ---------------
TOTAL LIABILITIES 881,462,716 877,293,370
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Shareholders' Equity:
Common stock ($1 par value, authorized)
(12,804,558 shares issued at 3/31/00)
(12,804,558 shares issued at 12/31/99) 12,804,558 12,804,558
Paid-In Capital 70,432,050 70,531,201
Accumulated other comprehensive earnings 94,860,220 99,800,109
Retained Earnings 194,417,711 189,250,195
Deferred compensation 5,068,569 4,705,536
Less: Treasury shares at cost
(3,002,484 shares at 3/31/00)
(2,931,212 shares at 12/31/99) (86,472,128) (84,022,141)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 291,110,980 293,069,458
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,172,573,696 $ 1,170,362,828
=============== ===============
The accompanying notes are an integral part of the financial statements
3
RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three-Month Period
Ended March 31,
-------------------------------
2000 1999
------------ -------------
Net cash provided by (used in)
operating activities ($ 1,728,282) $ 10,053,670
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Cash Flows from Investing Activities
Investments purchased (24,455,341) (10,438,950)
Investments sold 5,403,725 1,277,325
Investments called or matured 12,130,000 4,035,000
Net increase in short-term investments 13,050,596 8,598,674
Net property and equipment purchased (356,788) (1,544,489)
Investment in Underwriters Indemnity Holdings 0 (40,700,000)
------------ ------------
Net cash (used in)
provided by investing activities 5,772,192 (38,772,440)
------------ ------------
Cash Flows from Financing Activities
Cash dividends paid (1,382,955) (1,426,182)
Proceeds from issuance of notes payable 0 31,688,040
Payments on debt (574,000) 0
Change in contributed capital 0 110,735
Treasury shares purchased (2,086,955) (4,154,822)
Unearned ESOP shares purchased 0 2,500,999
------------ ------------
Net cash (used in)
provided by financing activities (4,043,910) 28,718,770
------------ ------------
Net increase in cash 0 0
------------ ------------
Cash at the beginning of the year 0 0
------------ ------------
Cash at March 31 $ 0 $ 0
============ ============
The accompanying notes are an integral part of the financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The financial information
is prepared in conformity with generally accepted accounting principles
and such principles are applied on a basis consistent with those
reflected in the 1999 annual report filed with the Securities and
Exchange Commission. Management has prepared the financial information
included herein without audit by independent certified public
accountants that do not express an opinion thereon. The condensed
consolidated balance sheet as of December 31, 1999 has been derived
from, and does not include all the disclosures contained in the audited
consolidated financial statements for the year ended December 31, 1999.
The information furnished includes all adjustments and normal recurring
accrual adjustments, which are, in the opinion of management, necessary
for a fair statement of results for the interim periods. Results of
operations for the three-month periods ended March 31, 2000 and 1999 are
not necessarily indicative of the results of a full year.
The accompanying financial data should be read in conjunction with the
notes to the financial statements contained in the 1999 10-K Annual
Report.
EARNINGS PER SHARE: Basic earnings per share (EPS) excludes dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the dilution that could occur if securities or
other contracts to issue common stock (common stock equivalents) were
exercised or converted into common stock. When inclusion of common stock
equivalents increases the earnings per share or reduces the loss per
share, the effect on earnings is antidilutive. Under these
circumstances, the diluted net earnings or net loss per share is
computed excluding the common stock equivalents.
Pursuant to disclosure requirements contained in Statement 128, the
following represents a reconciliation of the numerator and denominator
of the basic and diluted EPS computations contained in the financial
statements.
For the Three-Month Period Ended March 31, 2000
Income Shares Per Share
(Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------
BASIC EPS
Income available to $6,539,849 9,859,149 .66
common stockholders
EFFECT OF DILUTIVE SECURITIES
Incentive Stock Options -- 79,349
- ------------------------------------------------------------------------------
DILUTED EPS
Income available to common $6,539,849 9,938,498 .66
- ------------------------------------------------------------------------------
5
For the Three-Month Period Ended March 31, 1999
Income Shares Per Share
(Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------
BASIC EPS
Income available to $6,577,781 10,394,709 .63
common stockholders
EFFECT OF DILUTIVE SECURITIES
Incentive Stock Options -- 85,304
- ------------------------------------------------------------------------------
DILUTED EPS
Income available to common $6,577,781 10,480,013 .63
- ------------------------------------------------------------------------------
OTHER ACCOUNTING STANDARDS: In June 1998, the FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (Statement 133).
Statement 133 addresses the accounting for and disclosure of derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. This Statement standardizes the accounting
for derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of financial position and measure them at
fair value. This Statement, as amended by FASB Statement No. 137, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. Although
the Company does not currently invest in derivative instruments, this recently
issued Statement is under evaluation.
In October 1998, the AICPA issued Statement of Position (SOP) 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk." SOP 98-7 provides guidance on how to account for
insurance and reinsurance contracts that do not transfer insurance risk. The
method used for these contracts is referred to as deposit accounting. This SOP
specifies that at inception, a deposit asset or liability should be recognized
for insurance and reinsurance contracts accounted for under deposit accounting
and should be measured based on the consideration paid or received, less any
explicitly identified premiums or fees to be retained by the insurer effective
for financial statements for fiscal years beginning after June 15, 1999. The
Company does not have any insurance or reinsurance contracts that are required
to be accounted for under the deposit method as of March 31, 2000.
6
2. INDUSTRY SEGMENT INFORMATION - Selected information by industry segment
for the three months ended March 31, 2000 and 1999 is presented below.
SEGMENT DATA-- (in thousands)
EARNINGS REVENUES
2000 1999 2000 1999
---- ---- ---- ----
Property 3,240 4,070 13,215 11,937
Casualty (620) (816) 32,757 27,832
Surety 1,095 478 7,215 6,021
Net investment income 6,937 6,234 6,937 6,234
Realized gains (121) 23 (121) 23
General corporate expense
and interest on debt (2,097) (1,784)
Equity in earnings of
unconsolidated investee 562 454
------ ------
Total segment earnings before
income taxes 8,996 8,659
------ ------
Income taxes 2,456 2,081
------ ------
Total 6,540 6,578 60,003 52,047
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This discussion and analysis may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which are not historical facts, and involve
risks and uncertainties that could cause actual results to differ materially
from those expected and projected. Various risk factors that could affect future
results are listed in the company's filings with the Securities Exchange
Commission, including the Form 10-K for the year ended December 31, 1999.
OVERVIEW
RLI Corp. (the Company) is a holding company that, through its subsidiaries,
underwrites selected property and casualty insurance products.
The most significant operation is RLI Insurance Group (the Group), which
provides specialty property and casualty coverages for primarily commercial
risks. The Group accounted for 89% of the Company's total revenue for the three
months ended March 31, 2000.
7
THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THREE MONTHS
ENDED MARCH 31, 1999
Consolidated gross sales, which consist of gross premiums written, net
investment income and realized investment gains totaled $109.2 million for the
first three months of 2000 compared to $81.2 million for the same period in
1999. Gross writings of the Insurance Group improved 36.6% over 1999 levels
fueled by increases in virtually every product line. Consolidated revenue for
the first three months of 2000 increased $8.0 million or 15.3% from the same
period in 1999. Net premiums earned alone increased 16.2%. Net investment income
improved 11.3% to $6.9 million.
The net after-tax earnings for the first three months of 2000 totaled $6.5
million, $.66 per diluted share, compared to $6.6 million, $.63 per share, for
the same period in 1999. Net operating earnings, which consist of the Company's
net earnings reduced by after-tax realized investment gains, totaled $6.6
million, $.67 per share, compared to $6.6 million, $.63 per share, for the same
period in 1999.
Comprehensive earnings, which include net earnings plus unrealized gains/losses
net of tax, totaled $1.6 million, $.16 per share, compared to $1.6 million, $.15
per share, for the same period in 1999. Unrealized losses, net of tax, for the
first three months of 2000 were $4.9 million, $0.50 per share compared to losses
of $5.0 million, $.47 per share, for the same period in 1999.
RLI INSURANCE GROUP
Gross written premium for the Group increased to $102.4 million for the first
quarter of 2000 compared to $75.0 million for the same period in 1999. Much of
this improvement came from the property segment where various growth initiatives
are taking effect. Profitability remained steady with $3.7 million in pretax
underwriting profit for the first quarters of 2000 and 1999. The GAAP combined
ratio increased slightly to 93.0 for the first quarter of 2000 compared to 91.8
for the first quarter of 1999.
The Group's property segment increased premium writings significantly by 48.8%
in the first quarter of 2000. The driving force behind this improvement was a
98% increase in fire premiums. Difference in conditions premiums also increased
by 12% along with increases in other product lines. The property segment
generated underwriting profits of $3.2 million for the first three months of the
year compared to $4.1 million last year. The GAAP combined ratio increased to
75.5 compared to 66.0 a year ago due to a shift in the mix of product volume
away from DIC and increased catastrophe reinsurance costs during the first
quarter of 2000.
Casualty segment gross written premiums were $53.4 million for the first quarter
of 2000 compared to $43.0 for the prior year. The driving forces behind this
improvement were increases in the commercial umbrella product of $2.0 million,
the transportation product of $3.2 million, and the executive products group of
$2.3 million. The GAAP combined ratio fell slightly to 101.9 for the first
quarter compared to 103.0 last year. Booked at a combined ratio of 101.9, the
management of the Company believes this segment creates value for the Company as
investments supporting reserves and the resulting cash flows would generate
significant investment income.
8
Surety segment gross written premiums increased to $10.3 million for the first
three months of 2000 compared to $6.0 million for the same period in 1999. This
increase was the result of increases in both the Peoria and Houston operations.
Premiums increased by 117% in the Houston branch, while the Peoria branch
increased premiums by 59% in the first quarter. The GAAP combined ratio for the
surety segment fell to 84.8 in the first quarter from 92.0 a year ago. This was
mostly the result of improved efficiencies as reflected in the expense ratio,
which dropped from 71.3 for the three months ended March 31, 1999 to 65.4 for
the three months ended March 31, 2000.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $6.9 million during the first three months of 2000, an increase of 11.3% over
that reported for the same period in 1999. This is the result of the continued
growth in the operating cash flow and incrementally higher yields on new
investments. For the three months ended March 31, 2000, the Company experienced
a $7.6 million pre-tax unrealized loss on its investment portfolio.
Virtually all the Company's fixed income portfolio consists of securities rated
A or better and 98% were rated AA or better. The year-to-date yields on the
Company's fixed income investments for the three month periods ended March 31,
2000 and 1999 are as follows:
2000 1999
---- ----
Taxable 6.58% 6.58%
Non-taxable 4.89% 4.89%
For the first three months of 2000, yields on taxable and non-taxable securities
remained at an equivalent level with the same period last year.
The Company's available-for-sale portfolio of debt and equity securities had a
net unrealized loss before tax of $7.6 million for the first three months of
2000, consistent with the net unrealized loss for the same period in 1999. The
2000 year-to-date loss reflects largely stock market fluctuations and, to a
smaller extent, the impact of an increasing interest rate environment. The
Company's net unrealized gains before tax were $145.6 million and $153.2 million
at March 31, 2000 and December 31, 1999, respectively. Unrealized appreciation
on securities, net of tax, is reflected in accumulated other comprehensive
earnings, a component of shareholders' equity.
9
Interest expense on debt obligations increased to $1.2 million for the first
three months of 2000, a $349,000 increase from the same period in 1999. This
change is related to increased debt costs resulting from rising interest rates,
as well as a net increase of $10.6 million in the average outstanding debt
balances over the same period last year. The increase in average debt balances
is primarily attributable to the January 29, 1999, acquisition of Underwriters'
Indemnity Holdings, Inc., which was funded through $42.8 million in reverse
repurchase agreements from RLI Insurance Company. At March 31, 2000, outstanding
short-term balances totaled $77.8 million, compared to $74.9 million at March
31, 1999.
INCOME TAXES
The Company's effective tax rate for the first three months of 2000 was 27%
compared to 24% for the same period in 1999. This increase is primarily
attributable to goodwill amortization from the acquisition of Underwriters'
Indemnity not being deductible for tax purposes. Income tax expense attributable
to income from operations differed from the amounts computed by applying the
U.S. federal tax rate of 35% to pretax income for the first three months of 2000
and 1999 as a result of the following:
2000 1999
Amount % Amount %
------ --- ------ ---
Provision for income taxes at
the statutory rate of 35% $ 3,148,483 35% $ 3,030,713 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income ( 670,647) ( 7%) ( 623,632) ( 7%)
Dividends received deduction ( 401,219) ( 4%) ( 378,062) ( 4%)
Dividends paid deduction ( 61,528) ( 1%) ( 61,183) ( 1%)
Goodwill amortization 139,865 2% - -
Other items, net 300,862 2% 113,564 1%
----------- ---- ----------- ---
Total tax expense $ 2,455,816 27% $ 2,081,400 24%
LIQUIDITY AND CAPITAL RESOURCES
Historically, the primary sources of the Company's liquidity have been funds
generated from insurance premiums and investment income (operating activities)
and maturing investments (investing activities). In addition, the Company has
occasionally received proceeds from financing activities such as the sale of
common stock to the employee stock ownership plan, the sale of convertible
debentures, and short-term borrowings.
During the first three months of 2000, the Company repurchased 71,272 of its
outstanding shares at a cost of nearly $2.1 million. This repurchase program has
been funded through operating cash flow.
Invested assets at March 31, 2000 decreased by $22.2 million, or 3.2%, from
December 31, 1999. Additionally, short-term investments decreased to $42.8
million, down $21.3 million from December 31, 1999.
10
At March 31, 2000 the Company had short-term investments, cash and other
investments maturing within one year, of approximately $74.4 million and
additional investments of $133.6 million maturing within five years. The Company
maintains one source of credit, a $30.0 million line of credit that cannot be
canceled during its annual term. As of March 31, 2000, the Company had $19.6
million in outstanding short-term borrowings. Additionally, the Company was
party to five reverse repurchase transactions totaling $58.2 million.
Management believes that cash generated by operations, cash generated by
investments and cash available from financing activities will provide sufficient
sources of liquidity to meet its anticipated needs over the next twelve to
twenty-four months.
OTHER MATTERS
RLI's offices were closed for the New Year's holiday beginning Friday, December
31, 1999, through Sunday, January 2, 2000. During this time, the Company secured
systems and data networks through data backups, controlled shutdowns and
verification of system applications and data following Year 2000 (Y2K) rollover.
A significant number of activities were undertaken to minimize the potential
impact of Y2K issues on RLI's ability to provide quality service to its
customers, business partners, state regulators and employees.
The corporate computer systems environment was returned to operation on Saturday
morning, January 1, 2000. Preliminary testing of operating systems, networks,
communications and primary applications was without problems or issues. On
Sunday, January 2, 2000, effort was dedicated to user and development testing of
applications on the Local Area Networks, P390 and AS/400 systems. Additionally,
RLI branch employees provided support to each remote office to bring networks
and related equipment online and conducted network and application testing.
The Company controlled and monitored the entry of information into mission
critical systems on January 3 and 4, 2000. This period was used to verify input,
calculations, and output of data into financial and processing systems. RLI
continued to provide focused monitoring of data and system reports through the
month end of January without irregularities caused by Year 2000. To date, RLI
has not experienced production issues related to Y2K in any of the primary or
supporting computer systems.
Since 1997, the Company incurred approximately $1.5 million of direct expense to
complete changes and modifications to the business and systems environment for
Y2K compliance. Of this amount, approximately $420,000 was incurred in 1999 and
$20,000 was incurred in the first quarter of 2000. The project required
approximately 30,000 hours of technical staff effort and changes to systems
representing 13.5 million lines of programming code. Throughout the initiative,
actual Y2K expenses were within acceptable ranges of those forecasted.
The Company has received a minimal number of Y2K-related claims and believes
that, ultimately, no indemnity payments will be made, only related adjustment
expenses.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of economic losses due to adverse changes in the
estimated fair value of a financial instrument as the result of changes in
equity prices, interest rates, foreign exchange rates and commodity prices. The
Company's consolidated balance sheets include assets and liabilities whose
estimated fair values are subject to market risk. The primary market risks to
the Company are equity price risk associated with investments in equity
securities and interest rate risk associated with investments in fixed
maturities. From time to time, equity prices and interest rates fluctuate
causing an effect on the Company's investment portfolio. The Company has no
direct commodity or foreign exchange risk.
The Company's market risk exposures at March 31, 2000, have not materially
changed from those identified at December 31, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Not Applicable
ITEM 2. CHANGE IN SECURITIES - Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not Applicable
ITEM 5. OTHER INFORMATION - Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Not Applicable
(b) The Company did not file any reports on Form 8-K during the
three months ended March 31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RLI Corp.
/S/JOSEPH E. DONDANVILLE
---------------------------------------
Joseph E. Dondanville
Vice President, Chief Financial Officer
(Duly authorized and Principal
Financial and Accounting Officer)
Date: May 11, 2000
12