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, 1998_________
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from_________to____________
Commission File Number ____________0-6612______________
RLI CORP.
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(Exact name of registrant as specified in its charter)
ILLINOIS 37-0889946
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(State or other jurisdiction of (I.R.S. Employers 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 26, 1999 as reported on the New York Stock Exchange, was
$306,409,698. 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 par
value, on February 26, 1999 was $10,408,822.
DOCUMENTS INCORPORATED BY REFERENCES.
Portions of the Annual Report to Shareholders for the past year ended
December 31, 1998, are incorporated by reference into Parts I and II of this
document.
Portions of the Registrant's definitive Proxy Statement for the 1999
annual meeting of security holders to be held May 6, 1999, are incorporated
herein by reference into Part III of this document.
Exhibit index is located on pages 34-35 of this document.
1
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.
SIGNIFICANT DEVELOPMENT
UNDERWRITERS INDEMNITY HOLDING COMPANY MERGER
On January 29, 1999, the Company acquired Underwriters Indemnity
Holdings, Inc., ("UIH") located in Houston, Texas. The Company paid $40.7
million in cash in exchange for all outstanding shares of UIH subject to
post-closing contingencies. Included in the transaction were both of UIH's
operating insurance subsidiaries, Underwriters Indemnity Company of Texas
("UIC") and Planet Indemnity Company of Colorado ("PIC"). UIC and PIC
specialize in the marketing and underwriting of surety products for oil, gas,
mining and other energy-related exposures. Both UIC and PIC are rated "A-"
(Excellent) by A.M. Best.
(b) Financial Information about Industry Segments
Selected information about industry segments is included herein as Item
8.
(c) Narrative Description of Business
RLI INSURANCE GROUP
RLI Insurance Group is composed primarily of two main insurance
companies. RLI Insurance Company, the principal subsidiary, writes multiple
lines of 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 multiple lines of insurance on an admitted basis in
Kansas and surplus lines insurance in the remaining 49 states, the District
of Columbia, Puerto Rico, the Virgin Islands and Guam. Other companies in the
RLI Insurance Group include: Replacement Lens Inc., RLI Insurance Agency,
Ltd., RLI Insurance Ltd., Underwriters Indemnity Company and Planet Indemnity
Company.
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 early 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.
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
Marketing Division located at the Home Office in Peoria, Illinois. The
Company produces business under agreements with underwriting general agents.
Additional underwriting agents are being 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 Diego,
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, 1998 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,
1998, 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 $100,662,702 36.60%
Florida 24,036,160 8.74
New York 21,698,605 7.89
Texas 20,740,580 7.54
Hawaii 10,513,187 3.82
Ohio 8,867,799 3.23
New Jersey 8,090,247 2.94
Illinois 7,328,351 2.67
Michigan 5,644,425 2.05
Pennsylvania 5,627,816 2.05
All Other 61,785,825 22.47
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Total direct $274,995,697 100.00%
premiums ------------ -------
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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. The Company writes coverage for a wide range of
commercial and industrial classes such as office buildings, apartments,
condominiums, certain industrial and mercantile structures, and buildings
under construction. 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 1998, 1997,
and 1996, net earned premiums totaled $42,281,000, $48,799,000, and
$47,822,000, or 25%, 29%, and 31% 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 $9,689,000 and $13,229,000 or 6% and
8% of the Company's consolidated revenues for 1998 and 1997, respectively.
B. SURETY SEGMENT
3. SURETY. In 1993, the Company began writing surety business. This
product line is underwritten from the Home Office in Peoria and through the
Dallas, Houston and Seattle branch offices. The initial target market of the
Surety Division was a wide range of commercial surety bonds written primarily
through the independent agency system. In 1996, the Company expanded their
product offering to include contract bonds for small size contractors. Net
earned premiums totaled $18,307,000, $11,491,000, and $4,407,000, or 11%, 8%,
and 3% of the Company's consolidated revenues for 1998, 1997, and 1996,
respectively.
The acquisition of Underwriter's Indemnity Holdings, Inc., and its
operating insurance subsidiaries provide an ideal situation for our surety
line to grow in new directions. The facility is a leader in the oil and gas
field and will begin generating premium income in 1999.
C. CASUALTY SEGMENT
4. 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 $23,726,000, $26,332,000, and $34,834,000, or 14%, 16%, and
22% of the Company's consolidated revenues for the years 1998, 1997, and
1996, respectively.
5. COMMERCIAL AND PERSONAL UMBRELLA LIABILITY. The Company's commercial
umbrella coverage is produced through its Overland Park, St. Paul,
Alpharetta, Glastonbury, 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 expansion into California and the introduction of internet based
production of smaller premium light hazard businesses contributed to
significant premium growth in 1998. 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 $29,086,000, $22,566,000, and $21,282,000, or 17%,
12%, and 14% of the Company's consolidated revenues for the years 1998, 1997,
and 1996, respectively.
6. DIRECTORS' AND OFFICERS' LIABILITY/MISCELLANEOUS PROFESSIONAL
LIABILITY. The Company produces Directors' and Officers' Liability through
underwriting facilities in San Diego, Los Angeles, and New York City. The
Company also 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. Net earned premiums totaled $3,054,000, $4,430,000, and $5,000,000,
or 2%, 3%, and 3%, of the Company's consolidated revenues for the years 1998,
1997, and 1996, respectively.
4
7. EMPLOYER'S EXCESS INDEMNITY. Since 1993, the Company has written
Employer's Excess Indemnity coverage for businesses which have opted out of
the Workers' Compensation plan in the state of Texas. The coverage is similar
to accident and health, in that it indemnifies the employer for expenses
resulting from a work related injury or disease, excess of a self-insured
retention (SIR). The SIR can range from $50,000 to $500,000. The product is
underwritten out of the Overland Park branch office. A return to excessive
competition for Texas workers' compensation business has reduced the market
for this product since 1996. Net earned premiums totaled $1,722,000,
$5,130,000, and $6,566,000, or 1%, 3%, and 4%, of the Company's consolidated
revenues for 1998, 1997, and 1996, respectively.
8. 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
$3,806,000 or 2% of the Company's consolidated revenues for 1998.
9. OTHER. Smaller programs offered by the Company include: excess
medical, in-home business, personal automobile (Hawaii only), ocean marine
and occupational accident. Net earned premiums from these lines totaled
$10,653,000, $9,907,000, and $10,744,000, or 6%, 5%, and 7% of the Company's
consolidated revenues for the years, 1998, 1997, and 1996, 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 3,500 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 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.
The Company has, however, 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 1998, A.M. Best
reaffirmed "A" ratings for both RLI Insurance Company and Mt. Hawley
Insurance Company.
During 1997, the Company for the first time applied for and received a
claims-paying rating from Standard & Poor's. As a result, rating of "A"
(Good) was received for the combined insurance operation. In 1998, the "A"
rating was reaffirmed, with the addition of a "Positive Future Outlook". The
addition of the positive outlook to the rating indicates that Standard &
Poor's anticipates that there is a good chance that RLI's rating could
increase within the next year.
5
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" 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 reviews 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, 1998, 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 $135,269,000, $138,198,000, and $140,928,000 in 1998, 1997, and 1996,
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 limited 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, 1998, the Company had prepaid reinsurance premiums and
reinsurance recoverables on paid and unpaid losses and settlement expenses
with American Re-Insurance Company (rated A++ "superior" by A.M. Best
Company) that amounted to 80,365,000. 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, 1998. Also shown are the amounts of written premium ceded by the
Company to such reinsurers during 1998.
GROSS REINSURER CEDED
EXPOSURE AS OF PERCENT PREMIUMS PERCENT
DECEMBER 31, 1998 OF TOTAL WRITTEN OF TOTAL
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American Re-Insurance Co. $80,365,000 32.97% $30,916,000 21.27%
General Reins Corp. 23,469,000 9.63 12,631,000 8.69
Employer's Re 12,505,000 5.13 8,700,000 5.98
Transatlantic Reinsurance 11,439,000 4.69 10,047,000 6.91
NAC Reinsurance Corporation 7,057,000 2.89 4,516,000 3.11
Everest Re 7,043,000 2.89 6,163,000 4.24
TIG Insurance Co. 6,218,000 2.55 1,299,000 .89
St. Paul Fire & Marine 5,915,000 2.43 4,166,000 2.86
Old Lyme Ins. Co. of RI 5,543,000 2.27 6,394,000 4.40
Lloyd's of London 4,580,000 1.88 11,017,000 7.58
All other reinsurers 79,644,000 32.67 49,523,000 34.07
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Total ceded exposure $243,778,000 100.00% $145,372,000 100.00%
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As of December 31, 1998, the Company held $9,448,000 in irrevocable letters
of credit, $7,575,000 under trust agreements and $1,313,508 in cash to
collateralize a portion of the total amount recoverable.
6
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. 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 1998, the Company's underwriting was supported by up to $220,000,000
in traditional reinsurance protection. In 1999, the Company has enhanced this
protection by adding an additional $30,000,000 in catastrophe reinsurance
protection at improved terms and conditions. Using computer-assisted
techniques, the Company quantifies and monitors its exposure to earthquake
risk, the most significant catastrophe exposure to the Company. Detail is
captured for each location covered for earthquake risk and the Probable
Maximum Loss (PML) for each risk is determined. The PML calculation for each
risk includes all faults to which the risk is exposed. Richter scale
magnitudes used in the PML calculations are determined and applied separately
for each fault. The Company uses the greater of the magnitude of an
earthquake which only occurs every 100 years or 6.5 on the Richter scale in
its PML calculations. Several widely accepted methods are used to estimate
the magnitude of the 100 year event for each fault. Underwriting decisions
are based on the PML as determined by the system, which calculates PML's on
over 200 faults. Portfolio runs are made regularly to determine the Company's
overall exposure on each fault from all risks covered. Total exposure after
facultative reinsurance is managed by the Company to fall within the limits
covered by the Company's chosen net retention, working layer treaty
reinsurance and catastrophe reinsurance.
In 1998, the Company continued its innovative catastrophe reinsurance
and loss financing program with Centre Reinsurance (Centre 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 Centre 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 is intended to be a three-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 Centre Re, then Centre 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 1970's, substantial underwriting
losses in the early 1980's 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. As well, ongoing rate cuts are of
concern to financial analysts. For 1998, the industry's statutory combined
ratio is estimated to be 104.5. The Company believes that certain other
factors affect its ability to underwrite specialty lines successfully,
including:
7
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 Underwriting Policy limits extension of binding authority
to independent agents. 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 brokers who are not
affiliated with the Company. Only a Company underwriter has the authority to
bind the Company on such risks.
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 two underwriting
general agencies to underwrite contract surety business on behalf of RLI,
primarily in the East and Southeast. 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 ocean marine insurance, property and liability
insurance for apartment risks, farm insurance, miscellaneous professional
insurance and commercial automobile.
These underwriting general agencies 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 --
Specialty Property and Casualty Insurance 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 and administers all claims and directs all outside
legal and adjustment specialists. 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 1998, 1997, and 1996, were 6%, 7%, and 6%, 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 exposure data (including incurred but not reported losses) for
the periods ended 1998, 1997, and 1996:
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Inception-to-date December 31
(in thousands) 1998 1997 1996
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Loss and Loss Adjustment
Expense (LAE) payments
Gross $ 14,690 $11,570 $8,267
Ceded (9,140) (7,646) (5,761)
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Net $ 5,550 $ 3,924 $ 2,506
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Unpaid losses and LAE at end of year
Gross $ 12,360 $14,880 $17,596
Ceded ( 5,875) ( 8,842) (11,150)
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Net $ 6,485 $ 6,038 $ 6,446
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Although the Company's environmental exposure is limited as a result of
entering the liability lines after the industry had already recognized it as
a problem, Management cannot determine the Company's precise 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, 1998
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 1998, 1997, and 1996.
YEAR ENDED DECEMBER 31,
------------------------------------------
(Dollars in thousands) 1998 1997 1996
---- ----- -----
Unpaid losses and settlement
expenses at beginning of year:
Gross $404,263 $405,801 $418,986
Ceded (155,711) (157,995) (186,678)
------- ------- --------
Net 248,552 247,806 232,308
------- ------- --------
Increase (decrease) in incurred losses and settlement expenses:
Current accident year 68,131 61,771 69,724
Prior accident years (3,403) (520) (1,463)
------- ------- --------
Total incurred 64,728 61,251 68,261
------- ------- --------
Loss and settlement expense payments for claims incurred:
Current accident year (14,762) (11,284) (11,026)
Prior accident years (54,927) (49,023) (41,143)
------- ------- -------
Total paid (69,689) (60,307) (52,169)
-------- ------ -------
Insolvent reinsurer charged off (recovered) 7,911 (627) 607
Loss reserves commuted (4,240) 429 (1,201)
------- ------- --------
Unpaid losses and settlement
expenses at end of year $247,262 $248,552 $247,806
------- ------- -------
------- ------- -------
Unpaid losses and settlement expenses at end of year:
Gross $415,523 $404,263 $405,801
Ceded (168,261) (155,711) (157,995)
--------- ------- --------
Net $247,262 $248,552 $247,806
------- ------- -------
------- ------- -------
11
Explanation of significant components of reserve development by calendar
year are as follows:
1996 During 1996, the Company experienced approximately $1,463,000 of
favorable development on loss reserves. This development resulted from
approximately $1,519,000 of favorable development in the property lines
of business. Various property claims closed during the year were settled
below recorded reserves. The remaining $56,000 of adverse development
relates to the net effect of changes made to casualty loss reserves.
This development is a result of reserve strengthening of $3,557,000 made
in the General Liability and Miscellaneous Professional business on
accident years 1987 through 1995. This increase was offset by favorable
development and reserve decreases of $3,501,000 in the Umbrella and
Excess Employer's Indemnity programs on accident years 1986 and 1993
through 1995.
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 $3,402,000 of favorable development
on loss reserves. This development was the net result from several
reserve adjustments amongst 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 reclass between loss reserves
and contingent commissions. This reclass was warranted by favorable loss
development and had no impact to earnings.
The table on the following page presents the development under generally
accepted accounting principles of the Company's balance sheet reserves
for 1989 through 1998. 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) 1989 1990 1991 1992 1993
---- ---- ---- ---- ----
Net Liability for unpaid losses and
settlement expenses at end of year $105,025 $111,152 $119,411 $140,248 $175,491
Paid (cumulative) as of:
One year later 15,525 18,579 22,332 24,589 36,416
Two years later 26,685 35,963 37,763 46,342 63,675
Three years later 40,341 44,088 49,462 64,364 84,614
Four years later 44,714 52,322 57,085 78,994 96,741
Five years later 51,153 56,413 65,318 85,746 106,631
Six years later 54,546 62,989 70,270 92,689
Seven years later 59,444 66,254 75,668
Eight years later 62,266 71,373
Nine years later 67,235
Liability re-estimated as of:
One year later 91,646 101,251 108,249 128,600 166,666
Two years later 89,112 98,505 105,747 132,850 164,218
Three years later 87,981 95,690 107,777 132,376 157,286
Four years later 87,403 97,041 106,326 127,426 168,782
Five years later 90,030 96,490 100,968 140,536 163,127
Six years later 88,982 93,159 117,529 134,950
Seven years later 85,381 96,973 107,103
Eight years later 90,154 99,622
Nine years later 94,151
Net cumulative redundancy
(deficiency) $10,874 $11,530 $12,308 $5,298 $12,364
Gross liability $268,043 $310,767
Reinsurance recoverable (127,795) (135,276)
-------- --------
Net liability $140,248 $175,491
Gross re-estimated liability $283,890
Re-estimated recoverable (120,763)
--------
Net re-estimated liability $163,127
Gross cumulative redundancy
(deficiency) $ 26,877
Year Ended December 31,
-------------------------------------------------------
(Dollars in thousands) 1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Net Liability for unpaid losses and
settlement expenses at end of year $204,771 $232,308 $247,806 $248,552 $247,262
Paid (cumulative) as of:
One year later 46,905 37,505 47,999 54,927
Two years later 73,972 75,485 85,342
Three years later 100,936 103,482
Four years later 121,834
Five years later
Six years later
Seven year later
Eight years later
Nine years later
Liability re-estimated as of:
One year later 218,499 220,185 240,264 245,150
Two years later 214,352 228,636 242,865
Three years later 212,964 222,761
Four years later 217,790
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Net cumulative redundancy
(deficiency) $(13,019) $9,547 $4,941 $3,402
Gross liability $394,966 $418,986 $405,801 $404,263 $415,523
Reinsurance recoverable (190,195) (186,678) (157,995) (155,711) (168,261)
-------- -------- -------- -------- --------
Net liability $204,771 $232,308 $247,806 $248,552 $247,262
Gross re-estimated liability $408,715 $404,867 $407,051 $408,424
Re-estimated recoverable (190,925) (182,106) (164,186) (163,274)
-------- -------- -------- --------
Net re-estimated liability $217,790 $222,761 $242,865 $245,150
Gross cumulative redundancy
(deficiency) $(13,749) $ 14,119 $( 1,250) $ (4,161)
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) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statutory net premiums written $145,701 $144,674 $130,908 $130,453 $131,164
Policyholders' surplus $314,484 $265,526 $207,787 $172,313 $136,125
Ratio .5 to 1 .5 to 1 .6 to 1 .8 to 1 1.0 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 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Loss ratio 45.4 43.2 52.2 64.4 72.5
Expense ratio 42.8 43.6 35.2 43.1 44.4
---- ---- ---- ---- ----
Combined ratio 88.2 86.8 87.4 107.5(1) 116.9(1)
---- ---- ---- ---- ----
---- ---- ---- ---- ----
(1) Excluding the effects of the Northridge Earthquake, the GAAP combined
ratio for the years ended 1995 and 1994 would have been 86.2 and 91.1,
respectively.
14
The Company also calculates the statutory combined ratio, which is not
indicative of GAAP underwriting profits due to accounting for multiple-year
retrospectively-rated reinsurance contracts and 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 1998 1997 1996 1995 1994
-------- ---- ---- ---- -----
Loss ratio 48.0 43.0 52.3 63.6 73.4
Expense ratio 40.4 47.4 36.8 42.9 43.5
---- ---- ---- ---- ----
Combined ratio 88.4 90.4 89.1 106.5 (3) 116.9 (3)
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Industry combined ratio 104.5 (1) 101.6 (2) 105.8 (2) 106.4 (2) 108.4 (2)
---- ---- ---- ---- ----
---- ---- ---- ---- ----
(1) Source: Insurance Information Institute. Estimated for the year ended
December 31, 1998.
(2) Source: A.M. Best Aggregate & Averages -- Property-Casualty (1997 Edition).
(3) Excluding the effects of the Northridge Earthquake, the statutory combined
ratio for the years ended 1995 and 1994 would have been 85.3 and 89.7,
respectively.
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 1998, operating cash flows were used to acquire fixed income
instruments composed primarily of intermediate-term municipal and U.S.
Government and Agency securities. Additionally, a smaller portion of funds was
allocated to the equity portfolio and an investment grade convertible debenture
portfolio designed to provide diversification and yield enhancement to the
portfolio.
RLI's mix of fixed income securities continues to be biased toward U.S.
Government and Agency securities due to their high liquidity and almost
risk-free nature. The mix of tax-exempt and taxable instruments within the
portfolios 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,
1998, 96% 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.
15
The municipal bond component of the fixed maturity portfolio increased
$28.2 million, to $172.1 million; and comprised 52.3% of the Company's total
fixed maturity portfolio, up 9.2% from year- end 1997. The taxable U.S.
Government and Agency portion of the fixed income portfolio declined by $34.3
million to $143.7 million, or 43.7% of the total versus 53.3% at year end 1997.
Investment grade corporate securities totaled $4.2 million compared to $5.0
million at year- end 1997, while convertible debenture securities totaled $8.9
million, an increase over last year's $6.5 million.
The Company follows a program of matching assets to anticipated liabilities
to ensure its ability to hold securities until maturity. The Company's long-term
accounts payable and other liabilities are added to the estimate of its unpaid
losses and settlement expenses, broken out by line of business. 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 VALUE VALUE VALUE
- ------- ------------- ------------- ------------- --------------
1999 $32,600,000 $32,684,341 $33,229,363 $32,786,941
2000 32,685,000 33,064,261 34,055,168 33,229,235
2001 22,250,000 22,850,114 23,547,318 22,930,970
2002 28,930,000 29,964,671 30,991,320 30,225,787
2003 34,740,000 34,889,536 35,911,948 34,904,449
2004 20,345,000 20,429,631 21,182,564 20,438,600
2005 29,090,000 29,244,928 30,640,999 29,362,843
2006 21,540,000 21,606,893 22,525,427 21,538,659
2007 16,650,000 16,769,639 17,309,025 16,640,301
2008 20,355,000 20,235,585 20,995,265 20,131,847
2009 21,635,000 21,465,486 22,652,738 21,465,486
2010 23,280,000 23,582,486 24,334,504 23,582,486
2011 6,865,000 6,846,070 7,050,834 6,908,160
2012 7,415,000 7,401,994 7,632,658 7,401,994
2013 7,105,000 6,882,043 6,936,197 6,894,863
2014 0 0 0 0
2015 0 0 0 0
2016 0 0 0 0
2017 750,000 416,574 413,438 413,438
2018 0 0 0 0
TOTAL $326,235,000 $328,334,252 $339,408,766 $328,856,059
------------ ------------- ------------- ---------------
------------ ------------- ------------- ---------------
At December 31, 1998, the Company's equity securities were valued at $296.5
million, an increase of $45.1 million from the $251.4 million held at the end of
1997. During 1998, net common equity investments totaling $8.6 million were
purchased and pretax unrealized appreciation of common equity securities totaled
$36.0 million. Equity securities represented 43.8% of cash and invested assets
at the end of 1998, an increase from the 41.6% at year-end 1997. As of the
year-end, total equity investments held at the operating companies represented
88.2% of the combined statutory surplus of the insurance subsidiaries.
Combined cash and short-term investments totaling $51.9 million at year-end
1998 represented 7.7% of cash and invested assets versus 3.1% 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, except that 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) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Average invested
assets (1) $640,576 $570,901 $504,773 $442,717 $407,722
Investment
income (2)(3) 23,937 24,558 23,681 22,029 20,133
Realized gains
(losses) (3) 1,853 2,982 1,017 457 (3,595)
Change in unreal-
ized appreciation/
depreciation (3)(4) 36,183 55,760 25,033 36,037 (5,749)
Annualized return
on average
invested assets 9.7% 14.6% 9.9% 13.2% 2.7%
(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 income 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, operations 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 than 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
states 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
and locally-owned business entities. In such cases, the Company has arrangements
with residents or business entities licensed to act in the state.
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 multi-national
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.
LEGISLATION AT FEDERAL LEVEL
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, and Year 2000 legislation. The Company is also
monitoring the following federal proposals:
NATURAL DISASTER ACT--Recent natural disasters including Hurricane Georges,
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 excess federal reinsurance to provide relief to the industry
continue to be discussed. Two Initiatives, "The Natural Disaster Protection and
Insurance Act of 1997" (H.R. 230), and "The Homeowners Insurance Availability
Act of 1997" (H.R. 219), have been the primary tools for discussion and debate.
The Company will continue to monitor the progress of this issue.
18
FINANCIAL SERVICES MODERNIZATION -- Both judicial decisions and action by
the Office of the Comptroller of the Currency (OCC) have combined to grant
national banks more authority to enter non-banking business, including
insurance. The Barnett Bank decision, which permits the Comptroller of the
Currency to preempt any state law which "significantly interferes" with a bank's
ability to sell insurance products, has spawned the "Financial Services
Competition Act of 1997" (H.R. 10), (also known as "Financial Services
Modernization Legislation"). This Act, designed to shrink the powers of the OCC,
has been the subject of various revisions that would result in both positive and
negative effects on the insurance industry. The bill also contains a provision
that would create a National Association of Registered Agents and Brokers, which
would permit insurance producers to obtain a national license, rather than a
number of state licenses. Obviously, this legislation could have an important
impact on many aspects of the insurance industry; the Company continues to
monitor its progress.
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 405 associates. Of the 405 total associates,
47 are part-time and 358 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 and Mt. Hawley Insurance Company. Two RLI Insurance Company
Branch Offices also lease 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 space.
Additionally, the Company owns two other buildings located near the
headquarter building. One, a 19,000 square foot building, is leased to Maui
Jim, Inc. and is used as their headquarters. The other, a 20,000 square foot
building, was purchased in December of 1996. Currently used for warehousing
and record storage, this building will provide space for future office
expansion.
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 52 of the Annual Report to Shareholders
for the year ended December 31, 1998 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, 1998 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 28 of the Annual Report to
Shareholders for the year ended December 31, 1998 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 28 of the Annual Report to
Shareholders for the year ended December 31, 1998 attached in Exhibit 13.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the consolidated financial statements and supplementary data
included on pages 29 through 48 of the Annual Report to Shareholders for the
year ended December 31, 1998 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 1998.
(c) Exhibits. See Exhibit Index on pages 34-35.
(d) Financial Statement Schedules. The schedules included on attached pages 24
through 32 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 3, 1999
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 3, 1999
---------------------------------------------
* * * * *
By: /s/Joseph E. Dondanville
-----------------------------------------------
J. E. Dondanville, Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 3, 1999
---------------------------------------------
* * * * *
By: /s/Gerald D. Stephens
-----------------------------------------------
G. D. Stephens, Director
Date: March 3, 1999
---------------------------------------------
* * * * *
By: /s/ Bernard J. Daenzer
-----------------------------------------------
B. J. Daenzer, Director
Date: March 3, 1999
---------------------------------------------
* * * * *
By: /s/Richard J. Haayen
-----------------------------------------------
R. J. Haayen, Director
Date: March 3, 1999
---------------------------------------------
* * * * *
By: /s/William R. Keane
-----------------------------------------------
W. R. Keane, Director
Date: March 3, 1999
---------------------------------------------
* * * * *
22
By: /s/Gerald I. Lenrow
-----------------------------------------------
G. I. Lenrow, Director
Date: MARCH 3, 1999
---------------------------------------------
* * * * *
By: /s/Jonathan E. Michael
-----------------------------------------------
J.E. Michael, Director
Date: MARCH 3, 1999
---------------------------------------------
* * * * *
By: /s/Edwin S. Overman
-----------------------------------------------
E. S. Overman, Director
Date: March 3, 1999
---------------------------------------------
* * * * *
By: /s/Edward F. Sutkowski
-----------------------------------------------
E. F. Sutkowski, Director
Date: March 3, 1999
---------------------------------------------
* * * * *
By: /s/Robert O. Viets
-----------------------------------------------
R. O. Viets, Director
Date: March 3, 1999
---------------------------------------------
* * * * *
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, 1998. 26
II. Condensed Financial Information of Registrant for the three years
ended December 31, 1998. 27 - 29
III. Supplementary Insurance Information for the three years ended
December 31, 1998. 30 - 31
IV. Reinsurance for the three years ended December 31, 1998. 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 14, 1999, we reported on the consolidated balance sheets
of RLI Corp. and subsidiaries as of December 31, 1998 and 1997, 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, 1998, as contained in the 1998 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 1998. 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 14, 1999
25
RLI CORP. AND SUBSIDIARIES
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS
IN RELATED PARTIES
DECEMBER 31, 1998
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
United States government and government agencies
and authorities $124,418,833 $128,814,165 $124,418,833
States, political subdivisions, and revenues 159,572,691 165,730,065 159,572,691
- ------------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity 283,991,524 294,544,230 283,991,524
- ------------------------------------------------------------------------------------------------------------------------------------
Trading
U.S. governments 3,652,869 3,726,006 3,726,006
Foreign governments 0 0 0
Corporate 4,102,579 4,215,737 4,215,737
States, political subdivisions & revenues 401,934 406,398 406,398
- ------------------------------------------------------------------------------------------------------------------------------------
Total trading 8,157,382 8,348,141 8,348,141
- ------------------------------------------------------------------------------------------------------------------------------------
Available-for-sale
U.S. governments 15,177,280 15,527,980 15,527,980
Corporates 9,149,952 8,892,633 8,892,633
States, political subdivisions, and revenues 11,858,113 12,095,780 12,095,780
- ------------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale 36,185,345 36,516,393 36,516,393
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 328,334,251 339,408,764 328,856,058
- ------------------------------------------------------------------------------------------------------------------------------------
Equity securities, available-for-sale:
Common stock:
Public utilities 41,687,469 80,064,940 80,064,940
Banks, trusts and insurance companies 11,957,163 36,701,934 36,701,934
Industrial, miscellaneous and all other 73,563,360 179,260,083 179,260,083
Preferred stock 159,495 493,412 493,412
- ------------------------------------------------------------------------------------------------------------------------------------
Total equity securities 127,367,487 296,520,369 296,520,369
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term investments 51,917,333 51,917,333 51,917,333
- ------------------------------------------------------------------------------------------------------------------------------------
Total investments $507,619,071 $687,846,466 $677,293,760
- ------------------------------------------------------------------------------------------------------------------------------------
Note: See notes 1D 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, 1998 AND 1997
1998 1997
- -----------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 258,436 $ 135,663
Investments in subsidiaries/investees, at equity 304,713,805 264,146,254
Equity securities available-for-sale, at fair value
(Cost--$6,528,441 in 1998 and $6,677,285 in 1997) 13,823,699 12,288,528
Investment in Rabbi Trust 6,432,355
Property and equipment 998,780 1,045,298
Other assets 736,815 418,040
- -----------------------------------------------------------------------------------------------------------
Total assets $320,531,535 $284,466,138
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, current $ 4,249,318 $ 1,996,859
Notes payable, short-term 19,575,000 7,500,000
Deferred compensation--Rabbi Trust 6,432,355
Income taxes payable--current 465,203 332,621
Income taxes payable--deferred 2,229,622 1,523,663
Other liabilities 53,738 128,200
- -----------------------------------------------------------------------------------------------------------
Total liabilities 26,572,881 17,913,698
- -----------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($1 par value, authorized 50,000,000 shares,
issued 12,790,428 shares in 1998 and 10,229,673 shares in 1997) 12,790,428 10,229,673
Paid in Capital 71,092,631 74,587,595
Accumulated other comprehensive earnings net of tax 110,371,461 86,852,663
Retained earnings 163,324,161 140,431,791
Deferred compensation 3,460,606
Unearned ESOP shares (2,500,999)
Treasury shares at cost (2,384,736 shares in 1998
and 1,994,272 shares in 1997) (64,579,634) (45,549,282)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 293,958,654 266,552,440
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $320,531,535 $284,466,138
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
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,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income $ 453,843 $ 454,906 $ 164,181
Selling, general, and administrative expenses (3,914,954) (4,118,010) (3,559,113)
Interest expense on debt (1,122,358) (1,547,542) (2,808,470)
- -----------------------------------------------------------------------------------------------------------------------------
(4,583,469) (5,210,646) (6,203,402)
Income tax benefit (1,383,099) (1,675,135) (2,186,013)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss before equity
in net earnings of subsidiaries (3,200,370) (3,535,511) (4,017,389)
Equity in net earnings of subsidiaries/investees 31,438,961 33,706,994 29,713,110
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings $28,238,591 $30,171,483 $25,695,721
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Earnings, net of tax
Unrealized gains on securities:
Unrealized holding gains arising
during the period $ 1,217,174 $ 1,859,712 $901,569
Less: Reclassification adjustment for
(gains) losses included in
Net Earnings (122,659) (81,383) 10,846
- -----------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Earnings--parent only 1,094,515 1,778,329 912,415
Equity in Other Comprehensive
Earnings of Subsidiaries/Investees 22,424,283 4,465,638 15,361,757
- -----------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Earnings 23,518,798 36,243,967 16,274,172
- -----------------------------------------------------------------------------------------------------------------------------
Comprehensive Earnings $ 51,797,389 $66,415,450 $41,969,893
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
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,
1998 1997
1996
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Losses before equity in net earnings of subsidiaries/investees $(3,200,370) $(3,535,511) $(4,017,389)
Adjustments to reconcile net losses to net cash provided by operating
activities:
Other items, net (576,103) (1,792,215) (55,262)
Change in:
Affiliate balances payable 2,187,132 451,029 (207,668)
Interest Payable (1,265,000)
Federal income taxes 97,641 140,485 437,303
Deferred debt costs 805,701 123,164
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,491,700) (5,195,511) (3,719,852)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of:
Equity securities, available-for-sale (31,122) (135,001) (387,395)
Property and equipment (37,210)
Unconsolidated investee ownership interest (88,750) (3,694,118)
Sale of:
Equity securities, available-for-sale 368,672 383,838 236,986
Cash dividends received-subsidiaries/investees 13,384,443 16,998,248 21,125,783
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 13,633,243 13,515,757 20,975,374
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of debt 12,075,000 7,500,000
Payments on debt (2,800,000)
Fractional share paid (16,099) (1,211)
CatEPut Payment (1,212,500)
Shares issued under stock option plan 60,638 161,356
Unearned ESOP shares (2,500,999)
Treasury shares purchased (14,858,394) (20,738,547) (3,040,671)
Treasury shares reissued 2,207,526
Cash dividends paid (5,566,416) (4,704,015) (4,261,445)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (12,018,770) (17,782,417) (7,894,590)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 122,773 (9,462,171) 9,360,932
Cash at beginning of year 135,663 9,597,834 236,902
- -----------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $258,436 $135,663 $ 9,597,834
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Interest paid on outstanding debt for 1998, 1997, and 1996 amounted to
$2,327,113, $2,809,903, and $2,834,192, 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, 1998, 1997, AND 1996
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, 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
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended
December 31, 1996
Property segment $ 6,182,136 44,045,187 37,776,691 48,181,678 $11,030,823
Surety segment 3,421,403 1,715,328 5,483,068 4,406,633 1,195,897
Casualty segment 7,060,064 202,045,556 32,816,802 78,067,784 57,498,010
RLI Insurance Group $ 16,663,603 $247,806,071 $ 76,076,561 $130,656,095 $69,724,730
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
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, 1998, 1997, AND 1996
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, 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
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Year ended
December 31, 1996
Property segment $ (226,883) $11,442,412 $ 7,104,879 $ 48,809,514
Surety segment (24,597) 3,028,034 613,023 4,463,383
Casualty segment (1,211,943) 15,085,944 8,723,430 79,084,743
RLI Insurance Group $(1,463,423) $29,556,390 $16,441,332 $132,357,640
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
31
RLI CORP. AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
FOR THE YEARS ENDED 1998, 1997, AND 1996
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
- -----------------------------------------------------------------------------------------------------------------------------
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%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
1996
Property $135,260,684 $87,079,006 0 48,181,678 0%
Surety 6,222,892 1,857,187 40,928 4,406,633 .93%
Casualty 130,068,132 51,992,133 (8,215) 78,067,784 (.01)%
RLI Insurance Group
premiums earned $271,551,708 $140,928,326 $ 32,713 $130,656,095 .02%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
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, 1998, 1997 AND 1996
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
- -------------------------------------------------------------------------------------------------------------------------------
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
1996 Allowance for
insolvent reinsurers $16,336,146 $1,006,140 $ (444,488) -- $16,897,798
33
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT REFERENCE (PAGE)
- ----------- ----------------------- ----------------
2.1 Plan of Reorganization and Agreement Incorporated by reference to the Company's
of Merger Quarterly Form 10-Q for the First
Quarter ended March 31, 1993.
2.2 Articles of Merger Incorporated by reference to the Company's
Quarterly Form 10-Q for the Second Quarter
ended June 30, 1993.
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.
4.1 Indenture dated July 28, 1993 between Incorporated by reference to the Company's
the Company and Norwest Bank Registration Statement on Form S-3 filed on July
Minnesota, National Association as 21, 1993
Trustee
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 Registration Statement on 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 Registation Statement on 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. 333-01637
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 Attached Exhibit 10.
Compensation Agreement
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.
34
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT REFERENCE (PAGE)
- ----------- ----------------------- ----------------
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.
10.11 Reinsurance Agreements between the Incorporated by reference to the Company's
Company and NAC Reinsurance Corp. Annual Form 10-K/A
for the year ended December 31, 1992.
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 Share- Attached Exhibit 13.
holders for the year ended
December 31, 1998, pages 20-49 and 53.
21.1 Subsidiaries of the Registrant Attached page 36.
23.1 Consent of KPMG LLP Attached page 47.
23.2 Consent of Kirkland & Ellis Incorporated by reference to the Company's
Registration Statement on Form S-3 filed
July 21, 1993.
24.1 Powers of Attorney Incorporated by reference to the Company's
Registration Statement on Form S-3 filed
on July 21, 1993.
27 Financial Data Schedule Attached Exhibit 27.
28.1 Information from reports furnished to Attached page 48.
state insurance regulatory authorities
35