RLI Corp. (NYSE: RLI) – RLI Corp. reported first quarter 2012
operating earnings of $20.6 million ($0.96 per share), compared to
$24.8 million ($1.17 per share) for the first quarter of 2011.
First Quarter
Earnings Per Diluted Share
2012 2011* Operating earnings
$
0.96 $ 1.17 Net earnings
$ 1.30
$ 1.30
* First quarter 2011 results were revised to reflect the
retrospective adoption of a new accounting standard for policy
acquisition costs.
Highlights for the quarter included:
- 23% growth in gross premiums written,
including 10% growth driven by Contractors Bonding and Insurance
Company (CBIC).
- Combined ratio of 89.1.
- Underwriting income of $14.9
million.
- $7.8 million ($0.24 per share) pretax
favorable development in prior years’ loss reserves, net of effects
on bonus and profit sharing-related expenses.
- Comprehensive earnings of $38.8 million
($1.80 per share).
“We ended last year on a strong note, delivering our 16th
consecutive year of underwriting profit, and are pleased to be off
to a solid start in the first quarter by posting a respectable 89.1
combined ratio,” said RLI Corp. Chairman & CEO Jonathan E.
Michael. “In addition to growth from our acquisition of Contractors
Bonding and Insurance Company, we recognized organic growth across
each of our segments.”
“The insurance market is showing signs of moderate pricing
improvement, which is encouraging as we look to continue delivering
positive underwriting results. From a product, talent and capital
perspective, we are well-positioned to benefit from improved market
conditions,” said Michael.
Underwriting income
RLI achieved $14.9 million of underwriting income in the first
quarter of 2012 on an 89.1 combined ratio, compared to $20.9
million of underwriting income on an 82.0 combined ratio in the
same quarter for 2011. Results for 2012 include $7.8 million in
favorable development in prior years’ loss reserves, compared to
$10.5 million in favorable development in prior years’ loss
reserves in 2011. In addition, results for 2012 include increased
current accident year loss ratios on contract surety and select
casualty lines, as well as increased policy acquisition costs. The
increase in policy acquisition costs is due to expansion efforts,
the expense for which is accelerated under the recently adopted
accounting standard. See page 2 for further discussion.
The following table highlights annual underwriting income and
combined ratios by segment:
Underwriting
Income First Quarter
Combined Ratio First
Quarter (in millions)
2012 2011*
2012 2011* Casualty
$ 0.5
$ 5.5 Casualty
99.1 89.9 Property
11.9 10.0 Property
74.7 75.4 Surety
2.5 5.4 Surety
90.7 73.5 Total
$ 14.9 $
20.9 Total
89.1 82.0
* First quarter 2011 results were revised to reflect the
retrospective adoption of a new accounting standard for policy
acquisition costs.
Other income
For the quarter, RLI’s investment income declined 6.2% to $15.3
million, as low interest rates continue to keep reinvestment yields
depressed. The investment portfolio’s total return was 2.4% for the
quarter. The bond portfolio gained 1.0% in the quarter, and the
equity portfolio’s return was 7.6%.
Comprehensive earnings, which include after-tax unrealized
gains/losses from the investment portfolio, were $38.8 million for
the quarter ($1.80 per share) compared to $33.0 million ($1.55 per
share) for the same quarter in 2011. Realized investment gains, net
of tax, of $7.4 million in the quarter reflect security sales,
which favored a slight reduction in equity exposure and an increase
in overall fixed income credit quality.
During the quarter, equity in earnings of unconsolidated
investee was $2.9 million compared to $2.6 million from the same
period last year. These results are related to Maui Jim, Inc., a
producer of premium sunglasses.
Dividend paid in the first quarter
2012
On March 20, 2012, the company paid a dividend of $0.30 per
share, its 143rd consecutive quarterly dividend paid to
shareholders. RLI’s cumulative dividends, including this recent
payment, total more than $350 million paid over the last five
years.
Recently adopted accounting standard
As previously disclosed in RLI’s Annual Report on Form 10-K for
the year ended December 31, 2011, accounting guidance for deferred
acquisition costs incurred by insurance entities changed in 2012
under ASU 2010-26, Financial Services – Insurance (Topic 944)
Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts.
We adopted this new accounting standard, effective January 1,
2012, on a retrospective basis. Our adoption of the new standard
resulted in a $40.3 million reduction of deferred policy
acquisition costs asset and a $26.2 million decrease to
consolidated shareholders’ equity, net of a $14.1 million deferred
income tax benefit at December 31, 2011. The adjustment to
shareholders’ equity resulted in a reduction in book value of $1.24
per share based on the number of shares outstanding at January 1,
2012.
The new standard affects the timing of the recognition of policy
acquisition costs. Costs associated with unsuccessful efforts or
costs that cannot be tied directly to a successful policy
acquisition are treated as period costs and expensed as incurred,
as opposed to being deferred and amortized as the premium is
earned. In periods of expansion, the new standard will result in an
acceleration of expense recognition. In periods of contraction, the
inverse will occur.
Comparative period information for the first quarter of 2011 has
been revised to reflect changes resulting from our retrospective
adoption of the new accounting standard. The first quarter of 2011
was a period where premium and business were contracting. As a
result, the application of the new standard resulted in a $1.9
million decrease in policy acquisition costs recognized in the
revised first quarter of 2011 and a corresponding 1.6 point
reduction to our revised combined ratio. The revised net earnings
increased by $0.06 per share. In contrast, the impact of applying
the new standard to the first quarter of 2012 resulted in an
increase of approximately $1.6 million in policy acquisition costs
recognized, which decreased net earnings by $0.05 per share. The
increase in expense was due largely to costs associated with CBIC
but was also impacted by investments in expansion of other
products. Going forward, the impact of this new standard will vary
based on expansion or contraction, as well as changes in business
mix.
Non-GAAP measures
Underwriting income, operating earnings, earnings per share
(EPS) from operations and other per share items are non-GAAP
financial measures, and we believe that investors’ understanding of
RLI’s core operating performance is enhanced by our disclosure of
these financial measures. Underwriting income or profit represents
the pretax profitability of our insurance operations and is derived
by subtracting losses and settlement expenses, policy acquisition
costs, and insurance operating expenses from net premium earned.
Operating earnings and EPS from operations consist of our net
earnings adjusted by net realized investment gains/(losses) and
taxes related to net realized gains/(losses). Our definitions of
these items may not be comparable to the definitions used by other
companies. Net earnings and net earnings per share are the GAAP
financial measures that are most directly comparable to operating
earnings and EPS from operations. All earnings per share data are
calculated using fully diluted shares. Combined ratio refers to a
GAAP combined ratio.
Other news
At 10 a.m. central time (CT) tomorrow, April 19, 2012, RLI
management will hold a conference call to discuss quarterly results
with insurance industry analysts. Interested parties may listen to
the discussion through the Internet at www.rlicorp.com.
Except for historical information, this news release may include
forward-looking statements (within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) including, without limitation, statements
reflecting our current expectations about the future performance of
our company or our business segments or about future market
conditions. These statements are subject to certain risk factors
that could cause actual results to differ materially. Various risk
factors that could affect future results are listed in the
company's filings with the Securities and Exchange Commission;
including the Form 10-K Annual Report for the year ended December
31, 2011.
RLI, a specialty insurance company, offers a diversified
portfolio of property and casualty coverages and surety bonds
serving niche or underserved markets. RLI operates in all 50 states
from office locations across the country. RLI’s insurance
subsidiaries – RLI Insurance Company, Mt. Hawley Insurance Company
and RLI Indemnity Company – are rated A+ “Superior” by A.M. Best
Company and A+ “Strong” by Standard & Poor’s. Contractors
Bonding and Insurance Company is rated A “Excellent” by A.M. Best
Company.
For additional information, contact Aaron Jacoby, Vice
President, Corporate Development at 309-693-5880 or at
aaron.jacoby@rlicorp.com or visit our website at
www.rlicorp.com.
Supplemental disclosure regarding the earnings impact of
specific items:
Operating Earnings Per Share
2012 2011
1st Qtr 1st Qtr
Operating Earnings Per Share
$ 0.96 $ 1.17 (1)
Specific items included in operating earnings per share: (2)
(3)
·
Favorable development on casualty prior years' reserves
$
0.18 $ 0.23
·
Favorable development on property prior years' reserves
$
0.08 $ 0.05
·
Favorable (unfavorable) development on surety prior years' reserves
$ (0.05 ) $ 0.04
·
Favorable development on Hurricane Irene
$ 0.03 - (1)
First quarter 2011 results revised due to the retrospective
adoption of a new accounting standard for policy acquisition costs.
(2) Includes bonus and profit sharing-related impacts which
affected other insurance and general corporate expenses. (3)
Reserve development reflects changes from previously estimated
losses.
RLI CORP. 2012 FINANCIAL
HIGHLIGHTS (Unaudited) (Dollars in thousands, except per share
amounts)
Three Months Ended March
31, 2012 2011 (1) % Change
SUMMARIZED INCOME
STATEMENT DATA:
Net premiums earned $ 137,280 $ 116,051 18.3 % Net investment
income 15,293 16,303 -6.2 % Net realized investment gains
11,416 4,472 155.3 % Consolidated revenue
163,989 136,826 19.9 % Loss and settlement expenses 61,883
46,871 32.0 % Policy acquisition costs 48,197 38,618 24.8 % Other
insurance expenses 12,259 9,615 27.5 % Interest expense on debt
1,500 1,512 -0.8 % General corporate expenses 1,987
2,005 -0.9 % Total expenses 125,826 98,621 27.6 %
Equity in earnings of unconsolidated investee 2,946
2,616 12.6 % Earnings before income
taxes 41,109 40,821 0.7 % Income tax expense 13,071
13,115 -0.3 % Net earnings $ 28,038 $ 27,706
1.2 % Other comprehensive earnings, net of tax
10,776 5,248 105.3 % Comprehensive
earnings $ 38,814 $ 32,954 17.8 %
Operating earnings:
(1) Net earnings $ 28,038 $
27,706 1.2 % Less: Realized investment gains, net of tax
7,420 2,907 155.2 % - - -- Operating
earnings $ 20,618 $ 24,799 -16.9 %
Return
on Equity: Net earnings (trailing four quarters) 15.5 %
15.8 % Comprehensive earnings (trailing four quarters)
18.8 % 17.6 %
Per Share Data
Diluted:
Weighted average shares outstanding (in 000's) 21,528 21,285
EPS from operations
(2) $ 0.96 $ 1.17 -17.9 % Realized
gains, net of tax 0.34 0.13 161.5 % Net
earnings per share $ 1.30 $ 1.30 -
Comprehensive earnings per share $ 1.80 $ 1.55 16.1 %
Cash dividends per share $ 0.30 $ 0.29 3.4 %
Net Cash Flow provided by (used in) Operations $ (3,247 ) $
17,938 -
(1) Revised due to the retrospective
adoption of a new accounting standard for policy acquisition costs.
(2) See discussion of non-GAAP
financial measures on page 3.
RLI CORP. 2012 FINANCIAL
HIGHLIGHTS (Unaudited) (Dollars in thousands, except per share
amounts)
March 31, December
31, 2012 2011 (1) % Change
SUMMARIZED
BALANCE SHEET DATA:
Fixed income $ 1,413,215 $ 1,406,550 0.5 % (amortized cost -
$1,355,893 at 3/31/12) (amortized cost - $1,345,961 at 12/31/11)
Equity securities 406,399 388,689 4.6 % (cost - $267,495 at
3/31/12) (cost - $269,400 at 12/31/11) Cash and cash equivalents
128,757 105,049 22.6 % Total investments and
cash 1,948,371 1,900,288 2.5 % Premiums and reinsurance
balances receivable 132,352 124,496 6.3 % Ceded unearned premiums
61,998 61,629 0.6 % Reinsurance recoverable on unpaid losses
324,952 353,805 -8.2 % Deferred acquisition costs 51,655 52,105
-0.9 % Property and equipment 19,168 20,104 -4.7 % Investment in
unconsolidated investee 53,146 49,968 6.4 % Goodwill and
intangibles 60,248 60,482 -0.4 % Other assets 27,060
31,957 -15.3 % Total assets $ 2,678,950 $ 2,654,834
0.9 % Unpaid losses and settlement expenses 1,121,730
1,150,714 -2.5 % Unearned premiums 340,915 341,267 -0.1 %
Reinsurance balances payable 52,318 50,861 2.9 % Funds held 111,362
110,555 0.7 % Long-term debt - bonds payable 100,000 100,000 -
Income taxes - deferred 43,837 37,867 15.8 % Accrued expenses
42,558 58,883 -27.7 % Other liabilities 37,553 12,053
211.6 % Total liabilities 1,850,273 1,862,200 -0.6 %
Shareholders' equity 828,677 792,634 4.5 %
Total liabilities & shareholders' equity $ 2,678,950 $
2,654,834 0.9 %
OTHER
DATA
Common shares outstanding (in 000's) 21,210 21,162
Book value per share $ 39.07 $ 37.46 4.3 % Closing stock price per
share $ 71.64 $ 72.86 -1.7 % Cash dividends per share - ordinary $
1.20 $ 1.19 0.8 % Cash dividends per share - special $ - $ 5.00 -
Statutory Surplus $ 763,244 $ 710,186 7.5 %
(1) Revised due to the
retrospective adoption of a new accounting standard for policy
acquisition costs.
RLI CORP. 2012 FINANCIAL
HIGHLIGHTS UNDERWRITING SEGMENT DATA (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months
Ended March 31,
GAAP GAAP GAAP GAAP Casualty
Ratios Property
Ratios Surety Ratios
Total Ratios
2012
Gross premiums written $ 84,368 $ 63,852 $ 27,798 $ 176,018
Net premiums written 62,864 47,669 26,025 136,558 Net premiums
earned 63,510 46,992 26,778 137,280 Net loss & settlement
expenses 38,869 61.2% 16,066 34.2% 6,948 25.9% 61,883 45.1% Net
operating expenses 24,089
37.9% 19,009
40.5% 17,358
64.8% 60,456
44.0% Underwriting income $ 552 99.1% $ 11,917 74.7% $
2,472 90.7% $ 14,941 89.1%
2011
(1)
Gross premiums written $ 65,546 $ 56,288 $ 21,489 $ 143,323
Net premiums written 48,763 43,780 20,092 112,635 Net premiums
earned 54,979 40,826 20,246 116,051 Net loss & settlement
expenses 30,261 55.0% 14,369 35.2% 2,241 11.1% 46,871 40.4% Net
operating expenses 19,181
34.9% 16,424
40.2% 12,628
62.4% 48,233
41.6% Underwriting income $ 5,537 89.9% $ 10,033 75.4%
$ 5,377 73.5% $ 20,947 82.0%
(1) Revised due to the
retrospective adoption of a new accounting standard for policy
acquisition costs.
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