RLI(RLI) - 2022 Q4 - Annual Report

Part I Item 1. Business RLI Corp is a specialty insurance underwriter focused on niche property, casualty, and surety markets - RLI Corp., founded in 1965, underwrites specialty property, casualty, and surety products through its main subsidiaries: RLI Insurance Company (RLI Ins.), Mt. Hawley Insurance Company, and Contractors Bonding and Insurance Company (CBIC)[12] - The company operates in the specialty admitted, excess and surplus (E&S), and specialty reinsurance markets, focusing on risks that do not fit standard underwriting criteria[13][15] 2022 Gross Premiums Written by Market | Market | Gross Premiums Written (2022) | Percentage of Total | | :--- | :--- | :--- | | Specialty Admitted | $916.0 million | 59% | | Excess and Surplus | $617.8 million | 39% | | Specialty Reinsurance | $31.7 million | 2% | - The company's insurance operations are divided into three segments: Casualty, Property, and Surety[19] Net Premiums Earned by Segment (2020-2022) | Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Casualty | $711.8 million (62%) | $633.6 million (65%) | $569.5 million (66%) | | Commercial excess & personal umbrella | $253.9 million | $219.4 million | $178.2 million | | General liability | $100.4 million | $90.9 million | $91.7 million | | Commercial transportation | $97.0 million | $83.4 million | $64.6 million | | Professional services | $95.2 million | $88.9 million | $85.2 million | | Property | $307.9 million (27%) | $231.8 million (23%) | $183.7 million (21%) | | Commercial property | $163.1 million | $107.9 million | $79.4 million | | Marine | $113.2 million | $97.7 million | $81.9 million | | Surety | $124.7 million (11%) | $115.4 million (12%) | $112.5 million (13%) | | Grand Total | $1,144.4 million | $980.9 million | $865.7 million | - The Casualty segment is the largest, offering products like commercial excess, general liability, and transportation insurance. The Property segment covers commercial property and marine risks. The Surety segment provides commercial, miscellaneous, and contract bonds[21][30][33] - RLI distributes its products through a network of wholesale and retail brokers, independent agents, and carrier partners, as well as through digital and direct channels[36][41] - The company competes in a cyclical and highly competitive industry with approximately 2,600 other property and casualty companies. Key competitors include Arch, Chubb, CNA, Markel, and Travelers. RLI competes based on innovative coverages, service quality, and financial strength rather than solely on price[42] Financial Strength Ratings (as of Dec 31, 2022) | Rating Agency | RLI Ins., Mt. Hawley, CBIC | Rating Description | | :--- | :--- | :--- | | AM Best | A+ | Superior | | Standard & Poor's | A | Strong | | Moody's | A2 | - | - The company uses reinsurance to diversify business, limit maximum net loss on large risks and catastrophes, and reduce volatility. In 2022, RLI ceded $324.0 million in premiums, representing about 20.7% of its direct and assumed written premiums[45][46] - RLI's reinsurance program includes both treaty and facultative coverage, primarily on an excess of loss basis. The company strives to purchase reinsurance from financially strong partners, with over 93% of recoverables due from companies rated 'A' or better[46][47][48] Property Catastrophe Reinsurance Coverage (2022 vs. 2023) | Peril | 2023 Limit | 2023 Retention | 2022 Limit | 2022 Retention | | :--- | :--- | :--- | :--- | :--- | | California earthquake | $700 million | $25 million | $750 million | $25 million | | Non-California earthquake | $700 million | $50 million | $775 million | $25 million | | Other perils (incl. wind) | $600 million | $50 million | $625 million | $25 million | - For 2023, the company increased its retention for non-California earthquake and other perils from $25 million to $50 million, reflecting changes in the property reinsurance market[54][56] Key Operating Ratios (2018-2022) | Ratio | 2022 | 2021 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Premiums Written to Surplus | 0.9 to 1 | 0.9 to 1 | 0.8 to 1 | 0.8 to 1 | 1.0 to 1 | | Combined Ratio (GAAP) | 84.4 | 86.8 | 92.0 | 91.9 | 94.7 | - The company's investment strategy prioritizes capital preservation with a secondary focus on growing book value. The portfolio does not contain derivatives[68] - As of December 31, 2022, the investment portfolio was allocated 82% to fixed income, 15% to equities, and 3% to other/cash. 81% of the fixed income portfolio was rated 'A' or better[70] - RLI and its subsidiaries are subject to extensive state regulation, primarily by the Illinois Department of Insurance (IDOI), focusing on financial solvency and market conduct. Regulations restrict dividend payments, investments, and require adherence to Risk-Based Capital (RBC) standards[72][75][76] - As of December 31, 2022, each insurance subsidiary's RBC level was significantly in excess of the regulatory action level, with the principal subsidiary's statutory capital being more than five times its authorized control level[80] - As of December 31, 2022, the company employed 1,001 associates with an average tenure of 9.2 years. The compensation structure, including an Employee Stock Ownership Plan (ESOP), is designed to align employee and shareholder interests[97][102] Item 1A. Risk Factors The company faces key insurance, financial, and operational risks like market cycles and catastrophic events - Profitability is subject to significant fluctuations due to competitive pressures, rising loss costs (including social inflation), unpredictable catastrophes, and changes in reinsurance availability[105][110] - Business is concentrated in key states, with 53% of direct premiums earned in 2022 from California (17%), Florida (14%), New York (11%), and Texas (11%), making the company vulnerable to adverse events or regulatory changes in these areas[108] - Loss reserves are based on estimates and are inherently uncertain. If actual losses exceed reserves, profitability could be negatively impacted. This is a key risk due to the long-tail nature of some insurance lines[121][122][123] - The company is exposed to unpredictable catastrophic events, particularly earthquakes and hurricanes. Climate change may increase the frequency and severity of weather-related catastrophes, affecting losses and reinsurance costs[125][128] - Adverse economic conditions can lower demand for insurance products, as premiums are dependent on customer revenues, payroll, and construction spending[130] - As a holding company, RLI Corp. relies on dividends from its insurance subsidiaries, which are restricted by state insurance laws. This could impact its ability to pay corporate expenses and shareholder dividends[132] - The investment portfolio's value can fluctuate due to changes in interest rates, credit risk, and general market conditions, which may negatively impact the company's financial condition[134][136] - The company's success depends on its ability to manage operational risks (e.g., fraud, errors, IT failures) through its Enterprise Risk Management (ERM) framework and comply with regulations like the Own Risk and Solvency Assessment (ORSA)[137] - RLI depends on attracting and retaining experienced underwriting and claim talent with deep knowledge of its niche businesses[139] - Technology breaches, including cybersecurity incidents, could disrupt operations, result in the loss of confidential information, and expose the company to liability, reputational damage, and significant costs[147] - Pandemics like COVID-19 could adversely affect business through reduced demand, increased claims, operational disruptions, and financial market volatility[143][145] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments - None[153] Item 2. Properties The company owns its corporate headquarters in Peoria, Illinois, which includes a large solar field - The company owns its 23-acre corporate headquarters campus in Peoria, Illinois, which includes five buildings totaling 173,000 square feet[153] - The Peoria campus features a 1.8-megawatt solar field designed to produce enough electrical power to meet or exceed the annual needs of the local office buildings[154] Item 3. Legal Proceedings Details on legal proceedings are incorporated by reference from the financial statement notes - Details on legal proceedings are provided in Note 10 to the Consolidated Financial Statements under Item 8[155] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[156] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company shows a strong history of dividend growth and shareholder returns, outperforming market indices - RLI Corp. has paid dividends for 186 consecutive quarters and has increased its quarterly dividend for 47 consecutive years. A special cash dividend of $7.00 per share was paid in December 2022[157] Five-Year Annualized Total Return Comparison | Index | 5-Year Annualized Total Return | | :--- | :--- | | RLI Corp. | 20.4% | | S&P 500 | 9.4% | | S&P 500 P&C Index | 12.2% | - The company has a $100 million share repurchase program with $87.5 million of remaining capacity. The last share repurchase occurred in 2011[162] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net earnings surged in 2022 from a major asset sale, strong premium growth, and continued underwriting profit Consolidated Financial Highlights (2021 vs. 2022) | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total Consolidated Revenue | $1,697,992 | $1,179,245 | | Net Premiums Earned | $1,144,436 | $980,903 | | Underwriting Income | $178,216 | $129,926 | | Net Earnings | $583,411 | $279,354 | - The significant increase in net earnings in 2022 was primarily driven by a $571.0 million realized gain from the sale of the company's equity method investment in Maui Jim, Inc[238][268] - Gross premiums written increased by 16% in 2022, with growth in all three segments, led by a 44% increase in the Property segment[242][248] Underwriting Ratios (2021 vs. 2022) | Ratio | 2022 | 2021 | | :--- | :--- | :--- | | Loss Ratio | 44.9% | 46.5% | | Expense Ratio | 39.5% | 40.3% | | Combined Ratio | 84.4% | 86.8% | - Underwriting results in 2022 included $38.0 million in pretax losses from Hurricane Ian and benefited from $122.6 million of favorable development on prior years' loss reserves[243] - The most critical accounting policies involve significant estimates, including liability for unpaid losses and settlement expenses, investment valuation, recoverability of reinsurance, deferred policy acquisition costs, and deferred taxes[171] - Estimating loss reserves is an inherently uncertain process involving subjective judgments based on historical data and future trends. The process uses multiple standard actuarial methods (e.g., Paid Loss Development, Incurred Loss Development, Bornhuetter/Ferguson), with weights assigned based on the product and accident year maturity[122][189][190] - The company's best estimate of reserves is determined by the Loss Reserve Committee, which may enhance reserves beyond the actuarial central estimate to account for qualitative information and increased risk, particularly for its excess and surplus lines business[210][215] Summary of Cash Flows (in thousands) | Cash Flow Type | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | $250,448 | $384,905 | | Net cash from (used in) investing activities | $48,879 | $(274,826) | | Net cash used in financing activities | $(365,313) | $(83,492) | - Operating cash flow in 2022 was impacted by $141.5 million in tax payments related to the sale of Maui Jim. Investing activities included $686.6 million in cash proceeds from this sale. Financing activities included significant dividend payments[303] - As of December 31, 2022, the company has contractual obligations totaling $2.55 billion, with the largest component being $2.32 billion in estimated loss and settlement expense reserves[306] - The company maintains a $60.0 million revolving line of credit and has access to a secured lending facility through the Federal Home Loan Bank of Chicago, ensuring sufficient liquidity[310][311] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate and equity price risk, managed via diversification - The most significant market risk for the fixed income portfolio is changes in interest rates. The company attempts to minimize this by matching the duration of assets to liabilities[325] - Equity price risk is managed through a value-oriented, dividend-driven philosophy. The equity portfolio has a beta of 0.9 relative to the S&P 500, indicating slightly lower volatility than the broad market[327] Market Risk Sensitivity Analysis (as of Dec 31, 2022) | Hypothetical Event | Portfolio | Modeled Pretax Decrease in Fair Value | | :--- | :--- | :--- | | +100 basis point interest rate increase | Fixed Income ($2.7 billion) | $111.1 million | | -10% S&P 500 Index decline | Equity ($498.4 million) | $46.3 million | Item 8. Financial Statements and Supplementary Data This section contains the audited consolidated financial statements, notes, and the auditor's report Consolidated Balance Sheet Highlights (as of Dec 31, 2022) | Account (in thousands) | Amount | | :--- | :--- | | Total Assets | $4,767,068 | | Total Investments and Cash | $3,272,301 | | Total Liabilities | $3,589,727 | | Unpaid Losses and Settlement Expenses | $2,315,637 | | Unearned Premiums | $785,085 | | Total Shareholders' Equity | $1,177,341 | Consolidated Statement of Earnings Highlights (Year Ended Dec 31, 2022) | Account (in thousands) | Amount | | :--- | :--- | | Net Premiums Earned | $1,144,436 | | Net Realized Gains | $588,515 | | Total Consolidated Revenue | $1,697,992 | | Total Expenses | $987,167 | | Net Earnings | $583,411 | | Diluted EPS | $12.74 | - Note 2 (Investments): As of Dec 31, 2022, the investment portfolio had a fair value of $3.3 billion. The fixed income portfolio had $280.2 million in gross unrealized losses, primarily due to rising interest rates. The company believes it will recover the amortized cost basis of these securities[411][420][422] - Note 5 (Reinsurance): In 2022, the company ceded $324.0 million in written premiums. Over 93% of reinsurance recoverables are from companies rated 'A' or better by AM Best and S&P. The top reinsurer by exposure is Munich Re / HSB, representing 13.6% of total ceded exposure[439][441] - Note 6 (Loss Development): The company recorded favorable prior accident year development of $122.6 million in 2022, $125.5 million in 2021, and $101.1 million in 2020. The favorable development in 2022 was widespread, with the Casualty segment contributing $87.2 million[443][461] - Note 13 (Acquisitions and Dispositions): On September 30, 2022, RLI completed the sale of its investment in Maui Jim, Inc. for cash proceeds of $686.6 million, resulting in a net realized gain of $571.0 million[520] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on financial disclosure - There were no changes in or disagreements with accountants on accounting and financial disclosure[533] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective - Management, including the principal executive and financial officers, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[534] - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework. This assessment was audited by Deloitte & Touche LLP[535][536] Part III Items 10-14 Information on governance and ownership is incorporated by reference from the company's Proxy Statement - Information for Items 10 through 14 is incorporated by reference from the company's definitive Proxy Statement for the 2023 annual meeting of shareholders[8][538] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the report - This section contains the index of all financial statements, schedules, and exhibits filed with the report[540][541] - Key supplementary schedules provided include: Schedule I (Summary of Investments), Schedule II (Condensed Financial Information of Registrant), Schedule III (Supplementary Insurance Information), and Schedule VI (Supplementary Information Concerning Property-Casualty Insurance Operations)[542]