RLI(RLI) - 2023 Q4 - Annual Report

Part I Business RLI Corp. is a specialty insurer founded in 1965, operating through three subsidiaries across Casualty, Property, and Surety segments, focusing on underwriting profit and conservative investments Company and Market Overview RLI Corp. underwrites specialty P&C products through subsidiaries, focusing on admitted and E&S markets for unique risks - RLI Corp. operates through three insurance companies: RLI Insurance Company (admitted lines), Mt. Hawley Insurance Company (excess and surplus lines), and Contractors Bonding and Insurance Company (admitted lines)[10] 2023 Gross Premiums Written by Market | Market | Gross Premiums Written (2023) | Percentage of Total | | :--- | :--- | :--- | | Specialty Admitted | $992 million | 55% | | Excess and Surplus | $794 million | 44% | | Specialty Reinsurance | $21 million | 1% | Business Segments Operations are segmented into Casualty (59% of net premiums earned), Property (31%), and Surety (10%), each with distinct product offerings Net Premiums Earned by Segment (2021-2023) | Segment | 2023 Net Premiums Earned | % of Total (2023) | 2022 Net Premiums Earned | 2021 Net Premiums Earned | | :--- | :--- | :--- | :--- | :--- | | Casualty | $758,346,000 | 59% | $711,832,000 | $633,639,000 | | Property | $401,530,000 | 31% | $307,886,000 | $231,837,000 | | Surety | $134,430,000 | 10% | $124,718,000 | $115,427,000 | | Total | $1,294,306,000 | 100% | $1,144,436,000 | $980,903,000 | - The Casualty segment offers diverse products including commercial excess, personal umbrella, transportation, and professional services[19][20][21] - The Property segment primarily covers commercial property, including E&S lines for fire, earthquake, and wind, alongside marine and specialized homeowners' insurance[26][27][28] - The Surety segment provides commercial, transactional (e.g., license and permit bonds), and contract bonds for small to medium-sized contractors[29][30][31] Marketing, Competition, and Ratings RLI distributes products via brokers and agents, competing on service and pricing, maintaining strong financial strength ratings like A+ from AM Best - The company's primary distribution channels are wholesale/retail brokers, independent agents, and carrier partners[32] - RLI competes on innovative coverages, service quality, and fair pricing, prioritizing underwriting standards over market share[38] Financial Strength Ratings (as of Dec 31, 2023) | Rating Agency | RLI Ins., Mt. Hawley, CBIC | Rating Description | | :--- | :--- | :--- | | AM Best | A+ | Superior | | Standard & Poor's | A | Strong | | Moody's | A2 | Low Credit Risk | Reinsurance RLI uses reinsurance to diversify risk, limit losses, and reduce volatility, ceding $378.9 million in premiums in 2023 Premiums Written and Earned (2021-2023) | (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Premiums Written | | | | | Direct and Assumed | $1,806,660 | $1,565,486 | $1,347,354 | | Reinsurance ceded | ($378,913) | ($323,950) | ($289,821) | | Net | $1,427,747 | $1,241,536 | $1,057,533 | | Premiums Earned | | | | | Direct and Assumed | $1,699,419 | $1,460,845 | $1,253,296 | | Reinsurance ceded | ($405,113) | ($316,409) | ($272,393) | | Net | $1,294,306 | $1,144,436 | $980,903 | 2024 Catastrophe Coverage (in millions) | Peril | First-Dollar Retention | Limit | | :--- | :--- | :--- | | California earthquake | $25 | $850 | | Non-California earthquake | $50 | $850 | | Other perils (incl. hurricane) | $50 | $750 | - Based on the January 1, 2024 treaty, there is a 99.6% likelihood that net loss from a single catastrophic event will be less than 8.0% of policyholders' statutory surplus[55] Operating Ratios RLI maintains a conservative capital position with a 0.9 to 1 premiums-to-surplus ratio and a strong 86.6 GAAP combined ratio in 2023 Premiums to Surplus Ratio (2019-2023) | Year | Statutory Net Premiums Written | Policyholders' Surplus | Ratio | | :--- | :--- | :--- | :--- | | 2023 | $1,427,747,000 | $1,520,135,000 | 0.9 to 1 | | 2022 | $1,241,536,000 | $1,407,925,000 | 0.9 to 1 | | 2021 | $1,057,533,000 | $1,240,649,000 | 0.9 to 1 | | 2020 | $892,088,000 | $1,121,592,000 | 0.8 to 1 | | 2019 | $860,337,000 | $1,029,671,000 | 0.8 to 1 | Combined Ratio (2019-2023) | Year | Loss Ratio | Expense Ratio | Combined Ratio | | :--- | :--- | :--- | :--- | | 2023 | 46.7 | 39.9 | 86.6 | | 2022 | 44.9 | 39.5 | 84.4 | | 2021 | 46.5 | 40.3 | 86.8 | | 2020 | 51.2 | 40.8 | 92.0 | | 2019 | 49.3 | 42.6 | 91.9 | Investments RLI's investment strategy prioritizes capital preservation and book value growth, with 78% in fixed income and 16% in equity as of 2023 - The investment strategy prioritizes capital preservation and book value growth through total return, with no derivatives in the portfolio[62] Investment Portfolio Allocation (as of Dec 31, 2023) | Asset Class | Percentage of Total Portfolio | | :--- | :--- | | Fixed Income | 78% | | Equity | 16% | | Cash & Short-term | 5% | | Other Invested Assets | 1% | - As of December 31, 2023, 81% of the fixed income portfolio was rated 'A' or better, with 58% rated 'AA' or better[64] Regulation RLI and its subsidiaries are subject to extensive state regulation, primarily by the IDOI, covering solvency, market conduct, and dividend payments - The company is primarily regulated at the state level, with the Illinois Department of Insurance (IDOI) as its principal regulator[70] - State regulations restrict insurance subsidiaries' ability to pay dividends to RLI Corp., requiring prior approval for extraordinary dividends[71] - As of December 31, 2023, RLI's principal insurance subsidiary had $1.5 billion in statutory capital, over five times its $273 million authorized control level RBC[74] Human Capital RLI employed 1,099 associates in 2023, fostering an ownership culture through ESOP and LTIP, with insiders owning 9% of shares - The company's workforce grew to 1,099 employees in 2023 from 1,001 in 2022, with an average tenure of 8.8 years[92] - An Employee Stock Ownership Plan (ESOP) and long-term incentive plan (LTIP) align employee and shareholder interests[97] - As of December 31, 2023, insiders owned 9% of RLI Corp. shares[97] Risk Factors RLI faces risks from industry cyclicality, competition, producer concentration, inadequate loss reserves, catastrophes, climate change, and cybersecurity threats Insurance Industry Risks RLI faces P&C industry cyclicality, competition, producer concentration (42% from six entities), geographic concentration, and catastrophic loss unpredictability - The property and casualty insurance industry is cyclical, with results fluctuating due to competitive pressures, loss costs, and economic conditions[100] - In 2023, 42% of gross premiums written were generated through six producer entities, indicating concentration risk[104] - Business is geographically concentrated, with 57% of 2023 direct premiums earned from Florida (20%), California (17%), Texas (11%), and New York (9%)[105] - Estimating loss reserves is inherently uncertain; if actual losses exceed reserves, profitability will be negatively impacted[119][120] - The company is exposed to unpredictable catastrophic events, and climate change may increase the frequency and severity of weather-related losses[125][128] Financial and Investment Risks RLI's financial performance is exposed to adverse economic conditions, dividend restrictions from subsidiaries, and investment portfolio market fluctuations - Adverse economic conditions can reduce demand for insurance products, as premiums depend on customer revenues, payroll, and construction spending[132] - RLI Corp. relies on dividends from its insurance subsidiaries, which are restricted by state laws, potentially limiting parent company cash flow[134] - The investment portfolio's value can fluctuate due to interest rate changes, credit risk, and stock market movements, impacting financial condition[136] Operational Risks Operational risks include internal procedure failures, talent retention, third-party vendor reliance, cybersecurity threats, litigation, and potential pandemics - The company's success depends on managing operational risks like fraud, errors, and compliance failures through its enterprise risk management (ERM) framework[137] - The business depends on attracting and retaining experienced underwriting and claims talent[140] - RLI relies on third-party vendors for key components like catastrophe modeling software and claims processing, creating dependency risk[141] - Cybersecurity threats pose significant risk, potentially disrupting operations, compromising data, and leading to litigation and financial penalties[144][146] Unresolved Staff Comments The company reports no unresolved staff comments - None[153] Cybersecurity RLI manages cybersecurity risks using the NIST Framework, with oversight from the Board's audit committee and a management risk committee - The company's cybersecurity risk management is based on the NIST Cybersecurity Framework[154] - The Board's audit committee provides primary cybersecurity oversight, receiving quarterly updates from the CIO/CISO[156] - A management risk committee, chaired by the CEO, provides management-level oversight of cybersecurity risks[157] Properties RLI owns its Peoria, Illinois headquarters, featuring a 1.8-megawatt solar field, while other offices are leased - RLI owns its 173,000 square foot corporate headquarters on a 23-acre campus in Peoria, Illinois[162] - The Peoria campus features a 1.8-megawatt solar field designed to cover the headquarters' annual electrical needs[163] Legal Proceedings Legal proceedings information is detailed in Note 10 to the Consolidated Financial Statements - Details on legal proceedings are available in Note 10 to the Consolidated Financial Statements[164] Mine Safety Disclosures This item is not applicable to the company - Not applicable[165] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities RLI common stock trades on NYSE, boasts 190 consecutive quarterly dividends, and a 17.7% five-year annualized total return, outperforming benchmarks - RLI has paid dividends for 190 consecutive quarters and increased its quarterly dividend for 48 consecutive years[167] - A special cash dividend of $2.00 per share was paid in December 2023, compared to $7.00 per share in December 2022[167] Five-Year Annualized Total Return Comparison | Index | 5-Year Annualized Total Return | | :--- | :--- | | RLI | 17.7% | | S&P 500 | 15.7% | | S&P 500 P&C Index | 15.7% | - The board terminated its $100 million share repurchase program in 2023, with no shares repurchased during the year[173] Management's Discussion and Analysis of Financial Condition and Results of Operations RLI achieved its 28th consecutive year of underwriting profitability with an 86.6 combined ratio in 2023, driven by 15% gross premium growth and 40% net investment income increase Overview and Key Performance Measures RLI, a specialty insurer, achieved 28 consecutive years of underwriting profitability, with $173.2 million in underwriting income in 2023 - The company achieved its 28th consecutive year of underwriting profitability in 2023, with a 28-year average combined ratio of 88.2[176] Reconciliation of Net Earnings to Underwriting Income | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net earnings | $304,611 | $583,411 | | Earnings before income taxes | $377,265 | $720,678 | | Underwriting income | $173,185 | $178,216 | Critical Accounting Policies Critical accounting policies involve significant estimates for unpaid losses, investment valuation, reinsurance recoverability, and deferred policy acquisition costs - Critical accounting policies involve significant estimates for unpaid losses, investment valuation, reinsurance balances, deferred policy acquisition costs, and deferred taxes[182] - Loss reserves are estimates for reported (case) and incurred but not yet reported (IBNR) claims, involving significant judgment and subject to economic and legal variables[183][187] - The company uses multiple actuarial methods, including Paid Loss Development, Incurred Loss Development, and Bornhuetter/Ferguson (BF), weighted by accident year maturity and product characteristics[201][211] Results of Operations Consolidated revenue was $1.5 billion in 2023, with 13% net premium growth, $173 million underwriting income, and 40% net investment income increase Consolidated Revenue (2022-2023) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net premiums earned | $1,294,306 | $1,144,436 | | Net investment income | $120,383 | $86,078 | | Net realized gains | $32,518 | $588,515 | | Net unrealized gains (losses) on equity securities | $64,787 | ($121,037) | | Total consolidated revenue | $1,511,994 | $1,697,992 | Net Earnings (2022-2023) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Underwriting income | $173,185 | $178,216 | | Earnings before income taxes | $377,265 | $720,678 | | Net earnings | $304,611 | $583,411 | - Gross premiums written increased by 15% in 2023, with all three segments contributing, notably 40% growth in the Property segment[251][257][262] - The 2023 combined ratio was 86.6, up from 84.4 in 2022, driven by higher net retained catastrophe losses, including $49 million from Hawaiian wildfires[252][253] Liquidity and Capital Resources RLI maintains strong liquidity with $464.3 million in operating cash flow in 2023, and a capital structure of $100 million debt and $1.4 billion equity Summary of Cash Flows (2022-2023) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $464,257 | $250,448 | | Net cash provided by (used in) investing activities | ($211,803) | $48,879 | | Net cash used in financing activities | ($238,848) | ($365,313) | - As of December 31, 2023, total contractual obligations were approximately $2.57 billion, primarily $2.45 billion in estimated loss and settlement expense reserves[313] - The capital structure at year-end 2023 included $100 million in debt and $1.4 billion in shareholders' equity, with debt comprising 7% of total capital[325] Quantitative and Qualitative Disclosures About Market Risk RLI's primary market risks are interest rate and equity price risks, managed through duration matching and diversification, with sensitivity analysis provided - The most significant market risk is interest rate risk on the fixed income portfolio, managed by matching asset and liability durations[330] Market Risk Sensitivity Analysis (as of Dec 31, 2023) | Hypothetical Event | Portfolio | Pretax Reduction in Fair Value | | :--- | :--- | :--- | | +100 basis-point interest rate increase | Fixed Income | ($132 million) | | +200 basis-point interest rate increase | Fixed Income | ($255 million) | | -10% S&P 500 Index decline | Equity | ($55 million) | | -20% S&P 500 Index decline | Equity | ($110 million) | Financial Statements and Supplementary Data This section presents RLI Corp.'s consolidated financial statements, including balance sheets, earnings, equity, cash flows, and notes, along with the independent auditor's report Consolidated Financial Statements Consolidated financial statements show $5.18 billion in total assets, $1.41 billion in equity, and $304.6 million net earnings for 2023 Key Balance Sheet Data (as of Dec 31) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Total Investments and Cash | $3,676,318 | $3,272,301 | | Total Assets | $5,180,221 | $4,767,068 | | Unpaid Losses and Settlement Expenses | $2,446,025 | $2,315,637 | | Total Liabilities | $3,766,707 | $3,589,727 | | Total Shareholders' Equity | $1,413,514 | $1,177,341 | Key Earnings Data (for year ended Dec 31) | (in thousands, except per share) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Consolidated Revenue | $1,511,994 | $1,697,992 | $1,179,245 | | Net Earnings | $304,611 | $583,411 | $279,354 | | Diluted Net Earnings Per Share | $6.61 | $12.74 | $6.11 | Notes to Consolidated Financial Statements Notes detail accounting policies, the $3.7 billion investment portfolio, reinsurance program, loss reserve development, debt, and confirm strong subsidiary capital levels - The investment portfolio's fair value was $3.7 billion as of December 31, 2023, with $198.5 million unrealized losses in fixed income and $236.0 million unrealized gains in equity[282] - The company's reinsurance program limits net loss on any individual risk to a maximum of $10 million[450] - For 2023, the company recognized $108.5 million in favorable development on prior accident years' loss reserves, with the Casualty segment contributing $78.5 million[454][467] - As of December 31, 2023, the company had $100 million in debt outstanding, comprising $50 million from a revolving line of credit and $50 million from the FHLBC[444] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with accountants on accounting or financial disclosure matters - There were no changes in or disagreements with accountants[537] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[538] - Management concluded that internal control over financial reporting was effective as of December 31, 2023[539] Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading plan during 2023[542] Part III Part III incorporates information by reference from the 2024 proxy statement, covering directors, executive compensation, and security ownership Directors, Executive Officers, Corporate Governance, Compensation, and Other Matters Information for Items 10-14 is incorporated by reference from the 2024 definitive proxy statement - Item 10 (Directors, Executive Officers and Corporate Governance) is incorporated by reference from the proxy statement[545] - Item 11 (Executive Compensation) is incorporated by reference from the proxy statement[546] - Items 12, 13, and 14 are also incorporated by reference from the proxy statement[547][548] Part IV Part IV lists financial statements, schedules, and exhibits filed with the Form 10-K, including consolidated financials and supplementary data Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the annual report, including corporate governance documents - This item lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K[549][551] Form 10-K Summary The company indicates no Form 10-K summary is provided - None[555]