RLI(RLI) - 2024 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements RLI Corp.'s Q1 2024 and 2023 unaudited interim financial statements detail earnings, balance sheets, equity, cash flows, and related accounting notes Condensed Consolidated Statements of Earnings and Comprehensive Earnings RLI Corp. saw increased Q1 2024 net earnings and revenue from higher premiums and investment income, but comprehensive earnings fell due to fixed income losses | Metric | Q1 2024 (in millions) | Q1 2023 (in millions) | Change (%) | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Net premiums earned | $360.7 | $307.7 | 17.2% | | Consolidated revenue | $444.8 | $364.9 | 21.9% | | Net earnings | $127.9 | $98.8 | 29.4% | | Basic net earnings per share | $2.80 | $2.17 | 29.0% | | Diluted net earnings per share | $2.77 | $2.15 | 28.8% | | Comprehensive earnings | $115.2 | $136.5 | -15.6% | | Net unrealized gains on equity securities | $45.3 | $15.5 | 192.4% | | Net investment income | $32.8 | $27.1 | 21.3% | Condensed Consolidated Balance Sheets RLI Corp.'s total assets and shareholders' equity grew from December 2023 to March 2024, driven by investments and cash, with liabilities also rising from unpaid losses | Metric | March 31, 2024 (in billions) | December 31, 2023 (in billions) | Change (%) | | :------------------------------------------ | :--------------------------- | :------------------------------ | :--------- | | Total Assets | $5.34 | $5.18 | 3.05% | | Total Liabilities | $3.82 | $3.77 | 1.35% | | Total Shareholders' Equity | $1.52 | $1.41 | 7.59% | | Total investments and cash | $3.76 | $3.68 | 2.21% | | Unpaid losses and settlement expenses | $2.53 | $2.45 | 3.52% | Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity significantly increased from January to March 2024, driven by net earnings and share-based compensation, partially offset by comprehensive losses and dividends | Metric | March 31, 2024 (in millions) | January 1, 2024 (in millions) | Change (%) | | :-------------------------------- | :--------------------------- | :---------------------------- | :--------- | | Total Shareholders' Equity | $1,520.8 | $1,413.5 | 7.59% | | Net earnings (Q1 2024) | $127.9 | N/A | N/A | | Other comprehensive earnings (loss), net of tax (Q1 2024) | $(12.7) | N/A | N/A | | Share-based compensation (Q1 2024) | $4.4 | N/A | N/A | | Dividends and dividend equivalents (Q1 2024) | $(12.3) | N/A | N/A | Condensed Consolidated Statements of Cash Flows RLI Corp. saw a net cash increase in Q1 2024, primarily from strong operating cash flows, offsetting investing and financing activities | Cash Flow Activity | Q1 2024 (in millions) | Q1 2023 (in millions) | Change (%) | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Net cash provided by operating activities | $70.9 | $69.2 | 2.5% | | Net cash used in investing activities | $(53.1) | $(57.8) | -8.2% | | Net cash used in financing activities | $(9.7) | $(11.5) | -14.9% | | Net increase (decrease) in cash | $8.1 | $(0.05) | N/A | | Cash at March 31, | $44.6 | $22.8 | 95.7% | Notes to Unaudited Condensed Consolidated Interim Financial Statements This section details disclosures for interim financial statements, covering accounting policies, investments, loss development, income taxes, stock compensation, segments, leases, and acquisitions 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim financial statements follow GAAP, with no material 2024 impact from new standards, and comprehensive earnings showed unrealized losses due to higher interest rates - ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes) are prospective accounting standards effective for fiscal years beginning after December 15, 2024, and are expected to be disclosure-related without material financial impact[23][24] - Allowances for uncollectible reinsurance balances were $16 million (paid) and $11 million (unpaid) at March 31, 2024, with no write-offs in Q1 2024[28] - Goodwill and intangible assets totaled $53.6 million at March 31, 2024, with no impairment identified[29] - Other comprehensive earnings (loss), net of tax, was $(12.7) million in Q1 2024, compared to $37.7 million in Q1 2023, primarily due to unrealized losses on fixed income securities from increased interest rates[32][33][34] - Fair value measurements are categorized into Level 1 (unadjusted quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[36][38][39] 2. INVESTMENTS The investment portfolio, primarily fixed income and equity, saw Q1 2024 net realized gains from equities, while fixed income had losses, and credit loss allowance decreased | Sales Type | Q1 2024 Net Realized Gain (Loss) (in millions) | Q1 2023 Net Realized Gain (Loss) (in millions) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Fixed income securities | $(0.5) | $(0.05) | | Equity securities | $7.1 | $2.3 | | Investment Type (March 31, 2024) | Level 1 (in millions) | Level 2 (in millions) | Level 3 (in millions) | Total (in millions) | | :------------------------------- | :-------------------- | :-------------------- | :-------------------- | :------------------ | | Fixed income securities | $— | $2,800.8 | $62.6 | $2,863.3 | | Equity securities | $641.8 | $— | $1.6 | $643.4 | - The allowance for credit losses on available-for-sale fixed income securities decreased from $0.3 million at January 1, 2024, to $0.2 million at March 31, 2024, with no losses recognized on securities for which the intent to hold until recovery was lost in Q1 2024, compared to $2 million in Q1 2023[57] - As of March 31, 2024, the fixed income portfolio contained 1,336 securities with $228 million in unrealized losses, representing 7% of the portfolio's cost basis, with 86.4% of these securities rated NAIC 1 (AAA/AA/A)[58][61] - Other invested assets totaled $59 million at March 31, 2024, including $9 million in LIHTC interests, $12 million in HTC investment, and $27 million in private funds[62][65][66][68] - Investments in unconsolidated investees were $66 million at March 31, 2024, primarily in Prime Holdings Insurance Services, Inc[69] - Cash and short-term investments increased to $45 million and $147 million, respectively, at March 31, 2024, from $36 million and $135 million at December 31, 2023[70] 3. HISTORICAL LOSS AND LAE DEVELOPMENT RLI Corp. reported $42.4 million favorable development on prior years' loss reserves in Q1 2024, mainly from 2016-2019 and 2023 accident years, a decrease from $51.8 million in Q1 2023 | Metric | Q1 2024 (in millions) | Q1 2023 (in millions) | | :-------------------------------- | :-------------------- | :-------------------- | | Favorable development on prior accident years | $42.4 | $51.8 | - Drivers of favorable development in Q1 2024 included Marine, commercial property, personal umbrella, general liability, executive products, transportation, and surety, with no products experiencing significant adverse development in either period[71][72] 4. INCOME TAXES The effective tax rate for Q1 2024 increased to 20.1% from 19.5% in Q1 2023, primarily due to higher pretax income reducing the proportional impact of tax-favored adjustments | Metric | Q1 2024 | Q1 2023 | | :---------------- | :------ | :------ | | Effective tax rate | 20.1% | 19.5% | - The increase in the effective tax rate was due to higher pretax income decreasing the percentage impact of tax-favored adjustments[73] 5. STOCK BASED COMPENSATION RLI Corp.'s 2023 LTIP replaced the 2015 plan, with Q1 2024 equity award compensation expense decreasing, and $5 million unrecognized expense to be recognized over 2.63 years - The 2023 RLI Corp. Long-Term Incentive Plan (LTIP) replaced the 2015 LTIP, with 4,004,891 shares available for equity-based compensation, and 28,475 awards granted in Q1 2024[77] | Metric | Q1 2024 (in millions) | Q1 2023 (in millions) | | :-------------------------------- | :-------------------- | :-------------------- | | Total compensation expense (equity awards) | $1.8 | $2.5 | | Total income tax benefit | $0.3 | $0.4 | - Total unrecognized compensation expense relating to outstanding and unvested awards was $5 million, to be recognized over a weighted average vesting period of 2.63 years[78] - As of March 31, 2024, 1,574,750 stock options were outstanding with a weighted average exercise price of $95.04, and 45,650 nonvested Restricted Stock Units (RSUs) with a weighted average grant date fair value of $125.43[82][85] 6. OPERATING SEGMENT INFORMATION RLI Corp. saw increased Q1 2024 net premiums earned across all segments, led by Property, which also drove overall underwriting income growth, while Property's combined ratio improved | Segment | Q1 2024 Net Premiums Earned (in millions) | Q1 2023 Net Premiums Earned (in millions) | Change (%) | | :-------- | :-------------------------------------- | :-------------------------------------- | :--------- | | Casualty | $198.3 | $186.0 | 7% | | Property | $129.4 | $88.8 | 46% | | Surety | $33.0 | $32.9 | 0% | | Total | $360.7 | $307.7 | 17% | | Segment | Q1 2024 Net Underwriting Income (in millions) | Q1 2023 Net Underwriting Income (in millions) | Change (%) | | :-------- | :------------------------------------------ | :------------------------------------------ | :--------- | | Casualty | $13.7 | $31.8 | -57% | | Property | $57.7 | $28.4 | 103% | | Surety | $6.3 | $7.7 | -18% | | Total | $77.7 | $67.9 | 14% | | Segment | Q1 2024 Combined Ratio | Q1 2023 Combined Ratio | | :-------- | :--------------------- | :--------------------- | | Casualty | 93.2 | 82.9 | | Property | 55.3 | 68.0 | | Surety | 80.8 | 76.7 | | Total | 78.5 | 77.9 | 7. LEASES RLI Corp.'s Q1 2024 operating lease costs decreased, while ROU assets and liabilities increased, with obligations primarily for branch office facilities | Metric | Q1 2024 (in millions) | Q1 2023 (in millions) | Change (%) | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Total lease cost | $1.4 | $1.6 | -10.3% | | Operating lease ROU assets (Mar 31) | $16.1 | N/A | N/A | | Operating lease liabilities (Mar 31) | $17.4 | N/A | N/A | - Operating lease ROU assets increased to $16.1 million at March 31, 2024, from $13.7 million at December 31, 2023, and operating lease liabilities increased to $17.4 million at March 31, 2024, from $14.9 million at December 31, 2023[89] - The weighted-average remaining lease term for operating leases was 6.16 years, with a weighted-average discount rate of 3.48% as of March 31, 2024[89] 8. ACQUISITIONS AND DISPOSITIONS RLI Corp. recognized a $14 million gain in Q1 2023 from the Maui Jim, Inc. sale escrow payout, with no similar gains in Q1 2024 - A $14 million gain was recognized in Q1 2023 from the working capital escrow payout of the Maui Jim, Inc. sale[90] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses RLI Corp.'s Q1 2024 financial condition and operations, covering business overview, results, investments, income taxes, and liquidity, highlighting key drivers Overview RLI Corp. is a specialty insurer focused on niche property, casualty, and surety markets, achieving its 28th consecutive year of underwriting profitability in 2023 with an 88.2 average combined ratio - RLI Corp. is a U.S.-based specialty insurance company focused on niche markets, underwriting property, casualty, and surety products[93] - The company achieved its 28th consecutive year of underwriting profitability in 2023, with an average combined ratio of 88.2 over that period[93] - Key performance measures include underwriting income and combined ratio (loss ratio + expense ratio)[94][103] - The company's primary focus is on underwriting profitability, with a secondary focus on premium growth where underwriting profit exists[100] Results of Operations RLI Corp. reported improved Q1 2024 net earnings, driven by a 17% increase in net premiums earned and equity gains, with underwriting income rising to $78 million despite a 78.5% combined ratio - Net premiums earned increased 17% in Q1 2024, driven by property and casualty segments[108] | Metric | Q1 2024 (in millions) | Q1 2023 (in millions) | Change (%) | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Net earnings | $128.0 | $99.0 | 29.3% | | Comprehensive earnings | $115.0 | $137.0 | -16.1% | | Underwriting income | $78.0 | $68.0 | 14.7% | | Combined Ratio | 78.5% | 77.9% | +0.6 pts | | Loss Ratio | 39.9% | 37.2% | +2.7 pts | | Expense Ratio | 38.6% | 40.7% | -2.1 pts | - Q1 2024 results included $12 million of pretax storm losses (vs $4 million in Q1 2023) and $42 million of favorable development on prior years' loss reserves (vs $52 million in Q1 2023)[109] - Gross premiums written increased $54 million (13%) in Q1 2024, with growth across all three segments: Casualty (+13%), Property (+14%), and Surety (+12%)[116][117] - Casualty underwriting income decreased due to lower prior accident years' reserve releases, Property underwriting income significantly increased due to larger reserve releases and low attritional losses, despite higher storm losses, and Surety underwriting income decreased due to reinsurance reinstatement premium and higher expense ratio[123][125][126][127][129][130] Investment Income Net investment income increased 21% in Q1 2024 due to higher interest rates and an expanded asset base, with the diversified portfolio comprising 76.2% fixed income and 17.1% equity - Net investment income increased by 21% to $33 million in Q1 2024, driven by higher interest rates and an increased average asset base[131] | Investment Type (March 31, 2024) | % of Total Fair Value | | :------------------------------- | :-------------------- | | Fixed income | 76.2% | | Equity securities | 17.1% | | Short-term investments | 3.9% | | Other invested assets | 1.6% | | Cash | 1.2% | - The average fixed income duration was 4.6 years at March 31, 2024, and the equity portfolio increased by $53 million due to positive market performance[133] - The equity portfolio had a dividend yield of 1.9% at March 31, 2024, compared to 1.4% for the S&P 500 index, benefiting from a 13.1% effective tax rate on dividends due to the corporate dividend-received-deduction[148] Income Taxes The effective tax rate for Q1 2024 increased to 20.1% from 19.5% in Q1 2023, primarily due to higher pretax income reducing the proportional impact of tax-favored adjustments | Metric | Q1 2024 | Q1 2023 | | :---------------- | :------ | :------ | | Effective tax rate | 20.1% | 19.5% | - The higher effective tax rate in Q1 2024 was due to increased pretax income, which decreased the percentage impact of tax-favored adjustments[134] Liquidity and Capital Resources RLI Corp. generated $70.9 million in Q1 2024 operating cash flows, increasing net cash, and maintains $100 million in debt, with sufficient liquidity expected from its diversified investment portfolio | Cash Flow Activity | Q1 2024 (in millions) | Q1 2023 (in millions) | | :-------------------------------- | :-------------------- | :-------------------- | | Operating cash flows | $70.9 | $69.2 | | Net increase (decrease) in cash | $8.1 | $(0.05) | - As of March 31, 2024, RLI Corp. had $100 million in debt outstanding, including $50 million from a revolving line of credit with PNC Bank and $50 million borrowed from the Federal Home Loan Bank of Chicago (FHLBC)[138] - The investment portfolio increased by $81 million from December 31, 2023, to March 31, 2024, and cash and other investments maturing within one year totaled approximately $378 million[140][142] - The capital structure at March 31, 2024, consisted of $100 million in debt and $1.5 billion in shareholders' equity, with debt comprising 6% of total capital[151] - RLI Corp. paid a regular quarterly cash dividend of $0.27 per share on March 20, 2024, marking 48 consecutive years of dividend increases[152] - Ordinary dividends from the principal insurance subsidiary (RLI Ins.) to RLI Corp. were $17 million in Q1 2024, and as of March 31, 2024, $5 million of RLI Ins.'s net assets were unrestricted for ordinary dividend distribution[154] Item 3. Quantitative and Qualitative Disclosures about Market Risk No material changes to RLI Corp.'s market risk exposure from the 2023 10-K, with primary risks remaining equity price and interest rate, focused on high credit quality securities - No material changes to market risk exposure from the 2023 Annual Report on Form 10-K[156] - Primary market risks are equity price risk and interest rate risk, with investments consistently in high credit quality, investment-grade securities[157] Item 4. Controls and Procedures RLI Corp.'s management confirmed effective disclosure controls and procedures as of March 31, 2024, with no material changes to internal control over financial reporting during the quarter - Disclosure controls and procedures were deemed effective as of March 31, 2024[158] - No material changes were made to internal control over financial reporting during the last fiscal quarter[160] PART II - OTHER INFORMATION Item 1. Legal Proceedings There were no material changes to report regarding legal proceedings - No material changes to report[163] Item 1A. Risk Factors There were no material changes to report regarding risk factors - No material changes to report[164] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period - Not applicable[165] Item 3. Defaults upon Senior Securities This item is not applicable for the reporting period - Not applicable[166] Item 4. Mine Safety Disclosures This item is not applicable for the reporting period - Not applicable[167] Item 5. Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q1 2024 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the three months ended March 31, 2024[169] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including Sarbanes-Oxley certifications and Inline XBRL documents | Exhibit Number | Description of Document | | :------------- | :---------------------------------------------------------- | | 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 101.INS | Inline XBRL Instance Document | | 101.SCH | Inline XBRL Taxonomy Extension Schema | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | | 101.DEF | Inline XBRL Taxonomy Definition Linkbase | | 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | | 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | | 104 | Cover Page Interactive Data File | SIGNATURES This section contains the required Form 10-Q signatures, certifying its submission on behalf of RLI Corp. by its Chief Financial Officer - The report was signed by Todd W. Bryant, Chief Financial Officer (Principal Financial and Chief Accounting Officer) on April 24, 2024[175]