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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the period ended September 30, 1995
-------------------------------------------
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
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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. Employer
incorporation or organization) Identification Number)
9025 North Lindbergh Drive, Peoria, IL 61615
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(Address of principal executive offices) (Zip Code)
(309) 692-1000
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(Registrant's telephone number, including area code)
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.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 3, 1995 the number of shares outstanding of the registrant's
Common Stock was 7,849,434.
Page 1 of 19
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PART I
Item 1. Financial Statements
RLI Corp. and Subsidiaries
Condensed Consolidated Statement Of Earnings
(Unaudited)
For the Three-Month Period
Ended September 30,
1994 1995
(Restated)
----------- -----------
Net premiums earned $34,162,868 $32,170,742
RLI Vision Corp. revenue 8,874,208 8,964,995
Net investment income 5,060,832 5,575,171
Net realized investment gains 105,105 11,297
----------- -----------
$48,203,013 $46,722,205
----------- -----------
Losses and settlement expenses $22,155,795 $39,630,041
Policy acquisition costs 12,429,721 10,163,948
Insurance operating expenses 4,217,523 3,060,261
RLI Vision Corp. operating expenses 8,127,812 8,398,498
Interest expense on debt 853,670 843,109
General corporate expenses 444,560 388,988
----------- -----------
$48,229,081 $62,484,845
----------- -----------
Loss before income taxes ( 26,068) (15,762,640)
Income tax benefit (754,688) ( 6,201,970)
----------- -----------
Net earnings (loss) $ 728,620 ($9,560,670)
============ =============
Net earnings (loss) per share:
Primary $0.09 ($1.22)
Fully diluted $0.08 ($1.22)
Weighted average number of
common shares outstanding
Primary 7,807,277 7,849,434
Fully diluted 9,576,508 7,849,434
Cash dividends declared per common share $0.12 $0.13
The accompanying notes are an integral part of the financial statements.
2
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RLI Corp. and Subsidiaries
Condensed Consolidated Statement Of Earnings(Continued)
(Unaudited)
For the Nine-Month Period
Ended September 30,
1994 1995
(Restated)
------------ ------------
Net premiums earned $ 92,582,916 $100,960,184
RLI Vision Corp. revenue 25,464,280 26,708,811
Net investment income 14,672,638 16,241,021
Net realized investment gains 97,109 118,448
------------ ------------
$132,816,943 $144,028,464
------------ ------------
Losses and settlement expenses $ 77,797,703 $ 71,980,952
Policy acquisition costs 32,430,223 33,255,043
Insurance operating expenses 11,870,616 10,111,087
RLI Vision Corp. operating expenses 24,205,819 25,358,142
Interest expense on debt 2,576,196 2,529,383
General corporate expenses 2,016,807 1,684,669
------------ ------------
$150,897,364 $144,919,276
------------ ------------
Loss before income taxes (18,080,421) ( 890,812)
Income tax benefit ( 8,389,192) ( 2,146,892)
------------ ------------
Net earnings (loss) ($ 9,691,229) $ 1,256,080
============= ============
Net earnings (loss) per share:
Primary ($1.25) $0.16
Fully diluted ($1.25) $0.16
Weighted average number of
common shares outstanding
Primary 7,766,392 7,849,434
Fully diluted 7,766,392 7,849,434
Cash dividends declared per common share $0.34 $0.38
The accompanying notes are an integral part of the financial statements.
3
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RLI Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
December 31, September 30,
ASSETS 1994 1995
(Restated)
Investments ------------ -------------
Fixed maturities
Held-to-maturity, at amortized cost $246,796,658 $287,683,253
Available-for-sale, at fair value 13,338,669 12,125,417
Equity securities, at fair value 104,067,362 154,832,372
Short-term investments, at cost which
approximates fair value 52,329,819 0
----------- -------------
Total investments 416,532,508 454,641,042
Cash 8,185,806 ( 656,329)
Accrued investment income 5,166,083 5,387,825
Premiums and reinsurance balances receivable 26,082,932 46,380,254
Ceded unearned premiums 40,978,088 48,936,185
Reinsurance balances recoverable on unpaid losses 199,736,796 196,181,746
Deferred policy acquisition costs 19,208,212 16,417,961
Property and equipment 15,788,526 14,350,276
Income taxes - current 3,315,467 4,053,236
Income taxes - deferred 6,801,829 0
Other assets 16,006,822 13,436,987
----------- ------------
TOTAL ASSETS $757,803,069 $799,129,183
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and settlement expenses $394,966,040 $418,098,831
Unearned premiums 119,817,542 125,476,341
Reinsurance balances payable 39,859,746 42,482,042
Long-term debt:
Convertible debentures 46,000,000 46,000,000
Industrial development bonds 6,255,000 6,255,000
Income taxes-deferred 0 407,342
Other liabilities 19,734,780 13,730,016
----------- ------------
TOTAL LIABILITIES 626,633,108 652,449,572
----------- ------------
Shareholders' Equity:
Common stock (8,453,449 shares issued
and outstanding at 9/30/95) 6,762,905 8,453,449
Other shareholders' equity 127,807,805 141,626,911
Less: Treasury shares at cost
(604,015 shares at 9/30/95) (3,400,749) (3,400,749)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 131,169,961 146,679,611
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $757,803,069 $799,129,183
============ ============
The accompanying notes are an integral part of the financial statements.
4
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RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Nine-Month Period
Ended September 30,
--------------------------
1994 1995
(Restated)
------------ ------------
Net cash from operating activities $ 22,529,476 $ 7,474,127
------------ ------------
Cash Flows from Investing Activities
Investments purchased (71,451,446) ( 96,061,490)
Investments sold or matured 46,237,284 31,612,374
Net decrease in
short-term investments 7,193,098 52,329,819
Net property and equipment purchased ( 3,283,720) ( 1,247,768)
------------ ------------
Net cash used in investing activities (21,304,784) (13,367,065)
------------ ------------
Cash Flows from Financing Activities
Cash dividends paid (2,572,669) ( 2,945,187)
Change in contributed capital 0 ( 4,010)
Treasury shares reissued 2,255,577 0
------------ ------------
Net cash used in
financing activities ( 317,092) ( 2,949,197)
------------ ------------
Net increase (decrease) in cash 907,600 ( 8,842,135)
------------ ------------
Cash at the beginning of the year 9,388,516 8,185,806
------------ ------------
Cash as of September 30 $10,296,116 $ ( 656,329)
============ ============
The accompanying notes are an integral part of the financial statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The financial information is
prepared in conformity with generally accepted accounting principles and
such principles are applied on a basis consistent with those reflected in
the 1994 annual report filed with the Securities and Exchange Commission.
The financial information included herein has been prepared by management
without audit by independent certified public accountants who do not
express an opinion thereon. The condensed consolidated balance sheet as
of December 31, 1994 has been derived from, and does not include all the
disclosures contained in the audited consolidated financial statements for
the year ended December 31, 1994.
The information furnished includes all adjustments and normal recurring
accrual adjustments which are, in the opinion of management, necessary for
a fair statement of results for the interim periods. Results of
operations for the nine month periods ended September 30, 1994 and 1995
are not necessarily indicative of the results of a full year.
Primary earnings per share are computed using the weighted average number
of shares of common stock outstanding during the period.
Fully diluted earnings per share calculations are based on the weighted
average number of shares of common stock outstanding for the period,
assuming full conversion of all Convertible Debentures into common stock.
Net earnings are adjusted for purposes of this calculation to eliminate
interest and amortization of debt issuance costs on the Convertible
Debentures net of related taxes. When the conversion of Convertible
Debentures increases the earnings per share or reduces the loss per share,
the effect on earnings is antidilutive. Under these circumstances, the
fully diluted net earnings or net loss per share is computed assuming no
conversion of the Convertible Debentures.
1994 per share data has been restated to reflect the 5/4 stock split that
occurred on June 21, 1995.
The accompanying financial data should be read in conjunction with the
notes to the financial statements contained in the 1994 10-K Annual
Report.
2. SIGNIFICANT EVENT - As previously reported in RLI Corp.'s Form 10-Q filed
for the period ended June 30, 1995, on May 4, 1995, RLI Professional
Technologies, Inc., a wholly owned subsidiary of RLI Corp., acquired
through merger, Target Industries, Inc., a wholesale optical goods
distributor located in Cohasset, Massachusetts. As consideration, RLI
Corp. issued approximately 250,800 shares of its common stock. The
combined enterprise is now doing business under the name of RLI Vision
Corp. This business combination has been accounted for as a pooling-of-
interests. The consolidated financial statements for periods prior to the
combination have been restated to include the accounts and results of
operations of Target Industries, Inc.
6
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The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated
financial statements are summarized below.
Three Months Nine Months Year
Ended Ended Ended
September 30, 1994 September 30, 1994 December 31, 1994
------------------ ------------------ -----------------
(unaudited) (unaudited)
Net Sales Revenue:
RLI Corp. $43,374,544 $118,802,263 $171,902,369
Target
Industries, Inc. 4,828,469 14,014,680 18,793,195
----------- ----------- ------------
Combined $48,203,013 $132,816,943 $190,695,564
=========== ============ ============
Three Months Nine Months Year
Ended Ended Ended
September 30, 1994 September 30, 1994 December 31, 1994
------------------ ------------------ -----------------
(unaudited) (unaudited)
Net income (loss):
RLI Corp. $ 532,263 ($ 9,925,849) ($5,001,317)
Target
Industries, Inc. 196,357 234,620 225,446
----------- ------------- ------------
Combined $ 728,620 ($ 9,691,229) ($4,775,871)
=========== ============= ============
Prior to the combination, Target Industries, Inc. fiscal year ended June 30.
In recording the pooling-of-interests combination, Target Industries, Inc.
financial information was adjusted to properly reflect a fiscal period ending
December 31 for combination with RLI Corp.'s financial statements for the same
period.
Additionally, the consolidated balance sheet for the year ended December 31,
1994, has been restated to include the assets, liabilities, and equity of
Target Industries, Inc., as required under the pooling-of-interests method.
The net increases to RLI Corp.'s December 31, 1994 assets, liabilities, and
equity were $5,501,935, $3,929,447, and $1,572,488, respectively, as a result
of this merger.
7
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3. SIGNIFICANT DEVELOPMENTS - During the third quarter of 1995, the Company
concluded a study of claims development from the Northridge earthquake.
As a result of this study, known net case reserves were increased by $9.0
million, and an additional $16.0 million in reserves were recorded to
cover costs related to additional future development. The establishment
of these reserves resulted in a third quarter after-tax charge of $16
million or $2.05 per share. Through nine months ended September 30, 1995,
costs associated with Northridge earthquake have impacted earnings after
tax by $18.6 million or $2.37 per share. For the same period in 1994,
year-to-date earnings were reduced by $25.0 million, after tax, or $3.22
per share.
4. INDUSTRY SEGMENT INFORMATION - Selected information by industry segment
for the nine months ended September 30, 1994 and 1995 is presented below.
SEGMENT DATA - (in thousands) EARNINGS
(LOSS)
BEFORE
REV. TAXES ASSETS
1994 ------- -------- ------
RLI Insurance Group $ 92,583 ($29,516) $778,558
RLI Vision Corp. 25,464 1,258 14,512
Net investment income 14,673 14,673
Net realized investment gains 97 97
General corporate & interest expense 0 ( 4,593) 12,221
-------- --------- --------
Consolidated $132,817 ($18,081) $805,291
======== ========= ========
1995
RLI Insurance Group $100,960 ($14,387) $769,494
RLI Vision Corp. 26,709 1,351 14,897
Net investment income 16,241 16,241
Net realized investment gains 118 118
General corporate & interest expense - ( 4,294) 14,738
--------- --------- --------
Consolidated $144,028 ($ 891) $799,129
========= ========= ========
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
RLI Corp. (the Company) is a holding company that, through its subsidiaries,
underwrites specialty property and casualty insurance and provides a wide
range of services and products to the ophthalmic industry.
The most significant segment is the RLI Insurance Group (the Group), which
provides specialty property and casualty coverages for primarily commercial
risks. This segment accounted for 70% of the Company's total revenue for the
nine months ended September 30, 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1995, COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1994
Consolidated gross sales, which consists of gross premiums written, non-
insurance sales revenue, net investment income and realized investment gains
(losses) totaled $249.1 million for the first nine months of 1995, down 1.5%
from the same period in 1994. This decrease was due primarily to a 2.7%
decrease in gross sales of the insurance group, as detailed in the discussion
of RLI Insurance Group that follows. Net investment income and ophthalmic
group sales, however, posted gains of 10.7% and 1%, respectively, and served
to partially offset this decline. Consolidated revenue for the first nine
months of 1995 increased $11.2 million, or 8.4%, from the same period in 1994.
Net premiums earned in the first nine months of 1995 grew 9% over the first
nine months of 1994. Net premiums earned for the first nine months of 1994
were reduced by $17.9 million of reinsurance reinstatement premiums.
The net after-tax earnings for the first nine months of 1995 totaled $1.3
million, $.16 per share, compared to a net loss of $9.7 million, ($1.25) per
share, for the same period in 1994. The increase in net earnings is
attributable to improved underwriting results and increased net investment
income through the first nine months of 1995. Both periods, however, have
been negatively impacted by Northridge earthquake development as discussed
previously. Through the first nine months of 1995, the effects of the
Northridge reserve strengthening reduced earnings after tax by $16 million or
$2.05 per share, while earnings for the same period in 1994 were reduced by an
after-tax charge of $25.0 million or $3.22 per share as a result of this
event.
9
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Proforma earnings without the direct effects of the earthquake are as follows:
PROFORMA WITHOUT EARTHQUAKE (1)
(Unaudited)
Nine Months Ended September 30,
1994 1995 % Chg
-------- -------- ------
Net premiums written 122,224 99,888 -18.3%
Net premiums earned 110,528 102,187 - 7.5%
Consolidated revenue $150,762 $145,255 - 3.7%
Net earnings 15,329 19,823 29.3%
Per share data:
- ---------------
Operating earnings $1.96 $2.52 28.6%
Realized gain, net of tax .01 .01 -----
----- ----- -----
Net earnings $1.97 $2.53 28.4%
===== ===== =====
(1) Direct effects of the Northridge Earthquake include reinstatement
premiums, claims, related expenses and income tax benefits. Direct
effects exclude any property rate increases which may have been caused by
the earthquake.
A detail explanation of the effects of the earthquake and the impact it had on
the first nine months results is provided in the discussion of the RLI
Insurance Group that follows.
RLI INSURANCE GROUP
Gross premiums written for the first nine months of 1995 totaled $206.0
million, compared to $211.8 million reported for the first nine months of
1994. While gross premium writings in total declined 2.7%, gross premium
writings on casualty business during the first nine months of 1995 improved
8.9%, or $9.0 million, over 1994 levels. Offsetting this increase was a
13.4%, or $14.0 million reduction in 1995 gross property premium writings.
Rates on the Company's DIC (Difference in Conditions) book of business have
improved 25% over 1994 levels; however, the Company has recorded lower gross
property writings in 1995 as a direct result of efforts to eliminate certain
unprofitable property business and reduce the Company's overall catastrophe
exposure. Through these efforts, the Company has been successful in reducing
earthquake loss potential on residential and commercial risks in excess of 80%
and 40%, respectively, from prior year levels.
10
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Net premiums written for the first nine months of 1995 declined 7% from the
same period in 1994. In February 1995, the Company sold its Aviation
Underwriting Specialists (AUS) division to AVEMCO Corporation. AVEMCO
immediately assumed substantially all of the groups' Aviation business through
a reinsurance arrangement between AVEMCO and RLI Insurance Company. The Group
ceded its unearned premium reserves on the Aviation business as of January 1,
1995 to AVEMCO. This cession has resulted in $9.3 million in ceded premium or
a net result of $3.7 million of negative net premiums written on the Aviation
business in the first nine months of 1995. Compared to the first nine months
of 1994, Aviation net premium writings are down $12.4 million. Additionally,
in 1995, ceded premiums on catastrophe covers increased $5.4 million due to an
overall increase in catastrophe reinsurance rates. Lastly, a decrease in the
Company's gross writings, as mentioned previously, has attributed to this
decline. 1994 net premiums written through the first nine months were reduced
by a $16.2 million increase in ceded premiums written to reinstate reinsurance
coverage on catastrophe treaties affected by the earthquake.
Net premiums earned of $101.0 million in the first nine months of 1995
represent a 9% increase from the same period in 1994. This increase is
largely the result of the $17.9 million of ceded premiums earned to reinstate
reinsurance coverage in 1994. Excluding the reinstatement premiums, net
premiums earned on property business for the first nine months of 1995
decreased 4% over the same period in 1994. Net premiums earned from casualty
and other non-property business in the first nine months of 1995 declined 12%
from the same period in 1994. This decline resulted from the sale of AUS and
the runoff of contact lens business. Net premiums earned for 1995 have been
reduced by $7.3 million as a result of the sale of AUS, while net premiums
earned on the discontinued contact lens insurance product have dropped $5.0
million from 1994 levels. Partially offsetting these declines were increases
in the General Liability (G/L), Directors & Officers (D&O), and Employer's
Excess Indemnification (EEI) products. Net premiums earned in the first nine
months of 1995 from the G/L, D&O, and EEI products increased 4%, 21% and 11%,
respectively, from the same period in 1994.
The Group's pretax loss totaled $14.4 million for the first nine months of
1995 compared to a pretax loss of $29.5 million for the same period in 1994.
The combined effects of the earthquake including reserve strengthening and
loss development have reduced 1995 pretax earnings by $28.6 million, while
1994 pretax earnings were reduced by $37.9 million as a result of this event.
11
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The GAAP combined ratio dropped to 114.3 in 1995, down from 131.8 through the
first nine months of 1994. The loss and settlement expense component of the
combined ratio decreased to 71.3 in 1995 from 84.0 for the first nine months
of 1994. This decrease was primarily due to improved underwriting results in
1995, as a result of the elimination of certain unprofitable property
business. Both periods presented have been impacted as a result of earthquake
reserve strengthening and loss development. Through the first nine months of
1995, $27.3 million in losses were incurred as a result of the earthquake,
while $21.3 million were incurred for the same period in 1994. The operating
expense component of the combined ratio decreased to 43.0 in 1995 from 47.8
through the first nine months of 1994. The expense ratio in the first nine
months of 1994 increased due to the $17.9 million reduction of net premiums
earned related to the reinstatement of reinsurance coverage. 1995 policy
acquisition costs for the first nine months increased $800,000 over 1994
levels. Deferred acquisition costs, a component of this ratio, increased $5.7
million while commission expense through the first nine months of 1995
decreased $4.1 million over 1994 levels. 1994 included a $1.3 million
reduction in contingent commission expense as a result of the earthquake.
RLI VISION CORP.
Consolidated results for RLI Vision Corp., formerly RLI Professional
Technologies, have improved to a pretax profit of $1.4 million for the nine
months ended September 30, 1995 from $1.3 million for the same period in 1994.
Net sales for the Ophthalmic products, which includes contact lens
distribution, increased $1.3 million or 7% during the first nine months when
compared to the same period in 1994. Net sales from Total Lens Care, the non-
insurance replacement to contact lens insurance recorded an increase of
$96,000 or 3% during the first nine months 1995 when compared to the same
period in 1994. This increase resulted from reduced rebates to eyecare
practitioners from patient memberships on lenses ordered through the RLI
Service Center. Beginning in 1995, rebates were granted on new membership
applications only, as opposed to on new and renewal applications issued
previously. Also showing an increase in sales was license fees from the
Practice Automation System which recorded an increase of $305,000 or 45%.
These increases were partially offset by a decline in sales for the remaining
products, primarily in Extended Services which has shown a steady decline in
recent years.
Overall operating expenses, including cost of goods sold, have shown an
increase of $1.2 million or 5% for the nine months 1995 from the same period
in 1994. The increase results primarily from an increase of $963,000 or 7%
for the cost of goods sold on Ophthalmic products and increased accounts
receivable collection costs. These were partially offset by the segment's
continuing efforts with cost containment measures as well as higher costs in
1994 from aggressive marketing and advertising for Total Lens Care.
The results of operations for RLI Vision Corp. have been restated for prior
periods to include the results of Target Industries, Inc., which was acquired
through merger on May 4, 1995. Target Industries, which operates out of
Cohasset, Massachusetts, manufactures gas permeable contact lenses, markets
soft lenses of all types, provides Rx lab spectacles and frames, and markets
solutions and pharmaceuticals to the ophthalmic industry.
12
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INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $16.2 million during the first nine months of 1995, an increase of 11% over
that reported for the same period in 1994. This increase is the result of two
key factors: rising interest rates which began in late February 1994 and
continued throughout the year, and the reinvestment of maturing non-taxable
securities into higher yielding taxable investments.
Invested assets at September 30, 1995 increased by $38.1 million, or 9.2%,
from December 31, 1994. Short-term investments declined by $52.3 million from
December 31, 1994 due primarily to the funding of reinsurance obligations and
the first quarter 1995 reinvestment of funds generated from the fourth quarter
1994 sale of equity securities. In addition, the Company recognized realized
investment gains of $118,000 in the first nine months of 1995 compared to
realized investment gains of $97,000 in the first nine months of 1994.
The Company's fixed income portfolio consisted entirely of securities rated A
or better and 99% were rated AA or better. The year-to-date yields on the
Company's fixed income investments for the nine month periods ended September
30, 1994 and 1995 are as follows:
1994 1995
---- ----
Taxable 6.72% 6.83%
Non-taxable 5.25% 5.02%
Yields on taxable securities increased through the first nine months of 1995
due to rising interest rates during 1994. Available cash flows from
operations and funds from maturing securities during 1994 were invested in
higher yielding taxable securities. Yields on non-taxable securities for the
first nine months of 1995 declined from the same period in 1994, as maturing,
higher yielding non-taxable securities were reinvested in taxable securities.
The Company's available-for-sale portfolio of debt and equity securities had
net unrealized gains before tax of $26.5 million in the first nine months of
1995 compared to net unrealized losses before tax of $6.3 million for the same
period in 1994. Rising interest rates and an overall decline in the stock
market during the first nine months of 1994 caused the Company to record
unrealized losses on its debt and equity holdings. During the first nine
months of 1995, the Company's debt and equity securities rebounded as long-
term interest rates declined and the stock market flourished. Unrealized
appreciation on securities, net of tax is reflected in a separate component of
shareholders' equity. The Company's net unrealized gain before tax was $42.9
million and $16.4 million at September 30, 1995 and December 31, 1994,
respectively.
Interest expense on debt obligations decreased to $2,529,000 for the first
nine months of 1995, a $47,000 drop from the same period in 1994. This
reduction is due to the December 1, 1994 principal repayment of $745,000 on
the City of Peoria industrial development bonds.
13
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INCOME TAXES
The Company's effective tax rate for the first nine months 1995 was 241%
compared to 46% for the first nine months 1994. Income tax expense
attributable to income from operations differed from the amounts computed by
applying the U.S. federal tax rate of 35% to pretax income for the first nine
months of 1994 and 1995 as a result of the following:
1994 1995
Amount % Amount %
------ --- ------ ---
Provision for income taxes at
the statutory rate of 35% (6,328,147) 35% ( 311,787) 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income (1,213,493) 7% (1,030,621) 116%
Dividends received deduction ( 822,684) 5% ( 865,151) 97%
Dividends paid deduction ( 189,424) 1% ( 199,562) 22%
Other items, net 164,556 (1%) 260,229 ( 29%)
---------- ---- ---------- ----
Total tax benefit (8,389,192) 46% (2,146,892) 241%
The Company has filed and received refunds in the amount of $4.0 million from
the Internal Revenue Service for the 1991, 1992 and 1993 tax years, as a
result of carrying back the 1994 operating and realized capital losses.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the primary sources of the Company's liquidity have been funds
generated from insurance premiums (operating activities) and investment income
and maturing investments (investing activities). In addition, the Company has
occasionally received proceeds from financing activities such as the sale of
common stock to the employee stock ownership plan, sale of convertible
debentures, and small, short-term borrowings.
At September 30, 1995 the Company had short-term investments, cash and other
investments maturing within one year, of approximately $16.2 million and
additional investments of $110.1 million maturing within five years. The
Company maintains two major sources of credit from two financial institutions:
one $10.0 million secured line of credit and one $15.0 million line of credit.
Both lines are unused at November 1, 1995.
Management believes that cash generated by operations, cash generated by
investments and cash available from financing activities will provide
sufficient sources of liquidity to meet its anticipated needs over the next
twelve to twenty-four months, including settlement of accrued but unpaid costs
related to the Northridge Earthquake.
14
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THREE MONTHS ENDED SEPTEMBER 30, 1995, COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30, 1994
Consolidated gross sales decreased $6.1 million (7%) to $84.1 million for the
third quarter of 1995, compared to the same period in 1994. Gross sales of
the insurance segment decreased to $69.7 million, an 8% decrease compared to
the same period in 1994. During this same period, net investment income
improved 10% over 1994 levels. Consolidated revenue for the third quarter
1995 decreased $1.5 million, or 3%, from the same period in 1994. The net
loss for the third quarter of 1995 totaled $9.6 million, ($1.22) per share,
compared to net earnings of $728,000, $.09 per share, for the same period in
1994. The decrease in net earnings is primarily attributable to third quarter
1995 earthquake reserve strengthening. The establishment of these reserves
resulted in an after-tax charge of $16 million or $2.05 per share. For the
same period in 1994, earnings were reduced by $4.3 million, or $.48 per share,
as a result of this event.
RLI INSURANCE GROUP
Gross premiums written in the third quarter 1995 totaled $69.7 million an 8%
decrease from the third quarter 1994. This decrease is attributable to lower
property writings, as a result of the Company's continued effort to reduce its
earthquake exposure base and re-underwrite its overall property book of
business. Partially offsetting this decrease was a 7% increase in the
Company's casualty book. The Company's General Liability, Commercial
Umbrella, and Directors and Officers lines posted gains of 24%, 78%, and 14%
respectively. Net premiums written for the third quarter 1995 declined 6%
over 1994 levels. This decline is attributable to the sale of the Company's
Aviation Underwriting Specialist (AUS) division and an overall increase in the
cost of company's catastrophe reinsurance. Compared to the third quarter
1994, Aviation net premium writings are down $2.9 million, while ceded
premiums attributable to the Company's catastrophe covers increased $400,000
in the third quarter of 1995. Net premiums written in the third quarter of
1994 were reduced by a $4.2 million increase in ceded premiums written to
reinstate reinsurance coverage on catastrophe treaties affected by the
earthquake.
Premiums earned of $32.2 million in the third quarter 1995 represented a 6%
decrease from third quarter 1994. Earned premiums in the third quarter of
1995 were reduced by $2.9 million as a result of the sale of AUS, while net
premiums earned on the discontinued contact lens insurance product dropped
$800,000 compared to the third quarter of 1994. Third quarter 1994 earned
premium was reduced by a $4.2 million increase in catastrophe reinstatement
premiums as previously mentioned.
The segments pre-tax loss for the third quarter of 1995 was $20.7 million
compared to a pre-tax loss of $4.6 million for the same period in 1994. The
GAAP combined ratio increased to 164.3 from 113.6 in the third quarter of
1994. The loss and settlement expense component of the combined ratio
increased to 123.2 from 64.9, while the operating expense component of the
combined ratio declined to 41.1 from 48.7 in the third quarter of 1994. Third
quarter 1995 earnings and combined ratio have been negatively impacted as a
result of earthquake reserve strengthening as discussed previously.
15
<PAGE>
RLI VISION CORP.
Consolidated RLI Vision Corp. results have declined to a pretax profit of
$567,000 for the three months ended September 30, 1995 from $746,000 for the
same period in 1994. Contributing to the decline in results for 1995 was a 3%
increase in net operating expenses, including cost of goods sold, partially
offset by a 1% increase in sales. Net sales for the Ophthalmic products,
which included contact lens distribution, increased $171,000 or 3% during the
third quarter when compared to the same period in 1994. Also showing an
increase in sales was license fees from the Practice Automation Systems which
recorded an increase of $96,000 or 35%. These increases were partially offset
by a decline in sales for the remaining products, primarily in Extended
Services which has shown a steady decline in recent years.
Overall operating expenses, including cost of goods sold, have increased for
the third quarter 1995 resulting in actual expenses in 1995 of $8.4 million
compared to $8.1 million for the same period in 1994. This increase results
primarily from the $91,000 or 2% increase in cost of goods sold for the
Ophthalmic products, an increase in accounts receivable collection costs and
an increase in marketing and advertising costs. These increases were
partially offset by the segment's continuing efforts with cost containment
measures.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $5.6 million during the third quarter of 1995, an increase of 10% over that
reported for the same period in 1994. This increase is attributable to rising
interest rates in 1994 and the investment of funds from maturing securities in
1994 into higher yielding taxable securities. The Company also recognized
realized gains of $107,000 during the third quarter of 1995 compared to
realized gains of $105,000 in the third quarter of 1994.
Interest expense on debt obligations totaled $843,000 for the second quarter
of 1994 compared to $854,000 for the same period in 1994. This reduction is
due to the December 1, 1994 principal payment of $745,000 on the City of
Peoria industrial development bonds.
16
<PAGE>
INCOME TAXES
The difference between the effective rates and the statutory federal tax rate
of 35% applied to pre-tax income from continuing operations for the third
quarter of 1994 and 1995 is as follows:
1994 1995
Amount % Amount %
------ --- ------ ---
Provision for income taxes at
the statutory rate of 35% ( 9,123) 35% (5,516,927) 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income ( 386,823) --- ( 368,724) 2%
Dividends received deduction ( 269,488) --- ( 301,303) 2%
Dividends paid deduction ( 63,451) --- ( 67,307) 1%
Other items, net ( 25,803) --- 52,290 --
---------- --- ---------- ----
Total tax benefit ( 754,688) --- (6,201,971) 39%
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Change in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Not Applicable
(b) The Company did not file any reports on Form 8-K during the
nine months ended September 30, 1995.
SIGNATURES
Pursuant to the requirements 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.
/s/Joseph E. Dondanville
Joseph E. Dondanville
Vice President, Chief Financial Officer
(Duly authorized and Principal
Financial and Accounting Officer)
Date: November 11, 1995
18
<PAGE>
RLI Corp. and Subsidiaries
INDEX TO EXHIBITS
Exhibit Number Item
- -------------- ----------------------------------------------
27.0 Fianacial Data Schedule(Electronic Filing Only)
19
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE RLI CORP. FORM 10Q FOR THE PERIOD ENDED SEPTEMBER
30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 12,125
<DEBT-CARRYING-VALUE> 287,683
<DEBT-MARKET-VALUE> 288,326
<EQUITIES> 154,832
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 454,641
<CASH> (656)
<RECOVER-REINSURE> 46,380
<DEFERRED-ACQUISITION> 16,418
<TOTAL-ASSETS> 799,129
<POLICY-LOSSES> 221,917
<UNEARNED-PREMIUMS> 125,476
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 52,255
<COMMON> 8,453
0
0
<OTHER-SE> 138,226
<TOTAL-LIABILITY-AND-EQUITY> 799,129
100,960
<INVESTMENT-INCOME> 16,241
<INVESTMENT-GAINS> 118
<OTHER-INCOME> 26,709
<BENEFITS> 71,981
<UNDERWRITING-AMORTIZATION> 33,255
<UNDERWRITING-OTHER> 10,111
<INCOME-PRETAX> (891)
<INCOME-TAX> (2,147)
<INCOME-CONTINUING> 1,256
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,256
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
