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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 June 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 August 11, 1995 the number of shares outstanding of the registrant's
Common Stock was 7,849,434.
Page 1 of 18
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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 June 30,
1994 1995
(Restated)
----------- -----------
Net premiums earned $36,470,083 $33,226,482
RLI Vision Corp. revenue 8,668,980 9,011,315
Net investment income 4,915,558 5,265,829
Net realized investment gains (losses) (19,630) 136,542
----------- -----------
$50,034,991 $47,640,168
----------- -----------
Losses and settlement expenses $18,871,231 $16,298,650
Policy acquisition costs 11,835,688 10,168,476
Insurance operating expenses 3,927,258 3,462,627
RLI Vision Corp. operating expenses 8,253,962 8,642,111
Interest expense on debt 858,000 843,130
General corporate expenses 503,576 601,931
----------- -----------
$44,249,715 $40,016,925
----------- -----------
Earnings before income taxes 5,785,276 7,623,243
Income tax expense 1,249,160 2,143,424
----------- -----------
Net earnings $4,536,116 $5,479,819
============ ============
Net earnings per share:
Primary $0.58 $0.70
Fully diluted $0.53 $0.62
Weighted average number of
common shares outstanding
Primary 7,764,590 7,849,434
Fully diluted 9,533,821 9,618,665
Cash dividends declared per common share $0.11 $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 Six-Month Period
Ended June 30,
1994 1995
(Restated)
----------- -----------
Net premiums earned $58,420,048 $68,789,442
RLI Vision Corp. revenue 16,590,072 17,743,816
Net investment income 9,611,806 10,665,850
Net realized investment gains (losses) (7,996) 107,151
----------- -----------
$84,613,930 $97,306,259
----------- -----------
Losses and settlement expenses $55,641,908 $32,350,911
Policy acquisition costs 20,000,502 23,091,095
Insurance operating expenses 7,653,093 7,050,826
RLI Vision Corp. operating expenses 16,078,007 16,959,644
Interest expense on debt 1,722,526 1,686,274
General corporate expenses 1,572,247 1,295,681
----------- -----------
$102,668,283 $82,434,431
----------- -----------
Earnings (loss) before income taxes (18,054,353) 14,871,828
Income tax expense (benefit) (7,634,504) 4,055,078
----------- -----------
Net earnings (loss) ($10,419,849) $10,816,750
============ ============
Net earnings (loss) per share:
Primary ($1.35) $1.38
Fully diluted ($1.35) $1.22
Weighted average number of
common shares outstanding
Primary 7,745,610 7,849,434
Fully diluted 7,745,610 9,618,665
Cash dividends declared per common share $0.22 $0.25
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, June 30,
ASSETS 1994 1995
(Restated)
Investments ----------- -----------
Fixed maturities
Held-to-maturity, at amortized cost $246,796,658 $260,900,898
Available-for-sale, at fair value 13,338,669 15,156,096
Equity securities, at fair value 104,067,362 141,516,646
Short-term investments, at cost which
approximates fair value 52,329,819 6,591,367
----------- -----------
Total investments 416,532,508 424,165,007
Cash 8,185,806 5,591,746
Accrued investment income 5,166,083 5,185,170
Premiums and reinsurance balances receivable 26,082,932 48,325,067
Ceded unearned premium 40,978,088 46,805,051
Reinsurance balances recoverable on unpaid losses 199,736,796 212,333,303
Deferred policy acquisition costs 19,208,212 16,381,986
Property and equipment 15,788,526 14,735,157
Income taxes - current 3,315,467 0
Income taxes - deferred 6,801,829 4,058
Other assets 16,006,822 15,334,051
----------- -----------
TOTAL ASSETS $757,803,069 $788,860,596
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and settlement expenses $394,966,040 $400,472,745
Unearned premiums 119,817,542 119,830,644
Reinsurance balances payable 39,859,746 48,307,201
Long-term debt:
Convertible debentures 46,000,000 46,000,000
Industrial development bonds 6,255,000 6,255,000
Other liabilities 19,734,780 15,925,340
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TOTAL LIABILITIES 626,633,108 637,913,751
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Shareholders' Equity:
Common stock (8,453,449 shares issued
and outstanding at 6/30/95) 6,762,905 8,453,449
Other shareholders' equity 127,807,805 145,894,145
Less: Treasury shares at cost
(604,015 shares at 6/30/95) (3,400,749) (3,400,749)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 131,169,961 150,946,845
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $757,803,069 $788,860,596
============ ============
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 Six-Month Period
Ended June 30,
--------------------------
1994 1995
(Restated)
------------ ------------
Net cash provided by (used in)
operating activities $6,910,481 ($8,767,202)
------------ ------------
Cash Flows from Investing Activities
Investments purchased (44,572,226) (55,722,553)
Investments sold or matured 36,741,787 18,872,715
Net decrease in short-term investments 3,373,801 45,738,452
Net property and equipment purchased (2,632,598) (786,702)
------------ ------------
Net cash provided by (used in)
investing activities (7,089,236) 8,101,912
------------ ------------
Cash Flows from Financing Activities
Cash dividends paid (1,670,199) (1,924,760)
Fractional shares paid 0 (4,010)
Treasury shares reissued 1,475,539 0
------------ ------------
Net cash used in financing activities (194,660) (1,928,770)
------------ ------------
Net decrease in cash (373,415) (2,594,060)
------------ ------------
Cash at the beginning of the year 9,388,516 8,185,806
------------ ------------
Cash as of June 30 $ 9,015,101 $ 5,591,746
============ ============
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 six month periods ended June 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 - 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.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated
financial statements are summarized below.
6
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Three Months Six Months Year
Ended Ended Ended
June 30, 1994 June 30, 1994 December 31, 1994
------------- -------------- -----------------
(unaudited) (unaudited)
Net Sales Revenue:
RLI Corp. $45,132,716 $75,427,719 $171,902,369
Target Industries, Inc. 4,902,275 9,186,211 18,793,195
----------- ----------- ------------
Combined $50,034,991 $84,613,930 $190,695,564
========== ========== ===========
Three Months Six Months Year
Ended Ended Ended
June 30, 1994 June 30, 1994 December 31, 1994
------------- -------------- -----------------
(unaudited) (unaudited)
Net income (loss):
RLI Corp. $ 4,507,970 ($10,458,112) ($5,001,317)
Target Industries, Inc. 28,146 38,623 225,446
---------- ---------- -----------
Combined $ 4,536,116 ($10,419,849) ($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 statements for the twelve months ended December 31, 1994 were
adjusted to properly reflect a fiscal period ending December 31 and combined
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 increase to RLI Corp.'s December 31, 1994 assets, liabilities, and
equity was $5,501,935, $3,929,447, and $1,572,488, respectively, as a result
of this merger.
7
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3. INDUSTRY SEGMENT INFORMATION - Selected information by industry segment
for the six months ended June 30, 1994 and 1995.
SEGMENT DATA - (in thousands) EARNINGS
(LOSS)
BEFORE
REV. TAXES ASSETS
1994 ------- -------- ------
RLI Insurance Group $ 58,420 ($24,875) $766,934
RLI Vision Corp. 16,590 511 14,131
Net investment income 9,612 9,612
Net realized investment gains ( 8) ( 8)
General corporate & interest expense 0 ( 3,295) 12,194
-------- --------- --------
Consolidated $ 84,614 ($18,055) $793,259
======== ========= ========
1995
RLI Insurance Group $68,789 $ 6,296 $756,294
RLI Vision Corp. 17,744 784 16,059
Net investment income 10,666 10,666
Net realized investment gains 107 107
General corporate & interest expense - ( 2,982) 16,508
--------- --------- --------
Consolidated $ 97,306 $14,871 $788,861
========= ========= ========
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 71% of the Company's total revenue for the
six months ended June 30, 1995.
SIX MONTHS ENDED JUNE 30, 1995, COMPARED TO SIX MONTHS ENDED JUNE 30, 1994
Consolidated gross sales, which consists of gross premiums written, non-
insurance sales revenue, net investment income and realized investment gains
(losses) totaled $164.9 million for the first six months of 1995, up 1.3% over
the same period in 1994. The increase was due primarily to an 11% rise in net
investment income. Gross sales of the insurance group remained relatively
flat, posting a .4% increase over 1994 levels, while ophthalmic group sales
improved by 3%. Consolidated revenue for the first six months of 1995
increased $12.7 million, or 15%, from the same period in 1994. Net premiums
earned in the first six months of 1995 grew 18% over the first six months of
1994. Net premiums earned for the first six months of 1994 were reduced by
$13.8 million of reinsurance reinstatement premiums.
The net after-tax earnings for the first six months of 1995 totaled $10.8
million, $1.38 per share, compared to a net loss of $10.4 million, ($1.35) per
share, for the same period in 1994. The increase in net earnings is
attributable to improved underwriting results and increased net investment
income in the first six months of 1995. Through the first six months of 1994,
the effects of the Northridge Earthquake reduced earnings after tax by $20.8
million or $2.68 per share.
RLI INSURANCE GROUP
Gross premiums written for the first six months of 1995 totaled $136.3
million, compared to $135.7 million reported for the first six months of 1994.
While gross premium writings in total remained relatively flat, gross premium
writings on casualty business during the first half of 1995 improved 10%, or
$6.5 million, over 1994 levels. Partially offsetting this increase was a 9%,
or $6.0 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 reduce the Company's
catastrophe exposure. The Company anticipates that gross premium writings on
property business during 1995 will approximate 1994 levels, despite the
reduction in exposure.
9
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Net premiums written for the first six 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 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 $3.7 million of negative net premiums
written on the Aviation business in the first half of 1995. Compared to the
first half of 1994, Aviation net premium writings are down $9.5 million.
Additionally, in 1995, ceded premiums on catastrophe covers increased $5.0
million due to an overall increase in catastrophe reinsurance rates. Lastly,
in 1995, ceded premiums on the Company's surplus treaties have increased $7.3
million as a result of efforts to reduce the Company's overall exposure as
discussed above. 1994 net premiums written through the first six months were
reduced by a $12.0 million increase in ceded premiums written to reinstate
reinsurance coverage on catastrophe treaties affected by the earthquake.
Net premiums earned of $68.8 million in the first six months of 1995
represents an 18% increase from the same period in 1994. This increase is
largely the result of the $13.8 million increase in ceded premiums earned to
reinstate reinsurance coverage in 1994. Excluding the reinstatement premiums,
net premiums earned on property business for the first quarter of 1995
increased 4% over the same period in 1994. Rate increases achieved on
property business written throughout 1994 continue to impact earnings, the
result of the normal insurance earning patterns. Net premiums earned from
casualty and other non-property business in the first six months of 1995
declined 9% from the same period in 1994. This decline resulted from the sale
of AUS and the runoff of contact lens business. First quarter net premiums
earned for 1995 were reduced by $5.6 million as a result of the sale of AUS
while net premiums earned on the discontinued contact lens insurance product
dropped $2.8 million from 1994 first quarter levels. Partially offsetting
these declines were increases in the Directors & Officers (D&O) and Employers
Excess Indemnification (EEI) products. Net premiums earned in the first six
months of 1995 from the D&O and EEI products increased 44% and 19%,
respectively, from the same period in 1994.
The Group's pretax earnings totaled $6.3 million for the first six months of
1995 compared to a pretax loss of $24.9 million for the same period in 1994.
The combined effects of the earthquake including losses, expenses, and the
reduction of revenue due to the reinstatement of reinsurance coverages reduced
1994 pretax earnings by $31.5 million.
10
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The GAAP combined ratio dropped to 90.8 in 1995, down from 142.5 in the first
six months of 1994. The loss and settlement expense component of the combined
ratio decreased to 47.0 in 1995 from 95.2 for the first six months of 1994.
This decrease was primarily the result of earthquake losses in California
during January 1994. Net pretax catastrophe losses incurred in the first six
months of 1995 from floods in California and Northridge Earthquake development
totaled $5.7 million compared to $18.6 million of earthquake losses incurred
during the same period in 1994. The operating expense component of the
combined ratio decreased to 43.8 in 1995 from 47.3 in the first six months of
1994. The expense ratio in first six months of 1994 increased due to the
$13.8 million reduction of net premiums earned related to the reinstatement of
reinsurance coverage. 1995 policy acquisition costs for the first six months
increased $3.0 million over 1994 levels. Deferred acquisition costs, a
component of this ratio increased $5.1 million while commission expenses in
the first six months of 1995 decreased $1.8 million over 1994 levels,
primarily as a result of increased ceding commission. 1994 included a $1.3
million reduction in contingent commission expense as a result of the
earthquake.
As discussed above, during 1995, the Company has experienced loss development
from the 1994 Northridge earthquake. Through the first six months of 1995,
$3.8 million of additional development has occurred. The Company has
currently exhausted all catastrophe reinsurance available for the 1994
accident-year. As such, any future adverse development that occurs as a
result of this event will be absorbed by the Company's earnings and surplus.
RLI VISION CORP.
Consolidated results for RLI Vision Corp., formerly RLI Professional
Technologies, have improved to a pretax profit of $784,000 for the six months
ended June 30, 1995 from $511,000 for the same period in 1994. Contributing
to the improvement in results for 1995 was a 7% increase in sales revenue.
This increase was partially offset by a 6% increase in overall operating
expenses. The net sales for the Ophthalmic Products, which includes Contact
Lens distribution, increased $1.1 million or 9% during the first six months of
1995, 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 $132,000 or 6% during the first six months 1995, 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 $209,000 or 51%.
These increases were offset by a decline in sales for the remaining products,
primarily in Extended Services which has shown a steady decline in recent
years.
11
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Overall operating expenses, including cost of goods sold, have shown an
increase of $901,000 or 6% for the six months 1995 resulting in actual
expenses in 1995 of $17.0 million compared to $16.1 million for the same
period in 1994. The increase results primarily from an increase of $873,000
or 10% 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 Inc., 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.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $10.7 million during the first six months of 1995, an increase of 11% over
that reported for the same period in 1994. The 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 June 30, 1995 increased by $7.6 million, or 1.8%, from
December 31, 1994. Short-term investments declined by $45.7 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 $107,000 in the first six months of 1995 compared to
realized investment losses of $8,000 in the first six months of 1994.
The Company's fixed income portfolio consisted of all 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 six month periods ended June 30,
1994 and 1995 are as follows:
1994 1995
---- ----
Taxable 6.69% 6.88%
Non-taxable 5.20% 5.05%
Yields on taxable securities increased through the first six 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 six months of 1995 declined from the same period in 1994, as maturing,
higher yielding non-taxable securities were reinvested in taxable securities.
12
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The Company's available-for-sale portfolio of debt and equity securities had
net unrealized gains before tax of $16.8 million in the first six months of
1995 compared to net unrealized losses before tax of $9.2 million for the same
period in 1994. Rising interest rates and an overall decline in the stock
market during the first six months of 1994 caused the Company to record
unrealized losses on its debt and equity holdings. During the first six
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 $33.2
million and $16.5 million at June 30, 1995 and December 31, 1994,
respectively.
Interest expense on debt obligations decreased to $1,686,000 for the first six
months of 1995, a $37,000 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.
INCOME TAXES
The Company's effective tax rate for the first six months 1995 was 27%
compared to 42% for the first six 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 six
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% (6,319,024) 35% 5,205,140 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income (826,670) 4% (661,897) (4%)
Dividends received deduction (553,196) 3% (563,848) (4%)
Dividends paid deduction (125,973) 1% (132,255) (1%)
Other items, net 190,359 (1%) 207,939 1%
---------- ---- ---------- ----
Total tax expense (benefit) (7,634,504) 42% 4,055,079 27%
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.
13
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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 June 30, 1995 the Company had short-term investments, cash and other
investments maturing within one year, of approximately $30.0 million and
additional investments of $142.6 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 that cannot be canceled during its
annual term and one $15.0 million line of credit that cannot be canceled
during its annual term. Both lines are unused at August 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.
THREE MONTHS ENDED JUNE 30, 1995, COMPARED TO THREE MONTHS ENDED JUNE 30, 1994
Consolidated gross sales decreased $807,000 (1%) to $88.0 million for the
second quarter of 1995, compared to the same period in 1994. Gross sales of
the insurance segment remained relatively flat at $73.6 million, a 1% decrease
compared to the same period in 1994. During this same period, net investment
income improved 7% over 1994 levels. Consolidated revenue for the second
quarter 1995 decreased $2.4 million, or 5%, from the same period in 1994. Net
earnings for the second quarter of 1995 totaled $5.4 million, $.69 per share,
compared to net earnings of $4.5 million, $.58 per share, for the same period
in 1994. RLI Insurance Group showed a 79% increase in pre-tax earnings over
second quarter 1994 levels, as a result of improved loss experience and
underwriting results. The earthquake cost estimate increased 3% during the
second quarter of 1994, which reduced earnings by $576,000 ($.07 per share).
14
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RLI INSURANCE GROUP
Gross premiums written in the second quarter 1995 totaled $73.6 million a 1%
decrease from the second quarter 1994. This slight decrease is attributable
to the Company's continued effort to reduce its earthquake exposure base and
re-underwrite its overall property book of business. Net premiums written for
the second quarter 1995 declined 18% 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 second quarter 1994, Aviation net premium
writings are down $4.5 million, while ceded premiums attributable to the
Company's catastrophe covers increased $2.3 million in the second quarter of
1995. Net premiums written in the second quarter of 1994 were reduced by a
$500,000 increase in ceded premiums written to reinstate reinsurance coverage
on catastrophe treaties affected by the earthquake.
Premiums earned of $33.2 million in the second quarter 1995 represented a 9%
decrease from the second quarter 1994. Earned premiums in the second quarter
of 1995 were reduced by $3.6 million as a result of the sale of AUS, while net
premiums earned on the discontinued contact lens insurance product dropped
$2.8 million compared to the second quarter of 1994. Second quarter 1994
earned premium was reduced by a $500,000 increase in catastrophe reinstatement
premiums as previously mentioned. Partially offsetting these declines were
increases in the Directors and Officers (D&O) and Employer's Excess
Indemnification (EEI) products. Premium earned in the second quarter of 1995
from the D&O and EEI products increased 31% and 7%, respectively, from the
same period in 1994.
The segments pre-tax earnings were $3.3 million for the second quarter of 1995
compared to pre-tax earnings of $1.8 million for the same period in 1994. The
GAAP combined ratio decreased to 90.1 from 94.9 in the second quarter of 1994.
The loss and settlement expense component of the combined ratio decreased to
49.1 from 51.7, while the operating expense component of the combined ratio
decreased to 41.0 from 43.2 in the second quarter of 1994.
For the three months ended June 30, 1995, development on the Northridge
earthquake loss was $2.5 million. For the same period in 1994, net
catastrophe costs reduced pre-tax earnings by $873,000, a 3% increase from the
first quarter of 1994.
RLI VISION CORP.
Consolidated RLI Vision Corp. results have declined to a pretax profit of
$369,000 for the three months ended June 30, 1995 from $415,000 for the same
period in 1994. Contributing to the decline in results for 1995 was a 5%
increase in net operating expenses, including cost of goods sold,
partially offset by a 4% increase in sales revenue. Net sales for the
Ophthalmic Products, which includes Contact Lens distribution, increased
$410,000 or 6% during the second quarter, compared to the same period in 1994.
15
<PAGE>
Also showing an increase in sales was License Fees from the Practice
Automation System which recorded an increase of $120,000 or 59%. These were
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 second quarter 1995 resulting in actual expenses in 1995 of $8.7 million
compared to $8.3 million for the same period in 1994. This increase results
primarily from the $373,000 or 8% increase in cost of goods sold for the
Ophthalmic Products and an increase in accounts receivable collection costs.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $5.3 million during the second quarter of 1994, an increase of 7% over that
reported for the same period in 1993. This increase is attributable to rising
interest rates into 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 second quarter of 1995 compared to
realized losses of $20,000 in the second quarter of 1994.
Interest expense on debt obligations totaled $843,000 for the second quarter
of 1994 compared to $828,000 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.
INCOME TAXES
The Company's effective tax rate for the second quarter 1995 was 28% compared
to 22% for the second quarter 1994. The Company's effective tax rate is
generally dependent upon the level of non-taxable investment earnings compared
to total pre-tax earnings. Non-taxable investment earnings as a percentage of
total pre-tax earnings for the second quarter of 1995 decreased to 11% from
20% for the same period in 1994. As a result of this decrease, the effective
tax rate for the second quarter of 1995 has increased.
16
<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
The Company's Board of Directors adopted at its meeting of May 11,
1995, a non-qualified Incentive Stock Option Plan (The Plan). Under
The Plan, an officer may be granted an option to purchase shares at
100% of the grant date fair market value (110% if the optionee and
affiliates own 10% or more of the shares), payable in cash. Options
may be granted only during the ten year period beginning on the date
the shareholders adopt the ISO Plan. An exercise an option within
the first to occur of ten years (five years if the optionee and
affiliates own 10% or more of the shares) from the grant date, or
three months after the optionee ceases to be an employee. The
Company has reserved 1,000,000 shares for issuance to key executives
under The Plan. On May 11, 1995, 65,625 options were granted with
an exercise price of $20.60. As of June 30, 1995, no options have
been exercised.
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
six months ended June 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: August 11, 1995
17
<PAGE>
RLI Corp. and Subsidiaries
INDEX TO EXHIBITS
Exhibit Number Item
- -------------- -----------------------------------------------
27.0 Financial Data Schedule (Electronic Filing Only)
18
<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
JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 15,156
<DEBT-CARRYING-VALUE> 260,901
<DEBT-MARKET-VALUE> 271,079
<EQUITIES> 141,517
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 424,165
<CASH> 5,592
<RECOVER-REINSURE> 48,325
<DEFERRED-ACQUISITION> 16,382
<TOTAL-ASSETS> 788,861
<POLICY-LOSSES> 188,140
<UNEARNED-PREMIUMS> 119,831
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 52,255
<COMMON> 8,453
0
0
<OTHER-SE> 142,493
<TOTAL-LIABILITY-AND-EQUITY> 788,861
68,789
<INVESTMENT-INCOME> 10,666
<INVESTMENT-GAINS> 107
<OTHER-INCOME> 17,744
<BENEFITS> 32,351
<UNDERWRITING-AMORTIZATION> 23,091
<UNDERWRITING-OTHER> 7,051
<INCOME-PRETAX> 14,872
<INCOME-TAX> 4,055
<INCOME-CONTINUING> 10,817
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,817
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.22
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
