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 March 31, 1996
-------------------------------------------
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
-----------------------------------------
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 May 6, 1996 the number of shares outstanding of the registrant's
Common Stock was 7,935,776.
Page 1 of 12
<PAGE>
PART I
Item 1. Financial Statements
RLI Corp. and Subsidiaries
Condensed Consolidated Statement Of Earnings
(Unaudited)
For the Three-Month Period
Ended March 31,
1995 1996
(Restated)
----------- -----------
Net premiums earned $35,562,960 $32,166,978
RLI Vision Corp. revenue 8,732,501 8,822,975
Net investment income 5,400,021 5,727,445
Net realized investment gains (losses) ( 29,391) 141,310
----------- -----------
49,666,091 46,858,708
----------- -----------
Losses and settlement expenses 16,052,261 18,030,652
Policy acquisition costs 12,922,619 8,001,329
Insurance operating expenses 3,588,199 3,335,955
RLI Vision Corp. operating expenses 8,317,533 8,617,906
Interest expense on debt 843,144 721,344
General corporate expenses 693,750 735,042
----------- -----------
42,417,506 39,442,228
----------- -----------
Earnings before income taxes 7,248,585 7,416,480
Income tax expense 1,911,654 1,900,583
----------- -----------
Net earnings $ 5,336,931 $5,515,897
============ =============
Net earnings per share:
Primary $0.68 $ .70
Fully diluted $0.60 $ .62
Weighted average number of
common shares outstanding
Primary 7,849,434 7,906,856
Fully diluted 9,618,665 9,676,087
Cash dividends declared per common share $0.12 $0.13
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
RLI Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
December 31, March 31,
ASSETS 1995 1996
Investments ------------ -------------
Fixed maturities
Held-to-maturity, at amortized cost $251,637,536 $248,248,835
Available-for-sale, at fair value 45,119,811 44,820,768
Equity securities, at fair value 153,957,535 162,362,343
Short-term investments, at cost which
approximates fair value 23,874,732 0
----------- -------------
Total investments 474,589,614 455,431,946
Cash 1,196,926 5,267,770
Accrued investment income 5,854,731 5,371,916
Premiums and reinsurance balances receivable 36,447,284 66,870,317
Ceded unearned premiums 50,189,740 44,865,753
Reinsurance balances recoverable on unpaid losses 197,337,466 190,758,676
Deferred policy acquisition costs 15,806,911 15,198,559
Property and equipment 13,950,559 14,602,350
Income taxes - current 2,619,811 212,281
Other assets 16,654,099 15,099,902
----------- ------------
TOTAL ASSETS $814,647,141 $813,679,470
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and settlement expenses $418,985,960 $415,894,171
Unearned premiums 126,013,957 122,572,084
Reinsurance balances payable 37,744,456 37,822,328
Short-term debt 2,800,000 0
Long-term debt:
Convertible debentures 46,000,000 46,000,000
Income taxes-deferred 4,904,394 6,796,371
Other liabilities 19,590,658 14,871,626
----------- ------------
TOTAL LIABILITIES 656,039,425 643,956,580
----------- ------------
Shareholders' Equity:
Common stock (8,453,449 shares issued
and outstanding) 8,453,449 8,453,449
Other shareholders' equity 153,544,590 164,120,975
Less: Treasury shares at cost
(602,567 shares at 12/31/95)
(517,673 shares at 3/31/96) (3,390,323) (2,851,534)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 158,607,716 169,722,890
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $814,647,141 $813,679,470
============ ============
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three-Month Period
Ended March 31,
--------------------------
1995 1996
(Restated)
------------ ------------
Net cash used in operating activities ($ 17,672,284) ($ 18,722,746)
------------ ------------
Cash Flows from Investing Activities
Investments purchased (27,749,451) ( 6,730,266)
Investments sold 0 2,216,171
Investments called or matured 8,975,000 6,495,000
Net decrease in
short-term investments 36,090,515 23,874,780
Net property and equipment purchased ( 435,138) ( 1,384,490)
------------ ------------
Net cash from investing activities 16,880,926 24,471,195
------------ ------------
Cash Flows from Financing Activities
Cash dividends paid ( 904,334) ( 1,031,790)
Payments on debt 0 ( 2,800,000)
Change in contributed capital 0 1,615,396
Treasury shares reissued 0 538,789
------------ ------------
Net cash (used in)
financing activities ( 904,334) ( 1,677,605)
------------ ------------
Net increase (decrease) in cash (1,695,692) 4,070,844
------------ ------------
Cash at the beginning of the year 8,185,806 1,196,926
------------ ------------
Cash as of March 31 $ 6,490,114 $ 5,267,770
============ ============
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
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 1995 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, 1995 has been derived from, and does not include all the
disclosures contained in the audited consolidated financial statements for
the year ended December 31, 1995.
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 three month periods ended March 31, 1995 and 1996 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.
1995 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 1995 10-K Annual
Report.
2. SIGNIFICANT EVENT - As previously reported in RLI Corp.'s Form 10-K filed
for the period ended December 31, 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 313,500 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.
5
<PAGE>
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
Ended
March 31, 1995
------------------
(unaudited)
Net Sales Revenue:
RLI Corp. $44,742,974
Target
Industries, Inc. 4,923,117
-----------
Combined $49,666,091
===========
Three Months
Ended
March 31, 1995
------------------
(unaudited)
Net income (loss):
RLI Corp. $ 5,216,908
Target
Industries, Inc. 120,023
-----------
Combined $ 5,336,931
===========
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.
6
<PAGE>
3. INDUSTRY SEGMENT INFORMATION - Selected information by industry segment
for the three months ended March 31, 1995 and 1996 is presented below.
SEGMENT DATA - (in thousands) EARNINGS
(LOSS)
BEFORE
REV. TAXES ASSETS
1995 ------- -------- ------
RLI Insurance Group $ 35,563 $ 3,000 $724,881
RLI Vision Corp. 8,733 417 15,984
Net investment income 5,400 5,400
Net realized investment losses (29) (29)
General corporate & interest expense 0 (1,539) 13,387
-------- --------- --------
Consolidated $ 49,667 $ 7,249 $754,252
======== ========= ========
1996
RLI Insurance Group $ 32,167 $ 2,799 $784,446
RLI Vision Corp. 8,823 205 14,551
Net investment income 5,728 5,728
Net realized investment gains 141 141
General corporate & interest expense - (1,456) 14,682
--------- --------- --------
Consolidated $ 46,859 $ 7,416 $813,679
========= ========= ========
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 72% of the Company's total revenue for the
three months ended March 31, 1996.
7
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996, COMPARED TO THREE MONTHS
ENDED MARCH 31, 1995
Consolidated gross sales, which consist of gross premiums written, non-
insurance sales revenue, net investment income and realized investment gains
(losses) totaled $78.1 million for the first three months of 1996, up 1.6%
from the same period in 1995. This increase was primarily due to a 1.2%
increase in gross sales of the insurance group, as detailed in the discussion
of RLI Insurance Group that follows. Net investment income increased 6.1%
while ophthalmic group sales were virtually flat. Consolidated revenue for
the first three months of 1996 decreased $2.8 million, or 5.7%, from the same
period in 1995. Net premiums earned in the first three months of 1996 were
down 9.5% compared to the first three months of 1995 as property writings were
down most of last year.
The net after-tax earnings for the first three months of 1996 totaled $5.5
million, $.70 per share, compared to $5.3 million, $.68 per share, for the
same period in 1995. The increase in net earnings is attributable to
continued strong underwriting results and increased net investment income
through the first three months of 1996.
RLI INSURANCE GROUP
Gross premiums written for the first three months of 1996 totaled $63.4
million, compared to $62.7 million reported for the first three months of
1995. Property premiums increased to $30.8 million for the first quarter of
1996 compared to $23.6 million for the first quarter of 1995. This was offset
by declines in the casualty lines due to discontinuation of the Aviation
business as well as declines on other products such as Employers Excess
Indemnity and General Liability due to unfavorable pricing and market
conditions. Property writings in the first quarter of 1995 were lower partly
due to the Group's efforts towards reducing catastrophe exposure and re-
underwriting the fire book of business.
Net premiums written for the first three months of 1996 increased $7.6 million
or 28.9% from the same period in 1995. Of this increase, $6.9 million was
related to property business where a portfolio transfer of reinsurance
resulted in premiums being ceded on an earned rather than written basis.
Additionally, the sale of the Group's aviation business in January of 1995
involved the cession of all unearned premium reserves. This resulted in
negative net written premiums of $3.2 million through the first quarter of
1995.
Net premiums earned of $32.2 million in the first quarter of 1996 represent a
9.5% decrease from the same period in 1995. This decrease is largely the
result of the $2.5 million decline in property premiums earned as a result of
reduced writings throughout most of 1995. Earned premiums on casualty
business were virtually level for the first quarter of 1996 compared to 1995.
Modest gains were realized on General Liability, Personal Umbrella, Commercial
Umbrella and Surety. These were offset by declines on Employers Excess
Indemnification and the discontinuation of some smaller and unprofitable lines
of business.
8
<PAGE>
The Group's pretax earnings totaled $2.8 million for the first three months of
1996 compared to pretax earnings of $3.0 million for the same period in 1995.
Earnings for the first quarter of 1996 were reduced by $2.5 million or $.20
per share due to winter storm losses on the east coast. Earnings for the
first quarter of 1995 were reduced by $2.3 million or $.19 per share from
flooding in California.
The GAAP combined ratio through the first three months of 1996 was 91.3
compared to 91.5 for the same period in 1995. The loss ratio increased from
45.1 for the first quarter of 1995 to 56.1 in the first quarter of 1996. This
increase was mainly the result of more losses on non-catastrophe property
business coinciding with reduced premiums earned on those same lines. The
loss ratio increase was offset by a decline in the expense ratio from 46.4 for
the first quarter of 1995 to 35.2 in the first quarter of 1996. This was
largely the result of accruing contingent ceding commissions from reinsurers
based on recent favorable loss results on the Group's California property
programs.
RLI VISION CORP.
RLI Vision Corp., the Company's wholly-owned subsidiary that distributes a
variety of vision care products, reported first quarter 1996 revenue of $8.8
million, which was level with the first quarter 1995. Revenues from
ophthalmic products increased $249,000 or 3.8%, including contact lens and
other distribution products, which increased $202,000 or 3.6%; and
manufacturing of spectacle and RGP lenses, which increased overall $50,000 or
5.0%. Increases were also seen in the License Fees from RLISYS practice
management software of $65,000 or 22.1% over 1995, as well as an increase of
$130,000 for the Vision Care Advantage (VCA) managed care product, for which a
heavy marketing emphasis began during the latter half of 1995. Continued
growth is expected with these products. Revenues from third party
administration products, including Total Lens Care (TLC) and Clear Advantage
decreased $380,000 or 21.6% from 1995. This decrease was due primarily to the
continued downward trend of these services throughout the ophthalmic industry.
RLI Vision's pretax earnings for the first quarter 1996 decreased 50.6% to
$206,000 from $415,000 in the same period in 1995. Although revenues for the
ophthalmic products increased 3.8%, the cost of goods sold increased 6.5%,
resulting in a decline in the gross margin for these products of $59,000 or
3.2%. Operating expenses remained fairly level at $3.5 million in 1996 as
compared to 1995. This was partially due to a decrease of $102,000 in
salaries and benefits; and a decrease of $36,000 in collection costs.
Offsetting these declines were an increase in printing and supplies of
$65,000; and an increase of $68,000 in marketing expenses, primarily due to
the decline of marketing and advertising rebates received from lens
manufacturers.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $5.7 million during the first three months of 1996, an increase of 6.1%
over that reported for the same period in 1995. This increase is the result
9
<PAGE>
of a higher invested asset base from the prior year.
Invested assets at March 31, 1996 decreased by $19.2 million, or 4.0%, from
December 31, 1995. Short-term investments and declined by $19.8 million from
December 31, 1995 due primarily to the funding of reinsurance obligations and
other first quarter operating needs. In addition, the Company recognized
realized investment gains of $141,000 in the first three months of 1996
compared to realized investment losses of $29,000 in the first three months of
1995.
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 three month periods ended March 31,
1995 and 1996 are as follows:
1995 1996
---- ----
Taxable 7.04% 6.93%
Non-taxable 5.21% 5.00%
Yields on taxable securities decreased through the first three months of 1996
due to lower interest rates on securities purchased during 1995. Available
cash flows from operations and funds from maturing securities during 1995 were
invested in lower yielding taxable and tax-exempt securities.
The Company's available-for-sale portfolio of debt and equity securities had
net unrealized gains before tax of $6.9 million in the first three months of
1996 compared to net unrealized gains before tax of $7.9 million for the same
period in 1995. Lower interest rates and a strong rally in the stock market
during the first three months of 1995 caused the Company to record unrealized
gains on its debt and equity holdings. During the first three months of 1996,
the Company's equity securities continued their strong performance while debt
securities were adversely impacted by higher interest rates. 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 $59.4
million and $52.5 million at March 31, 1996 and December 31, 1995,
respectively.
Interest expense on debt obligations decreased to $721,344 for the first three
months of 1996, a $121,800 drop from the same period in 1995. This reduction
is due to the December 1, 1995 repayment of $5,440,000 on the City of Peoria
industrial development bonds, a part of which was refinanced through short-
term borrowings of $2.8 million. This short-term debt was repaid during the
first quarter of 1996.
INCOME TAXES
The Company's effective tax rate for the first three months of 1996 and 1995
was 26%. 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 three months of 1995 and 1996 as a result of the
following:
10
<PAGE>
1995 1996
Amount % Amount %
------ --- ------ ---
Provision for income taxes at
the statutory rate of 35% $ 2,537,005 35% $ 2,595,768 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income ( 351,788) ( 5%) ( 380,214) 5%
Dividends received deduction ( 264,501) ( 4%) ( 299,150) 4%
Dividends paid deduction ( 85,762) ( 1%) ( 64,168) 1%
Other items, net 76,700 1% 48,347 1%
---------- ---- ---------- ----
Total tax benefit $ 1,911,654 26% $ 1,900,583 26%
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 March 31, 1996 the Company had short-term investments, cash and other
investments maturing within one year, of approximately $26.5 million and
additional investments of $118.5 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 $30.0 million line of credit.
Both lines are unused at March 31, 1996.
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.
11
<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 three
months ended March 31, 1996.
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: May 14, 1996
12
<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 MARCH
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 44,821
<DEBT-CARRYING-VALUE> 248,249
<DEBT-MARKET-VALUE> 250,719
<EQUITIES> 162,362
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 455,431
<CASH> 5,268
<RECOVER-REINSURE> 66,870
<DEFERRED-ACQUISITION> 15,199
<TOTAL-ASSETS> 813,679
<POLICY-LOSSES> 225,135
<UNEARNED-PREMIUMS> 122,572
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 46,000
0
0
<COMMON> 8,453
<OTHER-SE> 161,270
<TOTAL-LIABILITY-AND-EQUITY> 813,679
32,167
<INVESTMENT-INCOME> 5,727
<INVESTMENT-GAINS> 141
<OTHER-INCOME> 8,823
<BENEFITS> 18,031
<UNDERWRITING-AMORTIZATION> 8,001
<UNDERWRITING-OTHER> 3,336
<INCOME-PRETAX> 7,416
<INCOME-TAX> 1,900
<INCOME-CONTINUING> 5,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,516
<EPS-PRIMARY> .70
<EPS-DILUTED> .62
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
