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, 1997
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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 6, 1997 the number of shares outstanding of the registrant's
Common Stock was 9,248,154.
Page 1 of 15
<PAGE>
PART I
Item 1. Financial Statements
RLI Corp. and Subsidiaries
Condensed Consolidated Statement Of Earnings
(Unaudited)
For the Three-Month Period
Ended September 30,
1997 1996
(Restated)
----------- -----------
Net premiums earned $35,895,116 $32,294,530
Net investment income 6,246,661 5,819,777
Net realized investment gains 544,529 37,671
----------- -----------
42,686,306 38,151,978
----------- -----------
Losses and settlement expenses 15,224,756 16,305,490
Policy acquisition costs 11,318,719 7,445,513
Insurance operating expenses 4,522,323 3,944,794
Interest expense on debt 115,489 696,860
General corporate expenses 975,447 706,744
----------- -----------
32,156,734 29,099,401
----------- -----------
Equity in earnings of
unconsolidated investee 319,148 354,186
----------- -----------
Earnings before income taxes 10,848,720 9,406,763
Income tax expense 2,952,000 2,608,086
----------- -----------
Net earnings $ 7,896,720 $6,798,677
============ =============
Net earnings per share:
Primary $0.88 $0.86
Fully diluted $0.85 $0.75
Weighted average number of
common shares outstanding
Primary 8,943,826 7,902,507
Fully diluted 9,366,903 9,671,738
Cash dividends declared per common share $0.15 $0.14
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
RLI Corp. and Subsidiaries
Condensed Consolidated Statement Of Earnings (Continued)
(Unaudited)
For the Nine-Month Period
Ended September 30,
1997 1996
(Restated)
------------ ------------
Net premiums earned $104,935,103 $ 96,851,771
Net investment income 18,267,558 17,639,076
Net realized investment gains 2,839,013 142,791
------------ ------------
126,041,674 114,633,638
------------ ------------
Losses and settlement expenses 46,578,496 51,243,514
Policy acquisition costs 32,212,878 22,952,519
Insurance operating expenses 13,068,816 11,143,020
Interest expense on debt 1,496,573 2,108,774
General corporate expenses 2,820,156 2,295,309
------------ ------------
96,176,919 89,743,136
------------ ------------
Equity in earnings of
unconsolidated investee 859,604 714,597
------------ ------------
Earnings before income taxes 30,724,359 25,605,099
Income tax expense 8,288,185 6,909,863
------------ ------------
Net earnings $ 22,436,174 $ 18,695,236
============ =============
Net earnings per share:
Primary $2.77 $2.36
Fully diluted $2.49 $2.08
Weighted average number of
common shares outstanding
Primary 8,093,893 7,915,000
Fully diluted 9,409,475 9,684,231
Cash dividends declared per common share $0.44 $0.41
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
RLI Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
September 30, December 31,
ASSETS 1997 1996
Investments ------------ -------------
Fixed maturities (Unaudited)
Held-to-maturity, at amortized cost $286,558,385 $263,282,430
Trading, at fair value 9,612,003 0
Available-for-sale, at fair value 37,689,079 44,904,303
Equity securities, at fair value 233,779,850 188,935,360
Short-term investments, at cost which
approximates fair value 4,584,022 40,823,967
----------- -------------
Total investments 572,223,339 537,946,060
Cash 0 0
Accrued investment income 5,932,567 5,835,885
Premiums and reinsurance balances receivable 43,060,340 37,166,516
Ceded unearned premiums 47,967,537 53,705,078
Reinsurance balances recoverable on unpaid losses 168,643,208 165,017,149
Deferred policy acquisition costs 22,831,124 16,663,603
Property and equipment 12,089,371 12,126,552
Investment in unconsolidated investee 13,524,413 8,970,691
Other assets 12,224,491 8,042,250
----------- ------------
TOTAL ASSETS $898,496,390 $845,473,784
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and settlement expenses $414,302,522 $405,801,220
Unearned premiums 129,964,144 129,781,639
Reinsurance balances payable 19,482,859 23,699,837
Long-term debt:
Convertible debentures 0 46,000,000
Income taxes-current 2,539,914 2,134,692
Income taxes-deferred 31,562,001 17,170,687
Other liabilities 20,931,763 20,846,348
----------- ------------
TOTAL LIABILITIES 618,783,203 645,434,423
----------- ------------
Shareholders' Equity:
Common stock ($1 par value, authorized
50,000,000 shares, issued 8,453,449 shares
at 12/31/96 and 10,224,223 shares at 9/30/97) 10,224,223 8,453,449
Other shareholders' equity 286,706,591 197,464,904
Less: Treasury shares at cost
(631,719 shares at 12/31/96)
(940,077 shares at 9/30/97) (17,217,627) (5,878,992)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 279,713,187 200,039,361
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $898,496,390 $845,473,784
============ ============
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Nine-Month Period
Ended September 30,
--------------------------
1997 1996
(Restated)
------------- -------------
Net cash provided by operating activities $ 7,704,628 $ 13,319,097
------------- -------------
Cash Flows from Investing Activities
Investments purchased (67,935,913) (40,284,926)
Investments sold 12,572,571 5,391,924
Investments called or matured 28,066,592 13,850,750
Net decrease in
short-term investments 36,239,946 11,203,942
Net property and equipment purchased ( 1,736,419) ( 1,618,474)
------------- -------------
Net cash from (used in) investing activities 7,206,777 (11,456,784)
------------- -------------
Cash Flows from Financing Activities
Cash dividends paid ( 3,604,004) ( 3,240,690)
Payments on debt 0 ( 1,200,000)
Change in contributed capital 32,445 0
Fractional Shares Paid ( 1,211) 0
Treasury shares reissued 0 2,194,653
Treasury shares purchased (11,338,635) ( 2,346,384)
------------- -------------
Net cash (used in)
financing activities (14,911,405) ( 4,592,421)
------------- -------------
Net increase (decrease) in cash 0 ( 2,730,108)
------------- -------------
Cash at the beginning of the year 0 3,506,945
------------- -------------
Cash as of September 30 $ 0 $ 776,837
============= ==============
The accompanying notes are an integral part of the financial statements.
5
<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 1996 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, 1996 has been derived from, and does not include all the
disclosures contained in the audited consolidated financial statements for
the year ended December 31, 1996.
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, 1997 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.
As previously reported in RLI Corp.'s Form 10-K filed for the period ended
December 31, 1996, on December 1, 1996, RLI Vision Corp., the Company's
wholly-owned optical goods distributor, merged with Hester Enterprises,
Inc., the manufacturer of Maui Jim sunglasses. The Company retained a 34%
minority interest in the combined entity, renamed Maui Jim, Inc. The
Company accounted for this merger as a non-monetary exchange of ownership
interests with no gain or loss recognized.
As a result of the merger, the Company has presented its minority interest
in Maui Jim, Inc. under the equity method of accounting beginning December
1, 1996. Additionally, for comparative purposes, the Company has restated
prior period financial information to present its 100% ownership in RLI
Vision Corp. under the equity method. This restatement is a change in
presentation only and has no impact on earnings. In January 1997, the
Company paid $3,694,119 for an additional 10% ownership interest in Maui
Jim, Inc., bringing the Company's total minority interest in Maui Jim,
Inc. to 44%.
The accompanying financial data should be read in conjunction with the
notes to the financial statements contained in the 1996 10-K Annual
Report.
6
<PAGE>
2. INDUSTRY SEGMENT INFORMATION - Selected information by industry segment
for the nine months ended September 30, 1997 and 1996 is presented below.
SEGMENT DATA - (in thousands) EARNINGS
(LOSS)
BEFORE
REV. TAXES ASSETS
1997 ------- -------- ------
RLI Insurance Group--Property $ 44,994 $ 14,580 $862,383
RLI Insurance Group--Casualty 51,927 ( 1,936)
RLI Insurance Group--Surety 8,014 431
Net investment income 18,268 18,268
Net realized investment gains 2,839 2,839
General corporate & interest expense -- (4,317) 22,589
Equity in earnings of unconsolidated
investee -- 860 13,524
-------- --------- --------
Consolidated $126,042 $ 30,725 $898,496
======== ========= ========
1996 (restated)
RLI Insurance Group--Property $ 35,502 $ 13,531 $808,498
RLI Insurance Group--Casualty 58,599 (1,510)
RLI Insurance Group--Surety 2,751 ( 508)
Net investment income 17,639 17,639
Net realized investment gains 143 143
General corporate & interest expense -- (4,404) 14,805
Equity in earnings of unconsolidated
investee -- 715 8,570
-------- --------- --------
Consolidated $114,634 $ 25,606 $831,873
======== ========= ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This discussion and analysis may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934 which are not historical facts, and
involve risks and uncertainties that could cause actual results to differ
materially from those expected and projected.
OVERVIEW
RLI Corp. (the Company) is a holding company that, through its subsidiaries,
underwrites selected property and casualty insurance products.
The most significant operation is RLI Insurance Group (the Group), which
provides specialty property and casualty coverages for primarily commercial
risks. The Group accounted for 83% of the Company's total revenue for the
nine months ended September 30, 1997.
7
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997,
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996
Consolidated gross sales, which consist of gross premiums written, net
investment income and realized investment gains (losses) totaled $233.2
million for the first nine months of 1997, up 3.2% from the same period in
1996. This modest improvement was the result of a 1.9% increase in gross
sales of the insurance group, as detailed in the discussion of RLI Insurance
Group that follows. Net investment income grew, as well, posting a 3.6%
improvement over 1996 levels. Consolidated revenue increased $11.4 million,
or 10.0%, from the same period in 1996. Net premiums earned for the first
nine months of 1997 were up $8.1 million, or 8.3%, compared to the same period
in 1996, as property and surety revenue showed marked improvement.
Additionally, realized investment gains were $2.7 million higher than 1996.
The sale of certain equity securities and real estate during the first nine
months of 1997 accounted for this increase.
The net after-tax earnings for the first nine months of 1997 totaled $22.7
million, $2.49 per fully-diluted share, compared to $18.7 million, $2.08 per
fully-diluted share, for the same period in 1996. The increase in net
earnings is attributable to strong property and surety underwriting results
and increased net investment income and investment gains.
RLI INSURANCE GROUP
Gross premiums written for the first nine months of 1997 totaled $212.0
million, compared to $208.1 million reported for the same period in 1996.
Property premiums increased to $110.8 million for the first nine months of
1997, compared to $105.0 million for the same period in 1996. The addition of
the Hawaiian Homeowners business in March of 1997 fueled this growth. As part
of the purchase agreement with the Hawaii Property Insurance Association, RLI
Insurance Group assumed $10.7 million in written premium. Since March, an
additional $2.0 million in premium has been assumed and $4.6 million has been
written directly by the Group, for total premium writings of $17.3 million
from this book as of September 30, 1997. It is anticipated that the Hawaiian
book will provide an additional $10.0 to $12.0 million in gross written
premium on an annual basis. The Company's surety book also posted substantial
growth in the first nine months of 1997. Direct writings for surety improved
to $19.1 million versus $6.8 million for the same period in 1996. This
increase is primarily the result of the implementation of two new contract
surety programs in the second quarter of 1996. The increased writings on the
property and surety books were partially offset by declines in the Company's
casualty book. Gross written premium on the casualty book declined $14.2
million to $82.1 million when compared to the same period in 1996. General
Liability, Employers Indemnity, and Directors and Officers Liability accounted
for $8.8, $4.2, and $2.6 million, respectively, of this decline, as continued
less favorable pricing and soft market conditions have resulted in the non-
renewal of certain accounts which cannot be underwritten profitably.
Net premiums written for the first nine months of 1997 increased $10.6
million, or 10.5%, from the same period in 1996. Of this increase, $13.7
million related to the property book. Net property writings increased $16.9
million with the addition of the Hawaiian Homeowners business. This increase,
however, was offset by a $3.4 million decline in Difference-In-
8
<PAGE>
Conditions net writings. This decline was primarily due to the change in
booking ceded premium from a written premium basis to an earned premium basis
on California Excess of Loss treaties in 1996. Ceded premiums and unearned
premiums were adjusted proportionally downward causing net premiums to be
higher in 1996 compared to 1997. The Company's surety book posted net premium
written of $10.8 million, a $6.1 million improvement over the same period in
1996. The improvements experienced in property and surety, however, were
offset by a $9.2 million decline in net casualty writings related to the less
favorable pricing and market conditions as mentioned previously.
Net premiums earned of $104.9 million in the first nine months of 1997
represents an $8.1 million, or 8.3%, increase over the same period in 1996.
Earned premiums associated with the Hawaiian Homeowners business caused
property to improve $9.5 million over 1996 levels. With the addition of the
two new programs, as mentioned previously, the surety book improved, as well,
posting a $5.3 million increase over 1996 levels. Earned premiums on the
casualty book, however, declined by $6.7 million due to the decline in
writings as mentioned previously.
The Group's pretax earnings totaled $13.1 million for the first nine months of
1997 compared to pretax earnings of $11.5 million for the same period in 1996.
The property book contributed to this improvement posting $14.6 million in
pretax earnings in 1997 compared to $13.5 million for the same period of 1996.
1996 property earnings were reduced by $2.2 million, or $.15 per fully-diluted
share, due to winter storm losses on the east coast. In 1997, however, only
$200,000, or $.01 per share, were reported from eastern winter storm losses.
Surety showed improvement, as well, reporting a pretax profit of $431,000
compared to a pretax loss of $508,000 for the same period in 1996. This
translates into surety's third consecutive quarter of operating profits and is
directly in line with the original business plan for this division. The
improvement experienced in property and surety was partially offset by a
decline in earnings on the casualty book. Casualty posted a pretax loss of
$1.9 million for the first nine months of 1997 compared to a pretax loss of
$1.5 million for the same period in 1996.
The GAAP combined ratio through the first nine months of 1997 was 87.6
compared to 88.1 for the same period in 1996. The loss ratio decreased to
44.4 for the first nine months of 1997 compared to 52.9 for the same period in
1996. This decrease was driven by improvements in property, casualty, and
surety loss ratios. The property book reported a loss ratio of 20.0 for the
first nine months of 1997 compared to 22.2 for the same period in 1996. The
decline in losses reported from eastern winter storms, as mentioned
previously, was the primary driver of this improvement. The casualty book
reported a loss ratio of 69.0 in 1997 compared to 72.6 in 1996. The higher
loss ratio in 1996 was the result of $2.2 million in General Liability reserve
strengthening on the 1994 through 1996 accident years. Additionally, the
surety book reported a loss ratio of 21.9% in 1997 compared to 29.7% in 1996.
Surety losses in 1996 were impacted by $200,000 in reserve strengthening on
the Company's miscellaneous surety program. The Company's expense ratio
increased to 43.2 for the first nine months of 1997, up from 35.2 for the same
period in 1996. This increase was primarily related to commissions associated
with the acquisition of the Hawaiian Homeowners business. The $12.7 million
9
<PAGE>
in assumed premium on the Hawaiian book was purchased at a commission rate of
65.4. New business, directly written by the Company, however, will carry a
commission rate between 17% and 20%. As a result, the property book's expense
ratio increased to 47.6 for the first nine months of 1997 compared to 39.6 for
the same period in 1996. The casualty book, as well, showed an increase in
expense ratio to 34.7 in 1997 from 30.0 in 1996. Despite only a $453,000
increase in total expense between periods, the $6.8 million decline in earned
premiums in 1997 compared to 1996 contributed to the increase in casualty's
expense ratio. The surety book, however, posted an improvement in expense
ratio, decreasing to 72.7 in 1997 from 88.8 in 1996. The tremendous growth in
surety earned premiums, as discussed previously, coupled with expense control
measures, contributed to this improvement.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $18.3 million during the first nine months of 1997, an increase of 3.6%
over that reported for the same period in 1996. This increase is the result
of a higher invested asset base for the nine months ended September 30, 1997
compared to the same period in 1996.
Invested assets at September 30, 1997 increased by $34.3 million, or 6.4%,
from December 31, 1996. Short-term investments, however, declined by $36.2
million from December 31, 1996 due primarily to the funding of reinsurance
obligations, operating needs, and the stock repurchase program, which is
discussed further in the Liquidity and Capital Resources section to follow.
In addition, the Company recognized realized investment gains of $2.8 million
in the first nine months of 1997 compared to $143,000 for the same period in
1996. Capital gains have increased over 1996 levels due to the sale of real
estate and certain equity securities. Capital gains associated with sale of
real estate amounted to $775,000. The remaining gains related to the sale of
certain equity securities deemed to have reached their full potential.
The Company's fixed income portfolio consisted entirely of securities rated A
or better and 98% 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, 1997 and 1996 have remained relatively flat and are as follows:
1997 1996
---- ----
Taxable 6.91% 6.94%
Non-taxable 4.99% 4.98%
The Company's available-for-sale portfolio of debt and equity securities had
net unrealized gains before tax of $41.8 million in the first nine months of
1997 compared to net unrealized gains before tax of $12.8 million for the same
period in 1996. During the second and third quarters of 1997, the stock
market rallied from the correction experienced in March of 1997. This rally
resulted in the Company recording $26.1 million in net unrealized gains before
tax for the three months ended June 30, 1997 and $15.7 million in unrealized
gains before tax for the three months ended September 30, 1997. 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 $119.3
million and $77.5 million at September 30, 1997 and December 31, 1996,
respectively. 10
<PAGE>
Interest expense on debt obligations decreased to $1.5 million for the first
nine months of 1997, a $600,000 drop from the same period in 1996. This
reduction is due to the July 21, 1997 conversion of the $46.0 million
convertible debentures into RLI common stock, as discussed further in the
Liquidity and Capital Resources section to follow.
INCOME TAXES
The Company's effective tax rate for the first nine months of 1997 and 1996
was 27%. 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 1997 and 1996 as a result of the
following:
1997 1996
Amount % Amount %
------ --- ------ ---
Provision for income taxes at
the statutory rate of 35% $10,753,526 35% $ 8,961,785 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income (1,367,868) ( 4%) (1,145,440) ( 4%)
Dividends received deduction ( 990,358) ( 3%) ( 901,518) ( 4%)
Dividends paid deduction ( 178,512) ( 1%) ( 193,687) ( 1%)
Other items, net 71,397 -- 188,723 1%
---------- ---- ---------- ----
Total tax expense $ 8,288,185 27% $ 6,909,863 27%
LIQUIDITY AND CAPITAL RESOURCES
Historically, the primary sources of the Company's liquidity have been funds
generated from insurance premiums and investment income (operating activities)
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.
During the first nine months of 1997, the Company repurchased 308,358 of its
outstanding shares at a cost of $11.3 million. Continuation of the share
repurchase program will be funded by internal capital and short-term
borrowings. These treasury shares are reflected as a separate component of
equity.
On June 20, 1997, the Company announced that it was calling for redemption all
of its outstanding 6% convertible debentures that were to mature July 15,
2003. The $46.0 million bond issue was to be redeemed for cash on July 22,
1997 at 103% of its principal amount, plus accrued interest. Holders of the
debenture had the option to convert, at any time prior to the close of
business on July 21, 1997, the debentures at an exchange rate of 38.4615
shares of RLI common stock for each $1,000 principal amount of convertible
debt ($26.00 per share conversion price). On July 24, 1997, the Company
announced that the entire $46.0 million had been converted into RLI common
stock. This conversion created an additional 1,769,199 new shares of RLI
common stock. 11
<PAGE>
At September 30, 1997 the Company had short-term investments, cash and other
investments maturing within one year, of approximately $22.3 million and
additional investments of $124.1 million maturing within five years. The
Company maintains two sources of credit from one financial institutions: one
$10.0 million secured and committed line of credit that cannot be canceled
during its annual term; and a $3.0 million secured line of credit available
for the issuance of letters of credit. Both lines were unused at September
30, 1997.
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.
THREE MONTHS ENDED SEPTEMBER 30, 1997,
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996
Consolidated gross sales, totaled $72.3 million for the third quarter of 1997,
down 5.1% from the same period in 1996. This decline was the result of a 6.9%
decrease in gross sales of the insurance group, as detailed in the discussion
of RLI Insurance Group that follows. Partially offsetting this decline, both
net investment income and investment gains showed improvement. Consolidated
revenue for the third quarter of 1997 increased $4.5 million, or 11.9%, from
the same period in 1996. Net premiums earned in the third quarter of 1997
were up 11.1% compared to 1996, as surety writings showed marked improvement,
and the Hawaiian homeowner's book provided additional earned premium.
The net after-tax earnings for the third quarter of 1997 totaled $7.9 million,
$0.85 per fully-diluted share, compared to $6.8 million, $0.75 per fully-
diluted share, for the same period in 1996. The increase in net earnings is
attributable to continued strong property and surety underwriting results and
increased net investment income and investment gains.
RLI INSURANCE GROUP
Gross premiums written in the third quarter of 1997 totaled $65.4 million,
compared to $70.3 million reported for the same period in 1996. Property
premiums declined $2.4 million from 1996 levels to $32.1 million for the third
quarter of 1997. Hawaiian Homeowners business added $2.9 million in written
premium. This increase, however, was offset by declines in Difference-In-
Condition and Property-Fire of $3.8 and $1.5 million, respectively. The
Company's casualty book posted a $5.4 million decline in writings, as well, as
soft market conditions have resulted in the non-renewal of certain accounts
which cannot be underwritten profitably. The Company's surety book, however,
posted premium growth in the third quarter of 1997. Direct writings for
surety improved to $6.7 million compared to $3.8 million for the same period
in 1996.
12
<PAGE>
Net premiums written for the third quarter of 1997 improved slightly to $33.0
million, up 1.4% from the same period in 1996. Net property writings
increased $2.9 million with the addition of the Hawaiian Homeowners business.
The Company's surety book posted net premium written of $3.8 million, a $1.6
million improvement over the same period in 1996. The improvements
experienced in property and surety, however, were offset by a $4.0 million
decline in net casualty writings related to the less favorable pricing and
market conditions mentioned previously.
Net premiums earned of $35.9 million in the third quarter of 1997 represents a
$3.6 million, or 11.1%, increase over the same period in 1996. Earned
premiums associated with the Hawaiian Homeowners business caused property to
improve $5.0 million over third quarter 1996 levels. The surety book
improved, as well, posting a $2.1 million increase over 1996 levels. Earned
premiums on the casualty book, however, declined by $3.5 million due to the
decline in writings mentioned previously.
The Group's pretax earnings totaled $4.8 million for the third quarter of 1997
compared to pretax earnings of $4.6 million for the same period in 1996. The
GAAP combined ratio for the third quarter of 1997 was 86.5 compared to 85.8
for the same period in 1996. The loss ratio decreased to 42.4 for the third
quarter of 1997 from 50.5 for the same period in 1996. The casualty and
surety books accounted for this improvement. The casualty loss ratio declined
to 67.7 in third quarter 1997 compared to 71.3 for the same period in 1996.
Additionally, the surety book's loss ratio declined to 22.6 in third quarter
1997 compared to 31.2% for the same period in 1996. Surety losses in 1996
were impacted by reserve strengthening on the miscellaneous surety program, as
mentioned previously. The Company's expense ratio increased to 44.1 for the
third quarter of 1997 from 35.3 for the third quarter of 1996. This increase
was primarily related to commissions and expenses associated with the Hawaiian
Homeowners business. These expenses contributed to the increase in property's
expense ratio to 46.3 in the third quarter of 1997 from 39.4 in the third
quarter of 1996. The casualty book, as well, showed an increase in expense
ratio to 36.3 in 1997 compared to 30.2 in 1996. Despite only a $80,000
increase in total expense between periods, the $3.5 million decline in earned
premiums in 1997 compared to 1996 contributed to the increase in the expense
ratio. The surety book, however, posted an improvement in expense ratio,
decreasing to 72.7 in 1997 from 81.5 in 1996. The tremendous growth in surety
earned premiums, as discussed previously, coupled with expense control
measures, contributed to this improvement.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $6.2 million during the third quarter of 1997, compared to $5.8 million
reported for the same period in 1996.
In addition, the Company recognized realized investment gains of $545,000 in
the third quarter of 1997 compared to a $38,000 for the same period in 1996.
13
<PAGE>
INCOME TAXES
The Company's effective tax rate for the third quarter of 1997 and 1996 was
27% and 28%, respectively. 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 three months ending September 30, 1997
and 1996 as a result of the following:
1997 1996
Amount % Amount %
------ --- ------ ---
Provision for income taxes at
the statutory rate of 35% $ 3,797,052 35% $ 3,292,367 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income ( 476,853) ( 4%) ( 394,982) ( 4%)
Dividends received deduction ( 328,787) ( 3%) ( 308,525) ( 3%)
Dividends paid deduction ( 59,015) ( 1%) ( 64,842) ( 1%)
Other items, net 19,603 -- 84,068 1%
---------- ---- ---------- ----
Total tax expense $ 2,952,000 27% $ 2,608,086 28%
14
<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
PART II - OTHER INFORMATION (Continued)
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 September 30, 1997.
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 7, 1997
15
<PAGE>
<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, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 47,301
<DEBT-CARRYING-VALUE> 286,558
<DEBT-MARKET-VALUE> 291,161
<EQUITIES> 233,780
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 572,223
<CASH> 0
<RECOVER-REINSURE> 43,060
<DEFERRED-ACQUISITION> 22,831
<TOTAL-ASSETS> 898,496
<POLICY-LOSSES> 245,660
<UNEARNED-PREMIUMS> 129,964
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 10,224
<OTHER-SE> 286,707
<TOTAL-LIABILITY-AND-EQUITY> 898,496
104,935
<INVESTMENT-INCOME> 18,268
<INVESTMENT-GAINS> 2,839
<OTHER-INCOME> 860
<BENEFITS> 46,578
<UNDERWRITING-AMORTIZATION> 32,213
<UNDERWRITING-OTHER> 13,069
<INCOME-PRETAX> 30,724
<INCOME-TAX> 8,288
<INCOME-CONTINUING> 22,436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,436
<EPS-PRIMARY> 2.77
<EPS-DILUTED> 2.49
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
