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, 1998
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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
-----------------------------------------
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 4, 1998 the number of shares outstanding of the registrant's
Common Stock was 8,420,524.
Page 1 of 13
<PAGE>
PART I
Item 1. Financial Statements
RLI Corp. & Subsidiaries
Condensed Consolidated Statement of Earnings and Comprehensive Earnings
For the Three-Month Period Ended March 31,
(Unaudited) 1998 1997
----------- -----------
Net premiums earned $34,915,110 $33,065,635
Net investment income 5,944,520 6,021,551
Net realized investment gains 572,563 560,024
----------- -----------
41,432,193 39,647,210
----------- -----------
Losses and settlement expenses 12,423,081 15,703,162
Policy acquisition costs 14,017,205 9,963,019
Insurance operating expenses 4,363,357 3,784,403
Interest expense on debt 403,796 690,552
General corporate expenses 1,166,880 880,469
----------- -----------
32,374,319 31,021,605
----------- -----------
Equity in earnings of uncons. investee 363,954 243,673
----------- -----------
Earnings before income taxes 9,421,828 8,869,278
Income tax expense 2,445,800 2,313,493
----------- -----------
Net earnings $ 6,976,028 $6,555,785
============ =============
Other comprehensive earnings, net of tax 17,416,125 1,425,546
------------ -------------
Comprehensive Earnings $ 24,392,153 $7,981,331
============ =============
Earnings per share:
Basic:
Net earnings per share from operations $0.78 $0.80
Realized gains, net of tax $0.04 $0.05
------------ -------------
Basic net earnings per share $0.82 $0.85
============ =============
Basic comprehensive earnings per share $2.85 $1.04
============ =============
Diluted:
Net earnings per share from operations $0.77 $0.70
Realized gains, net of tax $0.04 $0.04
------------ -------------
Diluted net earnings per share $0.81 $0.74
============ =============
Diluted comprehensive earnings per share $2.82 $0.89
============ =============
Weighted average number of common shares outstanding
Basic 8,546,998 7,698,716
Diluted 8,652,747 9,518,921
Cash dividends declared per common share $0.15 $0.14
The accompanying notes are an integral part of the financial statements.
2
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RLI Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
March 31, December 31,
ASSETS 1998 1997
(Unaudited)
Investments ------------ -------------
Fixed maturities
Held-to-maturity, at amortized cost $288,552,612 $290,034,309
Trading, at fair value 9,894,290 9,545,572
Available-for-sale, at fair value 34,491,651 34,120,202
Equity securities, at fair value 279,205,252 251,459,843
Short-term investments, at cost which
approximates fair value 8,501,015 18,696,896
----------- -------------
Total investments 620,644,820 603,856,822
Cash 0 0
Accrued investment income 5,867,465 6,348,257
Premiums and reinsurance balances receivable 38,253,329 30,719,768
Ceded unearned premiums 48,908,323 49,677,041
Reinsurance balances recoverable on unpaid losses 159,128,238 161,709,389
Deferred policy acquisition costs 20,947,542 21,984,585
Property and equipment 11,712,552 12,387,500
Investment in unconsolidated investee 14,068,281 13,615,577
Other assets 13,438,639 11,441,666
----------- ------------
TOTAL ASSETS $932,969,189 $911,740,605
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and settlement expenses $397,408,569 $404,263,638
Unearned premiums 123,285,530 128,542,853
Reinsurance balances payable 28,614,813 24,390,338
Short-term debt:
LOC and notes payable 37,787,000 24,900,000
Income taxes-current 2,718,941 2,701,964
Income taxes-deferred 45,913,001 36,339,801
Other liabilities 18,696,384 24,049,571
----------- ------------
TOTAL LIABILITIES 654,424,238 645,188,165
----------- ------------
Shareholders' Equity:
Common stock ($1 par value, authorized
50,000,000 shares, issued 10,229,673 shares
at 3/31/98 and at 12/31/97) 10,229,673 10,229,673
Accumulated other comprehensive earnings 104,268,788 86,852,663
Other shareholders' equity 220,552,269 215,019,386
Less: Treasury shares at cost
(1,809,149 shares at 3/31/98)
(1,595,419 shares at 12/31/97) (56,505,779) (45,549,282)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 278,544,951 266,552,440
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $932,969,189 $911,740,605
============ ============
The accompanying notes are an integral part of the financial statements.
3
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RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three-Month Period
Ended March 31,
--------------------------
1998 1997
------------ ------------
Net cash used in operating activities ($ 10,926,179) ($ 18,264,826)
------------ ------------
Cash Flows from Investing Activities
Investments purchased (13,007,456) (29,226,370)
Investments sold 1,674,437 5,423,220
Investments called or matured 11,230,900 15,761,592
Net decrease in
short-term investments 10,195,882 34,505,170
Net property and equipment (purchased) sold 163,807 ( 188,535)
------------ ------------
Net cash from investing activities 10,257,570 26,275,077
------------ ------------
Cash Flows from Financing Activities
Cash dividends paid ( 1,261,894) ( 1,067,564)
Proceeds from issuance of short-term debt 12,887,000
Change in contributed capital 0 5,665
Treasury shares purchased (10,956,497) ( 6,948,352)
------------ ------------
Net cash from (used in)
financing activities 668,609 ( 8,010,251)
------------ ------------
Net increase (decrease) in cash 0 0
------------ ------------
Cash at the beginning of the year 0 0
------------ ------------
Cash at March 31 $ 0 $ 0
============ ============
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 1997 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, 1997 has been derived from, and does not include all the
disclosures contained in the audited consolidated financial statements for
the year ended December 31, 1997.
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, 1998 and 1997 are
not necessarily indicative of the results of a full year.
The accompanying financial data should be read in conjunction with the
notes to the financial statements contained in the 1997 10-K Annual
Report.
Earnings Per Share: Basic earning per share(EPS) excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the dilution that could occur if securities or other
contracts to issue common stock (common stock equivalents) were exercised
or converted into common stock. When inclusion of common stock
equivalents increases the earnings per share or reduces the loss per
share, the effect on earnings is antidilutive. Under these circumstances,
the diluted net earnings or net loss per share is computed excluding the
common stock equivalents.
Pursuant to disclosure requirements contained in Statement 128, the
following represents a reconciliation of the numerator and denominator of
the basic and diluted EPS computations contained in the financial
statements.
For the three months ended March 31, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------
Basic EPS
Income available to 6,976,028 8,546,998 0.82
common stockholders
Effect of Dilutive Securities
Incentive Stock Options -- 105,749
- ------------------------------------------------------------------------------
Diluted EPS
Income available to common 6,976,028 8,652,747 0.81
- ------------------------------------------------------------------------------
5
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For the three months ended March 31, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------
Basic EPS
Income available to 6,555,785 7,698,716 0.85
common stockholders
Effect of Dilutive Securities
Convertible debentures 468,514 1,769,231
Incentive Stock Options -- 50,974
- ------------------------------------------------------------------------------
Diluted EPS
Income available to common 7,024,299 9,518,921 0.74
- ------------------------------------------------------------------------------
The comparison of Basic EPS between periods is impacted by the shares
associated with the Convertible debentures. In June 1997, the Company called
for redemption all of its outstanding convertible debentures. On July 24,
1997, the Company announced that all debentures had been converted. This
conversion resulted in an additional issuance of 1,769,231 shares of common
stock. Once converted, these shares became basic outstanding shares,
impacting both basic and diluted EPS. Prior to conversion, including first
quarter 1997, these potentially dilutive shares were included in calculating
dilutive EPS but were excluded when computing basic EPS. For both periods
presented, dilutive EPS includes the impact of the shares associated with the
convertible debentures and provides a more accurate comparison of per share
earnings.
Comprehensive Earnings: Financial Accounting Standards Board (FASB) Statement
No. 130, "Reporting Comprehensive Income," was issued in June 1997 and became
effective for interim and annual periods beginning after December 15, 1997.
The primary difference between reporting the Company's net and comprehensive
earnings is that comprehensive earnings include unrealized gains/losses net of
tax. Traditional reporting of net earnings directly credits or charges
shareholders' equity with unrealized gains/losses, rather than including them
in earnings.
Other Accounting Standards: In June 1997, the FASB issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(Statement 131). Statement 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This Statement
is effective for fiscal periods beginning after December 15, 1997. In the
initial year of application, this Statement need not be applied to interim
financial statements. The Company is currently evaluating its segment
disclosures with respect to this Statement.
6
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In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (Statement 132). Statement
132 revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those
plans. Statement 132 standardizes the disclosure requirements for pensions
and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values
of plan assets that will facilitate financial analysis, and eliminates certain
other disclosures that are no longer useful. This Statement is effective for
fiscal years beginning after December 15, 1997. The Company is currently
evaluating this recently issued Statement.
2. INDUSTRY SEGMENT INFORMATION - Selected information by industry segment
for the three months ended March 31, 1998 and 1997 is presented below.
SEGMENT DATA - (in thousands) EARNINGS
(LOSS)
BEFORE
REV. TAXES ASSETS**
1998 ------- -------- ------
RLI Insurance Group--Property $ 14,638 $ 5,124 $891,378
RLI Insurance Group--Casualty 16,486 ( 1,203)
RLI Insurance Group--Surety 3,791 191
Net investment income 5,945 5,945
Net realized investment gains 572 572
General corporate & interest expense -- (1,571) 27,523
Equity in Earnings of unconsolidated
investee -- 364 14,068
-------- --------- --------
Consolidated $ 41,432 $ 9,422 $932,969
======== ========= ========
1997
RLI Insurance Group--Property $ 12,701 $ 4,059 $804,632
RLI Insurance Group--Casualty 18,283 ( 522)
RLI Insurance Group--Surety 2,081 77
Net investment income 6,022 6,022
Net realized investment gains 560 560
General corporate & interest expense -- ( 1,571) 21,475
Equity in Earnings of unconsolidated
investee -- 244 12,908
-------- --------- --------
Consolidated $ 39,647 $ 8,869 $839,015
======== ========= ========
** The Company does not evaluate assets on the basis of individual Insurance
Group segments. Insurance Group assets presented in the tables represent
total assets of RLI Insurance Group and are inclusive of all segments
contained therein.
7
<PAGE>
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. Various risk factors that could
affect future results are listed in the company's filings with the Securities
Exchange Commission, including the Form 10-K for the year ended December 31,
1997.
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 84% of the Company's total revenue for the
three months ended March 31, 1998.
THREE MONTHS ENDED MARCH 31, 1998, COMPARED TO THREE MONTHS
ENDED MARCH 31, 1997
Consolidated gross sales, which consist of gross premiums written, net
investment income and realized investment gains (losses) totaled $69.2 million
for the first three months of 1998, down 10.0% from the same period in 1997.
This decrease was the result of a 10.9% decrease in gross writings of the
insurance group. As detailed in the discussion of RLI Insurance Group that
follows, first quarter 1997 results included $10.7 million of non-recurring
premiums associated with the Company's purchase of the Hawaii Residential
Insurance program. Net investment income remained flat at $5.9 million for
the first quarter 1998. Consolidated revenue for the first three months of
1998 increased $1.8 million, or 4.5%, from the same period in 1997. Net
premiums earned in the first three months of 1998 were up 5.6% compared to the
first three months of 1997, as property and surety revenue showed marked
improvement.
The net after-tax earnings for the first three months of 1998 totaled $7.0
million, $.81 per diluted share, compared to $6.6 million, $.74 per diluted
share, for the same period in 1997. The increase in net earnings is
attributable to continued strong property and surety underwriting results.
Comprehensive earnings, which includes net earnings plus unrealized
gains/losses net of tax, improved to $24.4 million, $2.82 per diluted share,
compared to $8.0 million, $.89 per share for the same period in 1997.
Improved operating earnings coupled with the rise in the stock market in 1998
accounted for this increase. Unrealized gains, net of tax, for the first
quarter of 1998 were $17.4 million, $2.01 per share compared to $1.4 million,
$.15 per share, for the same period in 1997.
8
<PAGE>
RLI INSURANCE GROUP
Gross premiums written for the first three months of 1998 totaled $62.6
million, compared to $70.3 million reported for the same period in 1997.
Property premiums decreased $13.9 million to $25.1 million for the first
quarter of 1998. Non-recurring premiums associated with the acquisition of
the Hawaiian Homeowners business in March of 1997 account for the majority of
this decline. As part of the purchase agreement with the Hawaii Property
Insurance Association, RLI Insurance Group assumed, on a one-time basis, $10.7
million in unearned premium. The Company's surety book, on the other hand,
grew its top line by 34.3% during the first quarter of 1998. Direct writings
for surety improved $1.7 million to $6.6 million versus $4.9 million for the
same period in 1997. This increase is primarily the result of the continued
growth of the Universal Bonding and Surety America programs. Gross writings
on the casualty book improved, as well, up $4.6 million over first quarter
1997 to $30.9 million. Commercial Umbrella improved $4.7 million to $10.6
million for the first quarter of 1998. The Company's expansion into the
WestCoast market, through its relationship with the general agency ALCO,
accounted for $3.1 million of this growth, while an additional $1.6 million in
production came from the Company's newly opened office in Dallas, Texas.
Additionally, the Transportation program launched in November of 1997 added
$2.4 million in writings during its first quarter of production. It is
anticipated that this program will add $17.0 million in annual written
premiums during 1998. Partially offsetting the growth in the Commercial
Umbrella and Transportation programs, Employer's Excess Indemnity experienced
a decline of $3.0 million, as the Company discontinued its relationship with
its primary brokerage firm for this program.
Net premiums written for the first three months of 1998 decreased $6.8 million
or 18.2% from the same period in 1997. Net property writings decreased $9.0
million over first quarter 1997, primarily due to the non-recurring premiums
associated with the assumption of the Hawaiian Homeowners business. The
surety book posted net premium written of $4.3 million, a $1.5 million
improvement over the same period in 1997, while net casualty writings improved
$800,000 to $17.0 million.
The decline experienced in written premiums, during the first quarter of 1998,
has not resulted in a decrease in Insurance Group revenue. In fact, net
premiums earned of $34.9 million in the first quarter of 1998 represents a
5.6% increase from the same period in 1997. Earned premiums associated with
the Hawaiian Homeowners business helped property to improve $1.9 million over
first quarter 1997 levels. With the continued growth of Universal Bonding and
Surety America, as mentioned previously, the surety book improved, as well,
posting a $1.7 million increase over 1997 levels. Earned premiums on the
casualty book, however, declined by $1.8 million due to the decline in
writings experienced throughout 1997. As the year progresses, growth
initiatives which have served to improve casualty's gross and net writings
should additionally help to offset this decline in earned premiums.
The Group's pretax earnings totaled $4.1 million for the first three months of
1998 compared to $3.6 million for the same period in 1997. The property book
was responsible for the majority of this improvement posting $5.1 million in
pretax earnings compared to $4.1 million for the first quarter of 1997. Costs
associated with the acquisition of the Hawaiian book caused 1997 earnings to
9
<PAGE>
be lower. Surety showed improvement, as well, reporting a pretax profit of
$191,000, up from $77,000 reported for the same period in 1997. The
improvement experienced in property and surety was partially offset by a
decline in earnings on the casualty book. The casualty book posted a pretax
loss of $1.2 million for the first quarter of 1998 compared to a pretax loss
of $523,000 for the same period in 1997.
The GAAP combined ratio through the first three months of 1998 was 88.2
compared to 89.1 for the same period in 1997. The loss ratio decreased from
47.5 for the first quarter of 1997 to 35.6 in the first quarter of 1998. This
decrease was the result of a decline in casualty's loss ratio, coupled with a
shift in earned premiums to the lower loss ratio property and surety books.
The casualty book's loss ratio decreased from 70.4 for the first quarter of
1997 to 51.8 for the first quarter 1998. Based on loss experience-to-date,
first quarter 1998 casualty results contain a $3.0 million reclass between
losses incurred and operating expenses (decreasing losses incurred and
increasing contingent commissions) on the Company's deductible buy-back
program, an experience-based program. This reclass has no impact on bottom
line net earnings, but does affect the comparison of loss and expense ratios
between periods. Net of this reclass, casualty's loss ratio is 70.0, in line
with 1997. Additionally, despite El Nino-related weather patterns across the
nation during the quarter, the property book's loss ratio, at 20.9, compares
favorably with 1997's 18.7. Winter storm losses impacted first quarter 1998
by $658,000 compared to $300,000 for the same period in 1997. Surety losses
remained flat at 21.8 compared to 21.2 for the same period in 1997. The
Company's expense ratio increased from 41.6 for the first quarter of 1997 to
52.6 for the first quarter of 1998. This increase was primarily related to
increases experienced on the casualty book. The casualty book's expense ratio
increased from 32.4 in 1997 to 55.5 in 1998. The aforementioned reclass on
the Company's deductible buy-back program accounted for 18.2 of the 23.1 point
increase. Net of this reclass, the casualty books expense ratio was 37.3, up
4.9 points from 1997's 32.4. Start-up costs associated the Company's
Transportation program, as well as the expansion of casualty operations in
Dallas, San Francisco, and Los Angeles, have caused expenses to trend upward.
Partially offsetting this increase, the Company's property and surety books
showed improvements in expense ratio for first quarter 1998. Property's
expense ratio decreased from 49.3 in 1997 to 44.1, in 1998. Commissions
associated with the Hawaiian Homeowner's acquisition caused first quarter
1997's expense ratio to be higher. Additionally, the surety book posted a
slight improvement in expense ratio, decreasing from 75.1 in 1997 to 73.2 in
1998.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $5.9 million during the first three months of 1998, a decrease of 1.3% over
that reported for the same period in 1997. This decrease is the result of a
drop in fixed income yields, an increase in tax exempt securities, and
increasing asset management fees on the appreciated common stock portfolio.
10
<PAGE>
Invested assets at March 31, 1997 increased by $16.8 million, or 2.8%, from
December 31, 1997, primarily driven by unrealized gains on the Company's
investment portfolio. For the three months ended March 31, 1998, the Company
experienced $26.8 million in pre-tax unrealized gains on its investment
portfolio. Short-term investments, however, declined by $10.1 million from
December 31, 1997 due primarily to the funding of reinsurance obligations and
other first quarter operating needs. In addition, the Company recognized
realized investment gains of $570,000 in the first three months of 1998
compared to $560,000 in the first three months of 1997.
Virtually all the Company's fixed income portfolio consists of securities
rated A or better and 97% 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, 1998 and 1997 are as follows:
1998 1997
---- ----
Taxable 6.81% 6.95%
Non-taxable 5.02% 5.06%
Yields on taxable and non-taxable securities declined through the first three
months of 1998 due to the maturity of higher yielding securities from the
portfolio. In a period of declining interest rates, these securities were
replaced with lower yielding securities.
The Company's available-for-sale portfolio of debt and equity securities had
net unrealized gains before tax of $26.8 million for the first three months of
1998 compared to net unrealized gains before tax of $2.2 million for the same
period in 1997. The Company's net unrealized gain before tax was $160.1
million and $133.3 million at March 31, 1998 and December 31, 1997,
respectively. Unrealized appreciation on securities, net of tax is reflected
in accumulated other comprehensive earnings, a component of shareholders'
equity.
Interest expense on debt obligations decreased to $404,000 for the first three
months of 1998, a $287,000 drop from the same period in 1997. This decrease
is related to a reduction in outstanding debt balances. Conversion of the
$46.0 million convertible debt into common equity occurred in July 1997.
Short-term debt accumulated in conjunction with the Company's stock repurchase
program began the year at $24.9 million and has increased to $37.8 million at
March 31, 1998.
11
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INCOME TAXES
The Company's effective tax rate for the first three months of 1998 and 1997
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 1998 and 1997 as a result of the
following:
1998 1997
Amount % Amount %
------ --- ------ ---
Provision for income taxes at
the statutory rate of 35% $ 3,297,639 35% $ 3,104,248 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income ( 529,773) ( 5%) ( 443,036) ( 5%)
Dividends received deduction ( 353,845) ( 4%) ( 331,772) ( 4%)
Dividends paid deduction ( 55,675) ( 1%) ( 62,678) ( 1%)
Other items, net 87,454 1% 46,731 1%
---------- ---- ---------- ----
Total tax expense $ 2,445,800 26% $ 2,313,493 26%
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 quarter of 1998, operating cash flows were negative due to
the funding of reinsurance obligations and the payment of year-end employee
benefit accruals. Employee benefit payments under the Company's Market Value
Potential Plan, an executive and associate bonus and incentive plan, totalled
$4.5 million during January 1998. Additionally, the Company contributed $2.6
million during the quarter to fund the Employee Stock Ownership Plan. These
obligations were accrued at year-end 1997. First quarter 1998 operating cash
flow shows improvement over the same period in 1997, primarily due to the
timing of one $10.0 million reinsurance deposit. The payment of this deposit
did not take place in 1998 until April. In 1997, however, this deposit was
made during the first quarter.
Also during the first quarter of 1998, the Company repurchased 213,730 of its
outstanding shares at a cost of $11.0 million. This repurchase program has
been funded through the issuace of short-term debt. These treasury shares are
reflected as a separate component of shareholders' equity.
At March 31, 1998 the Company had short-term investments, cash and other
investments maturing within one year, of approximately $31.4 million and
additional investments of $127.4 million maturing within five years. The
Company maintains two sources of credit from one financial institutions: a
$30.0 million unsecured line of credit that cannot be canceled during its
12
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annual term and a $3.0 million secured line of credit available for the
issuance of letters of credit. As of March 31, 1998, the Company had
$17,725,000 in outstanding short-term borrowings. Additionally, the Company
was party to three reverse repurchase transactions totaling $20,062,000.
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.
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, 1998.
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 10, 1998
13
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<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENT
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 44,386
<DEBT-CARRYING-VALUE> 288,553
<DEBT-MARKET-VALUE> 294,882
<EQUITIES> 279,205
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 620,645
<CASH> 0
<RECOVER-REINSURE> 38,253
<DEFERRED-ACQUISITION> 20,984
<TOTAL-ASSETS> 932,969
<POLICY-LOSSES> 238,280
<UNEARNED-PREMIUMS> 123,286
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 37,787
0
0
<COMMON> 10,230
<OTHER-SE> 268,315
<TOTAL-LIABILITY-AND-EQUITY> 932,969
34,915
<INVESTMENT-INCOME> 5,945
<INVESTMENT-GAINS> 573
<OTHER-INCOME> 364
<BENEFITS> 12,423
<UNDERWRITING-AMORTIZATION> 14,017
<UNDERWRITING-OTHER> 4,363
<INCOME-PRETAX> 9,422
<INCOME-TAX> 2,446
<INCOME-CONTINUING> 6,976
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,976
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.81
<RESERVE-OPEN> 242,554
<PROVISION-CURRENT> 13,982
<PROVISION-PRIOR> (1,559)
<PAYMENTS-CURRENT> 874
<PAYMENTS-PRIOR> 15,823
<RESERVE-CLOSE> 238,830
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
