<PAGE>
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, 2000
--------------------------------------------
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 August 7, 2000 the number of shares outstanding of the registrant's
Common Stock was 9,803,962.
Page 1 of 15
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
RLI Corp. & Subsidiaries
Condensed Consolidated Statement of Earnings and Comprehensive Earnings
<TABLE>
<CAPTION>
For the Three-Month Period
Ended June 30,
(Unaudited) 2000 1999
------------- -----------
<S> <C> <C>
Net premiums earned $57,643,399 $47,671,954
Net investment income 7,084,914 6,193,957
Net realized investment gains 33,840 2,234,634
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64,762,153 56,100,545
------------- -----------
Losses and settlement expenses 31,793,116 22,026,589
Policy acquisition costs 18,644,625 16,311,484
Insurance operating expenses 4,580,752 4,493,527
Interest expense on debt 1,295,462 939,460
General corporate expenses 570,611 807,520
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56,884,566 44,578,580
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Equity in earnings of uncons. investee 1,405,051 763,327
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Earnings before income taxes 9,282,638 12,285,292
Income tax expense 2,320,661 3,264,500
------------- -----------
Net earnings $ 6,961,977 $ 9,020,792
============= ===========
Other compre. earnings, net of tax 968,252 12,571,127
------------- -----------
Comprehensive earnings $ 7,930,229 $21,591,919
============= ===========
Earnings per share:
Basic:
Net earnings per share from operations $0.71 $0.75
Realized gains, net of tax $0.00 $0.14
------------- -----------
Basic net earnings per share $0.71 $0.89
============= ===========
Basic compre. earnings per share $0.81 $2.12
============= ===========
Diluted:
Net earnings per share from operations $0.70 $0.74
Realized gains, net of tax $0.00 $0.14
------------ -----------
Diluted net earnings per share $0.70 $0.88
============ ===========
Diluted compre. earnings per share $0.80 $2.10
============ ===========
Weighted average number of common shares
outstanding
Basic 9,802,074 10,173,411
Diluted 9,909,259 10,267,103
Cash dividends declared per common share $0.15 $0.14
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
RLI Corp. & Subsidiaries
Condensed Consolidated Statement of Earnings and Comprehensive Earnings
<TABLE>
<CAPTION>
For the Six-Month Period
Ended June 30,
(Unaudited) 2000 1999
------------- ------------
<S> <C> <C>
Net premiums earned $110,829,818 $93,461,432
Net investment income 14,021,746 12,428,180
Net realized investment gains (losses) (86,665) 2,257,967
------------- ------------
124,764,899 108,147,579
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Losses and settlement expenses 59,676,037 43,099,051
Policy acquisition costs 35,894,538 33,634,091
Insurance operating expenses 8,919,657 8,155,695
Interest expense on debt 2,533,960 1,828,755
General corporate expenses 1,429,088 1,702,894
------------- ------------
108,453,280 88,420,486
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Equity in earnings of uncons. investee 1,966,684 1,217,380
------------- ------------
Earnings before income taxes 18,278,303 20,944,473
Income tax expense 4,776,477 5,345,900
------------- ------------
Net earnings $13,501,826 $15,598,573
============= ============
Other compre. earnings (loss), net of tax (3,971,638) 7,611,886
------------- ------------
Comprehensive earnings $ 9,530,188 $23,210,459
============= ============
Earnings per share:
Basic:
Net earnings per share from operations $1.38 $1.38
Realized gains (losses), net of tax ($0.01) $0.14
------------- -----------
Basic net earnings per share $1.37 $1.52
============= ===========
Basic compre. earnings per share $0.97 $2.26
============= ===========
Diluted:
Net earnings per share from operations $1.37 $1.36
Realized gains (losses), net of tax ($0.01) $0.14
------------ -----------
Diluted net earnings per share $1.36 $1.50
============ ===========
Diluted compre. earnings per share $0.96 $2.24
============ ===========
Weighted average number of common shares
outstanding
Basic 9,830,767 10,283,449
Diluted 9,924,034 10,372,947
Cash dividends declared per common share $0.29 $0.27
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
RLI Corp. and Subsidiaries Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
(Unaudited)
-------------- -----------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities
Held-to-maturity, at amortized cost $ 288,217,540 $ 294,198,626
Trading, at market value 7,478,521 7,650,901
Available-for-sale, at market value 67,960,409 40,662,978
Equity securities, at fair value 280,354,898 284,639,044
Short-term investments, at cost 48,080,228 64,092,009
-------------- --------------
Total investments 692,091,596 691,243,558
Accrued investment income 7,058,471 6,999,134
Premiums and reinsurance balances receivable 102,879,980 65,476,876
Ceded unearned premium 60,659,539 48,676,411
Reinsurance balances recoverable on unpaid
losses 223,587,471 245,580,145
Federal income tax receivable 2,660,804 2,061,958
Deferred policy acquisition costs 41,470,603 34,357,631
Property and equipment 15,012,438 15,440,784
Investment in unconsolidated investee 17,028,329 15,070,277
Goodwill 33,325,279 34,140,327
Other assets 11,331,678 11,315,728
-------------- --------------
TOTAL ASSETS $1,207,106,188 $1,170,362,828
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and settlement expenses $ 511,406,800 $ 520,494,454
Unearned premiums 200,933,363 167,044,325
Reinsurance balances payable 54,900,882 44,278,883
Short-term debt, LOC and notes payable 78,118,818 78,396,568
Income taxes-deferred 39,639,985 41,662,396
Other liabilities 24,691,693 25,416,744
-------------- --------------
TOTAL LIABILITIES 909,691,541 877,293,370
-------------- --------------
Shareholders' Equity:
Common stock ($1 par value, authorized)
(12,804,558 shares issued at 6/30/00)
(12,804,558 shares issued at 12/31/99) 12,804,558 12,804,558
Paid-In Capital 70,275,800 70,531,201
Accumulated other comprehensive earnings 95,828,471 99,800,109
Retained Earnings 199,909,378 189,250,195
Deferred compensation 5,116,392 4,705,536
Less: Treasury shares at cost
(3,002,484 shares at 6/30/00)
(2,931,212 shares at 12/31/99) (86,519,952) (84,022,141)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 297,414,647 293,069,458
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,207,106,188 $1,170,362,828
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six-Month Period
Ended June 30,
---------------------------
2000 1999
------------ -------------
<S> <C> <C>
Net cash provided by operating activities $16,982,355 $19,187,390
------------ -------------
Cash Flows from Investing Activities
Investments purchased (57,162,897) (12,244,042)
Investments sold 13,424,256 8,595,525
Investments called or matured 20,146,700 6,965,000
Net decrease in short-term investments 12,807,127 1,371,685
Net property and equipment purchased (1,077,591) (2,604,784)
Investment in Underwriters Indemnity Holdings 0 (40,700,000)
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Net cash used in investing activities (11,862,405) (38,616,616)
------------ -------------
Cash Flows from Financing Activities
Cash dividends paid (2,755,245) (2,764,588)
Proceeds from issuance of notes payable 476,500 31,351,178
Payments on debt (754,250) 0
Change in contributed capital - 286,970
Treasury shares purchased (2,086,955) (11,945,333)
Unearned ESOP shares purchased - 2,500,999
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Net cash provided by
(used in) financing activities (5,119,950) 19,429,226
------------ -------------
Net increase in cash 0 0
------------ -------------
Cash at the beginning of the year 0 0
------------ -------------
Cash at June 30 $ 0 $ 0
============ =============
</TABLE>
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 1999 annual report filed with the Securities and
Exchange Commission. Management has prepared the financial information
included herein without audit by independent certified public
accountants that do not express an opinion thereon. The condensed
consolidated balance sheet as of December 31, 1999 has been derived
from, and does not include all the disclosures contained in the audited
consolidated financial statements for the year ended December 31, 1999.
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, 2000 and 1999 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 1999 10-K Annual
Report.
EARNINGS PER SHARE: Basic earnings 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.
<TABLE>
<CAPTION>
For the Six-Month Period Ended June 30, 2000
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to $13,501,826 9,830,767 1.37
common stockholders
EFFECT OF DILUTIVE SECURITIES
Incentive Stock Options -- 93,267
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DILUTED EPS
Income available to common $13,501,826 9,924,034 1.36
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</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
For the Six-Month Period Ended June 30, 1999
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to $15,598,573 10,283,449 1.52
common stockholders
EFFECT OF DILUTIVE SECURITIES
Incentive Stock Options -- 89,498
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DILUTED EPS
Income available to common $15,598,573 10,372,947 1.50
------------------------------------------------------------------------------
</TABLE>
OTHER ACCOUNTING STANDARDS: In June 1998, the FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (Statement 133).
Statement 133 addresses the accounting for and disclosure of derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. This Statement standardizes the accounting
for derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of financial position and measure them at
fair value. This Statement, as amended by FASB Statement No. 137, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company is currently evaluating its investment portfolio under the guidelines
set forth in this recently issued Statement.
In October 1998, the AICPA issued Statement of Position (SOP) 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk." SOP 98-7 provides guidance on how to account for
insurance and reinsurance contracts that do not transfer insurance risk. The
method used for these contracts is referred to as deposit accounting. This SOP
specifies that at inception, a deposit asset or liability should be recognized
for insurance and reinsurance contracts accounted for under deposit accounting
and should be measured based on the consideration paid or received, less any
explicitly identified premiums or fees to be retained by the insurer effective
for financial statements for fiscal years beginning after June 15, 1999. The
Company does not have any insurance or reinsurance contracts that are required
to be accounted for under the deposit method as of June 30, 2000.
7
<PAGE>
2. INDUSTRY SEGMENT INFORMATION - Selected information by industry segment
for the six months ended June 30, 2000 and 1999 is presented below.
<TABLE>
<CAPTION>
SEGMENT DATA-- (in thousands) EARNINGS REVENUES
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Property 5,573 8,940 27,877 24,802
Casualty (657) (1,206) 67,354 56,265
Surety 1,423 839 15,599 12,394
Net investment income 14,022 12,428 14,022 12,428
Realized gains (losses) (87) 2,258 (87) 2,258
General corporate expense
and interest on debt (3,963) (3,532)
Equity in earnings of
unconsolidated investee 1,967 1,217
------ ------
Total segment earnings before
income taxes 18,278 20,944
------ ------
Income taxes 4,776 5,346
------ ------
Total 13,502 15,598 124,765 108,147
------ ------ ------- -------
</TABLE>
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, 1999.
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 89% of the Company's total revenue for the six
months ended June 30, 2000.
8
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Consolidated gross sales, which consist of gross premiums written, net
investment income and realized investment gains (losses) totaled $234.3 million
for the first six months of 2000 compared to $178.3 million for the same period
in 1999. Gross premium writings of the Insurance Group improved 34.7% over 1999
levels, fueled by growth in virtually every product line. Consolidated revenue
for the first six months of 2000 increased $16.6 million or 15.4% from the same
period in 1999. Net premiums earned alone increased 18.6%. Net investment income
improved 12.8% to $14.0 million. Realized investment gains (losses) declined to
a loss of $87,000, compared to net investment gains of $2.3 million reported in
1999. The strategic sale of certain equity securities, late in the second
quarter of 1999, accounted for this difference.
The net after-tax earnings for the first six months of 2000 totaled $13.5
million, $1.36 per diluted share, compared to $15.6 million, $1.50 per share,
for the same period in 1999. Net operating earnings, which consist of the
Company's net earnings reduced by after-tax realized investment gains, totaled
$13.6 million, $1.37 per share, compared to $14.1 million, $1.36 per share, for
the same period in 1999.
Comprehensive earnings, which include net earnings plus unrealized gains/losses
net of tax, totaled $9.5 million, $0.96 per share, compared to $23.2 million,
$2.24 per share, for the same period in 1999. Unrealized losses, net of tax, for
the first six months of 2000 were $4.0 million, $0.40 per share compared to net
unrealized gains of $7.6 million, $0.74 per share, for the same period in 1999.
Stock market rallies experienced in April and June of 1999 account for the
positive comprehensive earnings through the first six months of 1999.
RLI INSURANCE GROUP
Gross written premium for the Group increased to $220.4 million for the first
six months of 2000 compared to $163.6 million for the same period in 1999. All
segments have contributed to this improvement as growth initiatives and firming
prices in select product lines have combined to advance the Company's top line.
Profitability declined with $6.3 million in pretax underwriting profit compared
to $8.6 million last year, as the Company's GAAP combined ratio increased to
94.2 for the first six months of 2000 from 90.8 reported for the same period
last year.
The Group's property segment increased premium writings by 31.8% in the first
six months of 2000. The driving force behind this improvement was a 68.1%
increase in fire premiums. Difference-in-conditions premiums also increased by
4.9% along with increases in other product lines. The property segment generated
underwriting profits of $5.6 million for the first six months of the year
compared to $8.9 million last year. The GAAP combined ratio increased to 80.0
compared to 63.9 a year ago due to a shift in the mix of product volume away
from difference-in-conditions to fire, as well as the impact of certain fire
losses experienced during the first six months of 2000.
9
<PAGE>
Casualty segment gross written premiums were $117.2 million for the first six
months of 2000, up $28.2 million, or 31.7% from the same period in 1999. The
driving forces behind this improvement were increases in the program business of
$8.1 million, the transportation product of $7.9 million, the general liability
product of $3.6 million, and the executive products group of $3.0 million. The
GAAP combined ratio fell slightly to 101.0 for the first six months compared to
102.1 last year, as the segment's expense ratio has shown improvement. Booked at
a combined ratio of 101.0, the management of the Company believes this segment
creates value for the Company as investments supporting reserves and the
resulting cash flows generate significant investment income.
Surety segment gross written premiums increased to $22.8 million for the first
six months of 2000, up $9.2 million, or 67.5%, from the same period in 1999.
This increase was the result of increases in both the Peoria and Houston
operations. Premiums increased by 79.2% in the Houston branch, while the Peoria
branch increased premiums by 63.7%. The GAAP combined ratio for the surety
segment fell to 90.8 in the first six months of 2000 from 93.3 a year ago, due
to an improvement in the segment's expense ratio. The surety book continues to
mature and provide profitable growth opportunities.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $14.0 million during the first six months of 2000, an increase of 12.8% over
that reported for the same period in 1999. Both a higher interest rate
environment and continued positive operating cash flow have resulted in the rise
in investment income. The Company experienced a net realized loss from
investments of $87,000 in the first six months of 2000, compared to a net
realized gain of $2.3 million for the same period in 1999, which was impacted by
the sale of certain equity securities. For the six months ended June 30, 2000,
the Company experienced a $6.1 million pre-tax unrealized loss on its investment
portfolio.
Virtually all the Company's fixed income portfolio consists 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 six month periods ended June 30, 2000
and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Taxable 6.62% 6.59%
Non-taxable 4.91% 4.77%
</TABLE>
For the first six months of 2000, yields on taxable and non-taxable securities
increased from the same period last year, reflecting an increasing interest rate
environment and the subsequent investment of new cash flow. Yields on
non-taxable securities reflect a greater increase than taxable securities due to
a greater proportion of new cash flow being directed to the non-taxable
portfolios.
10
<PAGE>
The Company's available-for-sale portfolio of debt and equity securities had a
net unrealized loss before tax of $6.1 million for the first six months of 2000,
compared with an $11.7 million gain for the same period in 1999. The 2000
year-to-date loss reflects largely stock market fluctuations and, to a smaller
extent, the impact of an increasing interest rate environment. The Company's net
cumulative unrealized gain before tax was $147.1 million down from $153.2
million at December 31, 1999. Unrealized appreciation on securities, net of tax,
is reflected in accumulated other comprehensive earnings, a component of
shareholders' equity.
Interest expense on debt obligations increased to $2.5 million for the first six
months of 2000, a $700,000 increase from the same period in 1999. This change is
related to increased debt costs resulting from rising interest rates, as well as
a net increase of $7.1 million in the average outstanding debt balances over the
same period last year. The increase in average debt balances for the
year-to-date is, in part, attributable to the January 29, 1999, acquisition of
Underwriters' Indemnity Holdings, Inc., which was funded through $42.8 million
in reverse repurchase agreements from RLI Insurance Company. Also contributing
to the increase was a temporary pay-down on the line of credit in 1999 reflected
in last year's average debt balance. At June 30, 2000, outstanding short-term
balances totaled $78.1 million, compared to $74.6 million at June 30, 1999.
INCOME TAXES
The Company's effective tax rate for the first six months of 2000 and 1999 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 six months of 2000 and 1999 as a result of the following:
<TABLE>
<CAPTION>
2000 1999
Amount % Amount %
------ --- ------ ---
<S> <C> <C> <C> <C>
Provision for income taxes at
the statutory rate of 35% $ 6,397,406 35% $ 7,330,566 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income (1,336,425) ( 7%) (1,264,015) ( 6%)
Dividends received deduction ( 776,418) ( 4%) ( 751,655) ( 3%)
Dividends paid deduction ( 127,005) ( 1%) ( 120,537) ( 1%)
Goodwill amortization 283,598 1% - -
Other items, net 335,321 2% 151,541 1%
----------- ---- ----------- ---
Total tax expense $ 4,776,477 26% $ 5,345,900 26%
</TABLE>
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, the sale of convertible
debentures, and short-term borrowings.
11
<PAGE>
During the first six months of 2000, the Company repurchased 71,272 of its
outstanding shares at a cost of nearly $2.1 million. All repurchase activity for
the year, thus far, occurred in the first quarter and was funded through
operating cash flow.
At June 30, 2000 the Company had short-term investments, cash and other
investments maturing within one year, of approximately $81.9 million and
additional investments of $144.7 million maturing within five years. The Company
maintains one primary source of credit, a $30.0 million line of credit that
cannot be canceled during its annual term. As of June 30, 2000, the Company had
$19.6 million in outstanding short-term borrowings on this facility.
Additionally, the Company was party to five reverse repurchase transactions
totaling $58.5 million.
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.
OTHER MATTERS
The Company completed its year 2000 (Y2K) project in 1999 with subsequent
monitoring of mission critical systems during the calendar rollover. Since this
project's beginning in 1997, the Company has incurred approximately $1.5 million
of direct expense to complete changes and modifications to the business and
systems environment for Y2K compliance. Of this amount, approximately $420,000
was incurred in 1999 and $20,000 was incurred in the first quarter of 2000.
Throughout the initiative, actual Y2K expenses were within acceptable ranges of
those forecasted. To date, the Company has not experienced production issues
related to Y2K in any of the primary or supporting computer systems.
The Company has received a minimal number of Y2K-related claims and believes
that, ultimately, no indemnity payments will be made, only related adjustment
expenses.
THREE MONTHS ENDED JUNE 30, 2000, COMPARED TO THREE MONTHS
ENDED JUNE 30, 1999
Consolidated gross sales totaled $125.1 million for the second quarter of 2000
compared to $97.0 million for the same period in 1999. As detailed in the
discussion of RLI Insurance Group that follows, second quarter 2000 gross
premiums improved $29.4 million, or 33.1%, over second quarter 1999 levels.
Consolidated revenue for the second quarter of 2000 increased $8.7 million, or
15.4%, from the same period in 1999. Net premiums earned in the second quarter
of 2000 improved $10.0 million compared to 1999, and investment income advanced
$900,000 over second quarter 1999 levels. Realized investment gains declined
$2.2 million from second quarter 1999 levels due to the strategic sale of
certain equity positions during the second quarter of 1999.
12
<PAGE>
The net after-tax earnings for the second quarter of 2000 totaled $7.0 million,
$0.70 per diluted share, compared to $9.0 million, $0.88 per share, for the same
period in 1999. Net operating earnings, which consist of the Company's net
earnings reduced by after-tax realized investment gains, was $6.9 million, $0.70
per share, compared to $7.6 million, $0.74 per share, for the same period in
1999.
Comprehensive earnings, which includes net earnings plus unrealized gains/losses
net of tax, totaled $7.9 million, $0.80 per share, compared to $21.6 million,
$2.10 per share, for the same period in 1999. Unrealized gains, net of tax, for
the second quarter of 2000 were $1.0 million, $0.10 per share compared to $12.6
million, $1.22 per share, for the same period in 1999. The higher 1999 level is
attributable to the stock market rallies that occurred in April and June, 1999.
RLI INSURANCE GROUP
Gross written premium for the second quarter of 2000 totaled $118.0 million,
compared to $88.6 million reported for the same period in 1999. All segments
have contributed to this improvement, as mentioned previously. Pretax
underwriting profit declined to $2.6 million in the second quarter of 2000
compared to $4.8 million for the same period last year. This equates to GAAP
combined ratios of 95.5 for the second quarter of 2000 compared to 89.8 for the
second quarter of 1999. The decline in profitability is attributed to certain
property losses experienced during the second quarter of 2000.
Property segment gross written premiums increased by 19.2% to $41.8 million in
the second quarter of 2000. Fueling this growth, fire premiums improved to $19.4
million for the second quarter of 2000, compared to $13.3 million for the same
period in 1999. Property segment underwriting profits were $2.3 million for the
second quarter of the year compared to $4.9 million last year. The GAAP combined
ratio for the property segment increased to 84.1 for the second quarter of 2000
compared to 62.2 for the same period last year. This increase is partially
attributable to a shift in the mix of product volume away from
difference-in-condition business. Additionally, certain fire losses experienced
during the second quarter of 2000 impacted the combined ratio.
Gross written premiums for the casualty segment were $63.7 million for the
second quarter of 2000 compared to $46.0 million for the prior year. This is
primarily due to the increases in program business, transportation, general
liability, and executive products mentioned previously. Program business and
transportation improved gross writings by $7.2 million and $4.7 million,
respectively for the quarter, while general liability advanced $2.7 million and
executive products $800,000. The GAAP combined ratio fell slightly to 100.1 for
the second quarter compared to 101.3 last year, as the segment's expense ratio
has shown improvement.
The Group's surety segment gross written premiums increased by 64.5% to $12.5
million for the second quarter of 2000 compared to $7.6 million for the same
period in 1999. This improvement was the result of growth in both the Peoria and
Houston operations, as mentioned previously. The GAAP combined ratio for the
surety segment rose to 96.1 in the second quarter from 94.3 a year ago. The
increase in combined ratio is attributable to early adverse loss experience on a
new contractor's program started in late 1999.
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<PAGE>
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $7.1 million during the second quarter of 2000, an increase of 14.4% over
that reported for the same period in 1999. Both a higher interest rate
environment and continued positive operating cash flow have allowed for
increased bond and short-term investments, resulting in the rise in investment
income.
The Company experienced a net realized gain from investments of $34,000 in the
second quarter of 2000 compared to a net realized gain of $2.2 million for the
same period in 1999. The majority of gains realized in the second quarter of
1999 were the result of the sale of certain equity securities.
INCOME TAXES
The Company's effective tax rate for the second quarter of 2000 was 25% compared
to 27% reported for the same period in 1999. The change in the effective rate is
reflective of a decline in underwriting profits, which are taxed at the 35%
rate, coupled with an increase tax-exempt interest income. 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 second
quarter of 2000 and 1999 as a result of the following:
<TABLE>
<CAPTION>
2000 1999
Amount % Amount %
------ --- ------ ---
<S> <C> <C> <C> <C>
Provision for income taxes at
the statutory rate of 35% $ 3,248,924 35% $ 4,299,852 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income ( 665,779) ( 7%) ( 640,383) ( 5%)
Dividends received deduction ( 375,199) ( 4%) ( 373,593) ( 3%)
Dividends paid deduction ( 65,477) ( 1%) ( 59,354) --
Goodwill amortization 143,742 2% -- --
Other items, net 34,450 -- 37,978 --
----------- ---- ----------- ---
Total tax expense $ 2,320,661 25% $ 3,264,500 27%
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of economic losses due to adverse changes in the
estimated fair value of a financial instrument as the result of changes in
equity prices, interest rates, foreign exchange rates and commodity prices. The
Company's consolidated balance sheets include assets and liabilities whose
estimated fair values are subject to market risk. The primary market risks to
the Company are equity price risk associated with investments in equity
securities and interest rate risk associated with investments in fixed
14
<PAGE>
maturities. From time to time, equity prices and interest rates fluctuate
causing an effect on the Company's investment portfolio. The Company has no
direct commodity or foreign exchange risk.
The Company's market risk exposures at June 30, 2000, have not materially
changed from those identified at December 31, 1999.
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 -
On May 4, 2000, at the Company's Annual Meeting of Shareholders, the
following members were elected to the Board of Directors:
Bernard J. Daenzer Edward F. Sutkowski
Jonathan E. Michael
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 June 30, 2000.
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 9, 2000
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