<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 September 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 November 10, 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
For the Three-Month Period Ended September 30,
<TABLE>
<CAPTION>
(Unaudited) 2000 1999
------------- -----------
<S> <C> <C>
Net premiums earned $61,250,871 $ 50,991,644
Net investment income 7,461,190 6,737,007
Net realized investment gains 603,801 2,264,925
------------- -----------
69,315,862 59,993,576
------------- -----------
Losses and settlement expenses 34,660,846 27,104,767
Policy acquisition costs 19,339,611 15,304,061
Insurance operating expenses 4,304,520 4,097,696
Interest expense on debt 1,359,793 1,076,296
General corporate expenses 607,030 680,954
------------- -----------
60,271,800 48,263,774
------------- -----------
Equity in earnings of uncons. investee 794,988 210,771
------------- -----------
Earnings before income taxes 9,839,050 11,940,573
Income tax expense 2,459,829 3,469,082
------------- -----------
Net earnings $ 7,379,221 $ 8,471,491
============= ============
Other compre. earnings(loss), net of tax 9,399,962 (21,189,824)
------------- -----------
Comprehensive earnings (loss) $16,779,183 $(12,718,333)
============= ===========
Earnings per share:
Basic:
Net earnings per share from operations $0.71 $0.70
Realized gains, net of tax $0.04 $0.15
------------- -----------
Basic net earnings per share $0.75 $0.85
============= ===========
Basic compre. earnings(loss)per share $1.71 $(1.27)
============= ===========
Diluted:
Net earnings per share from operations $0.70 $0.69
Realized gains, net of tax $0.04 $0.15
------------ -----------
Diluted net earnings per share $0.74 $0.84
============ ===========
Diluted compre. earnings(loss)per share $1.69 $(1.26)
============ ===========
Weighted average number of common shares
outstanding
Basic 9,803,879 10,015,096
Diluted 9,951,406 10,129,261
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
For the Nine-Month Period Ended September 30,
<TABLE>
<CAPTION>
(Unaudited) 2000 1999
------------- ------------
<S> <C> <C>
Net premiums earned $172,080,689 $144,453,076
Net investment income 21,482,936 19,165,187
Net realized investment gains 517,136 4,522,892
------------- ------------
194,080,761 168,141,155
------------- ------------
Losses and settlement expenses 94,336,883 70,203,818
Policy acquisition costs 55,234,149 48,938,152
Insurance operating expenses 13,224,177 12,253,391
Interest expense on debt 3,893,753 2,905,051
General corporate expenses 2,036,118 2,383,848
------------- ------------
168,725,080 136,684,260
------------- ------------
Equity in earnings of uncons. investee 2,761,672 1,428,151
------------- ------------
Earnings before income taxes 28,117,353 32,885,046
Income tax expense 7,236,306 8,814,982
------------- ------------
Net earnings $ 20,881,047 $ 24,070,064
============= ============
Other compre. earnings (loss), net of tax 5,428,324 (13,577,938)
------------- ------------
Comprehensive earnings $ 26,309,371 $ 10,492,126
============= ============
Earnings per share:
Basic:
Net earnings per share from operations $2.10 $2.07
Realized gains, net of tax $0.03 $0.29
------------- -----------
Basic net earnings per share $2.13 $2.36
============= ===========
Basic compre. earnings per share $2.68 $1.03
============= ===========
Diluted:
Net earnings per share from operations $2.07 $2.05
Realized gains, net of tax $0.03 $0.29
------------ -----------
Diluted net earnings per share $2.10 $2.34
============ ===========
Diluted compre. earnings per share $2.65 $1.02
============ ===========
Weighted average number of common shares
outstanding
Basic 9,821,837 10,193,015
Diluted 9,933,191 10,290,735
Cash dividends declared per common share $0.44 $0.41
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
RLI Corp. and Subsidiaries Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
(Unaudited)
------------------ -----------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities
Held-to-maturity, at amortized cost $ 309,443,955 $ 294,198,626
Trading, at market value 7,920,053 7,650,901
Available-for-sale, at market value 86,680,018 40,662,978
Equity securities, at fair value 294,647,667 284,639,044
Short-term investments, at cost 45,569,617 64,092,009
-------------- --------------
Total investments 744,261,310 691,243,558
Accrued investment income 6,902,135 6,999,134
Premiums and reinsurance balances receivable 98,358,607 65,476,876
Ceded unearned premium 61,635,431 48,676,411
Reinsurance balances recoverable on unpaid
losses 231,140,599 245,580,145
Federal income tax receivable 1,363,665 2,061,958
Deferred policy acquisition costs 45,321,492 34,357,631
Property and equipment 14,077,463 15,440,784
Investment in unconsolidated investee 17,833,608 15,070,277
Goodwill 32,805,763 34,140,327
Other assets 11,942,074 11,315,728
-------------- --------------
TOTAL ASSETS $1,265,642,147 $1,170,362,828
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and settlement expenses $ 533,857,479 $ 520,494,454
Unearned premiums 211,592,281 167,044,325
Reinsurance balances payable 55,745,839 44,278,883
Short-term debt, LOC and notes payable 78,539,318 78,396,568
Income taxes-deferred 44,786,285 41,662,396
Other liabilities 28,518,463 25,416,744
-------------- --------------
TOTAL LIABILITIES 953,039,665 877,293,370
-------------- --------------
Shareholders' Equity:
Common stock ($1 par value, authorized)
(12,806,446 shares issued at 9/30/00)
(12,804,558 shares issued at 12/31/99) 12,806,446 12,804,558
Paid-In Capital 70,153,160 70,531,201
Accumulated other comprehensive earnings 105,228,433 99,800,109
Retained Earnings 205,818,003 189,250,195
Deferred compensation 5,182,822 4,705,536
Less: Treasury shares at cost
(3,002,484 shares at 9/30/00)
(2,931,212 shares at 12/31/99) (86,586,382) (84,022,141)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 312,602,482 293,069,458
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,265,642,147 $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 Nine-Month Period
Ended September 30,
---------------------------
2000 1999
------------ -------------
<S> <C> <C>
Net cash provided by operating activities $ 55,414,044 $ 34,627,063
------------ -------------
Cash Flows from Investing Activities
Investments purchased (106,887,481) (54,251,597)
Investments sold 22,147,519 18,629,145
Investments called or matured 21,856,700 23,650,563
Net decrease in short-term investments 14,533,268 2,858,716
Net property and equipment purchased (931,209) (4,154,528)
Investment in Underwriters Indemnity Holdings 0 (40,700,000)
------------ -------------
Net cash used in investing activities (49,281,203) (53,967,701)
------------ -------------
Cash Flows from Financing Activities
Cash dividends paid (4,225,557) (4,172,608)
Proceeds from issuance of notes payable 1,029,250 36,330,603
Payments on debt (886,500) 0
Change in contributed capital 36,921 302,696
Treasury shares purchased (2,086,955) (15,621,052)
Unearned ESOP shares purchased - 2,500,999
------------ -------------
Net cash provided by
(used in) financing activities (6,132,841) 19,340,638
------------ -------------
Net increase in cash 0 0
------------ -------------
Cash at the beginning of the year 0 0
------------ -------------
Cash at September 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 nine-month periods ended September 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 the FASB issued
Statement No. 128, "Earnings per Share," 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 Nine-Month Period Ended September 30, 2000
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to $20,881,047 9,821,837 2.13
common stockholders
EFFECT OF DILUTIVE SECURITIES
Incentive Stock Options -- 111,354
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DILUTED EPS
Income available to common $20,881,047 9,933,191 2.10
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</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
For the Nine-Month Period Ended September 30, 1999
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to $24,070,064 10,193,015 2.36
common stockholders
EFFECT OF DILUTIVE SECURITIES
Incentive Stock Options -- 97,720
------------------------------------------------------------------------------
DILUTED EPS
Income available to common $24,070,064 10,290,735 2.34
------------------------------------------------------------------------------
</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 September 30, 2000.
In September 2000, the FASB issued Statement No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"(Statement
140). Statement 140 supercedes and replaces the guidance in FASB issued
Statement 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". Statement 140 provides guidance on
securitization transactions involving financial assets, sales of financial
assets such as receivable, loans and securities, collateralized borrowing
arrangements, securities lending transactions, and repurchase agreements.
Disclosure requirements under this Statement become effective for financial
statements for fiscal years ending after December 15, 2000. The Company is
currently evaluating this recently issued Statement.
7
<PAGE>
2. INDUSTRY SEGMENT INFORMATION - Selected information by industry segment
for the nine months ended September 30, 2000 and 1999 is presented
below.
SEGMENT DATA-- (in thousands)
<TABLE>
<CAPTION>
EARNINGS REVENUES
2000 1999 2000 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Property 7,152 12,963 44,229 37,902
Casualty (778) (1,711) 102,910 87,473
Surety 2,912 1,806 24,942 19,078
Net investment income 21,483 19,165 21,483 19,165
Realized gains 517 4,523 517 4,523
General corporate expense
and interest on debt (5,931) (5,289)
Equity in earnings of
unconsolidated investee 2,762 1,428
-------- -------
Total segment earnings before
income taxes 28,117 32,885
-------- -------
Income taxes 7,236 8,815
-------- -------- -------- -------
Total 20,881 24,070 194,081 168,141
-------- -------- -------- -------
</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 nine
months ended September 30, 2000.
8
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1999
Consolidated gross sales, which consist of gross premiums written, net
investment income and realized investment gains totaled $355.6 million for the
first nine months of 2000 compared to $278.4 million for the same period in
1999. Gross premium writings of the Group improved 31.0% over 1999 levels,
fueled by growth in virtually every product line. Consolidated revenue for the
first nine months of 2000 increased $25.9 million or 15.4% from the same period
in 1999. Net premiums earned alone increased 19.1%. Net investment income
improved 12.1% to $21.5 million. Realized investment gains declined to $517,000,
compared to $4.5 million reported in 1999. The strategic sale of certain equity
securities, during the second and third quarters of 1999, accounted for this
difference.
The net after-tax earnings for the first nine months of 2000 totaled $20.9
million, $2.10 per diluted share, compared to $24.1 million, $2.34 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
$20.5 million, $2.07 per share, compared to $21.1 million, $2.05 per share, for
the same period in 1999.
Comprehensive earnings, which include net earnings plus unrealized gains/losses
net of tax, totaled $26.3 million, $2.65 per share, compared to $10.5 million,
$1.02 per share, for the same period in 1999. Unrealized gains, net of tax, for
the first nine months of 2000 were $5.4 million, $0.55 per share compared to net
unrealized losses of $13.6 million, $1.32 per share, for the same period in
1999. The decline in the stock market in the third quarter of 1999 compared to
the stock market rally experienced in third quarter of 2000 account for this
difference.
RLI INSURANCE GROUP
Gross written premium for the Group increased to $333.6 million for the first
nine months of 2000 compared to $254.7 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 $9.3 million in pretax underwriting profit compared
to $13.1 million last year, as the Company's GAAP combined ratio increased to
94.6 for the first nine months of 2000 from 91.0 reported for the same period
last year.
The Group's property segment increased premium writings by $28.5 million, or
30.2%, in the first nine months of 2000. The driving force behind this
improvement was $15.6 million in premium from the new construction product,
which was launched in the fourth quarter of 1999, as well as $6.7 million in
increased fire premiums. Difference-in-conditions premiums also increased by
7.2% along with increases in other product lines. The property segment generated
underwriting profits of $7.2 million for the first nine months of the year
compared to $13.0 million last year. The GAAP combined ratio increased to 83.8
compared to 65.8 a year ago due to a shift in the mix of product volume away
from difference-in-conditions, a lower loss frequency product, to construction
and fire. Additionally, certain construction and commercial fire losses
experienced during the first nine months of 2000 impacted the combined ratio.
9
<PAGE>
Casualty segment gross written premiums were $176.4 million for the first nine
months of 2000, up $39.4 million, or 28.7% from the same period in 1999. The
driving forces behind this improvement were increases in the program business of
$14.3 million, the transportation product of $9.7 million, the general liability
product of $4.9 million, executive products group of $4.7 million, and personal
umbrella of $2.4 million. The GAAP combined ratio fell slightly to 100.8 for the
first nine months compared to 102.0 last year, as the segment's expense ratio
has shown improvement. At a combined ratio slightly above break-even, 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 $34.6 million for the first
nine months of 2000, up $11.0 million, or 46.9%, from the same period in 1999.
Increased premium production in contract and oil and gas bonding has accounted
for this improvement. The GAAP combined ratio for the surety segment fell to
88.3 in the first nine months of 2000 from 90.5 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 $21.5 million during the first nine months of 2000, an increase of 12.1% 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 gain from
investments of $517,000 in the first nine months of 2000, compared to a net
realized gain of $4.5 million for the same period in 1999, which was impacted by
the sale of certain equity securities. For the nine months ended September 30,
2000, the Company experienced $8.4 million pre-tax unrealized gains 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 nine month periods ended September
30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
----- -----
<S> <C> <C>
Taxable 6.66% 6.55%
Non-taxable 4.91% 4.76%
</TABLE>
For the first nine 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 wider spreads in the maturities targeted for these
investments and 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
net unrealized gains before tax of $8.4 million for the first nine months of
2000, compared with a $20.9 million loss for the same period in 1999. The
2000 year-to-date gain reflects the continuing improvement in the total
return generated by the equity portfolio. During the third quarter of 1999,
the decline experienced in the stock market negatively impacted the equity
portfolio's performance. The Company's net cumulative unrealized gain before
tax was $161.6 million up 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 $3.9 million for the first
nine months of 2000, a $989,000 increase from the same period in 1999. This
change is related to increased debt costs resulting from rising interest rates
on the short-term floating rate outstanding debt, as well as a net increase of
$4.7 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 September 30, 2000, outstanding short-term balances
totaled $78.5 million, compared to $79.5 million at September 30, 1999.
INCOME TAXES
The Company's effective tax rate for the first nine months of 2000 was 26%
compared to 27% 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 first nine
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% $ 9,841,073 35% $11,509,766 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income (2,019,010) (7%) (1,916,438) (6%)
Dividends received deduction (1,151,347) (4%) (1,120,546) (3%)
Dividends paid deduction (195,509) (1%) (183,071) (1%)
Goodwill amortization 422,409 2% 280,707 1%
Other items, net 338,690 1% 244,564 1%
----------- ---- ----------- ---
Total tax expense $ 7,236,306 26% $ 8,814,982 27%
=========== ==== =========== ===
</TABLE>
11
<PAGE>
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.
During the first nine 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 September 30, 2000 the Company had short-term investments, cash and other
investments maturing within one year, of approximately $73.3 million and
additional investments of $150.6 million maturing within five years. The Company
maintains one source of bank credit, a $30.0 million line of credit that cannot
be canceled during its annual term. As of September 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 $58.9 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.
12
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1999
Consolidated gross sales totaled $121.2 million for the third quarter of 2000
compared to $100.1 million for the same period in 1999. As detailed in the
discussion of RLI Insurance Group that follows, third quarter 2000 gross
premiums improved $22.1 million, or 24.2%, over third quarter 1999 levels.
Consolidated revenue for the third quarter of 2000 increased $9.3 million, or
15.5%, from the same period in 1999. Net premiums earned in the third quarter of
2000 improved $10.3 million compared to 1999, and investment income advanced
$724,000 over third quarter 1999 levels. Realized investment gains declined $1.7
million from third quarter 1999 levels due to the strategic sale of certain
equity positions during the third quarter of 1999.
The net after-tax earnings for the third quarter of 2000 totaled $7.4 million,
$0.74 per diluted share, compared to $8.5 million, $0.84 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 $7.0 million, $0.70
per share, compared to $7.0 million, $0.69 per share, for the same period in
1999.
Comprehensive earnings, which includes net earnings plus unrealized gains/losses
net of tax, totaled $16.8 million, $1.69 per share, compared to a comprehensive
loss of $12.7 million, $1.26 per share, for the same period in 1999. Unrealized
gains, net of tax, for the third quarter of 2000 were $9.4 million, $0.95 per
share compared to unrealized losses of $21.2 million, $2.10 per share, for the
same period in 1999. The loss incurred in 1999 is attributable to the stock
market declines in August and September, 1999.
RLI INSURANCE GROUP
Gross written premium for the third quarter of 2000 totaled $113.2 million,
compared to $91.1 million reported for the same period in 1999. All segments
have contributed to this improvement, as mentioned previously. Pretax
underwriting profit declined to $2.9 million in the third quarter of 2000
compared to $4.5 million for the same period last year. This equates to GAAP
combined ratios of 95.2 for the third quarter of 2000 compared to 91.2 for the
third quarter of 1999. The decline in profitability is attributed to certain
property losses experienced during the third quarter of 2000.
Property segment gross written premiums increased by $9.0 million to $42.2
million in the third quarter of 2000. Fueling this growth, premiums from the new
construction product added $6.5 million for the third quarter of 2000.
Difference-in-conditions premium advanced, as well, posting a $2.0 million, or
11.2%, increase to $20.1 million. Property segment underwriting profits were
$1.6 million for the third quarter of the year compared to $4.0 million last
year. The GAAP combined ratio for the property segment increased to 90.3 for the
third quarter of 2000 compared to 69.3 for the same period last year. This
increase is partially attributable to a shift in the mix of product volume away
from the lower loss frequency, difference-in-condition product to construction
and fire business. Additionally, certain construction and commercial fire losses
experienced during the third quarter of 2000 impacted the combined ratio.
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<PAGE>
Gross written premiums for the casualty segment were $59.2 million for the third
quarter of 2000 compared to $48.1 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 $6.1 million and $1.8 million, respectively for the
quarter, while general liability advanced $1.2 million, and executive products
$1.6 million. The GAAP combined ratio fell slightly to 100.3 for the third
quarter compared to 101.6 last year, as the segment's expense ratio has shown
improvement.
The Group's surety segment gross written premiums increased by 18.7% to $11.8
million for the third quarter of 2000 compared to $9.9 million for the same
period in 1999. This improvement was primarily the result of growth in contract
bonding, as mentioned previously. The GAAP combined ratio for the surety segment
fell to 84.1 for the third quarter of 2000 from 85.6 a year ago, due to an
improvement in the segment's expense ratio.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $7.5 million during the third quarter of 2000, an increase of 10.7% over 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 $604,000 in the
third quarter of 2000 compared to $2.3 million for the same period in 1999. The
majority of gains realized in the third quarter of 1999 were the result of the
sale of certain equity securities.
INCOME TAXES
The Company's effective tax rate for the third quarter of 2000 was 25% compared
to 29% 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% $ 3,443,667 35% $ 4,179,201 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income (682,585) (7%) (652,423) (5%)
Dividends received deduction (374,929) (4%) (368,891) (3%)
Dividends paid deduction (68,504) (1%) ( 62,533) (1%)
Goodwill amortization 102,206 1% 280,707 2%
Other items, net 39,974 1% 93,021 1%
----------- ---- ----------- ---
Total tax expense $ 2,459,829 25% $ 3,469,082 29%
=========== ==== =========== ===
</TABLE>
14
<PAGE>
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
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 September 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 - 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
nine months ended September 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: November 10, 2000
15