RLI Reports 2011 Fourth Quarter And Year-End Results

RLI Corp. (NYSE: RLI) – RLI Corp. reported fourth quarter 2011 operating earnings of $28.9 million ($1.35 per share), versus $35.1 million ($1.66 per share) for the comparable period last year. For the year ended December 31, 2011, operating earnings were $119.5 million ($5.58 per share), compared to $112.3 million ($5.29 per share) for the 2010 fiscal year.
                                 
        Fourth Quarter       Full Year
Earnings Per Diluted Share       2011       2010       2011       2010
Operating earnings       $1.35       $1.66       $5.58       $5.29
Net earnings       $1.43       $1.90       $6.09       $6.00

Highlights for the quarter included:
  • Combined ratio of 81.5.
  • Underwriting income of $26.8 million.
  • 12% growth in gross premiums written, including 8% growth driven by CBIC acquisition.
  • $10.6 million ($0.32 per share) pretax favorable development in prior years’ loss reserves, net of effects on bonus and profit sharing-related expenses.
  • Comprehensive earnings of $58.3 million ($2.72 per share).
  • Special dividend of $5.00 per share, representing $105.8 million returned to shareholders and resulting in a tax benefit of $2.7 million ($0.13 per share) as dividends to the ESOP are fully deductible.

Highlights for the year-ended 2011 included:
  • Combined ratio of 78.4.
  • Underwriting income of $116.3 million.
  • 10% growth in gross premiums written, including 6% growth driven by CBIC acquisition.
  • $91.7 million ($2.79 per share) pretax favorable development in prior years’ loss reserves, net of effects on bonus and profit sharing-related expenses.
  • Comprehensive earnings of $151.9 million ($7.09 per share).
  • Book value per share of $38.69 at year-end, representing an increase of 16%, excluding the special dividend.
  • Return on equity for the trailing four quarters was 15.7%.
  • Acquired Contractors Bonding and Insurance Company (CBIC).

“Throughout the fourth quarter and the year, we delivered strong financial results to our shareholders despite the challenges presented by a tough operating environment,” said RLI Corp. Chairman & CEO Jonathan E. Michael. “Our success reflects the advantages derived from our diversified business model and focus on disciplined underwriting and execution. I am pleased that we were able to share this success with our shareholders through a special dividend that was paid in the quarter.”

“We ended 2011 in a position of financial and operational strength,” said Michael. “Our successful acquisition and integration of CBIC, coupled with new product initiatives pursued over the past few years, contributed greatly to our premium growth. Moving forward, we will continue to maintain our underwriting discipline, make strategic investments in our business, and focus on delivering high quality products and services to our customers.”

“Our company’s outstanding performance is the result of the hard work and dedication of our remarkable associates. They have been instrumental in our ability to thrive within the current market conditions and competitive environment, while positioning us to grow and succeed in the years ahead. I thank all of our employees for their many contributions in 2011,” said Michael.

16 th consecutive year of underwriting income

For the quarter, RLI recorded underwriting income of $26.8 million on an 81.5 combined ratio versus underwriting income of $30.2 million on a 76.3 combined ratio in the fourth quarter of 2010. For the year, RLI achieved $116.3 million of underwriting income on a 78.4 combined ratio, compared to $95.4 million of underwriting income on an 80.7 combined ratio in 2010.

The following table highlights annual underwriting income and combined ratios by segment:
           
                       
Underwriting Income
(in millions)   2011   2010 Combined Ratio   2011   2010
Casualty $64.2 $36.4 Casualty 72.8 84.3
Property 30.5 34.1 Property 85.0 81.2
Surety   21.6   24.9 Surety       78.1   68.8
Total   $116.3   $95.4 Total       78.4   80.7
 

Other income

For the quarter, investment income was $16.2 million compared to $16.7 million for the same period in 2010. For the year ending December 31, 2011, investment income was $63.7 million versus $66.8 million for the same period in 2010. The decline in investment income was the result of lower reinvestment rates.

The investment portfolio’s total return for the quarter was 3.4%, with the bond portfolio returning 1.5% and the equity portfolio returning 12.1%. In 2011, the investment portfolio’s total return was 7.3% with the bond portfolio returning 7.1% and equities returning 7.1%.

Comprehensive earnings, which include after-tax unrealized gains/losses from the investment portfolio, were $58.3 million for the quarter ($2.72 per share) versus $30.8 million ($1.46 per share) over the same period last year. Full-year comprehensive earnings were $151.9 million ($7.09 per share) in 2011, compared to $146.0 million ($6.87 per share) in 2010.

During the quarter, equity in results of unconsolidated investee was a $0.7 million loss compared to a $0.2 million loss from the same period last year, both of which reflect seasonal results. For the year ending December 31, 2011, equity in earnings of unconsolidated investee was $6.5 million versus $7.1 million in 2010. These results are related to Maui Jim, Inc., a producer of premium sunglasses.

CBIC acquisition

On April 28, 2011, RLI closed on the acquisition of Contractors Bonding and Insurance Company for approximately $136 million in cash. CBIC is a Seattle-based insurance company specializing in surety bonds and related niche property and casualty products.

Special dividend and share repurchase program

On December 20, 2011, RLI paid an extraordinary cash dividend of $5.00 per share which totaled $105.8 million. RLI has paid dividends for 142 consecutive quarters and increased regular dividends in each of the last 36 years. The company’s regular quarterly dividend has grown by an average of 14.4% over the last 10 years.

For the year, RLI repurchased 111,956 shares at an average cost of $59.16 per share ($6.6 million). No shares were purchased in the fourth quarter. There is $87.5 million of remaining capacity from the additional $100 million stock repurchase program approved in the second quarter of 2010. Over the past six years, RLI has returned over $700 million dollars to its shareholders in the form of dividends and share repurchases.

Recently adopted accounting standard

As previously disclosed in RLI Corp’s Form 10-Q Quarterly Report as of and for the quarter ended September 30, 2011, accounting guidance for deferred acquisition costs incurred by insurance entities will change in 2012 under ASU 2010-26, Financial Services – Insurance (Topic 944) Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.

We have completed our estimate of the impact of adopting this new accounting standard effective January 1, 2012. The new guidance will have no impact on our cash flows, and will have minimal prospective impact on expenses or earnings before income taxes. Our adoption of the new standard, however, will result in a reduction of our deferred policy acquisition costs asset, an adjustment to deferred income taxes liability and a decrease to our consolidated shareholders’ equity. We plan to adopt the new standard using the retrospective adoption method as of January 1, 2012 and estimate that the adjustment to our consolidated shareholders’ equity will be a decrease of approximately $26 million, net of tax. This adjustment will result in a reduction in book value of approximately $1.24 per share, based on the number of shares outstanding at January 1, 2012.

Other news

At 10 a.m. central time (CT) tomorrow, January 26, 2012, RLI management will hold a conference call to discuss quarterly results with insurance industry analysts. Interested parties may listen to the discussion through the Internet at www.rlicorp.com.

Gross premiums written, underwriting income, operating earnings, earnings per share (EPS) from operations and other per share items are non-GAAP financial measures, and we believe that investors’ understanding of RLI’s core operating performance is enhanced by our disclosure of these financial measures. Gross premiums written is the component of net premiums earned that measures insurance business produced before the impact of ceding reinsurance premiums, but without respect to when those premiums will be recognized as actual revenue. Underwriting income or profit represents the pretax profitability of our insurance operations and is derived by subtracting losses and settlement expenses, policy acquisition costs, and insurance operating expenses from net premium earned. Operating earnings and EPS from operations consist of our net earnings adjusted by net realized investment gains/(losses) and taxes related to net realized gains/(losses). Our definitions of these items may not be comparable to the definitions used by other companies. Net earnings and net earnings per share are the GAAP financial measures that are most directly comparable to operating earnings and EPS from operations. All earnings per share data are calculated using fully diluted shares. Combined ratio refers to a GAAP combined ratio.

Except for historical information, this news release may include 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) including, without limitation, statements reflecting our current expectations about the future performance of our company or our business segments or about future market conditions. These statements are subject to certain risk factors that could cause actual results to differ materially. Various risk factors that could affect future results are listed in the company's filings with the Securities and Exchange Commission; including the Form 10-K Annual Report for the year ended December 31, 2010.

RLI, a specialty insurance company, offers a diversified portfolio of property and casualty coverages and surety bonds serving niche or underserved markets. RLI operates in all 50 states from office locations across the country. RLI’s insurance subsidiaries – RLI Insurance Company, Mt. Hawley Insurance Company and RLI Indemnity Company – are rated A+ “Superior” by A.M. Best Company and A+ “Strong” by Standard & Poor’s. RLI’s newest subsidiary, Contractors Bonding and Insurance Company, is rated A “Excellent” by A.M. Best Company.

For additional information, contact Aaron Jacoby, Vice President, Corporate Development at 309-693-5880 or at aaron.jacoby@rlicorp.com or visit our website at www.rlicorp.com.

Supplemental disclosure regarding the earnings impact of specific items:
   
Operating Earnings Per Share
 
2011     2010     2011     2010
4th Qtr. 4th Qtr. 12 Mos. 12 Mos.
Operating Earnings Per Share $ 1.35 $ 1.66

 
$ 5.58 $ 5.29
 
Specific items included in operating earnings per share: (1) (2)

·
Favorable development on casualty prior years' reserves $ 0.32 $ 0.49

 
$ 2.27 $ 1.61

·
Favorable (unfavorable) development on property prior years' reserves $ (0.02 ) $ 0.05 $ 0.30 $ 0.05

·
Favorable development on surety prior years' reserves $ 0.02 $ 0.03

 
$ 0.22 $ 0.31

·
2011 spring storms (3) $ - $ -

 
$ (0.36 ) $ -

·
Hurricane Irene $ 0.05 $ -

 
$ (0.13 ) $ -

·
Gain from tax benefit of special dividend to ESOP (4) $ 0.13 $ 0.17 $ 0.13 $ 0.17

·
Gain from change in tax rate applicable to Maui Jim (5) $ - $ 0.10 $ - $ 0.10
 
 
(1)   Includes bonus and profit sharing-related impacts which affected other insurance and general corporate expenses.
(2) Reserve development reflects revisions for previously estimated losses.
(3) From a comparative standpoint, twelve-month 2010 results included $0.10 per share in losses from Midwest and Southeast storms.
(4) Dividends paid in an ESOP on employer securities are fully deductible from taxable income and result in a 35% tax benefit.
(5)

As required under the accounting standard for income taxes, the gain reflects the tax benefit of applying the lower tax rate applicable to dividends received from an affiliate (7%) as compared to the corporate capital gains tax rate (35%) on which tax estimates were based.

 
RLI CORP.
2011 FINANCIAL HIGHLIGHTS
(Unaudited)
(Dollars in thousands, except per share amounts)
           
 
Three Months Ended December 31, Twelve Months Ended December 31,
2011 2010 % Change 2011 2010 % Change

SUMMARIZED INCOME STATEMENT DATA:
Net premiums earned $ 145,023 $ 127,026 14.2 % $ 538,452 $ 493,382 9.1 %
Net investment income 16,244 16,672 -2.6 % 63,681 66,799 -4.7 %
Net realized investment gains   2,691     7,962   -66.2 %   17,036     23,243   -26.7 %
Consolidated revenue 163,958 151,660 8.1 % 619,169 583,424 6.1 %
 
Loss and settlement expenses 58,048 46,180 25.7 % 200,084 201,332 -0.6 %
Policy acquisition costs 47,912 39,267 22.0 % 177,725 158,071 12.4 %
Other insurance expenses 12,265 11,426 7.3 % 44,312 38,584 14.8 %
Interest expense on debt 1,513 1,513 0.0 % 6,050 6,050 0.0 %
General corporate expenses   2,203     2,592   -15.0 %   7,766     7,998   -2.9 %
Total expenses 121,941 100,978 20.8 % 435,937 412,035 5.8 %
 
Equity in earnings (loss) of
unconsolidated investee   (718 )   (226 ) -217.7 %   6,497     7,101   -8.5 %
 
Earnings before income taxes 41,299 50,456 -18.1 % 189,729 178,490 6.3 %
Income tax expense   10,607     10,204   3.9 %   59,138     51,058   15.8 %
Net earnings $ 30,692   $ 40,252   -23.8 % $ 130,591   $ 127,432   2.5 %
 
Other comprehensive earnings (loss), net of tax   27,656     (9,405 )     21,333     18,581   14.8 %
 
Comprehensive earnings $ 58,348   $ 30,847   89.2 % $ 151,924   $ 146,013   4.0 %
 
 
Operating earnings: (1)
 
Net earnings $ 30,692 $ 40,252 -23.8 % $ 130,591 $ 127,432 2.5 %
 
Less: Realized investment gains , net of tax   1,749     5,176   -66.2 %   11,073     15,108   -26.7 %
 
Operating earnings $ 28,943   $ 35,076   -17.5 % $ 119,518   $ 112,324   6.4 %
 
Return on Equity:
Net earnings (trailing four quarters)   15.7 %   15.0 %
Comprehensive earnings (trailing four quarters)   18.3 %   17.2 %
 
Per Share Data
 

Diluted:
Weighted average shares outstanding (in 000's) 21,472 21,164 21,434 21,241
 
EPS from operations (1) $ 1.35 $ 1.66 -18.7 % $ 5.58 $ 5.29 5.5 %
Realized gains, net of tax   0.08     0.24   -66.7 %   0.51     0.71   -28.2 %
Net earnings per share $ 1.43   $ 1.90   -24.7 % $ 6.09   $ 6.00   1.5 %
 
Comprehensive earnings per share $ 2.72   $ 1.46   86.3 % $ 7.09   $ 6.87   3.2 %
 
Cash dividends per share $ 5.30 $ 7.29 -27.3 % $ 6.19 $ 8.15 -24.0 %
 
 
Net Cash Flow provided by Operations $ 2,069   $ 12,368   -83.3 % $ 117,991   $ 100,235   17.7 %
 
 
(1) See discussion of non-GAAP financial measures on page 3.
 
 
 
RLI CORP.
2011 FINANCIAL HIGHLIGHTS
(Unaudited)
(Dollars in thousands, except per share amounts)
     
 
December 31, December 31,
2011 2010 % Change

SUMMARIZED BALANCE SHEET DATA:
Fixed income $ 1,406,550 $ 1,441,337 -2.4 %
(amortized cost - $1,345,961 at 12/31/11)
(amortized cost - $1,403,140 at 12/31/10)
Equity securities 388,689 321,897 20.7 %
(cost - $269,400 at 12/31/11)
(cost - $213,069 at 12/31/10)
Cash and cash equivalents   105,049   39,787 164.0 %
Total investments and cash 1,900,288 1,803,021 5.4 %
 
Premiums and reinsurance balances receivable 124,496 107,391 15.9 %
Ceded unearned premiums 61,629 62,631 -1.6 %
Reinsurance recoverable on unpaid losses 353,805 354,163 -0.1 %
Deferred acquisition costs/VOBA* 92,441 74,435 24.2 %
Property and equipment 20,104 18,370 9.4 %
Investment in unconsolidated investee 49,968 43,358 15.2 %
Goodwill and intangibles 60,482 26,214 130.7 %
Other assets   31,957   25,009 27.8 %
Total assets $ 2,695,170 $ 2,514,592 7.2 %
 
Unpaid losses and settlement expenses $ 1,150,714 $ 1,173,943 -2.0 %
Unearned premiums 341,267 301,537 13.2 %
Reinsurance balances payable 50,861 23,851 113.2 %
Funds held 110,555 32,072 244.7 %
Long-term debt - bonds payable 100,000 100,000 -
Income taxes - deferred 51,985 33,930 53.2 %
Accrued expenses 58,883 42,436 38.8 %
Other liabilities   12,053   15,447 -22.0 %
Total liabilities 1,876,318 1,723,216 8.9 %
Shareholders' equity   818,852   791,376 3.5 %
Total liabilities & shareholders' equity $ 2,695,170 $ 2,514,592 7.2 %
 
* Includes asset for value of business acquired (VOBA) in CBIC acquisition
 

OTHER DATA
 
Common shares outstanding (in 000's) 21,162 20,965
 
Book value per share $ 38.69 $ 37.75 2.5 %
Closing stock price per share $ 72.86 $ 52.57 38.6 %
Cash dividends per share - ordinary $ 1.19 $ 1.15 3.5 %
Cash dividends per share - special $ 5.00 $ 7.00 -28.6 %
 
Statutory Surplus $ 710,186 $ 732,379 -3.0 %
 
 
 
RLI CORP.
2011 FINANCIAL HIGHLIGHTS
UNDERWRITING SEGMENT DATA
(Unaudited)
(Dollars in thousands, except per share amounts)
               

Three Months Ended December 31,
GAAP GAAP GAAP GAAP
Casualty Ratios Property Ratios Surety Ratios Total Ratios

2011
 
Gross premiums written $ 86,614 $ 51,542 $ 26,110 $ 164,266
Net premiums written 61,867 36,005 24,497 122,369
Net premiums earned 62,261 55,645 27,117 145,023
Net loss & settlement expenses 31,382 50.4 % 21,470 38.6 % 5,196 19.2 % 58,048 40.0 %
Net operating expenses   22,092 35.5 %   20,243 36.4 %   17,842 65.8 %   60,177 41.5 %
Underwriting income $ 8,787 85.9 % $ 13,932 75.0 % $ 4,079 85.0 % $ 26,798 81.5 %
 
 

2010
 
Gross premiums written $ 78,457 $ 46,987 $ 21,194 $ 146,638
Net premiums written 53,394 34,389 19,884 107,667
Net premiums earned 56,357 49,512 21,157 127,026
Net loss & settlement expenses 23,285 41.3 % 20,372 41.1 % 2,523 11.9 % 46,180 36.4 %
Net operating expenses   19,825 35.2 %   17,724 35.8 %   13,144 62.1 %   50,693 39.9 %
Underwriting income $ 13,247 76.5 % $ 11,416 76.9 % $ 5,490 74.0 % $ 30,153 76.3 %
 
 
 

Twelve Months Ended December 31,
GAAP GAAP GAAP GAAP
Casualty Ratios Property Ratios Surety Ratios Total Ratios

2011
 
Gross premiums written $ 325,697 $ 270,097 $ 106,313 $ 702,107
Net premiums written 238,611 210,904 100,123 549,638
Net premiums earned 236,198 203,660 98,594 538,452
Net loss & settlement expenses 85,091 36.0 % 101,969 50.1 % 13,024 13.2 % 200,084 37.2 %
Net operating expenses   86,932 36.8 %   71,137 34.9 %   63,968 64.9 %   222,037 41.2 %
Underwriting income $ 64,175 72.8 % $ 30,554 85.0 % $ 21,602 78.1 % $ 116,331 78.4 %
 
 

2010
 
Gross premiums written $ 313,591 $ 235,058 $ 87,667 $ 636,316
Net premiums written 223,253 179,899 81,988 485,140
Net premiums earned 232,047 181,645 79,690 493,382
Net loss & settlement expenses 114,861 49.5 % 82,463 45.4 % 4,008 5.0 % 201,332 40.8 %
Net operating expenses   80,754 34.8 %   65,097 35.8 %   50,804 63.8 %   196,655 39.9 %
Underwriting income $ 36,432 84.3 % $ 34,085 81.2 % $ 24,878 68.8 % $ 95,395 80.7 %

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