RLI Reports Second Quarter 2018 Results

RLI Corp. (NYSE: RLI) – RLI Corp. reported second quarter 2018 net earnings of $33.3 million ($0.74 per share), compared to $26.2 million ($0.59 per share) for the second quarter of 2017. Operating earnings⁽¹⁾ for the second quarter of 2018 were $26.7 million ($0.60 per share) compared to $27.1 million ($0.61 per share) for the same period in 2017.

Highlights for the quarter included:

• Underwriting income⁽¹⁾ of $14.1 million, resulting in a combined ratio⁽¹⁾ of 92.8.
• 12% increase in gross premiums written and 10% increase in investment income.
• Favorable development in prior years’ loss reserves resulting in a $12.4 million net increase in underwriting income.
• Losses from volcanic activity in Hawaii resulting in a $5.5 million net decrease to underwriting income.
• Book value per share of $19.17, an increase of 1% from year-end 2017, inclusive of dividends.

"We are pleased to report profitable underwriting results and strong premium growth in the second quarter,” said RLI Corp. Chairman & CEO Jonathan E. Michael. "We achieved a 93 combined ratio, which was driven by profitable underwriting in all segments. Although volcanic activity in Hawaii impacted our property results, I am proud of our team’s ongoing efforts to provide outstanding service and support to our policyholders living in affected areas. In addition, we posted 12% top line growth with contributions from multiple products across our diverse portfolio, marking our third consecutive quarter of double-digit growth. Because of the combined strength of our underwriting and investment performance, we were able to deliver $0.60 of operating earnings per share.”

Underwriting Income

RLI achieved $14.1 million of underwriting income in the second quarter of 2018 on a 92.8 combined ratio, compared to $19.7 million of underwriting income on an 89.3 combined ratio in the same quarter for 2017. Results for both years include favorable development in prior years’ loss reserves which totaled $12.4 million and $12.8 million for 2018 and 2017, respectively.

The following table highlights underwriting income and combined ratios by segment.

Other Income

RLI’s net investment income for the quarter increased 10.1% to $14.6 million, compared to the same period in 2017. For the six-month period ended June 30, 2018, investment income was $28.8 million versus $26.2 million for the same period in 2017. The investment portfolio’s total return was 0.8% for the quarter and -0.7% through the six-month period.

Comprehensive earnings were $25.6 million for the quarter ($0.57 per share) compared to $36.8 million ($0.83 per share) for the same quarter in 2017. In addition to net earnings, comprehensive earnings included after-tax unrealized gains/losses from the fixed income portfolio in 2018 and after-tax unrealized gains/losses from the fixed income and equity portfolios in 2017. See Recently Adopted Accounting Standard and Tax Reform discussion below.

Equity in earnings of unconsolidated investees was $7.1 million for the quarter compared to $6.8 million from the same period last year. These results are related to Maui Jim, Inc. ($6.6 million), a producer of premium sunglasses, and Prime Holdings Insurance Services, Inc. ($0.5 million), a specialty insurance company. For the second quarter of 2017, equity in earnings of unconsolidated investees from Maui Jim and Prime was $6.2 million and $0.6 million, respectively. For the six-month period ended June 30, 2018, equity in earnings of unconsolidated investees was $12.3 million versus $11.7 million in 2017.

Dividends Paid in the Second Quarter of 2018

On June 20, 2018, the company paid an ordinary dividend of $0.22 per share, a $0.01 increase over the prior quarter. RLI’s cumulative dividends total more than $613 million paid over the last five years.

Recently Adopted Accounting Standard and Tax Reform

As disclosed in RLI’s Annual Report on Form 10-K for the year ended December 31, 2017, accounting guidance for financial instruments changed in 2018 under ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. We adopted this accounting standard update, effective January 1, 2018, using a cumulative-effect adjustment. This adjustment moved the historical unrealized gains and losses, net of tax, on the equity portfolio from accumulated other comprehensive earnings to retained earnings, but had no impact on overall shareholders’ equity. In addition, for 2018 and forward, the change in fair value for equity securities is required to be recognized through net earnings rather than through other comprehensive income. As defined below, we exclude these unrealized gains and losses in arriving at operating earnings and earnings per share from operations. For the second quarter of 2018, $12.6 million of unrealized losses, gross of tax, were recognized within pre-tax earnings and the income tax expense was reduced by $2.6 million. The impact to our income statement will vary depending upon the level of volatility in the performance of the securities held in our equity portfolio and the overall market.

The change in the federal corporate tax rate from 35% to 21% commencing January 1, 2018, as enacted by the Tax Cuts and Jobs Act of 2017 (TCJA), contributed to a lower effective tax rate for 2018 as compared to 2017.

Non-GAAP and Performance Measures

Management has included certain non-generally accepted accounting principles ("non-GAAP”) financial measures in presenting the Company’s results. Management believes that these non-GAAP measures better explain the Company’s results of operations and allow for a more complete understanding of the underlying trends in the Company’s business. These measures should not be viewed as a substitute for those determined in accordance with generally accepted accounting principles ("GAAP”). In addition, our definitions of these items may not be comparable to the definitions used by other companies.

Operating earnings and earnings per share (EPS) from operations consist of our GAAP net earnings adjusted by the net realized gains/(losses), net unrealized gains/(losses) on equity securities for 2018 only and taxes related thereto. The adjustment for net unrealized gains/(losses) on equity securities is only applicable for 2018 due to the adoption of the above mentioned accounting standard update. Net earnings and net earnings per share are the GAAP financial measures that are most directly comparable to operating earnings and EPS from operations. A reconciliation of the operating earnings and EPS from operations to the comparable GAAP financial measures is included in the 2018 financial highlights below.

Underwriting income or profit represents the pretax profitability of our insurance operations and is derived by subtracting loss and settlement expenses, policy acquisition costs and insurance operating expenses from net premium earned, which are all GAAP financial measures. The combined ratio, which is derived from components of underwriting income, is a performance measure commonly used by property and casualty insurance companies and is calculated as the sum of loss and settlement expenses, policy acquisition costs and insurance operating expenses, divided by net premiums earned, which are all GAAP measures.

Other News

At 10 a.m. central daylight time (CDT) tomorrow, July 19, 2018, 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 https://edge.media-server.com/m6/p/2judher6.

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, 2017.

About RLI

RLI Corp. (NYSE: RLI) is a specialty insurer serving diverse, niche property, casualty and surety markets. The company provides deep underwriting expertise and superior service to commercial and personal lines customers nationwide. RLI’s products are offered through its insurance subsidiaries RLI Insurance Company, Mt. Hawley Insurance Company and Contractors Bonding and Insurance Company. All of RLI’s insurance subsidiaries are rated A+ (Superior) by A.M. Best Company. RLI has paid and increased regular dividends for 43 consecutive years and delivered underwriting profits for 22 consecutive years. To learn more about RLI, visit www.rlicorp.com.

Supplemental disclosure regarding the earnings impact of specific items:

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