SEC Info  
    Home      Search      My Interests      Help      Sign In      Please Sign In

Rli Corp – ‘10-K’ for 12/31/95

As of:  Tuesday, 3/26/96   ·   For:  12/31/95   ·   Accession #:  912057-96-5193   ·   File #:  1-09463

Previous ‘10-K’:  None   ·   Next:  ‘10-K’ on 3/25/97 for 12/31/96   ·   Latest:  ‘10-K’ on 2/22/19 for 12/31/18

  in   Show  &   Hints

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/26/96  Rli Corp                          10-K       12/31/95    7:254K                                   Merrill Corp/FA

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         40    189K 
 2: EX-11.0     Statement re: Computation of Earnings Per Share        2±    11K 
 3: EX-13       Annual or Quarterly Report to Security Holders        51±   236K 
 4: EX-21.1     Subsidiaries of the Registrant                         1      6K 
 5: EX-23.1     Consent of Experts or Counsel                          1      7K 
 7: EX-27       Financial Data Schedule (Pre-XBRL)                     2      9K 
 6: EX-28.1     Exhibit 29.1                                           1      7K 


10-K   —   Annual Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Item 1. Business
6Reinsurance
23Item 2. Properties
"Item 3. Legal Proceedings
"Item 4. Submission of Matters to A Vote of Security Holders
"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
"Item 6. Selected Financial Data
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
24Item 8. Financial Statements and Supplementary Data
"Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
10-K1st Page of 40TOCTopPreviousNextBottomJust 1st
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 ----------------------------------------------------- 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. ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Illinois 37-0889946 --------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employers Identification No.) incorporation or organization) 9025 North Lindbergh Drive, Peoria, Illinois 61615 --------------------------------------------------- ----------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (309) 692-1000 -------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered -------------------- ------------------------------------------ Common Stock $1.00 par value New York Stock Exchange 6% Convertible Subordinated Debentures due 2003 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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. X Yes No ------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on February 29, 1996 as reported on the New York Stock Exchange, was $147,806,135. Shares of Common Stock held directly or indirectly by each officer and director along with shares held by the Company ESOP have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the Registrant's Common Stock, $1 par value, on February 29, 1996 was 7,935,776. DOCUMENTS INCORPORATED BY REFERENCES. Portions of the Annual Report to Shareholders for the past year ended December 31, 1995, are incorporated by reference into Parts I and II of this document. Portions of the Registrant's definitive Proxy Statement for the 1996 annual meeting of security holders to be held May 2, 1996, are incorporated herein by reference into Part III of this document. Exhibit index is located on page 27 of this document. Page 1 of 44
10-K2nd Page of 40TOC1stPreviousNextBottomJust 2nd
PART I Item 1. BUSINESS (a) General Development of Business As used in this Form 10-K, the term "Company" refers to RLI Corp. and its subsidiaries and affiliates, unless the context otherwise indicates. RLI Corp., which was incorporated in Illinois in 1965, merged into and became a Delaware corporation in 1984. In May of 1993, RLI Corp. changed its state of incorporation back to Illinois through a merger. RLI Corp. is a holding company, which, through its subsidiaries, underwrites specialty property and casualty insurance, administers extended service programs, markets computers and automated practice management software to the ophthalmic industry, distributes contact and other lenses, spectacle frames and sunglasses, manufactures made-to-order spectacle and rigid gas permeable (RGP) lenses and writes miscellaneous surety bonds. SIGNIFICANT EVENT NORTHRIDGE EARTHQUAKE Refer to pages 24 through 31, Management's Discussion and Analysis from the Company's Annual Report to Shareholders, as attached in Exhibit 13. (b) Financial Information about Industry Segments Selected information about industry segments is included herein as Item 8. (c) Narrative Description of Business RLI INSURANCE GROUP RLI Insurance Group is composed primarily of two main insurance companies. RLI Insurance Company, the principal subsidiary, writes multiple lines of insurance on an admitted basis in all 50 states, the District of Columbia and Puerto Rico. Mt. Hawley Insurance Company, a subsidiary of RLI Insurance Company, writes multiple lines of insurance on an admitted basis in Kansas and surplus lines insurance in the remaining 49 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. Other companies in the RLI Insurance Group include: Replacement Lens Inc., License Express Services, Inc., RLI Aviation, Inc. and RLI Insurance Ltd. Since 1977, when the Company first began underwriting specialty property and casualty coverages for commercial risks, highly cyclical market conditions and a number of other factors have influenced the Company's growth and underwriting profits. The Company, as a "niche" company rather than an "all lines" company, seeks to develop expertise and large homogeneous books of business in areas generally overlooked by traditional markets. In response to the soft market conditions of the early 1980's, which were characterized by severe rate competition and excess underwriting capacity, the Company limited its writings in specialty property and casualty lines and terminated certain lines and sources of production. 2
10-K3rd Page of 40TOC1stPreviousNextBottomJust 3rd
Significant rate increases resulted when the insurance market hardened in late 1984. The Company responded by expanding its premium volume in targeted lines. In 1987, and continuing through 1995, the industry again experienced soft market conditions featuring intensified competition for admitted and surplus lines insurers, resulting in rate decreases. The Company has continually monitored its rates and controlled its costs in an effort to maximize profits during this current soft market period. As a result of Hurricane Andrew and other catastrophic losses, especially the Northridge Earthquake of January 17, 1994, property rates hardened in California, Florida and the wind belt, but remain soft in other areas of the country. During 1994 the Company did see rate increases of over 30% on the commercial property book of business. The casualty book of business incurred flat to moderate decreases. This trend continued during 1995. During 1995, rates for catastrophic driven property business, especially in California, remained hard. Some softening is expected for 1996. The Company initially began to write specialty property and casualty insurance primarily through independent underwriting agents. However, with the opening of its first branch office in 1984, the Company began to shift its marketing efforts from independent underwriting agents to wholly-owned branch offices which market to wholesale producers. The Company also markets certain products to retail producers from its Specialty Marketing Division located at the home office. Although the Company still maintains agreements with two underwriting agents, the majority of its specialty property and casualty business is marketed through its Specialty Marketing and Surety divisions and eight branch offices located in Los Angeles, California; San Diego, California; San Francisco, California; St. Paul, Minnesota; Kansas City, Kansas; Hartford, Connecticut; Atlanta, Georgia; and Chicago, Illinois. During 1995, an office was established in Columbus, Ohio to underwrite Lenders' Single Interest inland marine property insurance. The following table provides for the year ended December 31, 1995 the geographic distribution of the Company's risks insured as represented by direct premiums earned for all product lines. For the year ended December 31, 1995, no other state accounted for more than 2% of total direct premiums earned for all product lines. [Download Table] Direct Premiums State Earned Percent of Total ----- --------------- ----------------- California $103,619,169 39.2% Texas 39,562,154 15.0 Florida 16,757,701 6.3 New York 14,683,741 5.6 Illinois 7,215,762 2.7 Michigan 6,475,145 2.4 Pennsylvania 5,817,933 2.2 All other 70,519,765 26.6% ------------ ------ Total direct premiums $264,651,370 100.00% ------------ ------ The Company presently underwrites specialty property and casualty insurance primarily in the following lines: COMMERCIAL PROPERTY. The Company's commercial property coverage consists primarily of excess and surplus lines and specialty insurance such as fire and difference in conditions which includes earthquake, flood and collapse coverages. The Company writes coverage for a wide range of commercial and industrial classes such as office buildings, apartments, condominiums, certain industrial and mercantile structures, and buildings under construction. The St. Paul, Los Angeles, Hartford, Kansas City, San Francisco, Chicago, Columbus and Atlanta branch offices are responsible for underwriting this coverage. In 1993, 1994, and 1995, net earned premiums totaled $24,370,000, $42,646,000, and $49,430,000, or 14%, 22%, and 26%, respectively, of the Company's consolidated revenues. 3
10-K4th Page of 40TOC1stPreviousNextBottomJust 4th
GENERAL LIABILITY. The Company writes general liability coverages through its St. Paul, Hartford, Chicago and Atlanta branch offices and through one of its unaffiliated underwriting agents. The Company's general liability business consists primarily of coverage for third party liability of commercial insureds including manufacturers, contractors, apartments and mercantile. Net earned premiums totaled $35,025,000, $35,160,000, and $36,499,000, or 20%, 18%, and 19% of the Company's consolidated revenues for the years 1993, 1994, and 1995, respectively. COMMERCIAL AND PERSONAL UMBRELLA LIABILITY. The Company's commercial umbrella coverage is produced through its Kansas City, St. Paul, Atlanta, and Hartford branch offices. The coverage is principally written in excess of primary liability insurance provided by other carriers and, to a small degree, in excess of primary liability written by the Company. The personal umbrella coverage, which is produced through the Specialty Marketing Division, is written in excess of the homeowners and automobile liability coverage provided by other carriers. Net earned premiums totaled $16,764,000, $17,638,000, and $18,092,000, or 10%, 9%, and 10% of the Company's consolidated revenues for the years 1993, 1994, and 1995, respectively. DIRECTORS' AND OFFICERS' LIABILITY. In December, 1990, the Company established a new Directors' and Officers' Liability underwriting facility in San Diego, California. Net earned premiums totaled $3,487,000, $5,680,000, and $6,025,000, or 2%, 3%, and 3% of the Company's consolidated revenues for the years 1993, 1994, and 1995, respectively. EMPLOYER'S EXCESS INDEMNITY. In 1993, the Company began offering Employer's Excess Indemnity coverage for businesses which have opted out of the Workers' Compensation plan in the state of Texas. The coverage is similar to accident and health, in that it indemnifies the employer for expenses resulting from a work related injury or disease, excess of a self-insured retention (SIR). The SIR can range from $50,000 to $500,000. The product is underwritten out of the Kansas City branch office. Net earned premiums totaled $1,670,000, $7,953,000, and $8,257,000, or 1%, 4%, and 4% of the Company's consolidated revenues for 1993, 1994, and 1995, respectively. CONTACT LENS. Up until January of 1994, contact lens insurance was underwritten and marketed by the Company in the United States. In Canada, up until January of 1994,the Company marketed contact lens policies underwritten by Security National Insurance Company, an unaffiliated insurer, which business was, in turn, reinsured by RLI Insurance Company. The Company generally retained all risks associated with this coverage. This product has been phased out and replaced by a "non-insurance" product in an effort to better serve the needs of the Company's customers and to reduce expenses. The contact lens insurance is processed by RLI Vision Corp. Net earned premiums totaled $10,327,000, $4,833,000, and $743,000, or 7%, 3% and .4% of the Company's consolidated revenues for the years 1993, 1994, and 1995, respectively. OTHER. Smaller programs offered by the Company include: miscellaneous professional liability, fidelity and surety, commercial multi-peril and accident and health insurance. Net earned premiums from these lines totaled $34,346,000, $26,274,000, and $14,422,000, or 20%, 14%, and 8% of the Company's consolidated revenues for the years 1993, 1994, and 1995, respectively. The target market for the Surety Division continues to be a wide range of miscellaneous surety bonds which can be developed quickly and at relatively little additional risk. By providing a high level of quick, efficient service, the Company's newest venture will target business now handled by slow, inflexible multi-line companies. In June of 1995, a new facility was opened in Columbus, Ohio. This facility specializes in writing single interest inland marine property insurance for major lending institutions. This insurance covers the institution's interest in property used as collateral for loans, in the event of the borrower's default. In March of 1992, License Express Services, Inc., an agent/agency/broker licensing service subsidiary, was formed. Revenues for the period ended December 31, 1995 amounted to $103,000. Review of this division's viability during the 1996 planning cycle included recognition of strategic efforts by the National Association of 4
10-K5th Page of 40TOC1stPreviousNextBottomJust 5th
Insurance Commissioners to streamline and automate agent licensing efforts. The uncertainty of the future and limited prospects of near-term profitability resulted in the decision to withdraw this service from the agent licensing market. An agreement has been negotiated to refer the customers of this division to a competitor service in exchange for a stipulated royalty payment. COMPETITION The Company's specialty property and casualty insurance subsidiaries are part of an extremely competitive industry which is cyclical and characterized by periods of high premium rates and shortages of underwriting capacity followed by periods of severe competition and excess underwriting capacity. Within the United States alone, approximately 3,500 companies, both stock and mutual, actively market property and casualty products. The combination of products, service, pricing and other methods of competition vary from line to line. The Company's principal methods of meeting this competition are innovative products, marketing structure and quality service to the agents and policyholders at a fair price. The Company competes favorably in part because of its sound financial base and reputation, as well as its broad geographic penetration into all 50 states, the District of Columbia and Puerto Rico. In the property and casualty area, the Company has acquired experienced underwriting specialists in its branch and home offices. In 1987, the insurance industry, in general, entered into a "soft" or highly competitive period during which insurance rates generally decreased. The specialty property and casualty market continues to be soft with some rate increase in the property lines in California, Florida and the wind belt during 1993 and 1994. The Company is maintaining its underwriting and marketing standards by not seeking market share at the expense of earnings. RATINGS During 1992, the A.M. Best rating for RLI Insurance Company, the principal subsidiary of the Company, was upgraded to "A" (Excellent). During 1993, Mt. Hawley Insurance Company's (an indirect subsidiary of the Company) A.M. Best rating was upgraded from "A-" (Excellent) to "A" (Excellent). During 1995, A.M. Best reaffirmed "A" (Excellent) ratings for both RLI Insurance Company and Mt. Hawley Insurance Company. Ratings for the industry range from "A++" (Superior) to "F" (In Liquidation) and some companies are not rated. Publications of A.M. Best indicate that the "A" and "A-" (Excellent) ratings are assigned to those companies that in A.M. Best's opinion have achieved excellent overall performance when compared to the standards established by A.M. Best and have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability leverage and liquidity as well as the company's spread of risk, the quality and appropriateness of its reinsurance, the quality and diversification of its assets, the adequacy of its policy or loss reserves, the adequacy of its surplus, its capital structure and the experience and objectives of its management. A.M. Best's ratings are based on factors relevant to policyholders, agents, insurance brokers and intermediaries and are not directed to the protection of investors. In conjunction with RLI Corp.'s July, 1993 issuance of $46 million of 6.00% Convertible Debentures due 2003, the Company applied for and received a debt rating from two of the major debt rating agencies - Standard & Poor's Ratings Group and Moody's Investor Service. Each of these security review firms assigned investment grade ratings to the new debt issue. Moody's reviews corporations and assigns ratings exclusively for the purpose of grading bonds according to investment quality. Their rating symbols range from "Aaa" (highest) to "C" (lowest). The Company's new debt issue received a rating of "Baa3" classifying them as medium grade obligations, i.e. they are neither highly protected nor poorly secured. Moody's assigns this rating to companies when interest payments and principal security appear adequate for the present but certain protective elements may be lacking, or may be characteristically unreliable over any great length of time. 5
10-K6th Page of 40TOC1stPreviousNextBottomJust 6th
Standard & Poor's assigns ratings to corporate debt that range from "AAA" (highest) to "CCC" (lowest). Standard & Poor's assigned RLI's Convertible Debentures a rating of "BBB-" based on the Company's adequate capitalization and its disciplined underwriting approach. This classification deems the issuer to have adequate capacity to pay interest and repay principal. Standard & Poor's assigns this rating when the issuer normally exhibits adequate protection to debtholders, yet adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this capacity than in higher rated categories. REINSURANCE The Company reinsures a significant portion of its specialty property and casualty insurance exposure, paying to the reinsurer a portion of the premiums received on such policies. Earned premiums ceded to non-affiliated reinsurers totaled $108,272,000, $125,458,000 and $131,772,000 in 1993, 1994, and 1995, respectively. Insurance is ceded principally to reduce net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer liable to the insurer to the extent of the insurance ceded. During the period 1993 through 1995, certain of the Company's reinsurers were unable to meet their obligations to the Company under reinsurance treaties. As reserves were previously established for the uncollectible amounts, the effects of the insolvent reinsurers on net earnings for 1993 through 1995 were immaterial. The Company continually monitors the financial stability of its reinsurers and establishes reserves for uncollectible reinsurance balances on a regular basis. As a result of these reviews, the Company reevaluates its position with respect to its reinsurance. During 1993, 1994, and 1995, the Company provided $1,163,278, $1,000,000, and $613,296 for uncollectible reinsurance balances. Currently the Company attempts to purchase reinsurance from a limited number of financially strong reinsurers. Retention levels are adjusted each year to maintain a balance between the growth in surplus and the cost of reinsurance. At December 31, 1995, the Company had prepaid reinsurance premiums and reinsurance recoverables on paid and unpaid losses and settlement expenses with American Re-Insurance Company (rated A+ "superior" by A.M. Best Company) and Lloyds of London that amounted to $50,886,661 and $19,593,757, respectively. All other reinsurance balances recoverable, when considered by individual reinsurer, are less than 10% of shareholders' equity. The following table sets forth the largest reinsurers in terms of amounts recoverable, the total amounts recoverable net of reinsurance payables from such reinsurers as of December 31, 1995 and the amounts of written premium ceded by the Company to such reinsurers during 1995. [Download Table] Gross Reinsurer Ceded Exposure as of Percent Premiums Percent December 31, 1995 of Total Written of Total ----------------- -------- ------- -------- American Re-Insurance Co. $50,886,661 20.93% $19,567,724 13.89% Lloyds of London 19,593,757 8.06 17,658,920 12.47 Employers Re 12,763,642 5.25 7,203,799 5.11 General Reins Corp. 8,835,778 3.63 5,567,212 3.95 TransAtlantic Reinsurance 12,505,000 4.82 15,954,368 11.32 NAC Reinsurance Corporation 9,367,974 3.85 4,388,507 3.11 Security Ins Co of Hartford 5,869,269 2.41 4,279,075 3.04 TIG Insurance Co 6,182,575 2.54 1,042,859 0.74 All other reinsurers 117,936,468 48.51 65,320,789 46.37 ------------ ------ ------------ ------- Total ceded exposure $243,155,123 100.00% $140,983,253 100.00% ------------ ------ ------------ ------- ------------ ------ ------------ ------- 6
10-K7th Page of 40TOC1stPreviousNextBottomJust 7th
As of December 31, 1995, the Company held $24,925,074 in irrevocable letters of credit, $5,026,740 under trust agreements and $2,865,012 in cash to collateralize a portion of the total amount recoverable. Since 1992, the Company has purchased non-proportional contracts. This allows the Company to retain a larger percentage of the premium and a larger portion of the initial loss risk. Under non-proportional reinsurance, the ceding company retains losses on a risk up to a specified amount and the reinsurers assume any losses above that amount. Since 1989, through its various reinsurance programs, the Company has generally limited its maximum retained exposure on any one risk to $1,000,000. The Company sought to limit its net aggregate exposure to a single catastrophic event in 1995 to less than 10% of shareholders' equity by purchasing various types of reinsurance. The Company increased its commercial property reinsurance protection in 1995. Through implementation of this change, the Company reduced its net aggregate exposure on a single catastrophic event from 20% to 10% of shareholders' equity. Using computer-assisted techniques, the Company quantifies and monitors its exposure to earthquake risk, the most significant catastrophe exposure to the Company. Detail is captured for each location covered for earthquake risk and the Probable Maximum Loss (PML) for each risk is determined. The PML calculation for each risk includes all faults to which the risk is exposed. Richter scale magnitudes used in the PML calculations are determined and applied separately for each fault. The Company uses the greater of the magnitude of an earthquake which only occurs every 100 years or 6.5 on the Richter scale in its PML calculations. Several widely accepted methods are used to estimate the magnitude of the 100 year event for each fault. Underwriting decisions are based on the PML as determined by the system, which calculates PML's on over 200 faults. Portfolio runs are made regularly to determine the Company's overall exposure on each fault from all risks covered. Total exposure after facultative reinsurance is managed by the Company to fall within the limits covered by the Company's chosen net retention, working layer treaty reinsurance and catastrophe reinsurance. FACTORS AFFECTING SPECIALTY PROPERTY AND CASUALTY PROFITABILITY The profitability of the specialty property and casualty insurance business is generally subject to many factors, including rate competition, the severity and frequency of claims, natural disasters, state regulation of premium rates, default of reinsurers, interest rates, general business conditions, regulatory measures and court decisions that define and expand the extent of coverage and the amount of compensation due for injuries or losses. One of the distinguishing features of the property and casualty insurance business is that its product must be priced before the ultimate claims costs can be known. In addition, underwriting profitability has tended to fluctuate over cycles of several years' duration. Insurers generally had profitable underwriting results in the late 1970's, substantial underwriting losses in the early 1980's and somewhat smaller underwriting losses in 1986 and 1987. During the years 1988 through 1992, underwriting losses increased due to increased rate competition and the frequency and severity of catastrophic losses, although pre-tax operating income remained profitable due to investment income gains. During 1995 the industry's statutory combined ratio is estimated to be 107.2. The Company believes that certain other factors affect its ability to underwrite specialty lines successfully, including: 7
10-K8th Page of 40TOC1stPreviousNextBottomJust 8th
SPECIALIZED UNDERWRITING EXPERTISE. The Company employs experienced professionals in its branch offices. Each office restricts its production and underwriting of business to certain classes of insurance reflecting the particular areas of expertise of its key underwriters. In accepting risks, all independent and affiliated underwriters are required to comply with risk parameters, retention limits and rates prescribed by the Company's home office underwriting group, which reviews submissions and periodically audits and monitors underwriting files and reports on losses over $100,000. Compensation of senior underwriters is substantially dependent on the profitability of the business for which they are responsible. The loss of any of these professionals could have an adverse effect on the Company's underwriting abilities and earnings in these lines. The Company's Underwriting Policy limits extension of binding authority to independent agents. The Company's product distribution falls into distinct categories, with binding authority following the categorization. BROKER BUSINESS. The largest volume of broker generated premium is Commercial Property, General Liability, Commercial Umbrella and Employer's Excess Indemnity. This business is produced through wholesale brokers who are not affiliated with the Company. Only a Company underwriter has the authority to bind the Company on such risks. INDEPENDENT AGENT BUSINESS. The Specialty Marketing Division writes program business such as Personal Umbrella, Residential Earthquake, and the In-Home Business Policy. Each of these programs involves detailed eligibility criteria which are incorporated into strict underwriting guidelines. The programs involve prequalification of each risk using the "smart" system accessible by the independent agent. The independent agent cannot bind the risk unless they receive approval through the Company's "smart" system. UNDERWRITING AGENTS. One independent agent is authorized to underwrite and bind business on behalf of the Company within limited underwriting guidelines as follows: General Liability business up to a limit of $1,000,000 written for a variety of risks, primarily in Texas and Louisiana. With rare exceptions, producers of business who are not Company employees are compensated on the basis of direct commissions with no provision for any contingent profit commission. There are a few volume incentives for producers handling association business, with the increased commission involved being tied to the program's underwriting profit. This represents less than 5% of the business. RETENTION LIMITS. The Company limits its net retention of single and aggregate risks through the purchase of reinsurance. See "Business -- Specialty Property and Casualty Insurance Segment -- Reinsurance." The amount of reinsurance available fluctuates according to market conditions. Reinsurance arrangements are subject to annual renewal. Any significant reduction in the availability of reinsurance or increase in the cost of reinsurance could adversely affect the Company's ability to insure specialty property and casualty risks at current levels or to add to the amount thereof. CLAIMS ADJUSTMENT ABILITY. The Company has a professional claims management team with proven experience in all areas of multi-line claims work. This team supervises and administers all claims and directs all outside legal and adjustment specialists. Whether a claim is being handled by the Company's claim specialist or has been assigned to a local attorney or adjuster, detailed attention is given to each claim to minimize loss expenses while providing for loss payments in a fair and equitable manner. 8
10-K9th Page of 40TOC1stPreviousNextBottomJust 9th
EXPENSE CONTROL. Management continues to review all areas of the Company's operations to streamline the organization, emphasizing quality and customer service, while minimizing expenses. These strategies will help to contain the growth of future costs. Maintaining and improving underwriting and other key organizational systems continues to be paramount as a means of supporting the Company's orderly growth in anticipation of a market rebound, as it is the Company's philosophy to retain its talented insurance professionals and to build infrastructure in spite of the soft market. Other operating expenses as a percent of gross written premiums for the years 1993, 1994 and 1995 were 6%, 5%, and 5%, respectively. ENVIRONMENTAL EXPOSURES. The Company is subject to environmental claims and exposures through its commercial umbrella, general liability, and assumed reinsurance lines of business. Within these lines, the Company's environmental exposures include environmental site cleanup, asbestos removal, and mass tort liability. The majority of the exposure is in the excess layers of the Company's commercial umbrella and assumed reinsurance books of business. The following table represents inception-to-date paid and unpaid environmental exposure data (including incurred but not reported losses) for the periods ended 1994 and 1995: [Download Table] ------------------------------------------------------------------------------- Inception-to-date December 31 (in thousands) 1994 1995 ------------------------------------------------------------------------------- Loss and LAE payments Gross $ 3,549 $ 5,117 Ceded ( 2,933) ( 3,842) ------------------------------------------------------------------------------- Net $ 616 $ 1,275 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Unpaid losses and LAE at end of year Gross $15,519 $20,154 Ceded ( 9,875) ( 13,398) ------------------------------------------------------------------------------- Net $ 5,644 $ 6,756 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Although the Company's environmental exposure is limited as a result of entering the liability lines after the industry had already recognized it as a problem, Management cannot determine the Company's ultimate liability within any reasonable degree of certainty. This ultimate liability is difficult to assess due to evolving legislation on such issues as joint and several liability, retroactive liability, and standards of cleanup. Additionally, the Company participates primarily in the excess layers, making it even more difficult to assess the ultimate impact. LOSSES AND SETTLEMENT EXPENSES Many years may elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer's payment of that loss. To recognize liabilities for unpaid losses, insurers establish reserves, which are balance sheet liabilities. The reserves represent estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. 9
10-K10th Page of 40TOC1stPreviousNextBottomJust 10th
When a claim is reported, the claims department establishes a "case reserve" for the estimated amount of the ultimate payment. The estimate reflects the informed judgment of professional claims personnel, based on the Company's reserving practices and the experience and knowledge of such personnel regarding the nature and value of the specific type of claim. Estimates for losses incurred but not yet reported are determined on the basis of statistical information, including the Company's past experience. The Company does not use discounting (recognition of the time value of money) in reporting its estimated reserves for losses and settlement expenses. The reserves are closely monitored and reviewed by management, with changes reflected as a component of earnings in the current accounting period. For lines of business without sufficiently large numbers of policies or that have not accumulated sufficient development statistics, industry average development patterns are used. To the extent that the industry average development experience improves or deteriorates, the Company will adjust prior accident years' reserves for the change in development patterns. Additionally, there may be future adjustments to reserves should the Company's actual experience prove to be better or worse than industry averages. As part of the reserving process, historical data is reviewed and consideration is given to the anticipated impact of various factors such as legal developments and economic conditions, including the effects of inflation. The reserving process provides implicit recognition of the impact of inflation and other factors affecting claims payments by taking into account changes in historic payment patterns and perceived probable trends. Changes in reserves from the prior years' estimates are calculated based on experience as of the end of each succeeding year (loss and settlement expense development). The estimate is increased or decreased as more information becomes known about the frequency and severity of losses for individual years. A redundancy means the original estimate was higher than the current estimate; a deficiency means that the current estimate is higher than the original estimate. Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses, there can be no assurance that the ultimate liability will not exceed amounts reserved, with a resulting adverse effect on the Company. Based on the current assumptions used in calculating reserves, Management believes the Company's overall reserve levels at December 31, 1995 are adequate to meet its future obligations. 10
10-K11th Page of 40TOC1stPreviousNextBottomJust 11th
The table which follows is a reconciliation of the Company's unpaid losses and settlement expenses for the years 1993, 1994, and 1995. [Download Table] Year Ended December 31, -------------------------------- (Dollars in thousands) 1993 1994 1995 ---- ---- ---- Unpaid losses and settlement expenses at beginning of year: Gross $268,043 $310,767 $394,966 Ceded (137,591) (145,208) (199,737) ------- ------- ------- Net 130,452 165,559 195,229 ------- ------- ------- Increase (decrease) in incurred losses and settlement expenses: Current accident year 81,589 100,535 62,619 Prior accident years (1,852) 1,107 23,271 ----- ----- ------ Total incurred 79,737 101,642 85,890 ------ ------ ------ Loss and settlement expense payments for claims incurred: Current accident year (18,743) (36,501) (10,600) Prior accident years (24,726) (36,026) (48,023) ------ ------ ------ Total paid (43,469) (72,527) (58,623) ------ ------ ------ Insolvent reinsurer charge off (221) 643 514 Loss reserves commuted (940) (88) (1,376) ----- ----- ----- Unpaid losses and settlement expenses at end of year $165,559 $195,229 $221,648 -------- -------- -------- -------- -------- -------- Unpaid losses and settlement expenses at end of year: Gross $310,767 $394,966 $418,986 Ceded (145,208) (199,737) (197,338) ------- -------- ------- Net $165,559 $195,229 $221,648 -------- -------- -------- -------- -------- -------- Explanation of significant components of reserve development by calendar year are as follows: 1993 During 1993 favorable development was reported in the other and products liability lines. These lines showed overall favorable development of $1,349,000. The favorable development was primarily isolated to the 1988 and 1990 accident years due to a reduction in the estimated ultimate loss. This was offset by unfavorable development in the 1982 and 1983 accident years due to development of a products liability claim. Unfavorable development also occurred in the 1992 accident year due to increases in the estimated ultimate loss for this accident year. 11
10-K12th Page of 40TOC1stPreviousNextBottomJust 12th
Favorable development also resulted from a reduction in the Company's estimate of unpaid unallocated loss adjustment expenses. 1994 During 1994, the Company experienced approximately $1,107,000 of adverse development on loss reserves. This development resulted from approximately $2,512,000 of adverse development in the other liability and products liability lines of business. Approximately $1,000,000 of this development related to one individual claim. The remainder of the adverse development is related to changes in loss reserves on prior years related to the professional liability business written by RLI from 1987 through 1993. The Company has withdrawn from this line of business. Offsetting the adverse development experience in the other liability and products liability lines of business was approximately $1,644,000 of favorable development on the property line of business. This favorable development resulted from individual claim estimates where the claims closed for less than the recorded reserves. 1995 During 1995, the Company experienced approximately $23,300,000 of adverse development on loss reserves. This development resulted from approximately $27,300,000 of adverse development in the property line due to the 1994 Northridge earthquake. Excluding the earthquake development, the Company experienced approximately $4,000,000 of favorable development. Approximately $1,000,000 of this favorable development occurred in the property line excluding the earthquake, with the remaining $3,000,000 occurring in the other liability and products liability lines. The liability development was the result of IBNR reserve decreases made possible by lower than expected tail development on two liability programs. The table on the following page presents the development under generally accepted accounting principles of the Company's balance sheet reserves for 1986 through 1995. The top line of the table shows the reserves at the balance sheet date for each of the indicated periods. This represents the estimated amount of losses and settlement expenses arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The lower portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual periods. 12
10-K13th Page of 40TOC1stPreviousNextBottomJust 13th
[Enlarge/Download Table] Year Ended December 31, ------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Liability for unpaid losses and settlement expenses at end of year $57,088 $66,169 $89,197 $95,953 $103,302 $110,844 $130,452 $165,559 $195,229 $221,648 Paid (cumulative) as of: One year later 18,631 10,170 17,312 14,302 19,297 23,561 24,725 36,026 48,023 Two years later 23,341 21,860 26,093 26,685 35,963 37,763 46,342 63,675 Three years later 29,874 28,052 37,137 40,341 44,088 49,462 64,364 Four years later 30,071 35,459 47,617 44,714 52,322 57,085 Five years later 33,785 42,010 48,937 51,153 56,413 Six years later 38,536 41,698 53,670 54,546 Seven years later 37,661 44,995 56,254 Eight years later 39,216 46,113 Nine years later 40,080 Liability re-estimated as of: One year later 56,793 67,033 86,230 91,646 101,251 108,249 128,600 166,666 218,499 Two years later 59,797 67,939 85,120 89,112 98,505 105,747 132,850 164,218 Three years later 59,338 68,697 84,426 87,981 95,690 107,777 132,377 Four years later 58,847 69,904 84,931 87,403 97,041 106,326 Five years later 60,794 69,670 84,217 90,030 96,490 Six years later 60,547 70,486 87,585 88,982 Seven years later 61,329 72,074 86,593 Eight years later 63,327 72,540 Nine years later 63,719 Net cumulative redundancy (deficiency) $(6,631) $(6,371) $ 2,604 $ 6,971 $ 6,812 $ 4,518 $(1,925) $ 1,341 $(23,271) Gross liability $310,767 $394,966 $418,986 Reinsurance recoverable (145,208) (199,737) (197,338) --------- --------- --------- Net liability $165,559 $195,229 $221,648 Gross re-estimated liability $309,716 $437,649 Re-estimated recoverable (145,498) (219,150) --------- -------- Net re-estimated liability $164,218 $218,499 Gross cumulative redundancy (deficiency) $1,051 $(42,683) 13
10-K14th Page of 40TOC1stPreviousNextBottomJust 14th
The Company's loss reserves at the end of any particular calendar year are based upon the premiums received and earned as of the end of that particular year. Reinsurance premiums and losses, especially foreign, are not, in many cases, received and recorded until after the calendar year. The loss development as displayed includes losses incurred in a particular calendar year that relate to premiums reported, recorded and earned subsequent to that year. The following table adjusts the cumulative redundancy (deficiency), as shown in the foregoing table, for the estimated losses associated with such late reported premiums. [Enlarge/Download Table] Year Ended December 31, ------------------------------------------------------------------------------------------------- 1986 1987 1988 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- ---- ---- ---- Cumulative redundancy (deficiency) per above $( 6,631) $( 6,371) $ 2,604 $6,971 $6,812 $4,518 $(1,925) $ 1,341 $(23,271) Estimated losses associated with late reported premiums 1,600 1,356 ------- ------- ------- ------- ------ ------ ------- ------ ------- Adjusted cumulative redundancy (deficiency) $ (5,031) $( 5,015) $ 2,604 $ 6,971 $6,812 $4,518 $(1,925) $ 1,341 $(23,271) -------- -------- ------- ------- ------ ------ ------- ------- ------- -------- -------- ------- ------- ------ ------ ------- ------- ------- See discussion of calendar year development for 1992, 1993, and 1994 on pages 11 and 12. 14
10-K15th Page of 40TOC1stPreviousNextBottomJust 15th
OPERATING RATIOS PREMIUMS TO SURPLUS RATIO The following table shows, for the periods indicated, the Company's insurance subsidiaries' statutory ratios of net premiums written to policyholders' surplus. While there is no statutory requirement applicable to the Company which establishes a permissible net premiums written to surplus ratio, guidelines established by the National Association of Insurance Commissioners provide that this ratio should generally be no greater than 3 to 1. [Download Table] Year Ended December 31, ----------------------------------------------------------- (Dollars in thousands) 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- Statutory net premiums written $84,188 $110,895 $136,728 $131,164 $130,453 Policyholders' surplus $88,605 $100,585 $152,262 $136,125 $172,313 Ratio .9 to 1 1.1 to 1 .9 to 1 1.0 to 1 .8 to 1 GAAP AND STATUTORY COMBINED RATIOS The underwriting experience of the Company is best indicated by its GAAP combined ratio, which is the sum of (a) the ratio of incurred losses and settlement expenses to net premiums earned (loss ratio) and (b) the ratio of policy acquisition costs and other operating expenses to net premiums earned (expense ratio). [Download Table] Year Ended December 31, -------------------------------------------- GAAP 1991 1992 1993 1994 1995 ---- ---- ---- ---- ----- Loss ratio 60.6 60.3 63.3 72.5 64.4 Expense ratio 24.6 31.1 33.9 44.4 43.1 ---- ---- ---- ----- ----- Combined ratio 85.2 91.4 97.2 116.9 107.5 ---- ---- ---- ----- ----- ---- ---- ---- ----- ----- (1) Excluding the effects of the Northridge Earthquake, the GAAP combined ratio for the years ended 1995 and 1994 would have been 86.2 and 91.1, respectively. The Company also calculates the statutory combined ratio, which is not indicative of GAAP underwriting profits due to accounting for multiple-year retrospectively-rated reinsurance contracts and policy acquisition costs differently for statutory accounting purposes compared to GAAP. The statutory combined ratio is the sum of (a) the ratio of statutory loss and settlement expenses incurred to statutory net premiums earned (loss ratio) and (b) the ratio of statutory policy acquisition costs and other underwriting expenses to statutory net premiums written. [Download Table] Year Ended December 31, ----------------------------------------------- Statutory 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- Loss ratio 56.8 58.9 65.8 73.4 63.6 Expense ratio 34.8 36.9 22.1 (3) 43.5 42.9 ---- ---- ---- ---- ---- Combined ratio 91.6 95.8 87.9 (3) 116.9 (4) 106.5 (4) ---- ---- ---- ----- ----- ---- ---- ---- ----- ----- Industry combined ratio 108.8 (2) 115.7 (2) 106.9 (2) 108.4 (2) 105.3 (1) ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- 15
10-K16th Page of 40TOC1stPreviousNextBottomJust 16th
(1) Source: Insurance Information Institute. Estimated for the year ended December 31, 1995. (2) Source: A.M. Best Aggregate & Averages -- Property-Casualty (1995 Edition). (3) Contingent commission income recorded during 1993, from the cancellation of a multiple-year retrospectively-rated reinsurance contract, reduced the statutory combined and expense ratio by 10.3 points. (4) Excluding the effects of the Northridge Earthquake, the statutory combined ratio for the years ended 1995 and 1994 would have been 85.3 and 89.7, respectively. RLI VISION CORP. The Company believes that it was the world's largest provider of contact lens insurance between 1965 and 1993. In 1993, due to changes in the ophthalmic market place, the Company began converting its contact lens insurance book of business over to a non-insurance contact lens purchase plan called Total Lens Care. Beginning January 1, 1994, the Company no longer offered contact lens insurance. In the late 1970's, the Company became a third party administrator of ophthalmic practitioners' extended service programs. The Company further expanded its operations in 1985 when it developed and marketed an office automation computer system for eyecare professionals. The Company became a contact lens wholesale distributor in 1990. On May 4, 1995, RLI Vision Corp. (formerly known as RLI Professional Technologies, Inc.), a wholly-owned subsidiary of RLI Corp., acquired through merger, Target Industries, Inc., a wholesale optical goods distributor of contract lenses, Rx spectacles, frames and sunglasses, located in Cohasset, Massachusetts. As consideration, RLI Corp. issued 313,500 shares of its common stock. The combined enterprise is now doing business under the name of RLI Vision Corp. This business combination has been accounted for as a pooling-of- interests. The consolidated financial statements and related financial information for periods prior to the combination have been restated to include the accounts and results of operations of Target Industries, Inc. RLI Vision Corp.'s revenues, as restated to include Target Industries, Inc. revenues, of $29,195,000, $33,974,000 and $34,595,000, in 1993, 1994, and 1995, respectively, represented 17%, 18% and 18% of the Company's consolidated revenues after eliminations in such years. CONTACT LENS INSURANCE PROCESSING While the Company no longer offers contact lens insurance, policies will be in effect and honored through February, 1996. Claims will be processed by RLI Vision Corp. under an agreement with RLI Insurance Company. TOTAL LENS CARE Total Lens Care is a contact lens purchase plan which offers patients discounted prices on contact lenses in exchange for an annual membership fee. As of December 31, 1995, approximately 200,000 patients had enrolled in Total Lens Care, generating $4,576,601 in fees for the year ended December 31, 1995. Presently, 65% of the patients renew their TLC memberships as they expire. EXTENDED SERVICE PROGRAMS The Company administers approximately 6,900 individual ophthalmic practitioners' extended service programs which entitle enrolled patients to receive certain goods and services at discounted costs. At December 31, 1995, approximately 310,000 patients were enrolled in such programs. Revenues for the same period amounted to $1,874,111. In 1990, the Company introduced Vision Care Advantage (VCA), an eye care cost containment program offered nationwide to employers, unions and groups. In exchange for an enrollment fee, VCA members receive specified ophthalmic goods and services at discounted costs from a panel of approximately 4,500 participating practitioners. For the period ended December 31, 1995, revenues amounted to $132,976. 16
10-K17th Page of 40TOC1stPreviousNextBottomJust 17th
CONTACT LENSES In order to take advantage of its purchasing power, in 1990 the Company opened the RLI Service Center which purchases contact lenses at wholesale costs for distribution to RLI Insurance Company and private practitioners. In 1992, the Company opened a distribution center in southern California to better compete in the west-coast market. Consolidated revenue from contact lens distribution out of all sites was $19,268,768 in soft lenses and $1,285,730 in RGP lenses in 1995. OPHTHALMIC LENS LAB As a result of the acquisition of Target Industries, RLI Vision now operates its own spectacle Rx laboratories. In 1995, spectacle Rx revenue was $3,376,972, up 9% over 1994. RLISYS PRACTICE AUTOMATION SYSTEMS The Company's office automation software, formally known as RLISYS, is designed to assist ophthalmic practitioners in the management of their patient, accounting, insurance and marketing records. In 1993, the Company ceased offering hardware to complement the software and adopted a monthly licensing pricing structure. The Company is the single largest provider of ophthalmic software and has installed over 3,000 systems in eyecare professionals' offices throughout the United States. The Company provides users with training, support and supplies for their systems. In addition, the Company continually evaluates the system and develops enhancements designed to meet the changing needs of the ophthalmic community. COMPETITION AND INDUSTRY POSITION In regards to TLC and Extended Service, competition stems from ophthalmic practitioners who offer their own membership plans. These independently-operated programs are believed by the Company to be the largest source of competition. The contact lens distribution facilities operate in a very competitive market, with the cost of goods sold comprising nearly 79% of lens sales revenue. With such low margins, volume affects profitability. The Company believes that the total wholesale contact lens distribution market generates approximately $600 million in annual sales, $150 million (25%) of which is sold through distributors. The Company is one of approximately 50 distribution facilities in the United States. The Company's 1995 contact lens sales totaled $20,553,000. The Company considers itself the leader in office automation software, having captured 23% of the automated optometrist market. It is believed that the elimination of the large up-front purchase price and a switch to a monthly- licensing pricing structure, will make the RLISYS system much more affordable and enable the Company to increase its market share both through practitioners automating for the first time and practitioners converting to RLISYS from other software vendors. INVESTMENTS The investment portfolios of the Company are managed by an Investment Committee of the Board of Directors. The Company follows an investment policy that is reviewed quarterly and revised periodically. 17
10-K18th Page of 40TOC1stPreviousNextBottomJust 18th
Investments of the highest quality and marketability are critical for preserving claims paying ability. Virtually all of RLI's fixed income investments are U.S. Government securities or AA or better rated taxable and tax exempt issues. Common stock portfolios are limited to securities listed on national exchanges and listed by the Securities Valuation Office of the National Association of Insurance Commissioners. The investment portfolio serves primarily as the funding source of loss reserves and secondly as a source of income. For these reasons, RLI's primary investment criteria are quality and liquidity, followed by yield. During 1995, operating cash flows were used to acquire fixed income instruments composed almost entirely of intermediate-term U.S. Government and Agency securities and municipal securities. The tax-exempt component of the fixed maturity portfolios increased $14.7 million, to $106.8 million; and comprises 36.1% of the Company's fixed maturity portfolios, unchanged from year end 1994. Net purchases of taxable U.S. Government and Government Agency securities amounted to $22.2 million in 1995; these taxable securities comprise 63.0% ($186.2 million) of the fixed income portfolios. Investment grade corporate securities in the fixed income portfolios totaled $2.7 million at the end of 1995, up slightly from the 1994 level of $2.5 million. Equity portfolios increased $49.9 million from $104.1 million at the end of last year to $154.0 million at the end of 1995. During 1995, net common equity investments totaling $15.5 million were purchased and pretax unrealized appreciation of equity securities totaled $34.4 million. Equity securities as a percentage of cash and invested assets increased to 32.4% at the end of 1995 from 24.5% at year end 1994. Combined cash and short-term investments decreased $35.5 million in 1995 to 5.3% of cash and total invested assets from 14.3% in 1994. The Company's short-term investments consist of U.S. Government and Agency backed money market funds and the highest rated commercial paper. RLI's mix of fixed income securities continues to be biased in favor of U.S. Government and Agency securities due to their high liquidity and almost risk-free nature. The mixture of tax-exempt and taxable instruments within the fixed income portfolios is decided at the time of purchase on the basis of available after-tax returns and overall taxability of all invested assets. Almost all securities reviewed for purchase are either U.S. Government, Agency, or high grade municipal debt instruments. As part of its investment philosophy, the Company attempts to avoid exposure to default risk by holding, almost exclusively, instruments ranked in the top two grades of investment security quality by Standard & Poor's and Moody's (i.e. AAA and AA). Interest rate risk is minimized by the Company's policy of purchasing securities with limited call provisions. The Company follows a program of matching assets to anticipated liabilities to ensure its ability to hold securities until maturity. The Company's known debt and long-term accounts payable are added to the estimate of its unpaid losses and settlement expenses, by line of business. These anticipated liabilities are then factored against ultimate payout patterns and the resulting payout streams are fully funded with the purchase of fixed-income securities of like maturity. Management believes that interest rate risk can best be minimized by such asset/liability matching. [Download Table] Aggregate maturities for the fixed maturity securities are as follows: Maturity Par Amortized Fair Carrying Year Value Cost Value Value -------- -------- ---------- ---------- ----------- 1996 $17,670,000 $17,630,139 $17,788,259 $17,638,672 1997 19,640,000 19,618,969 19,950,236 19,637,385 1998 30,950,000 31,246,389 32,423,703 31,388,458 1999 37,885,000 38,367,149 40,744,005 38,942,963 2000 31,580,000 32,423,834 34,100,788 32,784,417 2001 19,350,000 20,233,445 20,947,597 20,227,870 2002 24,460,000 25,662,858 26,353,026 25,667,448 2003 41,155,000 41,408,041 41,872,419 41,427,626 2004 18,295,000 18,317,544 18,627,591 18,306,272 2005 28,790,000 29,295,646 30,782,099 29,312,375 2006 4,185,000 4,124,770 4,241,337 4,124,770 18
10-K19th Page of 40TOC1stPreviousNextBottomJust 19th
2007 3,100,000 3,105,254 3,612,205 3,105,255 2008 525,000 525,000 556,432 525,000 2009 5,000,000 5,256,988 5,476,470 5,256,988 2010 8,000,000 8,411,848 8,601,440 8,411,848 --------- --------- --------- --------- $290,585,000 $295,627,874 $306,077,607 $296,757,347 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Under generally accepted accounting principles, equity and fixed income securities are carried at fair market value, except that a company that can demonstrate its ability to hold fixed income securities until their originally scheduled maturity is permitted to carry such securities at amortized cost. RLI Corp. has chosen to carry most of its fixed income securities at amortized cost as it believes it has constructed its fixed income portfolios to match expected liability payouts and thus has the ability and intention to hold such securities until originally scheduled maturity. Consequently, fluctuations in the market value of most bonds are not reflected in the financial statements and do not affect shareholders' equity. At December 31, 1995, the Company's equity securities valued at $154.0 million, accounted for 32.4% of total cash and invested assets and 89.4% of the combined statutory surplus of its insurance subsidiaries. At December 31, 1995, net pretax unrealized capital appreciation of equity securities was $51.4 million. The Company's investment results are summarized in the following table: [Download Table] Year ended December 31, ------------------------------------------- (Dollars in thousands) 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- Average invested assets (1) $225,546 $260,616 $343,441 $410,058 $445,562 Investment income (2)(3) 12,742 13,483 16,857 20,133 22,029 Realized gains (losses) (3) 1,234 921 254 (3,595) 457 Change in unreal- ized appreciation/ depreciation (3)(4) 8,528 3,546 7,945 (5,749) 36,037 Annualized return on average invested assets 10.0% 6.9% 7.3% 2.6% 13.1% (1) Average of amounts at beginning and end of each year. (2) Investment income, net of investment expenses, including non-debt interest expense. (3) Before income taxes. (4) Relates to available-for-sale fixed maturities and equity securities. REGULATION STATE REGULATION The Company's insurance subsidiaries are highly regulated by insurance regulators in their states of incorporation as well as the states in which they do business. Such regulations, among other things, limit the amount of dividends and other distributions the subsidiaries can pay without prior approval of the insurance department in the states in which they are physically and/or commercially domiciled, and impose restrictions on the amount and type of investments they may have. Certain states also regulate the rates insurers may charge for certain property/casualty products. 19
10-K20th Page of 40TOC1stPreviousNextBottomJust 20th
These regulations are designed to ensure financial solvency of insurance companies and to require fair and adequate service and treatment for policyholders. They are enforced through the granting and revoking of licenses to do business, licensing of agents and brokers, monitoring of trade practices, policy form approval, fair and equitable premium and commission rates, and minimum reserve and capital requirements. The procedures are administered by the various state departments of insurance and are supplemented by periodic reporting procedures and periodic examinations. The quarterly and annual financial reports to the states utilize accounting principles which are different than the generally accepted accounting principles used in shareholders' reports. The statutory accounting principles, in keeping with the intent to assure policyholder protection, are based, in general, on a liquidation concept while generally accepted accounting principles are based on a going concern concept. Under the laws of most states and provinces, regulatory authorities have relatively broad discretion with respect to granting, renewing and revoking brokers' and agents' licenses to transact business in the state. The manner of operating in particular states may vary according to the licensing requirements of the particular state, which may, among other things, require a firm operate in the state through a corporation. In a few states and provinces, licenses are issued only to individual residents or locally-owned business entities. In such cases, the Company has arrangements with residents or business entities licensed to act in the state. As an insurance holding company, RLI Corp. is subject to regulation by the states in which its insurance subsidiaries are domiciled or transact business. Most states have enacted legislation that requires each insurance company in a holding company system to register with the insurance regulatory authority of its state of domicile and furnish to it financial and other information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair, and the insurer's policyholder surplus following any transaction must be both reasonable in relation to its outstanding liabilities and adequate for its needs. Notice to applicable regulators is required prior to the consummation of certain transactions affecting insurance subsidiaries of the holding company system. CALIFORNIA EARTHQUAKE AUTHORITY--The California Insurance Commissioner has been authorized to establish a state residential earthquake program. The most recent proposals for the program include industry participation, investment of private capital and reinsurance commitments. As the Company writes an insignificant amount of residential homeowner's insurance, it does not appear that the legislation will impact the Company in any significant manner. PROPOSITION 103 (RATE ROLLBACK INITIATIVE)--In November 1988, California voters approved Proposition 103, which requires insurance premium rates for certain lines of business to be rolled back twenty percent (20%) from the rates in effect in November 1987. As a result, in 1994 and 1993, the Company reduced pretax earnings by $71,280 and $416,400, respectively. No additional provision was made during 1995. The above amounts include interest for 1994 and 1993 in the amount of $71,280 and $259,200, respectively. The total amount of deferred premiums and interest accrued as of December 31, 1995, was $2.5 million. The state of California maintains that the Company is not in compliance with Proposition 103 and that the required amount of premiums to be returned is $6.5 million plus accrued interest. The Company maintains it had reduced rates by 20% or more on its most significant lines of business. This reduction is at issue with the California Department of Insurance. While it is impossible to predict the outcome, Management believes that the amount accrued is adequate to cover the ultimate rollback, if any. The matter has been set for hearing in March of 1996. 20
10-K21st Page of 40TOC1stPreviousNextBottomJust 21st
ASSESSMENTS AGAINST INSURERS Under insurance insolvency or guaranty laws in most states in which the Company operates, insurers doing business therein can be assessed for policyholder losses covered by insolvent insurance companies. The amount and timing of any future assessments on the Company under these laws cannot be reasonably estimated and are beyond the control of the Company. Recent financial difficulties of insurance companies increase the probability of assessments under these laws. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's financial strength. The Company generally accrues the full amount of the assessment upon notification. LEGISLATION AT FEDERAL LEVEL Although the federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include employee benefits regulation, limitation on anti-trust immunity, minimum solvency requirements and removal of barriers preventing banks from engaging in the insurance business. The Company is monitoring the following federal proposals: NATURAL DISASTER ACT--Recent natural disasters such as Hurricane Andrew, the Midwestern floods and the Northridge Earthquake have sparked debate on the best way to provide affordable insurance coverage for such events. At this time, the Company supports the proposed Natural Disaster Act as the most desirable alternative. MCCARRAN-FERGUSON ACT--The repeal of the McCarran-Ferguson Act has long been a topic of considerable debate. Congress has conducted numerous hearings on the issue, but has taken no action. The current legislature is inclined to drop the proposal. SUPERFUND REFORM (ENVIRONMENTAL LIABILITY)--Environmental liability and the methods of funding the cleanup of polluted sites received considerable attention in Congress during 1995. The Superfund Reform '95 Coalition lobbied for reform of the original law including full repeal of the retroactive liability standard. In the past, insurance industry supporters have suggested a general tax on all insurers to pay for the cleanup rather than requiring retroactive liability. The Company would not be significantly affected by any retroactive tax assessments since the Company did not write a large volume of liability insurance prior to 1984. However, if a tax is levied against current liability writers for prior pollution losses, the Company could have some tax exposure. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS The National Association of Insurance Commissioners (NAIC) facilitates the regulation of multi-state companies through uniform reporting requirements, standardized procedures for financial examinations, and uniform regulatory procedures embodied in model acts and regulations. Current developments address the reporting and regulation of the adequacy of capital and surplus. The NAIC has developed Property-Casualty Risk-Based Capital (RBC) standards that relate an insurer's reported statutory surplus to the risks inherent in its overall operations. The RBC formula uses the statutory annual statement to calculate the minimum indicated capital level to support asset (investment and credit) risk and underwriting (loss reserves, premiums written, and unearned premium) risk. The NAIC model law calls for various levels of regulatory action based on the magnitude of an indicated RBC capital deficiency, if any. The RBC standards became effective for 1994 annual statement filings. The Company continues to monitor its subsidiaries' internal capital requirements and the NAIC's RBC developments. The Company has determined that its capital levels are well in excess of the minimum capital requirements for all RBC action levels. Management believes that its capital levels are sufficient to support the level of risk inherent in its operations. 21
10-K22nd Page of 40TOC1stPreviousNextBottomJust 22nd
AGENCY LICENSES AND TRADEMARKS Replacement Lens Inc. and RLI Insurance Agency Ltd., or their designated employees, must be licensed to act as resident or non-resident brokers or agents by regulatory authorities in the states or provinces in which they operate. Replacement Lens Inc. obtained service mark registration of the letters "RLI" in 1978 and currently maintains such registration in 47 states. Such registration protects the mark from deceptively similar use by the Company's competitors. The duration of this registration is ten years for all states except three in which registration is limited to five years unless renewed. Duration of the registration in the State of Wisconsin is twenty years. CLIENTELE No significant part of the Company's or its subsidiaries' business is dependent upon a single client or upon a very few clients, the loss of any one of which would have a material adverse effect on the Company. EMPLOYEES The Company employs a total of 570 associates. Of that total, 222 work for RLI Vision Corp. and 348 work for RLI Insurance Company. Of the 570 total associates, 57 are part-time and 513 are full-time. (d) Financial Information about Foreign and Domestic Operations and Export Sales. For purposes of this discussion, foreign operations are not considered material to the Company's overall operations. 22
10-K23rd Page of 40TOC1stPreviousNextBottomJust 23rd
ITEM 2.PROPERTIES The Company owns a two-story, 80,000 square foot building in Peoria, Illinois, which serves as the Corporate Headquarters for RLI Corp., RLI Insurance Company and Mt. Hawley Insurance Company. Two RLI Insurance Company Branch Offices also lease office space in this building. Located on the same 29.2 acre campus, is a 2,500 square foot facility leased to a day care facility, and a 600 square foot condominium, attached to the day care building. The Company also owns a 12,800 square foot building near the headquarters building. Nearly 9,800 square feet of this building are used as warehouse storage for records and equipment. The remaining 3,000 square feet is leased to RLI Vision Corp., as a part of its contact lens distribution center. In addition, the Company owns a 19,000 square foot building near the headquarter building that is leased to RLI Vision Corp., which is used as the subsidiary's headquarters. RLI Vision Corp. also owns a 16,000 square foot building located in Cohasset, Massachusetts, a 2,700 square foot office condominium building located in Bedford, Massachusetts, and a 3,000 square foot building located in Lewistown, Maine, as well as the 10 acres on which these buildings are located. All other operations of RLI Corp. lease the office space which they need in various locations throughout the country. Item 3. LEGAL PROCEEDINGS The Company is involved in certain legal proceedings and disputes considered by management to be ordinary and incidental to the business or which have no foundation in fact. Management believes that valid defenses exist as to all such litigation and disputes, and is of the opinion that these will not have a material effect on the Company's consolidated financial statements. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted by the Company to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Refer to the Corporate Data on page 53 of the Annual Report to Shareholders for the year ended December 31, 1995 attached in Exhibit 13. Item 6. SELECTED FINANCIAL DATA Refer to the Selected Financial Data on pages 22 through 23 of the Annual Report to Shareholders for the year ended December 31, 1995 attached in Exhibit 13. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 24 through 31 of the Annual Report to Shareholders for the year ended December 31, 1995 attached in Exhibit 13. 23
10-K24th Page of 40TOC1stPreviousNextBottomJust 24th
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Refer to the consolidated financial statements and supplementary data included on pages 32 through 49 of the Annual Report to Shareholders for the year ended December 31, 1995 attached in Exhibit 13. (See Index to Financial Statements and Schedules attached on page 27.) Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in accountants or disagreements with accountants on any matters of accounting principles or practices or financial statement disclosure. PART III Items 10 to 13. Pursuant to General Instructions G(3) of Form 10-K, Items 10 to 13, inclusive, have not been restated or answered since the Company intends to file within 120 days after the close of its fiscal year with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, which proxy statement involves the election of directors. The information required in these items 10 to 13, inclusive, is incorporated by reference to that proxy statement. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (l-2) Consolidated Financial Statements and Schedules. See Index to Financial Statements and Schedules attached. (3) Exhibits. See Exhibit Index on page 27. (b) No reports on Form 8-K were filed during the last quarter of 1995. (c) Exhibits. See Exhibit Index on page 27. (d) Financial Statement Schedules. The schedules included on attached pages 28 through 38 as required by Regulation S-X are excluded from the Company's Annual Report to Shareholders. See Index to Financial Statements and Schedules on page 27. There is no other financial information required by Regulation S-X which is excluded from the Company's Annual Report to Shareholders. 24
10-K25th Page of 40TOC1stPreviousNextBottomJust 25th
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant) By: /s/Joseph E. Dondanville ------------------------------------ J. E. Dondanville Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 7, 1996 ---------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/Gerald D. Stephens ------------------------------------ G. D. Stephens, President (Principal Executive Officer) Date: March 7, 1996 ---------------------------------- * * * * * By: /s/Joseph E. Dondanville ------------------------------------ J. E. Dondanville, Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 7, 1996 ---------------------------------- * * * * * By: /s/Gerald D. Stephens ------------------------------------ G. D. Stephens, Director Date: March 7, 1996 ---------------------------------- * * * * * By: /s/Bernard J. Daenzer ------------------------------------ B. J. Daenzer, Director Date: March 7, 1996 ---------------------------------- * * * * * By: /s/Richard J. Haayen ------------------------------------ R. J. Haayen, Director Date: March 7, 1996 ---------------------------------- * * * * * By: /s/William R. Keane ------------------------------------ W. R. Keane, Director Date: March 7, 1996 ---------------------------------- * * * * * 25
10-K26th Page of 40TOC1stPreviousNextBottomJust 26th
By: /s/Gerald I. Lenrow ------------------------------------ G. I. Lenrow, Director Date: March 7, 1996 ---------------------------------- * * * * * By: /s/John S. McGuinness ------------------------------------ J. S. McGuinness, Director Date: March 7, 1996 ---------------------------------- * * * * * By: /s/Edwin S. Overman ------------------------------------ E. S. Overman, Director Date: March , 1996 ---------------------------------- * * * * * By: /s/Edward F. Sutkowski ------------------------------------ E. F. Sutkowski, Director Date: March 7, 1996 ---------------------------------- * * * * * By: /s/Robert O. Viets ------------------------------------ R. O. Viets, Director Date: March 7, 1996 ---------------------------------- * * * * * 26
10-K27th Page of 40TOC1stPreviousNextBottomJust 27th
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES [Download Table] Reference (Page) DATA SUBMITTED HEREWITH: Report of Independent Auditors 28 Schedules: I. Summary of Investments - Other than Investments in Related Parties at December 31, 1995. 29 II. Condensed Financial Information of Registrant for the three years ended December 31, 1995. 30 - 34 III. Supplementary Insurance Information for the three years ended December 31, 1995. 35 - 36 IV. Reinsurance for the three years ended December 31, 1995. 37 V. Valuation and Qualifying Accounts 38 VI. Supplemental Information Concerning Property- Casualty Insurance Operations for the three years ended December 31, 1995. 35 - 36 Schedules other than those listed are omitted for the reason that they are not required, are not applicable or that equivalent information has been included in the financial statements, and notes thereto, or elsewhere herein. 27
10-K28th Page of 40TOC1stPreviousNextBottomJust 28th
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders RLI Corp.: Under date of January 25, 1996, we reported on the consolidated balance sheets of RLI Corp. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in the 1995 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1995. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, in 1994 the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and in 1993 the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." KPMG Peat Marwick LLP Chicago, Illinois January 25, 1996 28
10-K29th Page of 40TOC1stPreviousNextBottomJust 29th
RLI CORP. AND SUBSIDIARIES SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1995 [Enlarge/Download Table] Column A Column B Column C Column D Amount at Which Shown in Fair the Balance Type of Investment Cost(1) Value Sheet ------------------------------------------------------------------------------------------------------------------------- Fixed maturities: Bonds: Held-to-maturity United States government and government agencies and authorities $148,846,846 $156,517,125 $148,846,846 States, municipalities and political subdivisions 102,292,482 103,931,411 102,292,482 Foreign governments 498,208 509,260 498,208 ------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity 251,637,536 260,957,796 251,637,536 ------------------------------------------------------------------------------------------------------------------------- Available-for-sale United States government and government agencies and authorities 33,730,335 34,767,197 34,767,197 All other corporate bonds 10,260,003 10,352,614 10,352,614 ------------------------------------------------------------------------------------------------------------------------- Total available-for-sale 43,990,338 45,119,811 45,119,811 ------------------------------------------------------------------------------------------------------------------------- Total fixed maturities 295,627,874 306,077,607 296,757,347 ------------------------------------------------------------------------------------------------------------------------- Equity securities, available-for-sale: Common stock: Public utilities 34,002,905 47,747,375 47,747,375 Banks, trusts and insurance companies 9,353,637 15,684,039 15,684,039 Industrial, miscellaneous and all other 59,224,292 90,526,121 90,526,121 ------------------------------------------------------------------------------------------------------------------------- Total equity securities 102,580,834 153,957,535 153,957,535 ------------------------------------------------------------------------------------------------------------------------- Short-term investments 23,874,732 23,874,732 23,874,732 ------------------------------------------------------------------------------------------------------------------------- Total investments $422,083,440 $483,909,874 $474,589,614 ------------------------------------------------------------------------------------------------------------------------- Note: See notes 1D and 2 of Notes to Consolidated Financial Statements. (1) Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts. 29
10-K30th Page of 40TOC1stPreviousNextBottomJust 30th
RLI CORP. AND SUBSIDIARIES SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS DECEMBER 31, 1994 AND 1995 [Download Table] 1994 1995 (restated) ------------------------------------------------------------------------------------ ASSETS Cash $ 1,426,075 $ 236,902 Investments in consolidated subsidiaries, at equity 173,544,318 199,299,589 Equity securities available-for-sale, at fair value (Cost--$6,897,359 in 1994 and $6,667,195 in 1995) 6,369,104 8,138,847 Investment in Rabbi Trust 1,717,187 2,817,965 Deferred debt costs 1,052,030 928,865 Income taxes recoverable 2,556,129 537,838 Property and equipment 1,119,976 1,090,713 Other assets 288,507 238,615 ------------------------------------------------------------------------------------ Total assets $188,073,326 $213,289,334 ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable, current $ 911,666 $ 1,163,723 Notes payable, short-term 2,800,000 Long-term debt: Convertible debentures 46,000,000 46,000,000 Industrial development bonds 6,255,000 Deferred compensation--Rabbi Trust 1,717,187 2,817,965 Interest payable--Convertible debentures 1,265,000 1,265,000 Other liabilities 754,512 634,930 ------------------------------------------------------------------------------------ Total liabilities 56,903,365 54,681,618 ------------------------------------------------------------------------------------ Shareholders' equity: Common stock ($1 par value, authorized 12,000,000 shares, issued 6,762,905 shares in 1994 and 8,453,449 in 1995) 6,762,905 8,453,449 Other shareholders' equity 127,807,805 153,544,590 Treasury shares at cost (604,015 shares in 1994 and 602,567 shares in 1995) (3,400,749) (3,390,323) ------------------------------------------------------------------------------------ Total shareholders' equity 131,169,961 158,607,716 ------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $188,073,326 $213,289,334 ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- See notes to condensed financial information. NOTE: See also Notes to Consolidated Financial Statements. 30
10-K31st Page of 40TOC1stPreviousNextBottomJust 31st
RLI CORP. AND SUBSIDIARIES SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, [Enlarge/Download Table] 1993 1994 1995 (restated) (restated) ------------------------------------------------------------------------------------------------------------------------- Net investment income (expense) $ 62,362 $ 146,815 $ 69,603 Selling, general, and administrative expenses 1,679,686 2,845,289 2,093,019 Interest expense on debt 1,855,697 3,431,464 3,347,378 --------------------------------------------------------------------------------------------------------------------------- (3,473,021) (6,129,938) (5,541,278) Income tax benefit (1,499,612) (2,312,907) (2,147,995) --------------------------------------------------------------------------------------------------------------------------- Net loss before equity in net earnings of subsidiaries and cumulative effect of accounting change (1,973,409) (3,817,031) (3,393,283) Equity in net earnings (loss) of subsidiaries 17,014,460 (958,840) 11,342,824 ---------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) before cumulative effect of accounting change 15,041,051 (4,775,871) 7,949,541 Cumulative effect to January 1, 1993 of initial application of SFAS 109 "Accounting for Income Taxes" 906,576 ---------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $15,947,627 $(4,775,871) $7,949,541 ---------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------- See notes to condensed financial information. NOTE: See also Notes to Consolidated Financial Statements. 31
10-K32nd Page of 40TOC1stPreviousNextBottomJust 32nd
RLI CORP. AND SUBSIDIARIES SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, [Enlarge/Download Table] 1993 1994 1995 (restated) (restated) -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Losses before equity in net earnings of subsidiaries $ (1,066,833) $ (3,817,031) $(3,393,283) Adjustments to reconcile net losses to net cash provided by operating activities: Write-down of investments 10,000 9,597 Other items, net (9,988) 445,597 (407,586) Change in: Affiliate balances payable (33,356) (10,058) 135,916 Federal income taxes (1,349,388) (1,034,695) 1,658,597 Deferred debt costs (1,187,938) 135,908 123,165 --------------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (3,637,503) (4,270,682) (1,883,191) --------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Purchase of: Equity securities, available-for-sale (5,380,075) (1,995,106) (857,883) Property and equipment (85,888) (1,054,894) (9,600) Sale of: Equity securities, available-for-sale 300,000 433,263 1,004,380 Capital contributions to subsidiaries (32,500,000) Cost of investment in related parties (4,765,619) Cash dividends received-subsidiaries 2,768,947 6,340,282 7,823,965 ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (39,662,635) 3,723,545 7,690,862 ---------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Payments on debt (745,000) (6,255,000) Proceeds from issuance of debt 46,000,000 2,800,000 Fractional share paid 4,010 Treasury shares reissued 4,043,970 2,513,375 33,667 Cash dividends paid (3,132,338) (3,461,217) (3,849,521) ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 46,911,632 (1,692,842) (7,266,844) ---------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 3,611,494 (2,239,979) (1,189,173) Cash at beginning of year 54,560 3,666,054 1,426,075 ---------------------------------------------------------------------------------------------------------------------------- Cash at end of year $ 3,666,054 $ 1,426,075 $ 236,902 ---------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------- Interest paid on outstanding debt for 1993, 1994, and 1995 amounted to $682,500, $3,345,714, and $3,372,479, respectively. See notes to condensed financial information. NOTE: See also Notes to Consolidated Financial Statements. 32
10-K33rd Page of 40TOC1stPreviousNextBottomJust 33rd
RLI CORP. AND SUBSIDIARIES SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO CONDENSED FINANCIAL STATEMENTS The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of RLI Corp. and subsidiaries (the Company). (1) Significant Event In September 1995, the Company strengthened loss reserves related to the January 17, 1994 Northridge Earthquake. While relatively minor development had occurred throughout the first six months of 1995, the third quarter claim-by-claim review indicated that greater future development was likely. The overall 1995 impact from the Northridge Earthquake was a reduction to after-tax earnings by $18.6 million or $2.37 per share. The additional development resulted, in part, from hidden damages and increased business interruption losses on the Company's excess policies which, in 1994, were estimated by adjusters to be well within coverage limits of the primary and underlying excess layers. Also contributing to the increased development were unanticipated building code enactments, escalating construction costs, and the impact of reopened claims as a result of the involvement of public adjusters. (2) Convertible Debentures On July 28, 1993, RLI Corp. issued $46.0 million of 6.0% convertible debentures which mature July 15, 2003 and pay interest semi-annually. RLI Corp. received $45,080,000 in net proceeds from the issue of which $30,500,000 was contributed to the insurance subsidiaries and $2,000,000 to RLI Vision Corp., the ophthalmic subsidiary. The balance has been retained for general corporate purposes. RLI Corp. incurred underwriting and related costs associated with the issuance of the debentures of $1,245,000 which will be amortized over a 120-month period. (3) Acquisition On May 4, 1995, RLI Vision Corp. (formerly known as RLI Professional Technologies, Inc.), a wholly-owned subsidiary of RLI Corp., acquired through merger, Target Industries, Inc., a wholesale optical goods distributor of contact lenses, Rx spectacles, frames and sunglasses, located in Cohasset, Massachusetts. As consideration, RLI Corp. issued 313,500 shares of its common stock. The combined enterprise is now doing business under the name of RLI Vision Corp. This business combination has been accounted for as a pooling-of-interests. The consolidated financial statements and related financial information for periods prior to the combination have been restated to include the accounts and results of operations of Target Industries, Inc. (4) Income Taxes The Company files a consolidated income tax return. Tax provisions for 1993, 1994, and 1995 were computed and apportioned to the subsidiaries on the basis of separate tax return liabilities. The Company adopted SFAS 109, "Accounting for Income Taxes" as of January 1, 1993. The cumulative effect of this change allocated to RLI Corp. of $906,576 is shown as a separate component on the RLI Corp. income statement. The cumulative effect of the charge allocated to the subsidiaries of $758,424 is included in the "Equity in net earnings of subsidiaries." (continued) 33
10-K34th Page of 40TOC1stPreviousNextBottomJust 34th
RLI CORP. AND SUBSIDIARIES SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO CONDENSED FINANCIAL STATEMENTS (5) Deferred Compensation The Company has a directors deferred compensation plan, and excess ESOP plan for key employees, through which shares of RLI Corp. common stock are purchased by the Company for the directors and key employees. In 1993, the Company funded these plans by establishing Rabbi Trusts. Since the assets of the Rabbi Trusts are subject to claims of the Company's general creditors, such assets are recorded as "Investment in Rabbi Trusts" in the accompanying balance sheet. A corresponding liability for the same amount, which represents the Company's liability to its directors and key employees, is reflected as "Deferred Compensation--Rabbi Trusts." (6) Stock Split In the second quarter of 1995, the Company announced a 5-for-4 stock split. Share and per share data have been restated to reflect the impact of the split. 34
10-K35th Page of 40TOC1stPreviousNextBottomJust 35th
RLI CORP. AND SUBSIDIARIES SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION SCHEDULE VI--SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 [Enlarge/Download Table] Column A Column B Column C (1) Column E (1) Column F Column H Incurred Deferred Unpaid Losses and policy losses and settlement acquisition settlement Unearned Premiums expenses Segment costs expenses, net premiums, net earned Current year ------------------------------------------------------------------------------------------------------------ Year ended December 31, 1993 RLI Insurance Group $18,722,395 $165,558,994 $72,362,259 $125,989,278 $ 81,589,111 -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- Year ended December 31, 1994 RLI Insurance Group $19,208,212 $195,229,244 $78,839,454 $140,184,488 $100,534,321 -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- Year ended December 31, 1995 RLI Insurance Group $15,806,911 $221,648,494 $75,824,217 $133,468,133 $ 62,618,745 -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- NOTE 1: The Company adopted Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113"), in the first quarter of 1993. This resulted in grossing up assets and liabilities for ceded reinsurance recoverables on unpaid losses and ceded unearned premiums with no impact on earnings or shareholders' equity. Included above is unpaid losses and settlement expenses and unearned premiums net of applicable ceded amounts. See the consolidated balance sheets for gross and ceded amounts. NOTE 2: Investment income is not allocated to the segments, therefore net investment income (column G) has not been provided. 35
10-K36th Page of 40TOC1stPreviousNextBottomJust 36th
RLI CORP. AND SUBSIDIARIES SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION SCHEDULE VI--SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 [Enlarge/Download Table] Column A Column H Column I Column J Column K Incurred Losses and settlement Policy Other Net expenses acquisition operating Premiums Segment Prior year costs expenses written --------------------------------------------------------------------------------------------------- Year ended December 31, 1993 RLI Insurance Group $(1,851,708) $27,640,459 $15,062,838 $143,531,051 -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- Year ended December 31, 1994 RLI Insurance Group $ 1,107,345 $47,106,098 $15,142,384 $146,661,684 --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- Year ended December 31, 1995 RLI Insurance Group $23,271,250 $43,042,045 $14,470,053 $130,452,895 --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- 36
10-K37th Page of 40TOC1stPreviousNextBottomJust 37th
RLI CORP. AND SUBSIDIARIES SCHEDULE IV--REINSURANCE FOR THE YEARS 1993, 1994, AND 1995 [Enlarge/Download Table] Column A Column B Column C Column D Column E Column F Percentage Ceded to Assumed of Amount Gross Other From Other Net Assumed to Amount Companies Companies Amount Net -------------------------------------------------------------------------------------------------------------------------------- 1993 -------------------------------------------------------------------------------------------------------------------------------- RLI Insurance Group premiums earned $233,757,304 $108,272,489 $504,463 $125,989,278 .4% -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- 1994 -------------------------------------------------------------------------------------------------------------------------------- RLI Insurance Group premiums earned $265,453,514 $125,458,397 $189,371 $140,184,488 .1% -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- 1995 -------------------------------------------------------------------------------------------------------------------------------- RLI Insurance Group premiums earned $264,651,370 $131,771,599 $588,362 $133,468,133 .4% -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- NOTES: Column B, "Gross Amount" includes only direct premiums earned. 37
10-K38th Page of 40TOC1stPreviousNextBottomJust 38th
RLI CORP. AND SUBSIDIARIES SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 3, 1993, 1994, AND 1995 [Enlarge/Download Table] Column A Column B Column C Column D Column E Balance at Amounts Balance beginning of charged to Amounts Amounts at end period expense written-off commuted of period ------------------------------------------------------------------------------------------------------------------------------------ 1993 Allowance for insolvent reinsurers $15,380,668 $1,163,278 $ (2,234) $ (939,564) $15,602,148 1994 Allowance for insolvent reinsurers $15,602,148 $1,000,000 $(1,054,748) -- $15,547,400 1995 Allowance for insolvent reinsurers $15,547,400 $ 613,296 $261,373 $ (85,923) $16,336,146 38
10-K39th Page of 40TOC1stPreviousNextBottomJust 39th
EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF DOCUMENT REFERENCE (PAGE) 2.1 Plan of Reorganization Incorporated by reference to the and Agreement of Merger Company's Quarterly Form 10-Q for the First Quarter ended March 31, 1993. 2.2 Articles of Merger Incorporated by reference to the Company's Quarterly Form 10-Q for the Second Quarter ended June 30, 1993. 3.1 Articles of incorporation Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Second Quarter ended June 30, 1993. 3.2 By-Laws Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Second Quarter ended June 30, 1993. 4.1 Indenture dated July Incorporated by reference to the 28, 1993 between the Company's Registration Company and Norwest Bank Statement on Form S-3 filed on July 21, 1993. Minnesota, National Association as Trustee 10.1 Executive Achievement Incorporated by reference to the Target Salary Plan Company's Registration Statement on Form S-2 filed on August 22, 1985, File No. 0-6612. 10.2 The William R. Keane/ Incorporated by reference to the RLI Corp. Director Company's Registration Deferred Compensation Statement on Form 10-Q for the Second Plan Quarter ended June 30, 1993. 10.3 The RLI Corp. Directors' Incorporated by reference to the Irrevocable Trust Company's Registration Agreement Statement on Form 10-Q for the Second Quarter ended June 30, 1993. 10.4 Key Employee Excess Incorporated by reference to the Benefit Plan for Company's Annual Form 10-K/A for the Gerald D. Stephens year ended December 31, 1992. 10.5 RLI Corp. Incentive Incorporated by reference to Company's Stock Option Plan Registration Statement on Form S-8 filed on March 11, 1996, File No. 333-01637 10.9 Reinsurance Agreements Incorporated by reference to the between the Company and Company's Annual Form 10-K/A for the American Re-Insurance year ended December 31, 1992. Company 10.10 Reinsurance Agreements Incorporated by reference to the between the Company and Company's Annual Form 10-K/A Lloyds of London for the year ended December 31, 1992. 10.11 Reinsurance Agreements Incorporated by reference to the between the Company Company's Annual Form 10-K/A for the and NAC Reinsurance Corp. year ended December 31, 1992. 11.0 Statement re computation Attached page 41. of per share earnings 13.1 Refer to the Annual Attached Exhibit 13. Report to Shareholders for the year ended December 31, 1995, pages 22-49 and 53. 39
10-KLast Page of 40TOC1stPreviousNextBottomJust 40th
EXHIBIT NO. DESCRIPTION OF DOCUMENT REFERENCE (PAGE) 21.1 Subsidiaries of the Attached page 42. Registrant 23.1 Consent of KPMG Peat Attached page 43. Marwick LLP 23.2 Consent of KPMG Peat Incorporated by reference to the Marwick LLP Company's Registration Statement on Form S-3 filed July 21, 1993. 23.3 Consent of Kirkland & Ellis Incorporated by reference to the Company's Registration Statement on Form S-3 filed July 21, 1993. 24.1 Powers of Attorney Incorporated by reference to the Company's Registration Statement on Form S-3 filed on July 21, 1993. 27 Financial Data Schedule Attached Exhibit 27 29.1 Information from reports Attached page 44 furnished to state insurance regulatory authorities 40

Dates Referenced Herein   and   Documents Incorporated by Reference

Referenced-On Page
This ‘10-K’ Filing    Date First  Last      Other Filings
7/15/0333
5/2/961DEF 14A,  PRE 14A
3/27/96DEFR14A
Filed on:3/26/96DEF 14A
3/11/9639S-8
3/7/962526
2/29/961
1/25/9628
For Period End:12/31/95139
12/3/9538
5/4/951633
12/31/942836
12/3/9438
1/17/94333
1/1/9416
12/31/933536
12/3/9338
7/28/9333
7/21/933940
6/30/9339
3/31/9339
1/1/933133
12/31/9239
 List all Filings 
Top
Filing Submission 0000912057-96-005193   –   Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Copyright © 2019 Fran Finnegan & Company.  All Rights Reserved.
AboutPrivacyRedactionsHelp — Mon., May 27, 8:06:05.1am ET