Back to GetFilings.com
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, 2000
------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
----------------------- -----------------------
Commission File Number 0-6612
--------------------------------------------------------
RLI CORP.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 37-0889946
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer 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
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
28, 2001 as reported on the New York Stock Exchange, was $412,084,932. 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, $1.00 par
value, on February 28, 2001 was 9,811,546.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Annual Report to Shareholders for the past year ended December
31, 2000, are incorporated by reference into Parts I and II of this document.
Portions of the Registrant's definitive Proxy Statement for the 2001 annual
meeting of security holders to be held May 3, 2001, are incorporated herein
by reference into Part III of this document.
Exhibit index is located on pages 33-34 of this document.
1
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 selected property and
casualty insurance.
(b) Financial Information about Industry Segments
Selected information about industry segments is included herein as Item I.
(c) Narrative Description of Business
RLI INSURANCE GROUP
RLI Insurance Group is principally composed of four insurance
companies. RLI Insurance Company, the principal subsidiary, writes multiple
lines insurance on an admitted basis in all 50 states, the District of
Columbia and Puerto Rico. Mt. Hawley Insurance Company ("Mt. Hawley"), a
subsidiary of RLI Insurance Company, writes surplus lines insurance in all 50
states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam.
Underwriters Indemnity Company ("UIC"), a subsidiary of RLI Insurance
Company, writes multiple lines insurance on an admitted basis in 33 states
and the District of Colombia and surplus lines insurance in Ohio. Planet
Indemnity Company ("PIC"), a subsidiary of Mt. Hawley, writes multiple lines
insurance on an admitted basis in 23 states and the District of Columbia. PIC
writes surplus lines insurance in an additional five states. Other companies
in the RLI Insurance Group include: Replacement Lens Inc., RLI Insurance
Agency, Ltd., RLI Insurance Ltd., Underwriters Indemnity General Agency,
Inc., and Safe Fleet Insurance Services, Inc.
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 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.
Significant rate increases resulted when the insurance market hardened
in late 1984. The Company responded by expanding its premium volume in
targeted lines. Since 1987, the industry has experienced generally 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 entrenched soft market condition. As a result of catastrophic
losses, such as Hurricane Andrew and the Northridge Earthquake, property
rates hardened in California, Florida and the wind belt, but remained soft in
other areas of the country. In 1994 and 1995, rates hardened and premium
growth was achieved in the commercial property book of business. Otherwise,
rates for property and casualty lines have declined over time. To maintain
profitability, underwriters have tightened selection criteria, broadened
their focus to other market segments and given up business where rates
dropped too low. Since the end of 1999, a trend has emerged of modest firming
in the pricing of branch office business which may indicate an improvement in
industry underwriting discipline.
2
The Company initially wrote specialty property and casualty insurance
through independent underwriting agents. The Company opened its first branch
office in 1984, and began to shift 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 Markets
Division and the Surety Division. The Company produces business under agreements
with underwriting general agents. Additional underwriting agents are accepted
under the auspices of Company product vice presidents. The majority of the
specialty property and casualty business is marketed through the Specialty
Markets and Surety divisions and branch offices located in Los Angeles,
California; Oakland, California; Glastonbury, Connecticut; Atlanta, Georgia;
Alpharetta, Georgia; Honolulu, Hawaii; Chicago, Illinois; Overland Park, Kansas;
Boston, Massachusetts; St. Paul, Minnesota; New York City, New York; Dallas,
Texas; Houston, Texas; and Seattle, Washington.
For the year ended December 31, 2000, the following table provides 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, 2000, no
other state accounted for more than 2% of total direct premiums earned for all
product lines.
Direct Premiums
State Earned Percent of Total
----- --------------- ----------------
California $113,338,998 29.50%
Texas 35,486,888 9.24
Florida 33,266,800 8.66
New York 27,285,381 7.10
Hawaii 14,831,592 3.86
Illinois 11,430,336 2.98
Ohio 10,406,330 2.71
Georgia 9,117,922 2.37
Tennessee 8,780,038 2.29
New Jersey 8,433,981 2.20
All Other 111,760,401 29.09
------------- -----
Total direct premiums $384,138,667 100.00%
============= =======
The Company presently underwrites selected property and casualty insurance
primarily in the following lines:
A. PROPERTY SEGMENT
1. 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 written in the United States and abroad. The Company
writes coverage for a wide range of commercial and industrial classes such as
office buildings, apartments, condominiums, certain industrial and mercantile
structures, buildings under construction and movable equipment. The Company
also writes boiler and machinery and ocean marine insurance under the same
management as commercial property. The Alpharetta, Boston, Chicago, Dallas,
Houston, Los Angeles and Oakland branch offices are responsible for
underwriting this coverage. In 2000, 1999, and 1998 net earned premiums
totaled $51,836,000, $43,918,000 and $42,281,000, or 20%, 19% and 25%,
respectively, of the Company's consolidated revenues.
2. HOMEOWNERS/RESIDENTIAL PROPERTY. In 1997, the Company assumed a book
of homeowners and dwelling fire business for Hawaii homeowners from the
Hawaii Property Insurance Association. In the aftermath of Hurricane Iniki in
1992, this business was available at reasonable rates and terms. Net earned
premiums totaled $8,712,000, $6,850,000 and $9,689,000, or 3%, 3% and 6% of
the Company's consolidated revenues for 2000, 1999 and 1998, respectively.
3. OTHER. The Company acquired property business as a part of the
acquisition of Underwriters Indemnity Holdings on January 29, 1999. All
property coverages associated with this business are being non-renewed in
3
accordance with allowed policy provisions. In 1999, net earned premiums
totaled $622,000 or less than 1% of the Company's consolidated revenue. In
2000, net earned premiums were negative ($485,000), as reinsurance
adjustments resulted in a reclass between premium earned and ceded
commissions. This change resulted in no net impact to the company's bottom
line.
B. SURETY SEGMENT
3. SURETY. The Company underwrites this product line from the Home
Office in Peoria and branch facilities in Atlanta, Boston, Chicago,
Cleveland, Dallas, Houston, Kansas City, Los Angeles, New York, Philadelphia
and Seattle. The division has recently expanded its commercial surety segment
by hiring a professional group of underwriters that will focus on writing
mid-market commercial surety accounts. The Company also continues to focus on
writing contract bonds for small size contractors, energy-related business
for oil and gas operators and a wide range of commercial surety bonds for
small businesses. Net earned premium totaled $34,739,000, $25,412,000 and
$18,307,000, or 13%, 11% and 11% of the Company's consolidated revenues for
2000, 1999 and 1998, respectively.
C. CASUALTY SEGMENT
4. GENERAL LIABILITY. The Company writes general liability coverages
through its Los Angeles, Glastonbury, Chicago, Alpharetta and Dallas branch
offices. The Company's general liability business consists primarily of
coverage for third party liability of commercial insureds including
manufacturers, contractors, apartments and mercantile risks. Net earned
premiums totaled $34,891,000, $31,149,000 and $23,726,000, or 13%, 14% and
14% of the Company's consolidated revenues for the years 2000, 1999 and 1998,
respectively.
5. COMMERCIAL AND PERSONAL UMBRELLA LIABILITY. The Company's commercial
umbrella coverage is produced through its Overland Park, St. Paul,
Alpharetta, Glastonbury, Los Angeles and Dallas branch offices. Commercial
Umbrella was also written through an underwriting general agency in San
Francisco until the agreement was discontinued late in 2000. 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 Markets Division, is written in excess of the homeowners and
automobile liability coverage provided by other carriers. Net earned premiums
totaled $62,879,000, $58,956,000 and $29,086,000, or 24%, 26% and 17% of the
Company's consolidated revenues for the years 2000, 1999 and 1998,
respectively.
6. EXECUTIVE PRODUCTS. The Company produces financial products such as
Directors' and Officers' Liability through underwriting facilities in Dallas,
Los Angeles and New York City. The Company offers Miscellaneous Professional
Liability for a variety of low to moderate classes of risks. D&O is a
relatively small component of the overall P&C market, which has been subject
to severe competition. Underwriters have relinquished market share rather
than accept inadequate pricing. The package of coverages offered has been
expanded to include a variety of coverages of interest to corporations and
executives, such as Employment Practices Liability and Fiduciary Liability.
This is designed to give the product broader appeal. Net earned premiums
totaled $2,987,000, $2,647,000 and $3,054,000, or 1%, 1% and 2% of the
Company's consolidated revenues for the years 2000, 1999 and 1998,
respectively.
7. PROGRAM BUSINESS. The Company began writing Program Business in 1998
through a broker in New Jersey. During 2000, the Program division's
infrastructure was improved by adding experienced staff to manage existing
and new program opportunities. This division continues to develop new
programs for a variety of affinity groups. Coverages offered include:
Commercial Property, General Liability, Commericial Automobile, Inland
Marine, and Crime. Often, these coverages are combined into a package or
portfolio policy. The division establishes relationships with underwriting
agencies that perform many of the underwriting and policy servicing functions
under guidelines established by the Company's underwriting group. Net earned
premiums totaled $4,580,000, $456,000 and $21,000 for 2000, 1999 and 1998,
respectively. Earned premiums for 2000 represents 2% of the Company's
consolidated revenue.
8. TRANSPORTATION. In 1997, the Company opened a transportation
insurance facility in Atlanta to offer automobile liability and physical
damage insurance to local, intermediate and long haul truckers, public
transportation
4
risks and equipment dealers. Incidental, related insurance coverages are also
offered, including general liability, commercial umbrella and excess
liability, and motor truck cargo. The facility is staffed by highly
experienced transportation underwriters who produce business through
independent agents and brokers nationwide. Net earned premiums totaled
$14,168,000, $9,647,000 and $3,806,000, or 5%, 4% and 2% of the Company's
consolidated revenues for 2000, 1999 and 1998, respectively.
9. OTHER. Smaller programs offered by the Company include: excess
medical, deductible buy-back, in-home business, personal automobile (Hawaii
only), and employer's excess indemnity. Net earned premiums from these lines
totaled $17,296,000, $15,617,000 and $12,354,000, or 7%, 6% and 6% of the
Company's consolidated revenues for the years 2000, 1999 and 1998,
respectively.
COMPETITION
The Company's specialty property and casualty insurance subsidiaries
are part of an extremely competitive industry which is cyclical and
historically 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 2,500
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
is a leader in using the internet to conduct e-business for products that
lend themselves to that approach. 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, Puerto
Rico, the Virgin Islands and Guam. 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 continued to be soft
with some rate increases experienced in the property lines in California,
Florida and the wind belt from 1993 through 1995. From 1996 to 1999,
competition reasserted itself and the Company reduced rates somewhat. Towards
the end of 1999, a favorable trend emerged of price firming on commercial
business, driven in part by the reinsurance market. This trend has continued
for the Company's commercial business throughout 2000. The Company has
continued to maintain its underwriting and marketing standards by not seeking
market share at the expense of earnings. New products and new programs are
offered where the opportunity exists to provide needed insurance coverage
with exceptional service on a profitable basis.
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 to "A" (Excellent). During 2000, A.M. Best gave
a group rating to the combined entity of both RLI Insurance Company and Mt.
Hawley Insurance Company based on the similarities of management structure
and strategy for the two firms. The rating for 2000 for the Group was
reaffirmed as "A", and both companies were assigned a financial size category
of "IX". Underwriters Indemnity Company's (an indirect subsidiary of the
Company) A.M. Best rating for 2000 remained "A-" (Excellent). Planet
Indemnity Company's (an indirect subsidiary of the Company) A.M. Best rating
for 2000 remained "A-" (Excellent).
During 1997, the Company, for the first time, applied for and received
a claims-paying rating from Standard & Poor's. As a result, a rating of "A"
(Good) was received for the combined insurance operation. In 1999, the "A"
rating was upgraded to "A+", as Standard & Poor's cited the Company's strong
operating performance, capitalization and risk management. In 2000, Standard
& Poor's reaffirmed the Company's "A+" rating.
A.M. Best ratings for the industry range from "A++" (Superior) to "F"
(In Liquidation) with some companies not being rated. Standard & Poor's
ratings for the industry range from "AAA" (Superior) to "CC" (Default
Expected). Publications of both A.M. Best and Standard & Poor's indicate that
"A" and "A+" ratings are assigned to those companies that, in their opinion,
have achieved excellent overall performance when compared to the standards
established by these firms 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, both firms review 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 and
loss reserves, the adequacy of its surplus, its capital structure
5
and the experience and objectives of its management. These ratings are based
on factors relevant to policyholders, agents, insurance brokers and
intermediaries and are not directed to the protection of investors.
As of December 31, 2000, the Company had no public debt outstanding;
therefore, no debt rating existed.
REINSURANCE
The Company reinsures a significant portion of its 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 $161,488,000, $129,886,000 and $135,269,000 in 2000, 1999
and 1998, 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.
The Company attempts to purchase reinsurance from a 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, 2000, the Company had reinsurance recoverables on paid and
unpaid losses and settlement expenses of $69,183,000 with American
Re-Insurance Co. and $33,345,000 with General Cologne Re (both companies
rated "A++" (Superior) by A.M. Best Company). 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 before reinsurance payables from such reinsurers as of
December 31, 2000. Also shown are the amounts of written premium ceded by the
Company to such reinsurers during 2000.
Gross Reinsurer Ceded
Exposure as of Percent Premiums Percent
December 31, 2000 of Total Written of Total
----------------- -------- ----------- --------
American Re-Insurance Co. $ 69,183,000 21.51% 26,648,000 15.05%
General Cologne Re 33,345,000 10.37 20,763,000 11.73
Transatlantic Reinsurance 27,232,000 8.47 9,791,000 5.53
Employer's Reinsurance Corp. 19,743,000 6.14 11,703,000 6.61
St. Paul Fire & Marine UK 15,269,000 4.75 1,248,000 0.70
Lloyd's Underwriters 13,789,000 4.29 18,194,000 10.28
St. Paul Fire & Marine 13,045,000 4.06 10,297,000 5.82
Houston Casualty Co 8,433,000 2.62 (5,000) 0.00
Everest Reinsurance 7,125,000 2.22 5,610,000 3.17
Liberty Mutual Insurance Co. 6,414,000 1.99 5,198,000 2.94
All other reinsurers 108,045,000 33.58 67,566,000 38.17
----------- ----- ---------- -----
Total ceded exposure $321,623,000 100.00% 177,013,000 100.00%
============ ======= =========== =======
As of December 31, 2000, the Company held $9,275,121 in irrevocable
letters of credit, $7,948,534 under trust agreements and $1,829,395 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.
6
In 2000, the Company's underwriting was supported by up to $250,000,000
in traditional catastrophe reinsurance protection. The Company continuously
monitors and quantifies its exposure to earthquake risk, the most significant
catastrophe exposure to the Company, by means of catastrophe exposure models
developed by independent experts in that field. For the application of the
catastrophe exposure models, exposure and coverage detail is recorded at each
risk location. The model results are used both in the underwriting analysis
of individual risks, and at a corporate level for the aggregate book of
catastrophe exposed business. From both perspectives, the Company considers
the potential loss produced by events with a Richter magnitude (a measure of
the energy released by an earthquake event) equivalent to the earthquake on
those faults which represent the greatest loss potential to the Company,
which are expected to recur at average intervals of 100 years, or 6.5
magnitude, whichever is greater. The probability that an earthquake event
would exceed the Company's reinsurance cover (including facultative, excess
of loss, surplus, and cat treaty) is 3.07%. In addition, the Company examines
the portfolio exposure considering all possible earthquake events of all
magnitudes and return periods, on all faults represented in the model. The
probability that an earthquake event would exceed our reinsurance cover and
100% of our surplus is 0.42%. The total exposure of the Company, as measured
by the catastrophe model output, is managed on a net of reinsurance basis to
conform to the operating risk constraint adopted by the Company's Board of
Directors.
In 2000, the Company continued its innovative catastrophe reinsurance
and loss financing program with Zurich Reinsurance NA (Zurich Re). The
program, called Catastrophe Equity Puts (CatEPuts)-SM-, augments the Company's
traditional reinsurance by integrating its loss financing needs with a
pre-negotiated sale of securities linked to exchange-traded shares. CatEPuts
allows the Company to put up to $50.0 million of its convertible preferred
shares to Zurich Re at a pre-negotiated rate in the event of a catastrophic
loss, provided the loss does not reduce GAAP equity to less than $55.0
million. CatEPuts began as a multi-year program and is designed to enable the
Company to continue operating after a loss of such magnitude that its
reinsurance capacity is exhausted. If the Company exercises its option to put
preferred shares to Zurich Re, then Zurich Re, in turn, has the option to
reinsure certain business written by the Company on a prospective basis. This
program, which began in 1996, was renewed in November of 2000 for an
additional three-year period.
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 1970s, substantial underwriting
losses in the early 1980s 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. Since 1993, the industry experienced
improvement in underwriting losses, particularly in years with fewer
catastrophe losses. The trends experienced during the late 1980s, however,
have continued; and companies continue to post underwriting losses but remain
profitable through investment income gains. For 2000, the industry's
statutory combined ratio is estimated to be 109.7, which continues the
deteriorating trend of recent years. The Company believes that certain other
factors affect its ability to underwrite specialty lines successfully,
including:
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
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 product distribution falls into distinct categories, with
binding authority following the categorization.
7
BROKER BUSINESS. The largest volume of broker generated premium is
Commercial Property, General Liability, Commercial Surety, Commercial
Umbrella and Commercial Automobile. This business is produced through
wholesale and retail brokers who are not affiliated with the Company.
INDEPENDENT AGENT BUSINESS. The Surety Division offers its business
through a variety of independent agents. Additionally, the Specialty Markets
Division writes program business, such as Personal Umbrella and the In-Home
Business Policy, through independent agents. Homeowners Dwelling Fire and
Personal Auto are produced through independent agents in Hawaii. 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. The Surety Division has authorized an underwriting
general agency to underwrite contract surety business on behalf of RLI,
primarily in Eastern states. An underwriting agency in San Francisco was
authorized to underwrite commercial umbrella business in select Western
states until late in 2000. An underwriting agency in New York is authorized
to underwrite and handle claims for low limit deductible buy-backs on program
business, primarily in the East. Other underwriting agencies have been
designated to underwrite programs involving various selected commercial
insurance products.
These underwriting general agencies may receive some compensation
through contingent profit commission. Otherwise, producers of business who
are not Company employees are generally compensated on the basis of direct
commissions with no provision for any contingent profit commission.
E-COMMERCE. The Company is actively employing e-commerce to produce and
efficiently process and service business for all of these segments, including
small commercial umbrella risks, liability insurance for artisan contractors,
property insurance for religious organizations, surety bonding and selected
professional liability and fiduciary liability coverages.
RETENTION LIMITS. The Company limits its net retention of single and
aggregate risks through the purchase of reinsurance (see "Business -- RLI
Insurance Group 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 the handling and resolution of all claims and
directs all outside legal and adjustment specialists on an individual claim
and/or audit basis. 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.
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
insurance operating expenses as a percent of gross written premiums for the
years 2000, 1999 and 1998 were 4%, 4% and 6%, respectively.
ENVIRONMENTAL EXPOSURES. The Company is subject to environmental claims
and exposures through its commercial umbrella, general liability and
discontinued 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.
8
The following table represents inception-to-date paid and unpaid
environmental claims data (including incurred but not reported losses) for
the periods ended 2000, 1999 and 1998:
- ----------------------------------------------------------------------------------------
Inception-to-date December 31
(in thousands) 2000 1999 1998
- ------------------------ -------- -------- --------
Loss and Loss Adjustment
Expense (LAE) payments
Gross $ 23,720 $ 22,565 $ 15,269
Ceded (14,070) (13,671) (9,354)
- ----------------------------------------------------------------------------------------
Net
$ 9,650 $ 8,894 $ 5,915
========================================================================================
Unpaid losses and LAE at end of year
Gross $ 17,110 $ 16,125 $ 18,226
Ceded (9,220) (8,566) (9,391)
- ----------------------------------------------------------------------------------------
Net $ 7,890 $ 7,559 $ 8,835
========================================================================================
Although the Company's environmental exposure is limited as a result of
entering liability lines after the industry had already recognized it as a
problem, management cannot determine the Company's ultimate liability with
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.
When a claim is reported the claims department establishes a "case
reserve" for the estimated amount of the ultimate payment within 90 days of
the receipt of the claim. 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 adjusts
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
9
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
settlement 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, 2000 are adequate
to meet its future obligations.
The table which follows is a reconciliation of the Company's unpaid losses
and settlement expenses for the years 2000, 1999 and 1998.
Year Ended December 31,
-------------------------------------------------
(Dollars in thousands) 2000 1999 1998
Unpaid losses and settlement
expenses at beginning of year:
Gross $520,494 $415,523 $404,263
Ceded (245,580) (168,261) (155,711)
--------- -------- --------
Net 274,914 247,262 248,552
------- ------- -------
Unpaid losses and settlement expenses:
UIH, Inc. - Acquisition Date:
Gross 74,979
Ceded (67,642)
-------
Net 7,337
-----
Increase (decrease) in incurred losses
and settlements expenses:
Current accident year 126,270 101,053 68,131
Prior accident years (1,684) (4,596) (3,403)
------- ------ -------
Total incurred 124,586 96,457 64,728
------- ------ ------
Loss and settlement expense payments
for claims incurred:
Current accident year (34,373) (21,675) (14,762)
Prior accident years (65,216) (53,892) (54,927)
-------- ------- -------
Total paid (99,589) (75,567) (69,689)
-------- ------- -------
Insolvent reinsurer charged off (recovered) 143 (1,000) 7,911
Loss reserves commuted 0 425 (4,240)
- --- ------
Unpaid losses and settlement
expenses at end of year: $300,054 $274,914 $247,262
======== ======== ========
Unpaid losses and settlement
expenses at end of year:
Gross $539,750 $520,494 $415,523
Ceded (239,696) (245,580) (168,261)
--------- -------- --------
Net $300,054 $274,914 $247,262
======== ======== ========
10
Explanation of significant components of reserve development by calendar
year are as follows:
1998 During 1998, the Company experienced $3,403,000 of favorable
development on loss reserves. This development was the net result of
several reserve adjustments among various programs. Reserve
strengthening of $2,600,000 to the surety line of business in the third
quarter was offset by favorable development in, primarily, the personal
umbrella product. Favorable development of approximately $3,000,000 on
a deductible buy-back program resulted in a corresponding increase in
contingent commissions and subsequently no impact on earnings.
1999 During 1999, the Company experienced $4,596,000 of favorable
development on loss reserves. This development resulted from
approximately $2,917,000 of favorable development in the property lines
of business and approximately $1,679,000 of favorable development in
the casualty lines of business. The favorable property development is a
continuing result of the Northridge Earthquake claims from the 1994
accident year settling for less than the open reserves. Favorable
development of $1.1 million on casualty claims resulted from claim
settlements and reevaluations of case reserves during the accounting
period which were, in the aggregate, less than the IBNR and case
reserves established at the beginning of the period. The remaining
$579,000 of casualty favorable development resulted from balances due
from insolvent reinsurers that had previously been written off.
2000 During 2000, the Company experienced $1,684,000 of favorable
development on loss reserves. This development was primarily the net
result of reserve adjustments to the Company's casualty segment.
Indicated favorable loss experience on prior accident years resulted in
a release of reserve redundancies.
The table on the following page presents the development under
generally accepted accounting principles of the Company's balance sheet
reserves from 1990 through 2000. 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.
11
Year Ended December 31,
----------------------------------------------------------------------------------------------
(Dollars in thousands) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Liability for unpaid losses and
Settlement expenses at end of year $119,411 $140,248 $175,491 $204,771 $232,308 $247,806 $248,552 $247,262 $274,914 $300,054
Paid (cumulative) as of:
One year later 22,332 24,589 36,416 46,905 37,505 47,999 54,927 53,892 65,216
Two years later 37,763 46,342 63,675 73,972 75,485 85,342 98,188 88,567
Three years later 49,462 64,364 84,614 100,936 103,482 112,083 120,994
Four years later 57,085 78,994 96,741 121,834 121,312 129,846
Five years later 65,318 85,746 106,631 135,524 132,045
Six years later 70,270 92,689 114,777 143,377
Seven years later 75,668 97,164 120,760
Eight years later 80,700 101,254
Nine years later 82,637
Liability re-estimated as of:
One year later 108,249 128,600 166,666 218,499 220,185 240,264 245,150 243,270 273,230
Two years later 105,747 132,850 164,218 214,352 228,636 242,865 248,762 233,041
Three years later 107,777 132,376 157,286 212,964 222,761 233,084 232,774
Four years later 106,326 127,426 168,782 217,790 210,876 219,888
Five years later 100,968 140,536 163,127 207,355 202,596
Six years later 117,529 134,950 156,210 199,632
Seven years later 107,103 127,738 150,381
Eight years later 100,518 123,395
Nine years later 99,920
Net cumulative redundancy
(deficiency) $ 19,491 $ 16,853 $ 25,110 $ 5,139 $ 29,712 $ 27,918 $ 15,778 $ 14,221 $ 1,684
Gross liability $268,043 $310,767 $394,966 $418,986 $405,801 $404,263 $415,523 $520,494 $539,750
Reinsurance recoverable (127,795)(135,276) (190,195) (186,678) (157,995) (155,711)(168,261) (245,580)(239,696)
-------- -------- -------- -------- -------- -------- -------- --------- ---------
Net liability $140,248 $175,491 $204,771 $232,308 $247,806 $248,552 $247,262 $274,914 $300,054
Gross re-estimated liability $304,127 $425,194 $405,454 $397,161 $444,431 $417,008 $526,264
Re-estimated recoverable (153,746) (225,562) (202,858) (177,273) (211,657)(183,967) (253,034)
--------- -------- ------- ------- ------- ------- -------
Net re-estimated liability $150,381 $199,632 $202,596 $219,888 $232,774 $233,041 $273,230
Gross cumulative redundancy
(deficiency) $ 6,640 $(30,228) $ 13,532 $ 8,640 $(40,168)$ (1,485) $ (5,770)
12
OPERATING RATIO
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.
Year Ended December 31,
------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998 1997 1996
---- ---- ---- ---- ---
Statutory net premiums written $260,853 $227,624 $145,701 $144,674 $130,908
Policyholders' surplus $309,945 $286,247 $314,484 $265,526 $207,787
Ratio .8 to 1 .8 to 1 .5 to 1 .5 to 1 .6 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).
Year Ended December 31,
------------------------------------------------------------------------------
GAAP 2000 1999 1998 1997 1996
- ---- ---- ---- ---- ---- ----
Loss ratio 53.8 49.4 45.4 43.2 52.2
Expense ratio 41.0 41.8 42.8 43.6 35.2
---- ---- ---- ---- ----
Combined ratio 94.8 91.2 88.2 86.8 87.4
==== ==== ==== ==== ====
13
The Company also calculates the statutory combined ratio, which is not
indicative of GAAP underwriting profits due to accounting for 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.
Year Ended December 31,
------------------------------------------------------------------------------------------------
Statutory 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Loss ratio 53.8 47.6 (3) 48.0 43.0 52.3
Expense ratio 42.0 42.5 (3) 40.4 47.4 36.8
---- ---- ---- ---- ----
Combined ratio 95.8 90.1 (3) 88.4 90.4 89.1
==== ==== ==== ==== ====
Industry combined ratio 109.7 (1) 108.1 (2) 106.0 (2) 101.9 (2) 106.0 (2)
----- ----- ----- ----- -----
(1) Source: Insurance Information Institute. Estimated for the year ended
December 31, 2000.
(2) Source: A.M. Best Aggregate & Averages -- Property-Casualty (2000
Edition).
(3) The ratios presented include the results of UIC and PIC only from the
date of acquisition, January 29, 1999.
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.
The investment portfolio serves primarily as the funding source for loss
reserves and secondly as a source of income and appreciation. For these reasons,
the Company's primary investment criteria are quality and liquidity, followed by
yield and potential for appreciation. Investments of the highest quality and
marketability are critical for preserving the Company's claims paying ability.
Virtually all of the Company's fixed income investments are U.S. Government or
AA-rated or better taxable and tax-exempt securities. Common stock investments
are limited to securities listed on the national exchanges and by the Securities
Valuation Office of the National Association of Insurance Commissioners.
During 2000, the majority of operating and portfolio cash flows were allocated
to the purchase of intermediate-term U.S. Government and Agency securities and
to a lesser extent to longer-term municipals. The Company's mix of tax-exempt
and taxable instruments within the portfolio 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 high
grade municipal or U.S. Government or Agency 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).
As of December 31, 2000, 98% of the fixed income portfolio was rated AA or
better. Interest rate risk is limited by restricting and managing acceptable
call provisions among new security purchases.
The municipal bond component of the fixed maturity portfolio increased $8.6
million, to $196.7 million; and comprised 49.0% of the company's total fixed
maturity portfolio, down 6.0% from year-end 1999. The taxable U.S. Government
and Agency portion of the fixed income portfolio increased by $50.1 million to
$201.1 million, or 50.0% of the total versus 44.1% at year-end 1999. Investment
grade corporate securities totaled $4.0 million compared to $3.4 million at
year-end 1999.
14
The Company follows a program of matching assets to anticipated liabilities to
ensure its ability to hold securities until maturity. These anticipated
liabilities are then factored against ultimate payout patterns and the resulting
payout streams are funded with the purchase of fixed-income securities of like
maturity. Management believes that both liquidity and interest rate risk can
best be minimized by such asset/liability matching.
Aggregate maturities for the fixed maturity securities are as follows:
MATURITY PAR AMORTIZED FAIR CARRYING
YEAR VALUE COST VALUE VALUE
---- ----- ---- ----- -----
2001 $21,205,000 21,359,109 21,428,246 21,357,907
2002 24,905,000 25,414,736 25,583,810 25,411,306
2003 50,295,000 50,202,277 50,724,641 50,529,103
2004 43,530,000 43,133,484 43,997,115 43,514,857
2005 38,705,000 38,859,314 40,269,271 39,428,227
2006 29,225,000 29,165,247 30,118,837 29,177,310
2007 34,975,000 34,716,549 35,755,187 35,159,267
2008 35,355,000 34,901,081 35,810,077 35,301,145
2009 40,500,000 39,888,323 41,642,831 40,429,875
2010 29,005,000 29,136,997 30,134,457 29,200,915
2011 17,445,000 17,275,324 17,852,226 17,369,297
2012 14,085,000 14,045,348 14,399,499 14,134,543
2013 13,023,620 12,873,222 13,204,303 12,892,335
2014 3,728,858 3,686,734 3,799,178 3,685,496
2015 3,366,151 3,381,829 3,473,486 3,384,137
2016 0 0 0 0
2017 35,000 36,129 35,995 35,995
2018 0 0 0 0
2019 0 0 0 0
2020 0 0 0 0
2021 0 0 0 0
2022 0 0 0 0
2023 0 0 0 0
2024 0 0 0 0
2025 50,000 51,566 50,447 50,447
2026 0 0 0 0
2027 40,000 42,562 41,699 41,699
2028 209,446 212,496 210,427 210,427
2029 329,313 321,766 328,228 328,228
2030 174,558 173,827 178,976 178,976
------- ------- ------- -------
$400,186,946 $398,877,920 $409,038,936 $401,821,492
------------ ------------ ------------ ------------
At December 31, 2000, the Company's equity securities were valued at $306.2
million, an increase of $21.6 million from the $284.6 million held at the end of
1999. During 2000, pretax unrealized appreciation of equity securities totaled
$17.1 million for the year. Equity securities represented 40.5% of cash and
invested assets at the end of 2000, a decrease from the 41.2% at year-end 1999.
As of the year-end, total equity investments held at the operating companies
represented 92.3% of the combined statutory surplus of the insurance
subsidiaries.
Combined cash and short-term investments totaling $48.1 million at year-end 2000
represented 6.4% of cash and invested assets versus 9.3% last year. The
Company's short-term investments consist of U.S. Government and Agency backed
money market funds and the highest rated commercial paper.
Under generally accepted accounting principles, equity and fixed income
securities are carried at fair market value. However, 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. The
Company has chosen to carry a large portion of its
15
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 their originally scheduled
maturity dates. Consequently, fluctuations in the market value of such bonds are
not reflected in the financial statements and do not affect shareholders'
equity.
The Company's investment results are summarized in the following table:
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Average Invested Assets (1) $723,677 684,269 $640,576 $570,901 $504,773
Investment Income (2)(3) $29,046 $26,015 23,937 24,558 23,681
Realized Gains/(Losses) (3) $2,847 $4,467 1,853 2,982 1,017
Change in Unrealized
Appreciation/(Depreciation) (3)(4) $20,537 ($16,263) 36,183 55,760 25,033
Annualized Return on Average 7.2% 2.1% 9.7% 14.6% 9.9%
Invested Assets
(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 income and equity securities.
REGULATION
STATE REGULATION
As an insurance holding company, RLI Corp., as well as its insurance
subsidiaries, are subject to regulation by the states in which the insurance
subsidiaries are domiciled or transact business. Holding company registration in
each insurer's state of domicile requires reporting to the state regulatory
authority the financial, operational and management data of the insurers within
the holding company 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 regulators is required prior
to the consummation of certain transactions affecting insurance subsidiaries of
the holding company system.
Other regulations 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.
Regulations designed to ensure financial solvency of insurers and to require
fair and adequate treatment and service for policyholders are enforced by
filing, reporting and examination requirements. Market oversight is conducted by
monitoring trade practices, approving policy forms, licensing of agents and
brokers, and requiring fair and equitable premiums and commission rates.
Financial solvency is monitored by minimum reserve and capital requirements,
periodic reporting procedures (annually, quarterly, or more frequently if
necessary), and periodic examinations.
The quarterly and annual financial reports to the states utilize
accounting principles which are different from the generally accepted accounting
principles that show the business as a going concern. The statutory accounting
principles used by regulators, in keeping with the intent to assure policyholder
protection, are generally based on a liquidation concept. The National
Association of Insurance Commissioners (NAIC) has recently developed a codified
version of these statutory accounting principles. These standards became
effective January 1, 2001 and should foster more consistency among the states
for accounting guidelines and reporting.
State 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 to operate in the state through a
corporation. In a few states, licenses are issued only to individual residents.
16
COMMERCIAL LINES DEREGULATION -- The NAIC and several state legislatures
have taken up the issue of commercial lines deregulation in an attempt to
streamline specific areas of insurance regulation. A growing contingent in the
regulatory community has acknowledged that some regulatory procedures and
practices may be cumbersome and inappropriate for commercial buyers of
insurance. Specifically, the large, sophisticated, multi-state or multinational
businesses that employ their own teams of risk managers to evaluate, reduce and
finance their loss exposures are less likely to need the form and rate
protections that regulators provide consumers and small to medium business
endeavors. And, while these large businesses may receive some benefit from the
state financial regulation of licensed insurers, it has long been acknowledged
that they do not need the protections addressed by the barriers to the surplus
lines market and other nontraditional markets. Indisputably, deregulation of the
licensed market will have an impact on the surplus lines insurance carriers,
which have been free from form and rate requirements.
USE OF CREDIT REPORTS IN UNDERWRITING -- Gains in access to electronic
commerce, and the means to gather information more rapidly, have spurred
regulators to take a second look at the use of consumer credit reports in
underwriting and rate making. In some states, regulators charged with protecting
insurance consumers from unfair trade practices are concerned that some
consumers' risks may be underwritten based solely on their credit standing, and
have sought to strengthen their laws and regulations to address this. This trend
comes on the heels of Congress' re-tooling of the Fair Credit Reporting Act in
1997, which specifically addresses this issue, and permits the use of consumer
credit reports in underwriting. The issue of federal preemption of state action
in this arena has not been judicially addressed.
FEDERAL REGULATION
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 federal preemption of state auto liability
laws, tax reform measures, product liability and electronic commerce. The
Company is also monitoring the following federal proposals:
NATURAL DISASTER ACT--Recent natural disasters, including Atlantic Coast
hurricanes, continue to fuel concern regarding the best way to provide
affordable insurance coverage for such events. Congress has yet to pass
legislation, but proposals to set up a system for federal relief to the industry
continue to be discussed. Two Initiatives, "The Natural Disaster Protection and
Insurance Act of 1997" (S.1361), and "The Homeowners Insurance Availability Act
of 1997" (H.R. 21), focus on excess federal reinsurance. In 1999, both the House
and Senate introduced versions of the "Policyholder Disaster Protection Act",
which would permit insurers to build tax deferred catastrophe reserves. The
Company will continue to monitor the progress of this issue.
FINANCIAL SERVICES MODERNIZATION -- The Gramm-Leach-Bliley Act was signed
into law by President Clinton on November 12, 1999. The principal focus of the
Act is to facilitate affiliations among banks, securities firms and insurance
companies. The Act amends the Federal Bank Holding Company Act by creating a new
category of bank holding company known as a "financial holding company" to
engage in activities that are "financial in nature," such as securities and
insurance. The Act repealed the Glass-Steagall Act, which prohibited a Federal
Reserve System member bank from being affiliated with a securities firm;
repealed the Garn-St. Germain Act, which prohibited a bank holding company and
its subsidiaries from selling or underwriting insurance; and repealed the
Federal Bank Holding Company Act provisions that prohibited a director, officer
or employee of a securities firm from serving as a director, officer or employee
of a bank.
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 the Privacy Consumer Financial and Health
Implementation regulation in response to the section of the Gramm-Leach-Bliley
Act that requires financial institutions to protect private information of
consumers. The Company is establishing procedures for compliance in accordance
with individual state statutes that incorporate elements of the NAIC regulation.
17
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 Company continues to monitor its subsidiaries' internal capital
requirements and the NAIC's RBC developments. The Company has determined that
its subsidiaries' 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.
CORPORATE COMPLIANCE
The Company has developed a Code of Conduct and Compliance Manual which
provides employees with guidance on complying with a variety of federal and
state laws.
AGENCY LICENSES AND TRADEMARKS
Replacement Lens Inc., or its designated employees, must be licensed to
act as resident or non-resident producers by regulatory authorities in the
states in which it operates.
RLI Insurance Company obtained service mark registration of the letters
"RLI" in 1998, and "eRLI" and "RLINK" in 2000, in the U.S. Patent and Trademark
Office. Such registrations protect the marks nationwide from deceptively similar
use by the Company's competitors. The duration of these registrations is ten
years unless renewed.
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 519 associates. Of the 519 total
associates, 60 are part-time and 459 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.
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, Mt. Hawley Insurance Company, Underwriters Indemnity Company
and Planet Indemnity Company. One RLI Insurance Company Branch Office also
leases office space in this building.
Located on the same 15.0 acre campus is a 12,800 square foot building.
Nearly 9,800 square feet of this building are used as warehouse storage for
records and equipment. The remaining 3,000 square feet are used as
office/conference space.
18
Additionally, the Company owns two other buildings located near the
headquarter building. One, a 19,000 square foot building, is leased to a RLI
Insurance Company Branch office, with the remaining 3,240 square feet being used
for record and furniture storage.
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 56 of the Annual Report to
Shareholders for the year ended December 31, 2000 attached in Exhibit 13.
Item 6. SELECTED FINANCIAL DATA
Refer to the Selected Financial Data on pages 54 through 55 of the Annual
Report to Shareholders for the year ended December 31, 2000 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 18 through 27 of the Annual Report to
Shareholders for the year ended December 31, 2000 attached in Exhibit 13.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Refer to the Management's Discussion and Analysis of Financial Condition
and Results of Operations on pages 18 through 27 of the Annual Report to
Shareholders for the year ended December 31, 2000 attached in Exhibit 13.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the consolidated financial statements and supplementary data
included on pages 28 through 50 of the Annual Report to Shareholders for the
year ended December 31, 2000 attached in Exhibit 13. (See Index to Financial
Statements and Schedules attached on page 23.)
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.
19
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 pages 33-34.
(b) No reports on Form 8-K were filed during the last quarter of 2000.
(c) Exhibits. See Exhibit Index on pages 33-34.
(d) Financial Statement Schedules. The schedules included on attached pages 23
through 32 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 23. There is no other financial information required by
Regulation S-X which is excluded from the Company's Annual Report to
Shareholders.
20
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 2, 2001
----------------------------------------------
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/Jonathan E. Michael
-----------------------------------------------
J.E. Michael, President, CEO
(Principal Executive Officer)
Date: March 2, 2001
----------------------------------------------
* * * * *
by /s/Joseph E. Dondanville
------------------------------------------------
J. E. Dondanville, Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 2, 2001
----------------------------------------------
* * * * *
By: /s/Gerald D. Stephens
-----------------------------------------------
G. D. Stephens, Director
Date: March 2, 2001
-----------------------------------------------
* * * * *
By: /s/Richard H. Blum
-----------------------------------------------
R.H. Blum, Director
Date: March 2, 2001
----------------------------------------------
* * * * *
By: /s/Bernard J. Daenzer
-----------------------------------------------
B. J. Daenzer, Director
Date: March 2, 2001
-------------------------------------------------------
* * * * *
21
By: /s/William R. Keane
-----------------------------------------------
W. R. Keane, Director
Date: March 2, 2001
----------------------------------------------
* * * * *
By: /s/Gerald I. Lenrow
-----------------------------------------------
G. I. Lenrow, Director
Date: March 2, 2001
----------------------------------------------
* * * * *
By: /s/F. Lynn Mcpheeters
-----------------------------------------------
F.L. McPheeters
Date: March 2, 2001
----------------------------------------------
* * * * *
By: /s/Jonathan E. Michael
-----------------------------------------------
J.E. Michael, Director
Date: March 2, 2001
----------------------------------------------
* * * * *
By: /s/Edwin S. Overman
-----------------------------------------------
E. S. Overman, Director
Date: March 2, 2001
----------------------------------------------
* * * * *
By: /s/Edward F. Sutkowski
-----------------------------------------------
E. F. Sutkowski, Director
Date: March 2, 2001
----------------------------------------------
* * * * *
By: /s/Robert O. Viets
-----------------------------------------------
R. O. Viets, Director
Date: March 2, 2001
----------------------------------------------
* * * * *
22
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Reference (Page)
DATA SUBMITTED HEREWITH:
Report of Independent Auditors 24
Schedules:
I. Summary of Investments - Other than Investments in Related Parties
at December 31,2000. 25
II. Condensed Financial Information of Registrant for the three years
ended December 31,2000. 26-28
III. Supplementary Insurance Information for the three years ended
December 31,2000. 29-30
IV. Reinsurance for the three years ended December 31, 2000. 31
V. Valuation and Qualifying Accounts 32
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.
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
RLI Corp.:
Under date of January 10, 2001, we reported on the consolidated balance sheets
of RLI Corp. and Subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of earnings and comprehensive earnings, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2000, as contained in the 2000 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 2000. In connection
with our audits of the aforementioned consolidated financial statements, we also
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.
KPMG LLP
Chicago, Illinois
January 10, 2001
24
RLI CORP. AND SUBSIDIARIES
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS
IN RELATED PARTIES
DECEMBER 31, 2000
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
U.S. government $118,048,706 $120,636,195 $118,048,706
States, political subdivisions, and revenues 178,418,082 183,048,034 178,418,082
- -----------------------------------------------------------------------------------------------------------------
Total held-to-maturity 296,466,788 303,684,229 296,466,788
- -----------------------------------------------------------------------------------------------------------------
Trading
U.S. government 4,163,568 4,240,546 4,240,546
Corporate 3,912,135 3,967,592 3,967,592
- -----------------------------------------------------------------------------------------------------------------
Total trading 8,075,703 8,208,138 8,208,138
- -----------------------------------------------------------------------------------------------------------------
Available-for-sale
U.S. government 76,332,539 78,821,887 78,821,887
States, political subdivisions, and revenues 18,002,890 18,324,679 18,324,679
- -----------------------------------------------------------------------------------------------------------------
Total available-for-sale 94,335,429 97,146,566 97,146,566
- -----------------------------------------------------------------------------------------------------------------
Total fixed maturities 398,877,920 409,038,933 401,821,492
- -----------------------------------------------------------------------------------------------------------------
Equity securities, available-for-sale:
Common stock:
Public utilities 32,433,194 66,525,796 66,525,796
Banks, trusts and insurance companies 12,821,604 35,953,155 35,953,155
Industrial, miscellaneous and all other 89,992,776 203,715,307 203,715,307
- -----------------------------------------------------------------------------------------------------------------
Total equity securities 135,247,574 306,194,258 306,194,258
- -----------------------------------------------------------------------------------------------------------------
Short-term investments 48,095,064 48,095,064 48,095,064
- -----------------------------------------------------------------------------------------------------------------
Total investments $582,220,558 $763,328,255 $756,110,814
- -----------------------------------------------------------------------------------------------------------------
Note: See notes 1C and 2 of Notes to Consolidated Financial Statements, as
attached in Exhibit 13. (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.
25
RLI CORP. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
DECEMBER 31,
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ (1,647) $ (23,389)
Investments in subsidiaries/investees, at equity 337,384,004 303,763,329
Equity securities available-for-sale, at fair value
(Cost--$7,586,444 in 2000 and $6,709,665 in 1999) 15,101,269 13,810,951
Other assets 1,009,071 116,198
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $353,492,697 $317,667,089
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, current $ 2,620,068 $ 1,058,556
Notes payable, short-term 19,640,568 19,640,568
Income taxes payable--current 269,644 1,046,258
Income taxes payable--deferred 4,111,440 2,624,172
Other liabilities 197,432 228,259
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 26,839,152 24,597,813
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($1 par value, authorized 50,000,000 shares,
issued 12,806,446 shares in 2000 and 12,804,558 shares in 1999) 12,806,446 12,804,558
Paid in Capital 69,942,458 70,531,201
Accumulated other comprehensive earnings, net of tax 113,149,420 99,800,109
Retained earnings 212,158,781 189,250,013
Deferred compensation 5,389,402 4,705,536
Treasury shares at cost (3,002,484 shares in 2000 and
2,931,212 shares in 1999) (86,792,962) (84,022,141)
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 326,653,545 293,069,276
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $353,492,697 $317,667,089
===================================================================================================================================
See Notes to Consolidated Financial Statements, as attached in Exhibit 13.
26
RLI CORP. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)--(CONTINUED)
CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
YEARS ENDED DECEMBER 31,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Net investment income $ 1,089,374 $ 490,468 $ 453,843
Selling, general and administrative expenses (3,388,177) (2,090,512) (3,914,954)
Interest expense on debt (1,417,368) (1,048,395) (1,122,358)
- -----------------------------------------------------------------------------------------------------------------------
(3,716,171) (2,648,439) (4,583,469)
Income tax benefit (473,203) (724,948) (1,383,099)
- -----------------------------------------------------------------------------------------------------------------------
Net loss before equity
in net earnings of subsidiaries (3,242,968) (1,923,491) (3,200,370)
Equity in net earnings of subsidiaries/investees 31,935,387 33,374,544 31,438,961
- -----------------------------------------------------------------------------------------------------------------------
Net earnings $28,692,419 $31,451,053 $28,238,591
=======================================================================================================================
Other Comprehensive Earnings, net of tax
Unrealized gains on securities:
Unrealized holding gains arising
during the period $ 814,249 $ 18,443 $ 1,217,174
Less: Reclassification adjustment for
(gains) losses included in
Net Earnings (545,411) (144,514) (122,659)
- -----------------------------------------------------------------------------------------------------------------------
Other Comprehensive Earnings--parent only 268,838 (126,071) 1,094,515
Equity in Other Comprehensive
Earnings of Subsidiaries/Investees 13,080,473 (10,445,281) 22,424,283
- -----------------------------------------------------------------------------------------------------------------------
Other Comprehensive Earnings 13,349,311 (10,571,352) 23,518,798
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive Earnings $42,041,730 $20,879,701 $51,757,389
=======================================================================================================================
See Notes to Consolidated Financial Statements, as attached in Exhibit 13
27
RLI CORP. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Losses before equity in net earnings of $ (3,242,968) $ (1,923,491) $ (3,200,370)
subsidiaries/investees
Adjustments to reconcile net losses to net
cash provided by operating activities:
Net realized investment (gains) (936,365) (222,329) (188,706)
Other items, net (130,156) 415,574 (387,397)
Change in:
Affiliate balances payable 1,468,438 (3,226,757) 2,187,132
Federal income taxes 395,254 1,041,305 97,641
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,445,797) (3,915,698) (1,491,700)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of:
Equity securities, available-for-sale (2,618,536) (675,182) (31,122)
Unconsolidated investee ownership interest (88,750)
Sale of:
Equity securities, available-for-sale 2,678,121 716,288 368,672
Cash dividends received-subsidiaries/investees 11,894,822 24,926,533 13,384,443
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 11,954,407 24,967,639 13,633,243
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of debt 65,568 12,075,000
Fractional share paid (16,099)
CatEPut Payment (1,417,321) (210,616) (1,212,500)
Shares issued under stock option plan 36,921 302,696 60,638
Unearned ESOP shares 2,500,999 (2,500,999)
Treasury shares purchased (2,086,955) (18,197,576) (14,858,394)
Cash dividends paid (6,019,513) (5,794,837) (5,566,416)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (9,486,868) (21,333,766) (12,018,770)
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 21,742 (281,825) 122,773
Cash at beginning of year (23,389) 258,436 135,663
- -----------------------------------------------------------------------------------------------------------------------
Cash at end of year $ (1,647) $ (23,389) $ 258,436
=======================================================================================================================
Interest paid on outstanding debt for 2000, 1999 and 1998 amounted to
$5,218,178, $3,483,174 and $2,327,113, respectively. See Notes to Consolidated
Financial Statements, as attached in Exhibit 13.
28
RLI CORP. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE VI--SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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, 2000
Property segment $ 12,095,958 $ 39,505,479 $ 48,521,649 $ 60,063,428 $ 32,488,730
Surety segment 12,798,231 7,423,787 23,151,563 34,738,666 8,775,695
Casualty segment 18,392,839 253,124,207 75,945,106 136,800,415 85,005,042
RLI Insurance Group $ 43,287,028 $300,053,473 $147,618,318 $231,602,509 $126,269,467
==========================================================================================================================
Year ended
December 31, 1999
Property segment $ 8,036,389 $ 33,182,976 $ 35,899,659 $ 51,390,298 $ 20,068,671
Surety segment 9,444,841 6,059,534 16,724,125 25,412,355 4,539,480
Casualty segment 16,876,401 235,671,799 65,744,130 118,471,537 76,444,745
RLI Insurance Group $ 34,357,631 $274,914,309 $118,367,914 $195,274,190 $101,052,896
==========================================================================================================================
Year ended
December 31, 1998
Property segment $ 8,783,705 $ 29,634,175 $ 34,977,862 $ 52,281,163 $ 12,050,748
Surety segment 5,263,476 5,397,144 8,944,616 18,307,259 4,198,692
Casualty segment 8,462,960 212,230,257 38,320,680 71,735,513 51,882,019
RLI Insurance Group $ 22,510,141 $247,261,576 $ 82,243,158 $142,323,935 $ 68,131,459
==========================================================================================================================
NOTE 1: Investment income is not allocated to the segments, therefore net
investment income (column G) has not been provided.
29
RLI CORP. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE VI--SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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, 2000
Property segment $ (241,379) $ 17,358,596 $ 5,467,408 $ 72,685,413
Surety segment (478,045) $ 20,304,477 $ 2,504,035 $ 41,166,105
Casualty segment (964,455) $ 38,790,950 $ 10,507,211 $147,001,734
RLI Insurance Group $ (1,683,879) $ 76,454,023 $ 18,478,654 $260,853,252
=======================================================================================================================
Year ended
December 31, 1999
Property segment $ (4,313,840) $ 14,088,564 $ 4,482,798 $ 51,126,413
Surety segment 426,439 16,099,457 1,948,194 30,887,434
Casualty segment (708,214) 36,363,806 8,698,923 145,609,854
RLI Insurance Group $ (4,595,615) $ 66,551,827 $ 15,129,915 $227,623,701
=======================================================================================================================
Year ended
December 31, 1998
Property segment $ (300,799) $ 14,394,458 $ 6,335,787 $ 46,029,088
Surety segment 2,430,308 10,990,793 1,406,353 19,133,037
Casualty segment (5,532,667) 18,895,582 8,783,745 80,539,155
RLI Insurance Group $ (3,403,158) $ 44,280,833 $ 16,525,885 $145,701,280
=======================================================================================================================
30
RLI CORP. AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
FOR THE YEARS ENDED 2000, 1999 AND 1998
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of Amount
Direct Other From Other Net Assumed to
Amount Companies Companies Amount Net
- -----------------------------------------------------------------------------------------------------------------------------------
2000
Property $137,459,500 $ 85,483,761 $ 8,087,689 $ 60,063,428 13.46%
Surety 36,746,835 2,180,535 172,366 34,738,666 .50%
Casualty 209,932,332 73,823,824 691,907 136,800,415 .51%
RLI Insurance Group
Premiums earned $384,138,667 $ 161,488,120 $ 8,951,962 $ 231,602,509 3.87%
===================================================================================================================================
1999
Property $116,594,261 $ 75,114,048 $ 9,910,085 $ 51,390,298 19.28%
Surety 29,604,063 4,730,231 538,523 25,412,355 2.12%
Casualty 167,912,453 50,041,820 600,904 118,471,537 .51%
RLI Insurance Group
premiums earned $314,110,777 $129,886,099 $ 11,049,512 $195,274,190 5.66%
===================================================================================================================================
1998
Property $115,926,412 $ 65,712,932 $ 2,067,683 $ 52,281,163 3.95%
Surety 29,149,915 11,157,925 315,269 18,307,259 1.72%
Casualty 129,919,370 58,398,009 214,152 71,735,513 .30%
RLI Insurance Group
premiums earned $274,995,697 $135,268,866 $ 2,597,104 $142,323,935 1.82%
===================================================================================================================================
NOTES: Column B, "Gross Amount" includes only direct premiums earned.
31
RLI CORP. AND SUBSIDIARIES
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Column A Column B Column C Column D Column E
Balance at Amounts Amounts Balance
beginning of charged to recovered Amounts at end
period expense (written-off) commuted of period
- -------------------------------------------------------------------------------------------------------------------------------
2000 Allowance for
insolvent reinsurers $10,236,966 -- $ (72,428) -- $10,164,538
1999 Allowance for
insolvent reinsurers $ 9,642,947 -- $ 571,814 $ 22,205 $10,236,966
1998 Allowance for
insolvent reinsurers $17,057,194 -- $(574,934) $(6,839,313) $ 9,642,947
32
EXHIBIT INDEX
Exhibit No. Description of Document Reference (Page)
- ----------- ----------------------- -----------------
3.1 Articles of incorporation Incorporated by reference to the Company's
Quarterly Form 10-Q for the Second Quarter
ended June 30, 1997.
3.2 By-Laws Attached as Exhibit 3.2.
10.1 Market Value Potential Plan* Incorporated by reference to the Company's
Quarterly Form 10-Q for the Second Quarter
ended June 30, 1997.
10.2 RLI Corp. Director Deferred Incorporated by reference to the Company's
Compensation Plan* Quarterly Form 10-Q for the Second Quarter
ended June 30, 1993.
10.3 The RLI Corp. Directors' Irrevocable Incorporated by reference to the Company's
Trust Agreement* Quarterly Form 10-Q for the Second Quarter
ended June 30, 1993.
10.4 Key Employee Excess Benefit Plan* Incorporated by reference to the Company's
Annual Form 10-K/A for the year ended
December 31, 1992.
10.5 RLI Corp. Incentive Stock Incorporated by reference to Company's
Option Plan* Registration Statement on Form S-8 filed on
March 11, 1996, File No. 333-01637
10.6 Directors' Stock Option Plan* Incorporated by reference to the Company's
Registration Statement on Form S-8 filed on
June 6, 1997, File No. 333-28625.
10.7 RLI Corp. Executive Deferred Incorporated by reference to the Company's
Compensation Agreement* Annual Form 10-K for the year ended December
31, 1998.
10.9 Reinsurance Agreements between the Incorporated by reference to the Company's
Company and American Re-Insurance Annual Form 10-K/A for the year ended
Company December 31, 1992.
10.10 Reinsurance Agreements between the Incorporated by reference to the Company's
Company and Lloyd's of London Annual Form 10-K/A for the year ended
December 31, 1992
33
EXHIBIT INDEX
Exhibit No. Description of Document Reference (Page)
- ----------- ----------------------- -----------------
11.0 Statement re computation of per Refer to the Notes to Consolidated Financial
share earnings Statements--Note 1K
"Earnings per share", on page 38 of the Annual
Report to Shareholders attached in Exhibit 13.
13.1 Refer to the Annual Report to Share- Attached Exhibit 13.
holders for the year ended
December 31, 2000, pages 18-50
and 54-56.
21.1 Subsidiaries of the Registrant Attached page 46.
23.1 Consent of KPMG LLP Attached page 47.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K.
34