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