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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, 1996
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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
incorporation or organization) Identification No.)
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:
Name of each exchange
Title of each class 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
28, 1997 as reported on the New York Stock Exchange, was $263,068,745. 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 28, 1997 was 7,625,181.
DOCUMENTS INCORPORATED BY REFERENCES.
Portions of the Annual Report to Shareholders for the past year ended December
31, 1996, are incorporated by reference into Parts I and II of this document.
Portions of the Registrant's definitive Proxy Statement for the 1997 annual
meeting of security holders to be held May 1, 1997, are incorporated herein by
reference into Part III of this document.
Exhibit index is located on pages 34-35 of this document.
Page 1 of 35
PART I
Item 1. BUSINESS
(a) General Development of Business
As used in this Form 10-K, the term "Company" refers to RLI Corp. and its
subsidiaries and affiliates, unless the context otherwise indicates.
RLI Corp., which was incorporated in Illinois in 1965, merged into and
became a Delaware corporation in 1984. In May of 1993, RLI Corp. changed its
state of incorporation back to Illinois through a merger. RLI Corp. is a
holding company, which, through its subsidiaries, underwrites selected property
and casualty insurance.
SIGNIFICANT DEVELOPMENT
OPHTHALMIC MERGER
In November 1996, the Company announced the merger of its ophthalmic
services subsidiary, RLI Vision Corp., with Hester Enterprises, Inc. The
resulting organization operates under the name Maui Jim, Inc. This transaction
brings together the infrastructure of RLI Vision to support the recent sales
growth of Maui Jim sunglasses. The Company has a 44% (34% at December 31, 1996)
minority interest in Maui Jim, Inc., which is reflected in the Company's
financial statements as an equity-based investment. Fourth quarter 1996 results
included a one-time charge to the Company of $733,000, or $.06 per share, for
the effect of the change from pooling to purchase accounting stemming from a
1995 RLI Vision Corp. business combination. This change was required because of
the aforementioned merger.
For further discussion of this transaction, refer to Note 1B of Notes to
Consolidated Financial Statements 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., RLI Aviation, Inc., License Express
Services, 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.
2
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.
Significant rate increases resulted when the insurance market hardened in
late 1984. The Company responded by expanding its premium volume in targeted
lines. Since 1987, the industry has experienced generally soft market
conditions featuring intensified competition for admitted and surplus lines
insurers, resulting in rate decreases. The Company has continually monitored
its rates and controlled its costs in an effort to maximize profits during this
entrenched soft market condition. As a result of 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 secured rate
increases of over 30% on the commercial property book of business, while the
casualty book of business incurred flat to moderate decreases. During 1995,
rates for catastrophic driven property business, especially in California,
continued to remain hard. In 1996, as expected, some softening began for this
type of business. The Company's casualty book has continued to incur flat to
moderate rate decreases.
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. The Company produced business under agreements with three
underwriting agents in 1996. 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; Overland Park, Kansas;
Glastonbury, Connecticut; Atlanta, Georgia; and Chicago, Illinois. In 1995,
the Company established an underwriting facility in Columbus, Ohio to underwrite
Lenders' Single Interest inland marine property insurance.
The following table provides for the year ended December 31, 1996 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, 1996, 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 $106,222,590 39.1%
Texas 38,767,328 14.3
Florida 20,731,370 7.6
New York 18,377,973 6.8
Michigan 6,554,086 2.4
Pennsylvania 5,754,042 2.1
Illinois 5,647,419 2.1
All other 69,496,900 25.6
---------- -----
Total direct premiums $271,551,708 100.00%
============ =======
3
The Company presently underwrites selected 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, Glastonbury, Overland Park, San Francisco, Chicago, Columbus
and Atlanta branch offices are responsible for underwriting this coverage. In
1994, 1995, and 1996, net earned premiums totaled $42,646,000, $49,430,000, and
$47,822,000 or 27%, 32%, and 31% respectively, of the Company's consolidated
revenues.
GENERAL LIABILITY. The Company writes general liability coverages through
its St. Paul, Glastonbury, 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 $35,160,000, $36,499,000, and $34,834,000, or 22%, 23% and 22%
of the Company's consolidated revenues for the years 1994, 1995, and 1996,
respectively.
COMMERCIAL AND PERSONAL UMBRELLA LIABILITY. The Company's commercial
umbrella coverage is produced through its Overland Park, St. Paul, Atlanta, and
Glastonbury 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 $17,638,000, $18,092,000, and
$21,282,000 or 11%, 12%, and 14% of the Company's consolidated revenues for the
years 1994, 1995, and 1996, respectively.
DIRECTORS' AND OFFICERS' LIABILITY/MISCELLANEOUS PROFESSIONAL LIABILITY.
In December, 1990, the Company established a new Directors' and Officers'
Liability underwriting facility in San Diego, California. In 1996, the facility
expanded to offer Miscellaneous Professional Liability for a variety of low to
moderate classes of risks. Net earned premiums totaled $5,680,000, $6,025,000,
and $5,000,000, or 4%, 4% and 3% of the Company's consolidated revenues for the
years 1994, 1995, and 1996, 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 Overland Park branch office. Net earned premiums totaled $7,953,000,
$8,257,000, and $6,566,000 or 5%, and 5%, and 4% of the Company's consolidated
revenues for 1994, 1995, and 1996, respectively.
SURETY. In 1993, the Company began writing surety business. This product
line is underwritten from the Home Office in Peoria and through an underwriting
facility in Dallas, Texas. The initial target market of the Surety Division was
a wide range of commercial surety bonds written primarily through the
independent agency system. In 1996, the Company expanded their product offering
to include contract bonds for small size contractors. Net earned premiums
totaled $2,300,000, $2,956,000, and $4,408,000, or 1%, 2%, and 3% of the
Company's consolidated revenues for 1994, 1995, and 1996, respectively.
OTHER. Smaller programs offered by the Company include: primary employer's
indemnity, excess medical, contact lens (discontinued in 1995), commercial
multi-peril and accident and health insurance. Net earned premiums from these
lines totaled $28,807,000, $12,209,000, and $10,744,000 or 18%, 8% and 7% of the
Company's consolidated revenues for the years 1994, 1995, and 1996,
respectively.
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.
4
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 increases experienced in the property lines in California,
Florida and the wind belt from 1993 through 1995. 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 1996, 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 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 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.
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.
5
REINSURANCE
The Company reinsures a significant portion of its property and casualty
insurance exposure, paying to the reinsurer a portion of the premiums received
on such policies. Earned premiums ceded to non-affiliated reinsurers totaled
$125,458,000, $131,772,000, and $140,928,000 in 1994, 1995, and 1996,
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 1994 through 1996, 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 1994 through 1996 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 1994, 1995, and 1996, the
Company provided $1,000,000, $613,296, and $1,006,140 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, 1996, 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) that amounted to $59,492,246. 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, 1996 and the amounts of written premium ceded by
the Company to such reinsurers during 1996.
GROSS REINSURER CEDED
EXPOSURE AS OF PERCENT PREMIUMS PERCENT
DECEMBER 31, 1996 OF TOTAL WRITTEN OF TOTAL
American Re-Insurance Co. $59,492,246 26.20% $19,393,486 13.43%
General Reins Corp. 13,776,840 6.07 7,932,445 5.49
Transatlantic Reinsurance 12,347,185 5.44 16,718,104 11.57
Lloyd's of London 10,687,256 4.71 14,615,153 10.12
NAC Reinsurance Corporation 9,339,787 4.11 4,379,530 3.03
Employer's Re 8,102,927 3.57 8,530,215 5.91
TIG Insurance Co 6,505,160 2.86 708,688 0.49
St. Paul Fire & Marine 5,414,767 2.38 1,927,657 1.33
Security Ins. Co. of Hartford 5,214,385 2.30 1,441,772 1.00
Everest Re 5,064,106 2.23 6,384,821 4.42
All other reinsurers 91,151,134 40.13 62,411,792 43.21
---------- ----- ---------- -----
Total ceded exposure $227,095,793 100.00% $144,443,663 100.00%
============ ======= ============ =======
As of December 31, 1996, the Company held $18,566,380 in irrevocable
letters of credit, $4,570,492 under trust agreements and $1,684,154 in cash to
collateralize a portion of the total amount recoverable.
6
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 seeks to limit its net
aggregate exposure to a single catastrophic event to less than 10% of
shareholders' equity by purchasing various types of reinsurance.
The Company maintained its commercial property reinsurance protection in
1996, but decreased net exposure by reducing its retention in the fourth
catastrophe layer. Through implementation of this change, the Company
reaffirmed its ability to maintain its net aggregate exposure on a single
catastrophic event to less than 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.
In 1996, the Company entered into an innovative catastrophe reinsurance and
loss financing program with Centre Reinsurance (Centre Re). The program, called
Catastrophe Equity Puts (CatEPuts)SM, augments the Company's traditional
reinsurance by integrating its loss financing needs with a pre-negotiated sale
of securities linked to exchange-traded shares. CatEPuts allows the Company to
put up to $50.0 million of its convertible preferred shares to Centre Re at a
pre-negotiated rate in the event of a catastrophic loss provided the loss does
not reduce GAAP equity to less than $55.0 million. CatEPuts is intended to be a
three-year program and is designed to enable the Company to continue operating
after a loss of such magnitude that its reinsurance capacity is exhausted. If
the Company exercises its option to put preferred shares to Centre Re, then
Centre Re, in turn, has the option to reinsure certain business written by the
Company on a prospective basis.
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
1993 through 1995, the industry experienced some improvement in underwriting
losses. The trends experienced during the late 1980s, however, have continued,
and companies continue to post underwriting losses but remain profitable through
investment income gains. During 1996 the industry's statutory combined ratio is
estimated to be 106.1. 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 Surety Division offers its business
through a variety of independent agents. Additionally, the Specialty Marketing
Division writes program business, such as Personal Umbrella and the In-Home
Business Policy, through independent agents. 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. As well, the Surety
Division has authorized an underwriting agency to underwrite and bind contract
surety business on behalf of RLI, primarily in the East and Southeast.
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 insurance operating expenses
as a percent of gross written premiums for the years 1994, 1995, and 1996 were
5%, 5%, and 6%, respectively.
ENVIRONMENTAL EXPOSURES. The Company is subject to environmental claims
and exposures through its commercial umbrella, general liability, and
discontinued assumed reinsurance lines of business. Within these lines, the
Company's environmental exposures include environmental site cleanup, asbestos
removal, and mass tort liability. The majority of the exposure is in the excess
layers of the Company's commercial umbrella and assumed reinsurance books of
business.
The following table represents inception-to-date paid and unpaid
environmental exposure data (including incurred but not reported losses) for the
periods ended 1994, 1995 and 1996:
- -------------------------------------------------------------------------------
Inception-to-date December 31
(in thousands) 1994 1995 1996
- -------------------------------------------------------------------------------
Loss and Loss Adjustment
Expense (LAE) payments
Gross $ 3,549 $ 5,117 $ 8,267
Ceded ( 2,933) ( 3,842) ($ 5,761)
- -------------------------------------------------------------------------------
Net $ 616 $ 1,275 $ 2,506
===============================================================================
Unpaid losses and LAE at end of year
Gross $ 15,519 $20,154 $17,596
Ceded ( 9,875) (13,398) ($11,150)
- -------------------------------------------------------------------------------
Net $ 5,644 $ 6,756 $ 6,446
===============================================================================
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 adjusts prior accident years'
reserves for the change in development patterns. Additionally, there may be
future adjustments to reserves should the Company's actual experience prove to
be better or worse than industry averages.
As part of the reserving process, historical data is reviewed and
consideration is given to the anticipated impact of various factors such as
legal developments and economic conditions, including the effects of inflation.
The reserving process provides implicit recognition of the impact of inflation
and other factors affecting claims payments by taking into account changes in
historic payment patterns and perceived probable trends. Changes in reserves
from the prior years' estimates are calculated based on experience as of the end
of each succeeding year (loss and settlement expense development). The estimate
is increased or decreased as more information becomes known about the 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, 1996 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 1994, 1995, and 1996.
Year Ended December 31,
--------------------------------------
(Dollars in thousands) 1994 1995 1996
---- ---- ----
Unpaid losses and settlement
expenses at beginning of year:
Gross $310,767 $394,966 $418,986
Ceded (145,208) (199,737) (197,338)
------- ------- -------
Net 165,559 195,229 221,648
------- ------- -------
Increase (decrease) in incurred losses and
settlement expenses:
Current accident year 100,535 62,619 69,724
Prior accident years 1,107 23,271 (1,463)
----- ------ ------
Total incurred 101,642 85,890 68,261
------- ------ ------
Loss and settlement expense payments for
claims incurred:
Current accident year (36,501) (10,586) (11,026)
Prior accident years (36,026) (48,023) (37,505)
------ ------ ------
Total paid (72,527) (58,609) (48,531)
------ ------ ------
Insolvent reinsurer charge off 643 514 607
Loss reserves commuted (88) (1,376) (1,201)
------ ----- ------
Unpaid losses and settlement
expenses at end of year $195,229 $221,648 $240,784
======== ======== ========
Unpaid losses and settlement
expenses at end of year:
Gross $394,966 $418,986 $405,801
Ceded (199,737) (197,338) (165,017)
-------- -------- --------
Net $195,229 $221,648 $240,784
======== ======== ========
Explanation of significant components of reserve development by calendar
year are as follows:
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.
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.
11
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.
1996 During 1996, the Company experienced approximately $1,463,000 of
favorable development on loss reserves. This development resulted
from approximately $1,519,000 of favorable development in the property
lines of business. Various property claims closed during the year were
settled below recorded reserves. The remaining $56,000 of adverse
development relates to the net effect of changes made to casualty loss
reserves. This development is a result of reserve strengthening of
$3,557,000 made in the General Liability and Miscellaneous Professional
business on accident years 1987 through 1995. This increase was offset
by favorable development and reserve decreases of $3,501,000 in the
Umbrella and Excess Employer's Indemnity programs on accident years
1986 and 1993 through 1995.
The table on the following page presents the development under generally
accepted accounting principles of the Company's balance sheet reserves for
1987 through 1996. 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) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Liability for unpaid
losses and settlement
expenses at end of year $66,169 $89,197 $95,953 $103,302 $110,844 $130,452 $165,559 $195,229 $221,648 $240,784
Paid (cumulative) as of:
One year later 10,170 17,312 14,302 19,297 23,561 24,725 36,026 48,023 37,505
Two years later 21,860 26,093 26,685 35,963 37,763 46,342 63,675 73,972
Three years later 28,052 37,137 40,341 44,088 49,462 64,364 84,614
Four years later 35,459 47,617 44,714 52,322 57,085 78,994
Five years later 42,010 48,937 51,153 56,413 65,318
Six years later 41,698 53,670 54,546 62,989
Seven years later 44,995 56,254 59,444
Eight years later 46,113 60,499
Nine years later 49,551
Liability re-estimated
as of:
One year later 67,033 86,230 91,646 101,251 108,249 128,600 166,666 218,499 220,185
Two years later 67,939 85,120 89,112 98,505 105,747 132,850 164,218 214,352
Three years later 68,697 84,426 87,981 95,690 107,777 132,377 157,286
Four years later 69,904 84,931 87,403 97,041 106,326 127,426
Five years later 69,670 84,217 90,030 96,490 100,968
Six years later 70,486 87,585 88,982 93,159
Seven years later 72,074 86,593 85,381
Eight years later 72,540 83,306
Nine years later 69,601
Net cumulative redundancy
(deficiency) $(3,432) $ 5,891 $10,572 $10,143 $ 9,876 $ 3,026 $ 8,273 $(19,123) $ 1,463
Gross liability $394,966 $418,986 $405,801
Reinsurance recoverable (199,737) (197,338) (165,017)
-------- -------- --------
Net liability $195,229 $221,648 $240,784
Gross re-estimated liability $427,830 $413,669
Re-estimated recoverable (213,478) (193,484)
-------- --------
Net re-estimated liability $214,352 $220,185
Gross cumulative redundancy
(deficiency) $(32,864) $5,227
13
OPERATING RATIO
PREMIUMS TO SURPLUS RATIO
The following table shows, for the periods indicated, the Company's
insurance subsidiaries' statutory ratios of net premiums written to
policyholders' surplus. While there is no statutory requirement applicable to
the Company which establishes a permissible net premiums written to surplus
ratio, guidelines established by the National Association of Insurance
Commissioners provide that this ratio should generally be no greater than 3 to
1.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
(Dollars in thousands) 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Statutory net premiums written $110,895 $136,728 $131,164 $130,453 $130,908
Policyholders' surplus $100,585 $152,262 $136,125 $172,313 $207,787
Ratio 1.1 to 1 .9 to 1 1.0 to 1 .8 to 1 .6 to 1
GAAP AND STATUTORY COMBINED RATIOS
The underwriting experience of the Company is best indicated by its GAAP
combined ratio, which is the sum of (a) the ratio of incurred losses and
settlement expenses to net premiums earned (loss ratio) and (b) the ratio of
policy acquisition costs and other operating expenses to net premiums earned
(expense ratio).
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
GAAP 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Loss ratio 60.3 63.3 72.5 64.4 52.2
Expense ratio 31.1 33.9 44.4 43.1 35.2
---- ---- ---- ---- ----
Combined ratio 91.4 97.2 116.9 107.5 87.4
==== ==== ===== ===== ====
(1) Excluding the effects of the Northridge Earthquake, the GAAP combined ratio
for the years ended 1994 and 1995 would have been 91.1 and 86.2,
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 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Loss ratio 58.9 65.8 73.4 63.6 52.3
Expense ratio 36.9 22.1 (3) 43.5 42.9 36.8
---- ---- ---- ---- ----
Combined ratio 95.8 87.9 (3) 116.9 (4) 106.5 (4) 89.1
==== ==== ===== ===== ====
Industry combined ratio 115.7 (2) 106.9 (2) 108.4 (2) 106.4 (2) 106.1 (1)
===== ===== ===== ===== =====
14
(1) Source: Insurance Information Institute. Estimated for the year ended
December 31, 1996.
(2) Source: A.M. Best Aggregate & Averages -- Property-Casualty (1996
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 1994 and 1995 would have been 89.7 and 85.3,
respectively.
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.
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 rated or better 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 1996, operating cash flows were used to acquire fixed income
instruments composed mainly of intermediate-term U.S. Government and Agency
securities and municipal securities. Additionally, a small portion of the funds
were allocated to an investment grade convertible debenture portfolio designed
to provide diversification and yield enhancement to the portfolio. The
tax-exempt component of the fixed maturity portfolio increased $7.9 million, to
$114.7 million; and comprises 37.2% of the Company's total fixed maturity
portfolio, up 1.1% from year end 1995. The taxable U.S. Government, Agency and
Municipal portion of the fixed income portfolio declined slightly by $0.4
million to $185.8 million, or 60.3% of the total versus 63.0% at year end 1995.
Investment grade corporate securities totaled $3.7 million compared to $2.7
million at year end 1995, while convertible debenture securities totaling $4.0
million were added to the portfolio in 1996.
Equity securities increased $34.9 million from $154.0 million at the end of
last year to $188.9 million at the end of 1996. During 1996, net common equity
investments totaling $9.2 million were purchased and pretax unrealized
appreciation of equity securities totaled $25.8 million. Equity securities as a
percentage of cash and invested assets increased to 35.1% at the end of 1996
from 32.4% at year end 1995. Combined cash and short-term investments totaling
$40.8 million at year end 1996 represented 7.6% of cash and invested assets
versus 4.4% in 1995. 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. The
majority of 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 limited by restricting and managing acceptable call provisions among new
security purchases.
15
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 VALUE VALUE VALUE
- ---- ----- ----- ----- -----
1997 $16,745,000 $16,719,228 $16,829,890 $16,721,759
1998 27,995,000 28,260,289 28,717,798 28,287,175
1999 39,270,000 39,626,036 40,901,976 39,943,462
2000 32,910,000 33,687,738 34,601,360 33,876,334
2001 20,640,000 21,371,646 21,649,472 21,305,084
2002 23,380,000 24,390,589 24,560,773 24,300,451
2003 41,300,000 41,534,757 40,607,493 41,534,757
2004 20,295,000 20,433,996 20,474,843 20,433,996
2005 29,040,000 29,446,145 29,833,274 29,446,145
2006 14,350,000 14,343,596 14,532,125 14,343,596
2007 7,100,000 7,114,873 7,218,453 7,114,873
2008 8,275,000 8,029,518 8,206,127 8,029,518
2009 10,310,000 10,384,245 10,416,465 10,384,245
2010 9,750,000 10,132,696 9,968,673 10,132,696
2011 2,000,000 812,348 787,500 812,348
2012 0 0 0 0
2013 1,400,000 999,354 1,088,500 999,354
2014 0 0 0 0
2015 500,000 520,940 535,000 520,940
------- ------- ------- -------
$305,260,000 $307,807,994 $310,929,722 $308,186,733
============ ============ ============ ============
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, 1996, the Company's equity
securities valued at $188.9 million, accounted for 35.1% of total cash and
invested assets and 90.9% of the combined statutory surplus of its insurance
subsidiaries. At December 31, 1996, net pretax unrealized capital appreciation
of equity securities was $77.2 million.
16
The Company's investment results are summarized in the following table:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
(Dollars in thousands) 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Average invested
assets (1) $259,522 $341,361 $407,722 $442,717 $504,773
Investment
income (2)(3) 13,483 16,857 20,133 22,029 23,681
Realized gains
(losses) (3) 921 254 (3,595) 457 1,018
Change in unreal-
ized appreciation/
depreciation (3)(4) 3,546 7,945 (5,749) 36,037 25,033
Annualized return
on average
invested assets 6.9% 7.3% 2.7% 13.2% 9.9%
(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.
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. Currently, the National Association of Insurance
Commissioners (NAIC) has a project to codify statutory accounting practices, the
result of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, the project may result in changes
to the accounting policies that insurance enterprises use to prepare their
statutory financial statements.
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.
17
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.
PROPOSITION 103 (RATE ROLLBACK INITIATIVE)--In November 1988, California
voters approved Proposition 103, which requires insurance rates for certain
lines of business to be rolled back 20% from the rates in effect in November
1987. Beginning in 1989 and ending in 1994, the Company deferred premium
revenue of $1,449,200 and accrued interest in the amount of $1,050,480 to cover
the proposed rollback. No additional provision was made during 1995 and the
total funds accrued for rollback remained $2,449,680 at December 31, 1995.
During 1996, the Company reached a settlement with the California Department of
Insurance resolving its total liability for refunds and interest under
Proposition 103. The settlement requires the Company to pay $2,987,050 in
refunds and interest. In the second quarter of 1996, the Company recorded a
pretax charge of $487,370 to record the difference between the actual settlement
and the amount previously accrued. The Company is currently in the process of
issuing refund checks to policyholders.
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. Previously
the Company supported the proposed Natural Disaster Act as the most desirable
alternative. That Act was never passed and the Company is considering other
proposed alternatives.
SUPERFUND REFORM (ENVIRONMENTAL LIABILITY)--In 1996, the president asked
congress to reinstate the corporate levies that provide funds for Superfund
cleanup. Congressional representatives indicate they would not support a
reinstatement but are considering comprehensive reform of this bill, that if
passed, could impose some tax liability on the Company.
18
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.
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 357 associates. Of the 357 total
associates, 40 are part-time and 317 are full-time.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
For purposes of this discussion, foreign operations are not considered
material to the Company's overall operations.
Item 2. PROPERTIES
The Company owns a two-story, 80,000 square foot building in Peoria,
Illinois, which serves as the Corporate Headquarters for RLI Corp., RLI
Insurance Company and Mt. Hawley Insurance Company. Two RLI Insurance Company
Branch Offices also lease office space in this building.
Located on the same 23.0 acre campus is a 12,800 square foot building.
Nearly 9,800 square feet of this building are used as warehouse storage for
records and equipment. The remaining 3,000 square feet is leased to Maui Jim,
Inc., as a part of its contact lens distribution center.
19
Additionally, the Company owns two other buildings located near the
headquarter building. One, a 19,000 square foot building, is leased to Maui
Jim, Inc. and is used as their headquarters. The other, a 20,000 square foot
building, was purchased in December of 1996. Currently, used for warehousing
and record storage, this building will provide space for future office
expansion.
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 49 of the Annual Report to Shareholders
for the year ended December 31, 1996 attached in Exhibit 13.
Item 6. SELECTED FINANCIAL DATA
Refer to the Selected Financial Data on pages 18 through 19 of the Annual
Report to Shareholders for the year ended December 31, 1996 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 20 through 25 of the Annual Report to
Shareholders for the year ended December 31, 1996 attached in Exhibit 13.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the consolidated financial statements and supplementary data
included on pages 26 through 43 of the Annual Report to Shareholders for the
year ended December 31, 1996 attached in Exhibit 13. (See Index to Financial
Statements and Schedules attached on page 24.)
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.
20
PART III
Items 10 to 13.
Pursuant to General Instructions G(3) of Form 10-K, Items 10 to 13,
inclusive, have not been restated or answered since the Company intends to file
within 120 days after the close of its fiscal year with the Securities and
Exchange Commission a definitive proxy statement pursuant to Regulation 14A
under the Securities Exchange Act of 1934, which proxy statement involves the
election of directors. The information required in these items 10 to 13,
inclusive, is incorporated by reference to that proxy statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (l-2) Consolidated Financial Statements and Schedules. See Index to
Financial Statements and Schedules attached.
(3) Exhibits. See Exhibit Index on pages 34-35.
(b) No reports on Form 8-K were filed during the last quarter of 1996.
(c) Exhibits. See Exhibit Index on pages 34-35.
(d) Financial Statement Schedules. The schedules included on attached pages 25
through 33 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 24. There is no other financial information required by
Regulation S-X which is excluded from the Company's Annual Report to
Shareholders.
21
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 5, 1997
--------------------------------------------------
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 5, 1997
------------------------------------------------
* * * * *
By: /S/Joseph E. Dondanville
----------------------------------------------------
J. E. Dondanville, Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 5, 1997
----------------------------------------------------
* * * * *
By: /S/Gerald D. Stephens
------------------------------------------------
G. D. Stephens, Director
Date: March 5, 1997
------------------------------------------------
* * * * *
By: /S/Bernard J. Daenzer
------------------------------------------------
B. J. Daenzer, Director
Date: March 5, 1997
------------------------------------------------
* * * * *
By: /S/Richard J. Haayen
------------------------------------------------
R. J. Haayen, Director
Date: March 5, 1997
------------------------------------------------
* * * * *
By: /S/William R. Keane
------------------------------------------------
W. R. Keane, Director
Date: March 5, 1997
------------------------------------------------
* * * * *
22
By: /S/Gerald I. Lenrow
------------------------------------------------
G. I. Lenrow, Director
Date: March 5, 1997
------------------------------------------------
* * * * *
By: /S/John S. McGuinness
------------------------------------------------
J. S. McGuinness, Director
Date: March 5, 1997
------------------------------------------------
* * * * *
By: /S/Edwin S. Overman
-------------------------------------------------
E. S. Overman, Director
Date: March 5, 1997
------------------------------------------------
* * * * *
By: /S/Edward F. Sutkowski
------------------------------------------------
E. F. Sutkowski, Director
Date: March 5, 1997
------------------------------------------------
* * * * *
By: /S/Robert O. Viets
------------------------------------------------
R. O. Viets, Director
Date: March 5, 1997
------------------------------------------------
* * * * *
23
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
REFERENCE (PAGE)
DATA SUBMITTED HEREWITH:
Report of Independent Auditors 25
Schedules:
I. Summary of Investments - Other than Investments in
Related Parties at December 31, 1996. 26
II. Condensed Financial Information of Registrant
for the three years ended December 31, 1996. 27 - 29
III.Supplementary Insurance Information
for the three years ended December 31, 1996. 30 - 31
IV. Reinsurance for the three years ended December 31, 1996. 32
V. Valuation and Qualifying Accounts 33
VI. Supplemental Information Concerning Property-Casualty Insurance
Operations for the three years ended December 31, 1996. 30 - 31
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.
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
RLI Corp.:
Under date of January 21, 1997, we reported on the consolidated balance sheets
of RLI Corp. and subsidiaries as of December 31, 1996 and 1995, 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, 1996, as contained
in the 1996 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 1996. 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.
KPMG Peat Marwick LLP
Chicago, Illinois
January 21, 1997
25
RLI CORP. AND SUBSIDIARIES
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS
IN RELATED PARTIES
DECEMBER 31, 1996
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 $152,612,589 $154,134,493 $152,612,589
States, political subdivisions, and revenues 110,669,841 111,890,926 110,669,841
- --------------------------------------------------------------------------------------------------------------
Total held-to-maturity 263,282,430 266,025,419 263,282,430
- --------------------------------------------------------------------------------------------------------------
Available-for-sale
United States government and government
agencies and authorities 29,461,455 29,681,299 29,681,299
Foreign governments 443,198 435,094 435,094
Corporates 7,585,492 7,736,658 7,736,658
States, political subdivisions, and revenues 7,035,419 7,051,252 7,051,252
- --------------------------------------------------------------------------------------------------------------
Total available-for-sale 44,525,564 44,904,303 44,904,303
- --------------------------------------------------------------------------------------------------------------
Total fixed maturities 307,807,994 310,929,722 308,186,733
- --------------------------------------------------------------------------------------------------------------
Equity securities, available-for-sale:
Common stock:
Public utilities 36,340,454 51,075,525 51,075,525
Banks, trusts and insurance companies 9,872,511 22,279,317 22,279,317
Industrial, miscellaneous and all other 65,558,288 115,578,210 115,578,210
Preferred stock 1,950 2,308 2,308
- --------------------------------------------------------------------------------------------------------------
Total equity securities 111,773,203 188,935,360 188,935,360
- --------------------------------------------------------------------------------------------------------------
Short-term investments 40,823,967 40,823,967 40,823,967
- --------------------------------------------------------------------------------------------------------------
Total investments $460,405,164 $540,689,049 $537,946,060
- --------------------------------------------------------------------------------------------------------------
Note: See notes 1D and 2 of Notes to Consolidated Financial Statements, as
attached in Exhibit 13.
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or accrual
of discounts.
26
RLI CORP. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
1995 1996
- -------------------------------------------------------------------------------
ASSETS
Cash $ 236,902 $ 9,597,834
Investments in subsidiaries, at equity 199,299,589 228,205,464
Equity securities available-for-sale,
at fair value
(Cost--$6,667,195 in 1995 and
$6,800,912 in 1996) 8,138,847 9,676,285
Investment in Rabbi Trust 2,817,965 4,062,723
Deferred debt costs 928,865 805,701
Income taxes recoverable 537,838
Property and equipment 1,090,713 1,051,637
Other assets 238,615 898,113
- -------------------------------------------------------------------------------
Total assets $213,289,334 $254,297,757
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, current $ 1,163,723 $ 1,283,960
Notes payable, short-term 2,800,000
Deferred compensation--Rabbi Trust 2,817,965 4,062,723
Interest payable--Convertible debentures 1,265,000 1,265,000
Income taxes payables 815,999
Long-term debt--Convertible debentures 46,000,000 46,000,000
Other liabilities 634,930 830,714
- -------------------------------------------------------------------------------
Total liabilities 54,681,618 54,258,396
- -------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($1 par value, authorized
12,000,000 shares, in 1995 and 50,000,000
shares in 1996, issued 8,453,449
shares in 1995 and 1996) 8,453,449 8,453,449
Other shareholders' equity 153,544,590 197,464,904
Treasury shares at cost (602,567 shares
in 1995 and 631,719 shares in 1996) (3,390,323) (5,878,992)
- -------------------------------------------------------------------------------
Total shareholders' equity 158,607,716 200,039,361
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $213,289,334 $254,297,757
===============================================================================
See Notes to Consolidated Financial Statements, as attached in Exhibit 13.
27
RLI CORP. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)--(CONTINUED)
CONDENSED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31,
1994 1995 1996
- ----------------------------------------------------------------------------------------------------
Net investment income (expense) $ 146,815 $ ( 100,881) $ 164,181
Selling, general, and administrative expenses 2,845,289 2,093,019 3,559,113
Interest expense on debt 3,431,464 3,347,378 2,808,470
- ----------------------------------------------------------------------------------------------------
(6,129,938) (5,541,278) (6,203,402)
Income tax benefit (2,312,907) (2,147,995) (2,186,013)
- ----------------------------------------------------------------------------------------------------
Net loss before equity in net earnings
of subsidiaries (3,817,031) (3,393,283) (4,017,389)
Equity in net earnings (loss) of subsidiaries (958,840) 11,342,824 29,713,110
- ----------------------------------------------------------------------------------------------------
Net earnings (loss) $(4,775,871) $7,949,541 $25,695,721
====================================================================================================
See Notes to Consolidated Financial Statements, as attached in Exhibit 13.
28
RLI CORP. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1994 1995 1996
- ------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Losses before equity in net earnings
of subsidiaries $(3,817,031) $(3,393,283) $(4,017,389)
Adjustments to reconcile net losses to net
cash provided by operating activities:
Write-down of investments 9,597
Other items, net 445,597 (399,566) (55,262)
Change in:
Affiliate balances payable (10,058) 135,916 (207,668)
Federal income taxes (1,034,695) 1,658,597 437,303
Deferred debt costs 135,908 123,165 123,164
- ------------------------------------------------------------------------------------------
Net cash used in operating activities (4,270,682) (1,875,171) (3,719,852)
- ------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of:
Equity securities, available-for-sale (1,995,106) (857,883) (387,395)
Property and equipment (1,054,894) (9,600)
Sale of:
Equity securities, available-for-sale 433,263 1,004,380 236,986
Cash dividends received-subsidiaries 6,340,282 7,823,965 21,125,783
- ------------------------------------------------------------------------------------------
Net cash provided by investing activities 3,723,545 7,960,862 20,975,374
- ------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Payments on debt (745,000) (6,255,000) (2,800,000)
Proceeds from issuance of debt 2,800,000
Fractional share paid (4,010)
Treasury shares reissued 2,513,375 33,667 2,207,526
Treasury shares purchased (3,040,671)
Cash dividends paid (3,461,217) (3,849,521) (4,261,445)
- ------------------------------------------------------------------------------------------
Net cash used in financing activities (1,692,842) (7,274,864) (7,894,590)
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash (2,239,979) (1,189,173) 9,360,932
Cash at beginning of year 3,666,054 1,426,075 236,902
- ------------------------------------------------------------------------------------------
Cash at end of year $ 1,426,075 $ 236,902 $ 9,597,834
===============================================================================
Interest paid on outstanding debt for 1994, 1995, and 1996 amounted to
$3,345,714, $3,372,479, and $2,834,192, respectively.
See Notes to Consolidated Financial Statements, as attached in Exhibit 13.
29
RLI CORP. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE VI--SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
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, 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
==================================================================================================
Year ended
December 31, 1996
RLI Insurance Group $16,663,603 $240,784,071 $76,076,561 $130,656,095 $ 69,724,730
==================================================================================================
NOTE 1: Investment income is not allocated to the segments, therefore net
investment income (column G) has not been provided.
30
RLI CORP. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE VI--SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
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, 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
============================================================================================
Year ended
December 31, 1996
RLI Insurance Group $( 1,463,423) $29,556,390 $16,441,332 $132,357,640
============================================================================================
31
RLI CORP. AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
FOR THE YEARS 1994, 1995, AND 1996
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
- ----------------------------------------------------------------------------------------------------
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%
====================================================================================================
1996
- ----------------------------------------------------------------------------------------------------
RLI Insurance Group
premiums earned $271,551,708 $140,928,326 $ 32,713 $130,656,095 .02%
====================================================================================================
NOTES: Column B, "Gross Amount" includes only direct premiums earned.
32
RLI CORP. AND SUBSIDIARIES
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
Column A Column B Column C Column D Column E
Balance at Amounts Amounts Balance
beginning of charged to recovered Amounts at end
period expense (written-off) commuted of period
- --------------------------------------------------------------------------------------------------------
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
1996 Allowance for
insolvent reinsurers $16,336,146 $1,006,140 $ (444,488) -- $16,897,798
33
EXHIBIT INDEX
Exhibit No. Description of Document Reference (page)
- ----------- ----------------------- ----------------
2.1 Plan of Reorganization Incorporated by reference to the
and Agreement Company's Quarterly
of Merger 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 Attached Exhibit 3.1.
incorporation
3.2 By-Laws Attached Exhibit 3.2.
4.1 Indenture dated Incorporated by reference to the
July 28, 1993 between Company's Registration Statement on
the Company and Form S-3 filed on July 21, 1993.
Norwest Bank
Minnesota, National
Association as Trustee
10.1 Executive Achievement Incorporated by reference to the
Target Salary Company's Registration
Plan Statement on Form S-2 filed on
August 22, 1985, File No. 0-6612.
10.2 RLI Corp. Director Incorporated by reference to the
Deferred Company's Registration Statement on
Compensation Plan Form 10-Q for the Second Quarter ended
June 30, 1993.
10.3 The RLI Corp. Incorporated by reference to the
Directors' Irrevocable Company's Registration Statement on
Trust Agreement Form 10-Q for the Second Quarter ended
June 30, 1993.
10.4 Key Employee Excess Incorporated by reference to the
Benefit Plan Company's Annual Form 10-K/A
for the 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 Annual
between the Company Form 10-K/A for the year ended
and American December 31, 1992.
Re-Insurance Company
10.10 Reinsurance Agreements Incorporated by reference to the
between the Company Company's Annual Form 10-K/A
and Lloyds of London for the year ended December 31, 1992.
10.11 Reinsurance Agreements Incorporated by reference to the
between the Company and Company's Annual Form 10-K/A
NAC Reinsurance Corp. for the year ended December 31, 1992.
11.0 Statement re computation Attached page 36.
of per share earnings
13.1 Refer to the Annual Attached Exhibit 13.
Report to Shareholders
for the year ended
December 31, 1996,
pages 18-43 and 49.
34
Exhibit No. Description of Document Reference (page)
- ----------- ----------------------- ----------------
21.1 Subsidiaries of the Attached page 37.
Registrant
23.1 Consent of KPMG Peat Attached page 38.
Marwick LLP
23.2 Consent of Kirkland Incorporated by reference to the
& Ellis 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 Attached page 39.
reports furnished to
state insurance
regulatory authorities
35