Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
--------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission File Number 0-6612
----------------------------------------------------------
RLI CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 37-0889946
- ---------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employers Identification No.)
incorporation or organization)
9025 North Lindbergh Drive, Peoria, Illinois 61615
- --------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (309) 692-1000
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock $1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
27, 1998 as reported on the New York Stock Exchange, was $354,629,102. 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 27, 1998 was 8,546,958.
DOCUMENTS INCORPORATED BY REFERENCES.
Portions of the Annual Report to Shareholders for the past year ended December
31, 1997, are incorporated by reference into Parts I and II of this document.
Portions of the Registrant's definitive Proxy Statement for the 1998 annual
meeting of security holders to be held May 7, 1998, are incorporated herein by
reference into Part III of this document.
Exhibit index is located on pages 33-34 of this document.
PART I
Item 1. BUSINESS
(a) General Development of Business
As used in this Form 10-K, the term "Company" refers to RLI Corp. and
its subsidiaries and affiliates, unless the context otherwise indicates.
RLI Corp., which was incorporated in Illinois in 1965, merged into and
became a Delaware corporation in 1984. In May of 1993, RLI Corp. changed its
state of incorporation back to Illinois through a merger. RLI Corp. is a
holding company, which, through its subsidiaries, underwrites selected property
and casualty insurance.
(b) Financial Information about Industry Segments
Selected information about industry segments is included herein as
Item 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.,
RLI Insurance Agency, Ltd., 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.
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. Since 1996, as expected,
competition has reappeared for this type of business and the Company has
reduced rates somewhat. The Company's casualty book has continued to incur
flat to moderate rate decreases.
2
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 four underwriting general agents in 1997. The majority
of its specialty property and casualty business is marketed through its
Specialty Markets and Surety divisions and eleven branch offices located in
Los Angeles, California; San Diego, California; San Francisco, California;
St. Paul, Minnesota; Overland Park, Kansas; Glastonbury, Connecticut;
Atlanta, Georgia; Alpharetta, Georgia; Chicago, Illinois; Dallas, Texas; and
Honolulu, Hawaii.
The following table provides for the year ended December 31, 1997 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, 1997, 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 $105,546,214 39.3%
Texas 31,148,921 11.6
Florida 21,068,919 7.8
New York 18,735,576 7.0
Ohio 6,746,665 2.5
Pennsylvania 6,058,952 2.3
New Jersey 5,965,523 2.2
Illinois 5,859,848 2.2
Michigan 5,858,720 2.2
All other 61,579,933 22.9
----------- ------
Total direct premiums $268,569,271 100.00%
------------ -------
------------ -------
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 Alpharetta branch offices are
responsible for underwriting this coverage. In 1997, 1996, and 1995, net
earned premiums totaled $48,799,000, $47,822,000, and $49,430,000 or 29%,
31%, and 32% respectively, of the Company's consolidated revenues.
GENERAL LIABILITY. The Company writes general liability coverages
through its St. Paul, Glastonbury, Chicago, Alpharetta and Dallas branch
offices. The Company's general liability business consists primarily of
coverage for third party liability of commercial insureds including
manufacturers, contractors, apartments and mercantile. Net earned premiums
totaled $26,332,000, $34,834,000, and $36,499,000, or 16%, 22%, and 23% of
the Company's consolidated revenues for the years 1997, 1996, and 1995,
respectively.
3
COMMERCIAL AND PERSONAL UMBRELLA LIABILITY. The Company's
commercial umbrella coverage is produced through its Overland Park, St. Paul,
Alpharetta, Glastonbury, and Dallas branch offices, and through an
underwriting general agency in San Francisco. The coverage is principally
written in excess of primary liability insurance provided by other carriers
and, to a small degree, in excess of primary liability written by the
Company. The personal umbrella coverage, which is produced through the
Specialty Markets Division, is written in excess of the homeowners and
automobile liability coverage provided by other carriers. Net earned
premiums totaled $22,566,000, $21,282,000, and $18,092,000 or 12%, 14%, and
12% of the Company's consolidated revenues for the years 1997, 1996, and
1995, respectively.
DIRECTORS' AND OFFICERS' LIABILITY/MISCELLANEOUS PROFESSIONAL
LIABILITY. The Company produces Directors' and Officers' Liability through
its 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 $4,430,000,
$5,000,000, and $6,025,000, or 3%, 3%, and 4% of the Company's consolidated
revenues for the years 1997, 1996, and 1995, respectively.
EMPLOYER'S EXCESS INDEMNITY. Since 1993, the Company has written
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. A return to
excessive competition for Texas workers' compensation business has reduced
the market for this product since 1996. Net earned premiums totaled
$5,130,000, $6,566,000, and $8,257,000, or 3%, 4%, and 5% of the Company's
consolidated revenues for 1997, 1996, and 1995, respectively.
SURETY. In 1993, the Company began writing surety business. This
product line is underwritten from the Home Office in Peoria and through the
Dallas, Texas branch office. 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 $$11,491,000, $4,407,000, and $2,956,000, or 8%, 3%,
and 2% of the Company's consolidated revenues for 1997, 1996, and 1995,
respectively.
HOMEOWNERS/RESIDENTIAL PROPERTY. In 1997, the Company assumed a
highly profitable book of homeowners and dwelling fire business for Hawaii
homeowners from the Hawaii Property Insurance Association. In the aftermath
of Hurricane Iniki in 1992, this business was available at reasonable rates
and terms. Net earned premiums totalled $13,229,000 or 8% of the Company's
consolidated revenues for the 1997 year.
TRANSPORTATION. In 1997, the Company opened a transportation
insurance facility in Atlanta to offer automobile liability and physical
damage insurance to local, intermediate and long haul truckers, public
transportation risks and equipment dealers. Incidental, related insurance
coverages are also offered, including general liability, commercial umbrella
and excess liability, and motor truck cargo. The facility is staffed by
highly experienced transportation underwriters who will produce business
through independent agents and brokers nationwide. The facility will begin
generating premium income in 1998.
OTHER. Smaller programs offered by the Company include: primary
employer's indemnity, excess medical, commercial multi-peril, in-home
business, and accident and health insurance. Net earned premiums from these
lines totaled $9,907,000, $10,744,000, and $12,209,000 or 5%, 7%, and 8% of
the Company's consolidated revenues for the years, 1997, 1996, and 1995,
respectively.
In June of 1995, a new facility was opened in Columbus, Ohio
specializing 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. This facility was closed October, 1997, and the coverage is
currently underwritten with the Atlanta branch office.
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. In 1996, and continuing
through 1997, some rate softening occurred in these property lines as
competition reappeared. As a result, the Company reduced rates somewhat.
The Company has, however, continued to maintain its underwriting and
marketing standards by not seeking market share at the expense of earnings.
New products and new programs are offered where the opportunity exists to
provide needed insurance coverage with exceptional service on a profitable
basis.
RATINGS
During 1992, the A.M. Best rating for RLI Insurance Company, the
principal subsidiary of the Company, was upgraded to "A" (Excellent). During
1993, Mt. Hawley Insurance Company's (an indirect subsidiary of the Company)
A.M. Best rating was upgraded from "A-" (Excellent) to "A" (Excellent).
During 1997, 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) with some companies not being 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 major debt rating agencies. Both Standard &
Poor's Ratings Group and Moody's Investor Service assigned investment grade
ratings to the issue. In July, 1997, the Company called for redemption the
entire $46 million issue. As of December 31, 1997, the Company had no public
debt outstanding.
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 $138,298,000, $140,928,000, and $131,772,000 in 1997,
1996, 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.
5
During the period 1995 through 1997, 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 1995 through 1997 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 1995 and 1996, the Company provided $613,296 and
$1,006,140 for uncollectible reinsurance balances. During 1997, no
additional provision was made. The Company believes that current reserve
levels for uncollectible reinsurance are sufficient to cover the related
exposure.
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, 1997, 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 $67,733,602. 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, 1997 and the amounts of
written premium ceded by the Company to such reinsurers during 1997.
Gross Reinsurer Ceded
--------------- -----
Exposure as of Percent Premiums Percent
-------------- ------- -------- -------
December 31, 1997 of Total Written of Total
----------------- -------- ------- --------
American Re-Insurance Co. $ 67,733,602 29.92% $ 21,862,933 16.30%
General Reins Corp. 16,717,318 7.39 8,055,842 6.00
Transatlantic Reinsurance 12,610,119 5.57 11,973,090 8.92
Employer's Re 8,039,583 3.55 7,330,366 5.46
NAC Reinsurance Corporation 5,825,704 2.57 4,853,765 3.62
Lloyd's of London 5,737,797 2.53 14,257,401 10.63
Everest Re 5,648,534 2.50 4,603,867 3.43
Old Lyme Ins. Co. of RI 5,546,935 2.45 5,457,835 4.07
TIG Insurance Co. 4,989,331 2.20 834,632 0.62
Universal Bonding Ins. 4,830,367 2.13 8,160,494 6.08
All other reinsurers 88,667,959 39.19 46,779,323 34.87
---------- ----- ---------- -----
Total ceded exposure $226,347,249 100.00% $134,169,548 100.00%
------------ ------- ------------ -------
------------ ------- ------------ -------
As of December 31, 1997, the Company held $11,626,930 in irrevocable
letters of credit, $7,282,657 under trust agreements and $1,412,968 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 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.
6
In 1997, the Company's underwriting was supported by up to
$200,000,000 in traditional reinsurance protection. In 1998, the Company has
enhanced this protection by adding an additional $20,000,000 in catastrophe
reinsurance protection at improved terms and conditions. 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 1997, the Company continued its 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 1996, the
industry experienced 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. As well, ongoing rate cuts are of concern to financial
analysts. For 1997, the industry's statutory combined ratio is estimated to
be 102.0. The Company believes that certain other factors affect its ability
to underwrite specialty lines successfully, including:
SPECIALIZED UNDERWRITING EXPERTISE. The Company employs
experienced professionals in its branch offices. Each office restricts its
production and underwriting of business to certain classes of insurance
reflecting the particular areas of expertise of its key underwriters. In
accepting risks, all independent and affiliated underwriters are required to
comply with risk parameters, retention limits and rates prescribed by the
Company's 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.
7
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 Markets 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. The Surety Division has authorized two
underwriting general agencies to underwrite and bind contract surety business
on behalf of RLI, primarily in the East and Southeast. One underwriting
general agency in San Francisco has been authorized to underwrite commercial
umbrella business in select Western states. Another underwriting agent in
New York has been authorized to underwrite and handle claims for low limit
deductible buy-backs on program business, primarily in the East.
These underwriting general agencies receive some compensation
through contingent profit commission. Otherwise, producers of business who
are not Company employees are generally compensated on the basis of direct
commissions with no provision for any contingent profit commission. 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.
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 1997, 1996, and 1995 were 7%, 6%, and 5%, respectively.
ENVIRONMENTAL EXPOSURES. The Company is subject to environmental
claims and exposures through its commercial umbrella, general liability, and
discontinued assumed reinsurance lines of business. Within these lines, the
Company's environmental exposures include environmental site cleanup,
asbestos removal, and mass tort liability. The majority of the exposure is
in the excess layers of the Company's commercial umbrella and assumed
reinsurance books of business.
8
The following table represents inception-to-date paid and unpaid
environmental exposure data (including incurred but not reported losses) for
the periods ended 1997, 1996, and 1995:
- --------------------------------------------------------------------------------
Inception-to-date December 31
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Loss and Loss Adjustment
Expense (LAE) payments
Gross $ 11,570 $ 8,267 $ 5,117
Ceded (7,646) (5,761) ($ 3,842)
- ---------------------------------------------------------------------------------
Net $ 3,924 $ 2,506 $ 1,275
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Unpaid losses and LAE at end of year
Gross $ 14,880 $17,596 $20,154
Ceded (8,842) (11,150) ($13,398)
- ---------------------------------------------------------------------------------
Net $ 6,038 $ 6,446 $ 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.
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.
9
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, 1997 are adequate to meet its future obligations.
The table which follows is a reconciliation of the Company's unpaid
losses and settlement expenses for the years 1997, 1996, and 1995.
Year Ended December 31,
-------------------------------
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Unpaid losses and settlement
expenses at beginning of year:
Gross $405,801 $418,986 $394,966
Ceded (165,017) (197,338) (199,737)
------- ------- -------
Net 240,784 221,648 195,229
------- ------- -------
Increase (decrease) in incurred
losses and settlement expenses:
Current accident year 61,771 69,724 62,619
Prior accident years (520) (1,463) 23,271
------- ------- -------
Total incurred 61,251 68,261 85,890
------- ------- -------
------- ------- -------
Loss and settlement expense payments
for claims incurred:
Current accident year (11,284) (11,026) (10,586)
Prior accident years (47,999) (37,505) (48,023)
------- ------- -------
Total paid (59,283) (48,531) (58,609)
------- ------- -------
------- ------- -------
Insolvent reinsurer charged
off (recovered) (627) 607 514
Loss reserves commuted 429 (1,201) (1,376)
------- ------- -------
Unpaid losses and settlement
expenses at end of year $242,554 $240,784 $221,648
------- ------- -------
------- ------- -------
Unpaid losses and settlement
expenses at end of year:
Gross 404,264 $405,801 $418,986
Ceded (161,710) (165,017) (197,338)
------- ------- -------
Net $242,554 $240,784 $221,648
------- ------- -------
------- ------- -------
10
Explanation of significant components of reserve development by
calendar year are as follows:
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.
1997 During 1997, the Company experienced approximately $520,000 of
favorable development on loss reserves. The development results
from loss reserve adjustments in various lines of business.
Reserve strengthening was necessary on the Property line of
business due to development on the Lender's Single Interest
program. As a result, an increase of $1,465,000 was made to IBNR
reserves. This increase, however, was offset by $1,985,000 of
favorable development on the Company's other casualty, in-home
business, and surety bonding programs.
The table on the following page presents the development under
generally accepted accounting principles of the Company's balance
sheet reserves for 1988 through 1997. The top line of the table
shows the reserves at the balance sheet date for each of the
indicated periods. This represents the estimated amount of losses
and settlement expenses arising in all prior years that are unpaid
at the balance sheet date, including losses that had been incurred
but not yet reported to the Company. The lower portion of the
table shows the re-estimated amount of the previously recorded
reserves based on experience as of the end of each succeeding year.
The estimate changes as more information becomes known about the
frequency and severity of claims for individual periods.
11
Year Ended December 31,
------------------------------------------------------------------------------------------------
(Dollars in thousands) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------- ------- -------- -------- -------- -------- -------- -------- -------- --------
Net Liability for unpaid
losses and settlement
expenses at end of year $89,197 $95,953 $103,302 $110,844 $130,452 $165,559 $195,229 $221,648 $240,784 $242,554
Paid (cumulative) as of:
One year later 17,312 14,302 19,297 23,561 24,725 36,026 48,023 37,505 47,999
Two years later 26,093 26,685 35,963 37,763 46,342 63,675 73,972 75,485
Three years later 37,137 40,341 44,088 49,462 64,364 84,614 100,936
Four years later 47,617 44,714 52,322 57,085 78,994 96,741
Five years later 48,937 51,153 56,413 65,318 85,746
Six years later 53,670 54,546 62,989 70,270
Seven years later 56,254 59,444 66,254
Eight years later 60,499 62,266
Nine years later 62,689
Liability re-estimated as of:
One year later 86,230 91,646 101,251 108,249 128,600 166,666 218,499 220,185 240,264
Two years later 85,120 89,112 98,505 105,747 132,850 164,218 214,352 218,142
Three years later 84,426 87,981 95,690 107,777 132,377 157,286 211,451
Four years later 84,931 87,403 97,041 106,326 127,426 152,460
Five years later 84,217 90,030 96,490 100,968 122,789
Six years later 87,585 88,982 93,159 97,101
Seven years later 86,593 85,381 89,692
Eight years later 83,306 83,344
Nine years later 81,964
Net cumulative redundancy
(deficiency) $7,233 $12,609 $13,610 $13,743 $7,663 $13,099 $(16,222) $3,506 $520
Gross liability $268,043 $310,767 $394,966 $418,986 $405,801 $404,264
Reinsurance recoverable (137,591) (145,208) (199,737) (197,338) (165,017) (161,710)
-------- -------- -------- -------- -------- --------
Net liability $130,452 $165,559 $195,229 $221,648 $240,784 $242,554
Gross re-estimated liability $249,557 $284,294 $414,669 $403,825 $409,839
Re-estimated recoverable (126,768) (131,834) (203,218) (185,683) (169,575)
-------- -------- -------- -------- --------
Net re-estimated liability $122,789 $152,460 $211,451 $218,142 $240,264
Gross cumulative redundancy
(deficiency) $ 18,486 $ 26,473 $(19,703) $15,161 $(4,038)
12
OPERATING RATIO
PREMIUMS TO SURPLUS RATIO
The following table shows, for the periods indicated, the Company's
insurance subsidiaries' statutory ratios of net premiums written to
policyholders' surplus. While there is no statutory requirement applicable to
the Company which establishes a permissible net premiums written to surplus
ratio, guidelines established by the National Association of Insurance
Commissioners provide that this ratio should generally be no greater
than 3 to 1.
Year Ended December 31,
-----------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
--------- --------- --------- -------- ---------
Statutory net premiums written $144,674 $130,908 $130,453 $131,164 $136,728
Policyholders' surplus $265,526 $207,787 $172,313 $136,125 $152,262
Ratio .5 to 1 .6 to 1 .8 to 1 1.0 to 1 .9 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 1997 1996 1995 1994 1993
---- ----- ---- ---- ----
Loss ratio 43.2 52.2 64.4 72.5 63.3
Expense ratio 43.6 35.2 43.1 44.4 33.9
---- ---- ----- ----- ----
Combined ratio 86.8 87.4 107.5 116.9 97.2
---- ---- ----- ----- ----
---- ---- ----- ----- ----
(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 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Loss ratio 43.0 52.3 63.6 73.4 65.8
Expense ratio 47.4 36.8 42.9 43.5 22.1 (4)
---- ---- ----- ----- -----
Combined ratio 90.4 89.1 106.5 (3) 116.9 (3) 87.9 (4)
---- ---- ----- ----- -----
---- ---- ----- ----- -----
Industry combined ratio 102.0 (1) 105.8 (2) 106.4 (2) 108.4 (2) 106.9 (2)
---- ---- ----- ----- -----
---- ---- ----- ----- -----
13
(1) Source: Insurance Information Institute. Estimated for the year
ended December 31, 1997.
(2) Source: A.M. Best Aggregate & Averages -- Property-Casualty (1997
Edition).
(3) 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.
(4) 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.
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 1997, 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 $25.1
million, to $139.8 million; and comprises 41.9% of the Company's total fixed
maturity portfolio, up 4.7% from year end 1996. The taxable U.S. Government,
Agency and Municipal portion of the fixed income portfolio declined by $3.3
million to $182.5 million, or 54.7% of the total versus 60.3% at year end
1996. Investment grade corporate securities totaled $4.9 million compared to
$3.7 million at year end 1996, while convertible debenture securities totaled
$6.5 million, or 1.9% of the fixed income portfolio.
Equity securities increased $62.6 million from $188.9 million at
the end of last year to $251.5 million at the end of 1997. During 1997, net
common equity investments totaling $6.9 million were purchased and pretax
unrealized appreciation of equity securities totaled $55.7 million. Equity
securities as a percentage of cash and invested assets increased to 41.6% at
the end of 1997 from 35.1% at year end 1996. Combined cash and short-term
investments totaling $18.7 million at year end 1997 represented 3.1% of cash
and invested assets versus 7.6% in 1996. 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.
14
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
- ---- ---------- ---------- ---------- ----------
1998 25,865,000 25,981,122 26,130,321 25,981,088
1999 34,985,000 35,197,887 36,030,860 35,364,470
2000 30,420,000 30,893,131 31,756,488 31,051,729
2001 20,370,000 20,946,461 21,440,505 20,970,047
2002 24,080,000 24,929,360 25,382,405 24,957,602
2003 41,270,000 41,465,570 41,584,515 41,426,089
2004 20,445,000 20,600,945 21,069,790 20,607,290
2005 30,290,000 30,489,946 31,462,432 30,453,708
2006 21,965,000 22,074,075 22,917,607 22,197,060
2007 15,800,000 15,968,813 16,272,714 15,933,831
2008 13,090,000 12,979,536 13,661,432 13,068,111
2009 23,125,000 23,158,055 23,907,396 23,158,055
2010 16,535,000 16,935,113 17,161,419 16,935,113
2011 4,000,000 3,972,741 4,033,570 4,009,119
2012 5,095,000 5,116,372 5,201,898 5,116,372
2013 2,000,000 1,734,360 1,762,629 1,772,899
2014 0 0 0 0
2015 500,000 520,376 566,250 566,250
2016 0 0 0 0
2017 250,000 131,416 131,250 131,250
------------ ------------ ------------ ------------
$330,085,000 $333,095,279 $340,473,481 $333,700,083
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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, 1997, the Company's equity securities valued at
$251.5 million, accounted for 41.6% of total cash and invested assets and
94.7% of the combined statutory surplus of its insurance subsidiaries. At
December 31, 1997, net pretax unrealized capital appreciation of equity
securities was $132.8 million.
15
The Company's investment results are summarized in the following table:
Year ended December 31,
----------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Average invested
assets (1) $570,971 $504,773 $442,717 $407,722 $341,361
Investment
income (2)(3) 24,558 23,681 22,029 20,133 16,857
Realized gains
(losses) (3) 2,982 1,018 457 (3,595) 254
Change in unreal-
ized appreciation/
depreciation (3)(4) 55,760 25,033 36,037 (5,749) 7,945
Annualized return
on average
invested assets 14.6% 9.9% 13.2% 2.7% 7.3%
(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 , 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, 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.
16
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. During 1997, the Company issued refund
checks to policyholders. As of December 31, 1997, the total unclaimed refund
amount was $1,526,283. Any amounts unclaimed as of November 1, 1998 will
escheat to the California Division of Unclaimed Property.
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. A new congressional bill, "The Homeowners
Insurance Availability Act of 1997" addresses issues of catastrophe insurance
for homeowners through federal assistance to state guarantee funds. The
Company is monitoring the bill's progress and has neither opposed nor
supported the bill at this time.
SUPERFUND REFORM (ENVIRONMENTAL LIABILITY)--The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), more
commonly known as Superfund, remains in effect, but no reform legislation was
passed in 1997. Insurance companies, other businesses, environmental groups
and municipalities are advocating a variety of reform proposals to revise the
cleanup and liability provisions of CERCLA. Any reform proposal could result
in additional taxation to fund cleanup efforts.
17
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 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.
CORPORATE COMPLIANCE
The Company has developed a Code of Conduct and Compliance Manual which
provides employees with guidance on complying with a variety of federal and
state laws.
AGENCY LICENSES AND TRADEMARKS
Replacement Lens Inc. or its designated employees, must be licensed to
act as resident or non-resident brokers or agents by regulatory authorities
in the states in which it operates.
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 392 associates. Of the 392 total
associates, 35 are part-time and 357 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.
18
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 15.0 acre campus is a 12,800 square foot building.
Nearly 9,800 square feet of this building are used as warehouse storage for
records and equipment. The remaining 3,000 square feet is used as office
space.
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 53 of the Annual Report to Shareholders
for the year ended December 31, 1997 attached in Exhibit 13.
Item 6. SELECTED FINANCIAL DATA
Refer to the Selected Financial Data on pages 20 through 21 of the Annual
Report to Shareholders for the year ended December 31, 1997 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 22 through 29 of the Annual Report to
Shareholders for the year ended December 31, 1997 attached in Exhibit 13.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the consolidated financial statements and supplementary data
included on pages 30 through 49 of the Annual Report to Shareholders for the
year ended December 31, 1997 attached in Exhibit 13. (See Index to Financial
Statements and Schedules attached on page 23.)
19
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 pages 33-34.
(b) No reports on Form 8-K were filed during the last quarter of 1997.
(c) Exhibits. See Exhibit Index on pages 33-34.
(d) Financial Statement Schedules. The schedules included on attached pages
24 through 32 as required by Regulation S-X are excluded from the
Company's Annual Report to Shareholders. See Index to Financial
Statements and Schedules on page 23. There is no other financial
information required by Regulation S-X which is excluded from the
Company's Annual Report to Shareholders.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RLI Corp.
(Registrant)
By: /s/Joseph E. Dondanville
-------------------------------------------------
J. E. Dondanville
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 11, 1998
-----------------------------------------------
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 11, 1998
-----------------------------------------------
* * * * *
By: /s/Joseph E. Dondanville
-------------------------------------------------
J. E. Dondanville, Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 11, 1998
-----------------------------------------------
* * * * *
By: /s/Gerald D. Stephens
-------------------------------------------------
G. D. Stephens, Director
Date: March 11, 1998
-----------------------------------------------
* * * * *
By: /s/Bernard J. Daenzer
-------------------------------------------------
B. J. Daenzer, Director
Date: March 11, 1998
-----------------------------------------------
* * * * *
By: /s/Richard J. Haayen
-------------------------------------------------
R. J. Haayen, Director
Date: March 11, 1998
-----------------------------------------------
* * * * *
By: /s/William R. Keane
-------------------------------------------------
W. R. Keane, Director
Date: March 11, 1998
-----------------------------------------------
* * * * *
21
By: /s/Gerald I. Lenrow
-------------------------------------------------
G. I. Lenrow, Director
Date: March 11, 1998
-----------------------------------------------
* * * * *
By: /s/Jonathan E. Michael
-------------------------------------------------
J.E. Michael, Director
Date: March 11, 1998
-----------------------------------------------
* * * * *
By: /s/Edwin S. Overman
-------------------------------------------------
E. S. Overman, Director
Date: March 11, 1998
-----------------------------------------------
* * * * *
By: /s/Edward F. Sutkowski
-------------------------------------------------
E. F. Sutkowski, Director
Date: March 11, 1998
-----------------------------------------------
* * * * *
By: /s/Robert O. Viets
-------------------------------------------------
R. O. Viets, Director
Date: March 11, 1998
-----------------------------------------------
* * * * *
22
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Reference (Page)
DATA SUBMITTED HEREWITH:
Report of Independent Auditors 24
Schedules:
I. Summary of Investments - Other than Investments in Related Parties
at December 31, 1997. 25
II. Condensed Financial Information of Registrant for the three years
ended December 31, 1997. 26 - 28
III. Supplementary Insurance Information for the three years ended
December 31, 1997. 29 - 30
IV. Reinsurance for the three years ended December 31, 1997. 31
V. Valuation and Qualifying Accounts 32
VI. Supplemental Information Concerning Property-Casualty Insurance
Operations for the three years ended December 31, 1997. 29 - 30
Schedules other than those listed are omitted for the reason that they are
not required, are not applicable or that equivalent information has been
included in the financial statements, and notes thereto, or elsewhere herein.
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
RLI Corp.:
Under date of January 21, 1998, we reported on the consolidated balance
sheets of RLI Corp. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of earnings and comprehensive earnings,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, as contained in the 1997 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
1997. 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, 1998
24
RLI CORP. AND SUBSIDIARIES
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS
IN RELATED PARTIES
DECEMBER 31, 1997
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 $153,767,160 $156,388,429 $153,767,160
States, political subdivisions, and revenues 136,267,149 140,419,278 136,267,149
- -----------------------------------------------------------------------------------------------------------
Total held-to-maturity 290,034,309 296,807,707 290,034,309
- -----------------------------------------------------------------------------------------------------------
Trading
U.S. governments 3,655,128 3,712,755 3,712,755
Foreign governments 440,589 448,026 448,026
Corporate 4,919,479 4,977,849 4,977,849
States, political subdivisions & revenues 404,082 406,942 406,942
- -----------------------------------------------------------------------------------------------------------
Total trading 9,419,278 9,545,572 9,545,572
- -----------------------------------------------------------------------------------------------------------
Available-for-sale
U.S. governments 20,248,316 20,464,950 20,464,950
Corporates 6,342,006 6,472,500 6,472,500
States, political subdivisions, and revenues 7,051,370 7,182,572 7,182,572
- -----------------------------------------------------------------------------------------------------------
Total available-for-sale 33,641,692 34,120,202 34,120,202
- -----------------------------------------------------------------------------------------------------------
Total fixed maturities 333,095,279 340,473,481 333,700,083
- -----------------------------------------------------------------------------------------------------------
Equity securities, available-for-sale:
Common stock:
Public utilities 38,504,391 66,506,467 66,506,467
Banks, trusts and insurance companies 9,844,003 31,739,750 31,739,750
Industrial, miscellaneous and all other 70,287,038 153,212,226 153,212,226
Preferred stock 1,958 1,400 1,400
- -----------------------------------------------------------------------------------------------------------
Total equity securities 118,637,390 251,459,843 251,459,843
- -----------------------------------------------------------------------------------------------------------
Short-term investments 18,696,896 18,696,896 18,696,896
- -----------------------------------------------------------------------------------------------------------
Total investments $470,429,565 $610,630,220 $603,856,822
- -----------------------------------------------------------------------------------------------------------
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.
25
RLI CORP. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
- -------------------------------------------------------------------------------------------
ASSETS
Cash $ 135,663 $ 9,597,834
Investments in subsidiaries, at equity 264,146,254 228,205,464
Equity securities available-for-sale, at fair value
(Cost--$6,677,285 in 1997 and $6,800,912 in 1996) 12,288,528 9,676,285
Investment in Rabbi Trust 6,432,355 4,062,723
Deferred debt costs 805,701
Property and equipment 1,045,298 1,051,637
Other assets 418,040 898,113
- -------------------------------------------------------------------------------------------
Total assets $284,466,138 $254,297,757
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, current $ 1,996,859 $ 1,283,960
Notes payable, short-term 7,500,000
Deferred compensation--Rabbi Trust 6,432,355 4,062,723
Interest payable--Convertible debentures 1,265,000
Income taxes payable--current 332,621 10,878
Income taxes payable--deferred 1,523,663 805,121
Long-term debt--Convertible debentures 46,000,000
Other liabilities 128,200 830,714
- -------------------------------------------------------------------------------------------
Total liabilities 17,913,698 54,258,396
- -------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($1 par value, authorized 50,000,000 shares,
issued 10,229,673 in 1997 and 8,453,449 shares in 1996) 10,229,673 8,453,449
Other shareholders' equity 301,872,049 197,464,904
Treasury shares at cost (1,595,419 shares in 1997
and 631,719 shares in 1996) (45,549,282) (5,878,992)
- -------------------------------------------------------------------------------------------
Total shareholders' equity 266,552,440 200,039,361
- -------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $284,466,138 $254,297,757
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements, as attached in Exhibit 13.
26
RLI CORP. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)--(CONTINUED)
CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
YEARS ENDED DECEMBER 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (expense) $ 454,906 $ 164,181 $ (100,881)
Selling, general, and administrative expenses 4,118,010 3,559,113 2,093,019
Interest expense on debt 1,547,542 2,808,470 3,347,378
- --------------------------------------------------------------------------------------------------------------------------------
(5,210,646) (6,203,402) (5,541,278)
Income tax benefit (1,675,135) (2,186,013) (2,147,995)
- --------------------------------------------------------------------------------------------------------------------------------
Net loss before equity
in net earnings of subsidiaries (3,535,511) (4,017,389) (3,393,283)
Equity in net earnings of subsidiaries 33,706,994 29,713,110 11,342,824
- --------------------------------------------------------------------------------------------------------------------------------
Net earnings $30,171,483 $25,695,721 $ 7,949,541
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Earnings, net of tax
Unrealized gains on securities:
Unrealized holding gains arising
during the period $1,859,712 $901,569 $1,245,523
Less: Reclassification adjustment for
(gains) losses included in
Net Earnings (81,383) 1,778,329 10,846 912,415 54,384 1,299,907
- --------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Earnings--parent only 1,778,329 912,415 1,299,907
Equity in Other Comprehensive
Earnings of Subsidiaries 34,465,638 15,361,757 22,124,323
- --------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Earnings 36,243,967 16,274,172 23,424,230
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive Earnings $66,415,450 $41,969,893 $31,373,771
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements, as attached in Exhibit 13.
27
RLI CORP. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Losses before equity in net earnings of subsidiaries $ (3,535,511) $(4,017,389) $(3,393,283)
Adjustments to reconcile net losses to net
cash provided by operating activities:
Other items, net (1,792,215) (55,262) (399,566)
Change in:
Affiliate balances payable 451,029 (207,668) 135,916
Interest Payable (1,265,000)
Federal income taxes 140,485 437,303 1,658,597
Deferred debt costs 805,701 123,164 123,165
- ----------------------------------------------------------------------------------------------------
Net cash used in operating activities (5,195,511) (3,719,852) (1,875,171)
- ----------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of:
Equity securities, available-for-sale (135,001) (387,395) (857,883)
Property and equipment (37,210) (9,600)
Unconsolidated investee ownership interest (3,694,118)
Sale of:
Equity securities, available-for-sale 383,838 236,986 1,004,380
Cash dividends received-subsidiaries 16,998,248 21,125,783 7,823,965
- ----------------------------------------------------------------------------------------------------
Net cash provided by investing activities 13,515,757 20,975,374 7,960,862
- ----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of debt 7,500,000 2,800,000
Payments on debt (2,800,000) (6,255,000)
Fractional share paid (1,211) (4,010)
Shares issued under stock option plan 161,356
Treasury shares reissued 2,207,526 33,667
Treasury shares purchased (20,738,547) (3,040,671)
Cash dividends paid (4,704,015) (4,261,445) (3,849,521)
- ----------------------------------------------------------------------------------------------------
Net cash used in financing activities (17,782,417) (7,894,590) (7,274,864)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (9,462,171) 9,360,932 (1,189,173)
Cash at beginning of year 9,597,834 236,902 1,426,075
- ----------------------------------------------------------------------------------------------------
Cash at end of year $ 135,663 $ 9,597,834 $ 236,902
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Interest paid on outstanding debt for 1997, 1996, and 1995 amounted to
$2,809,903, $2,834,192, and $3,372,479, respectively.
See Notes to Consolidated Financial Statements, as attached in Exhibit 13.
28
RLI CORP. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE VI--SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, 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, 1997
RLI Insurance Group $ 21,984,585 $242,554,249 $ 78,865,812 $141,884,445 $ 61,771,256
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Year ended
December 31, 1996
RLI Insurance Group $ 16,663,603 $240,784,071 $ 76,076,561 $130,656,095 $ 69,724,730
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
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: Investment income is not allocated to the segments, therefore net
investment income (column G) has not been provided.
29
RLI CORP. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE VI--SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996, 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, 1997
RLI Insurance Group $ (519,822) $43,140,381 $18,741,377 $144,673,696
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Year ended
December 31, 1996
RLI Insurance Group $ (1,463,423) $29,556,390 $16,441,332 $132,357,640
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Year ended
December 31, 1995
RLI Insurance Group $ 23,271,250 $43,042,045 $14,470,053 $130,452,895
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
30
RLI CORP. AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
FOR THE YEARS 1997, 1996, 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
- ----------------------------------------------------------------------------------------------------
1997
- ----------------------------------------------------------------------------------------------------
RLI Insurance Group
premiums earned $268,569,271 $138,197,583 $11,512,757 $141,884,445 8.1%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
1996
- ----------------------------------------------------------------------------------------------------
RLI Insurance Group
premiums earned $271,551,708 $140,928,326 $ 32,713 $130,656,095 .02%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
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.
31
RLI CORP. AND SUBSIDIARIES
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
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
- ---------------------------------------------------------------------------------------------------------------
1997 Allowance for
insolvent reinsurers $16,897,798 -- $ 159,396 -- $17,057,194
1996 Allowance for
insolvent reinsurers $16,336,146 $1,006,140 $(444,488) -- $16,897,798
1995 Allowance for
insolvent reinsurers $15,547,400 $ 613,296 $ 261,373 $(85,923) $16,336,146
32
EXHIBIT INDEX
Exhibit No. Description of Document Reference (page)
- ----------- ----------------------- ----------------
2.1 Plan of Reorganization and Agreement Incorporated by reference to the 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 incorporation Incorporated by reference to the Company's
Quarterly Form 10-Q for the Second Quarter ended June 30, 1997.
3.2 By-Laws Incorporated by reference to the Company's Quarterly Form
10-Q for the Second Quarter ended June 30, 1997.
4.1 Indenture dated July 28, 1993 between Incorporated by reference to the Company's Registration
the Company and Norwest Bank Statement on Form S-3 filed on July 21, 1993.
Minnesota, National Association as
Trustee
10.1 Market Value Potential Plan Incorporated by reference to the Company's Quarterly
Form 10-Q for the Second Quarter ended June 30, 1997.
10.2 RLI Corp. Director Deferred Incorporated by reference to the Company's Registration
Compensation Plan Statement on Form 10-Q for the Second Quarter ended
June 30, 1993.
10.3 The RLI Corp. Directors' Irrevocable Incorporated by reference to the Company's Registration
Trust Agreement Statement on Form 10-Q for the Second Quarter ended
June 30, 1993.
10.4 Key Employee Excess Benefit Plan Incorporated by reference to the Company's
Annual Form 10-K/A for the year ended December 31, 1992.
10.5 RLI Corp. Incentive Stock Incorporated by reference to Company's Registration Statement
Option Plan on Form S-8 filed on March 11, 1996, File No. 333-01637
10.6 Directors' Stock Option Plan Incorporated by reference to the Company's Quarterly
Form 10-Q for the Second Quarter ended June 30, 1997.
10.9 Reinsurance Agreements between the Incorporated by reference to the Company's Annual Form 10-K/A
Company and American Re-Insurance for the year ended December 31, 1992.
Company
10.10 Reinsurance Agreements between the Incorporated by reference to the Company's Annual Form 10-K/A
Company and Lloyds of London for the year ended December 31, 1992.
10.11 Reinsurance Agreements between the Incorporated by reference to the Company's Annual Form 10-K/A
Company and NAC Reinsurance Corp. for the year ended December 31, 1992.
11.0 Statement re computation of per Refer to the Notes to Consolidated Financial Statements--Note 1K
share earnings "Earnings per share", on page 36 of the Annual Report to Shareholders
attached in Exhibit 13.
33
Exhibit No. Description of Document Reference (page)
- ----------- ----------------------- ----------------
13.1 Refer to the Annual Report to Share- Attached Exhibit 13.
holders for the year ended
December 31, 1997, pages 20-49
and 53.
21.1 Subsidiaries of the Registrant Attached page 35.
23.1 Consent of KPMG Peat Marwick LLP Attached page 36.
23.2 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.
28.1 Information from reports furnished to Attached page 37.
state insurance regulatory authorities
34