RLI Corp. is a specialty insurance company that has consistently delivered underwriting profits for 28 consecutive years. The company's focus on niche markets and unique product offerings has allowed it to navigate the cyclical insurance industry with discipline and resilience.

Financials

In the latest fiscal year, RLI reported annual net income of $304.6 million on revenue of $1.50 billion. The company generated robust operating cash flow of $464.3 million and free cash flow of $458.3 million, showcasing its ability to convert earnings into cash. This strong financial performance has enabled RLI to increase its dividend for 49 consecutive years, a testament to its commitment to shareholder value creation.

For the second quarter of 2023, RLI reported net earnings of $82.0 million, or $1.78 per share, compared to $77.7 million, or $1.69 per share, in the same period of 2022. Operating earnings, which exclude the impact of realized and unrealized investment gains and losses, were $79.3 million, or $1.72 per share, up from $53.3 million, or $1.16 per share, in the prior-year quarter.

The company's underwriting performance remained strong, with a combined ratio of 81.5% in the second quarter, compared to 87.2% in the same period last year. Underwriting income increased 70% year-over-year to $70.0 million, driven by growth in earned premiums, lower attritional losses in the Property segment, and continued favorable development on prior-year loss reserves across all three business segments.

Business Overview

Casualty Segment

RLI's Casualty segment, which includes commercial excess, personal umbrella, general liability, and other specialty coverages, reported a combined ratio of 95.1% in the second quarter, a slight improvement from 96.3% in the prior-year period. The segment benefited from $12.8 million in favorable prior-year loss development, primarily in the general liability, commercial excess, and executive products lines.

Property Segment

The Property segment, which comprises commercial property, marine, and other property coverages, achieved a combined ratio of 60.3% in the second quarter, a significant improvement from 74.6% in the same period of 2022. The segment experienced $5.3 million in favorable prior-year loss development, largely related to the marine line, and a $1.0 million reduction in prior-year storm losses.

Surety Segment

RLI's Surety segment, which specializes in contract, commercial, and transactional surety bonds, reported a combined ratio of 81.8% in the second quarter, compared to 75.0% in the prior-year period. The segment generated $2.4 million in favorable prior-year loss development, down from $4.2 million in the second quarter of 2022.

Investments

Net investment income increased 18.0% to $34.0 million in the second quarter, driven by a larger asset base and higher reinvestment rates. The investment portfolio achieved a total return of 0.9% for the quarter and 2.7% for the first half of 2023. RLI's comprehensive earnings, which include the impact of unrealized gains and losses on the fixed-income portfolio, were $74.1 million, or $1.61 per share, in the second quarter, compared to $57.9 million, or $1.26 per share, in the prior-year period.

Liquidity

RLI's balance sheet remains strong, with total investments and cash of $3.9 billion as of June 30, 2023. The company's book value per share increased 14% from the end of 2022 to $34.64, reflecting the growth in shareholders' equity. RLI's statutory surplus, a key measure of financial strength, grew 12.4% from the end of 2022 to $1.7 billion as of June 30, 2023.

Risks and Challenges

In terms of geographic diversification, RLI's business is spread across the United States, with a significant presence in California, Florida, and other coastal regions that are exposed to natural catastrophe risks. The company's product mix is also well-diversified, with the Casualty, Property, and Surety segments each contributing approximately one-third of total premiums.

Outlook

Looking ahead, RLI's management remains cautious in areas where risks are more dynamic or difficult to quantify, such as legal system abuse in certain lines of business. The company continues to focus on underwriting discipline and prudent risk management to navigate the evolving insurance landscape. While the company did not provide specific financial guidance, its track record of consistent underwriting profitability and strong cash flow generation suggests that RLI is well-positioned to deliver long-term value for its shareholders.

Conclusion

Overall, RLI's performance in the second quarter and first half of 2023 demonstrates the strength of its underwriting-focused business model and diversified product portfolio. The company's ability to generate consistent underwriting profits, maintain a strong balance sheet, and return capital to shareholders through dividends makes it an attractive investment proposition in the specialty insurance space.