RLI Corp is a U.S.-based specialty insurance company that has carved out a niche for itself in the property and casualty insurance market. With over 75 years of experience, RLI has developed a reputation for its disciplined underwriting approach and diversified product portfolio, which have allowed the company to navigate various market cycles and deliver consistent profitability.
Company History and Evolution
Founded in 1965, RLI started as a specialty insurance company focused on providing surety bonds and other specialty insurance products. In its early years, the company established itself as a leader in the surety bond market, developing unique products tailored to the needs of small and medium-sized businesses. This focus on niche markets and specialized expertise became a hallmark of the company's strategy. Over the 1970s and 1980s, RLI broadened its portfolio by launching casualty and property insurance products, including commercial excess, general liability, and marine coverages. The company leveraged its deep underwriting knowledge and customer-centric approach to carve out profitable market positions in these new business lines.
RLI weathered several industry challenges during its history, including the insurance crisis of the 1980s and the rise of social inflation. The company's disciplined risk management and commitment to underwriting profitability allowed it to navigate these headwinds successfully, maintaining its reputation for consistent financial performance. By the 1990s and 2000s, RLI had established a diverse, nationwide specialty insurance business, with a strong presence in niche markets such as personal umbrella, transportation, and professional liability. The company continued to invest in its underwriting talent and claims expertise, which enabled it to deliver favorable loss experience relative to industry peers.
Key Success Factors
One of the key factors behind RLI's success is its focus on underwriting discipline. The company's management team takes a long-term view, prioritizing sustainable profitability over short-term growth. This approach has allowed RLI to maintain a combined ratio, a measure of underwriting profitability, below 100% for the past 28 consecutive years, a remarkable feat in the industry.
Financials and Liquidity
RLI's financial strength is evidenced by its robust balance sheet and ample liquidity. As of September 30, 2024, the company reported total assets of $5.79 billion and shareholders' equity of $1.75 billion. Its current ratio stood at 60.4, while its quick ratio was an impressive 237.4, indicating a strong ability to meet short-term obligations.
In terms of profitability, RLI has consistently delivered strong financial results. For the first nine months of 2024, the company reported net earnings of $304.92 million, compared to $190.00 million in the same period of the previous year. This improvement was driven by higher underwriting income, investment income, and unrealized gains on the company's equity portfolio.
For the most recent fiscal year (2023), RLI reported revenue of $1.52 billion, net income of $304.61 million, operating cash flow of $464.26 million, and free cash flow of $458.34 million. In the most recent quarter (Q3 2024), the company achieved revenue of $469.995 million, net income of $95.027 million, operating cash flow of $219.368 million, and free cash flow of $219.021 million. Revenue increased 22% year-over-year, driven by strong growth in the casualty and property segments. Net income more than tripled compared to Q3 2023, primarily due to higher underwriting income, investment income, and unrealized gains on equity securities.
RLI's liquidity position remains strong, with a debt-to-equity ratio of 0.11 as of September 30, 2024. The company held $60.63 million in cash and had access to a $100 million revolving credit facility with PNC Bank, of which $50 million was drawn. Additionally, RLI has a $50 million borrowing from the Federal Home Loan Bank of Chicago, providing further financial flexibility.
Product Portfolio and Performance
RLI's diversified product portfolio has also been a key driver of its success. The company operates through three main business segments: Casualty, Property, and Surety.
The Casualty segment, which accounted for 55.5% of gross premiums written in the first nine months of 2024, has seen robust growth, with a 14% increase in premiums. This segment consists primarily of commercial excess, personal umbrella, general liability, transportation, and management liability coverages, as well as package business and other specialty coverages like professional liability and workers' compensation for office-based professionals. The Casualty segment is subject to the risk of estimating losses and related loss reserves, as the ultimate settlement of a casualty claim may take several years to fully develop. It is also exposed to inflation risk and may be affected by evolving legislation and court decisions.
The Property segment, contributing 41.7% of gross premiums, reported a 9% increase. This segment is comprised mainly of commercial fire, hurricane, earthquake, difference in conditions, and marine coverages. It also offers homeowners coverages in Hawaii. The Property segment's results are subject to the variability introduced by perils such as earthquakes, fires, hurricanes, and other storms. RLI limits its net aggregate exposure to catastrophic events by managing the total policy limits written in a particular region, purchasing reinsurance, and maintaining policy terms and conditions.
The Surety segment, making up the remaining 2.8% of gross premiums, grew by 12% during the same period. This segment specializes in writing small to medium-sized contract surety coverages, including payment and performance bonds. It also offers a variety of commercial surety bonds and transactional bonds. While surety coverages typically maintain a relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of the insureds.
In the third quarter of 2024, RLI recorded $37 million in losses related to Hurricanes Helene and Beryl, which impacted the property segment. However, the company's diversification and disciplined approach helped it maintain a combined ratio of 89.6% for the quarter, a testament to its resilience. For the first nine months of 2024, RLI achieved an 83.3% combined ratio, driven by favorable loss reserve development and lower catastrophe losses in the Property segment.
The company's investment portfolio, which supports its insurance operations, generated $103.5 million in net investment income during the first nine months of 2024, an 18% increase from the same period in 2023. The portfolio maintains a high-quality, diversified mix of fixed income, equity, and other invested assets.
Future Outlook
Looking ahead, RLI's management remains optimistic about the company's prospects. The company has continued to invest in technology, talent, and customer relationships, positioning it to capitalize on emerging opportunities in its target markets. Furthermore, RLI's strong balance sheet and access to various sources of capital provide the company with the financial flexibility to weather potential challenges and pursue strategic growth initiatives.
In terms of recent events, RLI provided a range of loss estimates for Hurricane Milton, which made landfall in Florida on October 9, 2024. The company currently estimates that pre-tax losses from Hurricane Milton, net of any reinsurance benefits, will be between $45 million and $55 million. RLI stated that they would not expect to publish any narrowing or adjustment to this loss estimate range between now and their fourth quarter earnings release, unless their claim estimates change materially.
Conclusion
In conclusion, RLI Corp has established itself as a resilient specialty insurer, delivering consistent profitability and shareholder value through its disciplined underwriting approach and diversified product portfolio. The company's strong financial position, prudent risk management, and focus on long-term sustainability make it a compelling investment opportunity for those seeking exposure to the property and casualty insurance sector. With its track record of 28 consecutive years of underwriting profitability and an average combined ratio of 88.2% over that period, RLI continues to demonstrate its ability to outperform the industry and navigate challenging market conditions.