10-K 1 a2041847z10-k.txt 10-K 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, 2000 ------------------------------------ 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. Employer 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 28, 2001 as reported on the New York Stock Exchange, was $412,084,932. 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, $1.00 par value, on February 28, 2001 was 9,811,546. DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Annual Report to Shareholders for the past year ended December 31, 2000, are incorporated by reference into Parts I and II of this document. Portions of the Registrant's definitive Proxy Statement for the 2001 annual meeting of security holders to be held May 3, 2001, are incorporated herein by reference into Part III of this document. Exhibit index is located on pages 33-34 of this document. 1 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 I. (c) Narrative Description of Business RLI INSURANCE GROUP RLI Insurance Group is principally composed of four insurance companies. RLI Insurance Company, the principal subsidiary, writes multiple lines insurance on an admitted basis in all 50 states, the District of Columbia and Puerto Rico. Mt. Hawley Insurance Company ("Mt. Hawley"), a subsidiary of RLI Insurance Company, writes surplus lines insurance in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. Underwriters Indemnity Company ("UIC"), a subsidiary of RLI Insurance Company, writes multiple lines insurance on an admitted basis in 33 states and the District of Colombia and surplus lines insurance in Ohio. Planet Indemnity Company ("PIC"), a subsidiary of Mt. Hawley, writes multiple lines insurance on an admitted basis in 23 states and the District of Columbia. PIC writes surplus lines insurance in an additional five states. Other companies in the RLI Insurance Group include: Replacement Lens Inc., RLI Insurance Agency, Ltd., RLI Insurance Ltd., Underwriters Indemnity General Agency, Inc., and Safe Fleet Insurance Services, Inc. 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 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 catastrophic losses, such as Hurricane Andrew and the Northridge Earthquake, property rates hardened in California, Florida and the wind belt, but remained soft in other areas of the country. In 1994 and 1995, rates hardened and premium growth was achieved in the commercial property book of business. Otherwise, rates for property and casualty lines have declined over time. To maintain profitability, underwriters have tightened selection criteria, broadened their focus to other market segments and given up business where rates dropped too low. Since the end of 1999, a trend has emerged of modest firming in the pricing of branch office business which may indicate an improvement in industry underwriting discipline. 2 The Company initially wrote specialty property and casualty insurance through independent underwriting agents. The Company opened its first branch office in 1984, and began to shift 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 Markets Division and the Surety Division. The Company produces business under agreements with underwriting general agents. Additional underwriting agents are accepted under the auspices of Company product vice presidents. The majority of the specialty property and casualty business is marketed through the Specialty Markets and Surety divisions and branch offices located in Los Angeles, California; Oakland, California; Glastonbury, Connecticut; Atlanta, Georgia; Alpharetta, Georgia; Honolulu, Hawaii; Chicago, Illinois; Overland Park, Kansas; Boston, Massachusetts; St. Paul, Minnesota; New York City, New York; Dallas, Texas; Houston, Texas; and Seattle, Washington. For the year ended December 31, 2000, the following table provides 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, 2000, 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 $113,338,998 29.50% Texas 35,486,888 9.24 Florida 33,266,800 8.66 New York 27,285,381 7.10 Hawaii 14,831,592 3.86 Illinois 11,430,336 2.98 Ohio 10,406,330 2.71 Georgia 9,117,922 2.37 Tennessee 8,780,038 2.29 New Jersey 8,433,981 2.20 All Other 111,760,401 29.09 ------------- ----- Total direct premiums $384,138,667 100.00% ============= =======
The Company presently underwrites selected property and casualty insurance primarily in the following lines: A. PROPERTY SEGMENT 1. 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 written in the United States and abroad. The Company writes coverage for a wide range of commercial and industrial classes such as office buildings, apartments, condominiums, certain industrial and mercantile structures, buildings under construction and movable equipment. The Company also writes boiler and machinery and ocean marine insurance under the same management as commercial property. The Alpharetta, Boston, Chicago, Dallas, Houston, Los Angeles and Oakland branch offices are responsible for underwriting this coverage. In 2000, 1999, and 1998 net earned premiums totaled $51,836,000, $43,918,000 and $42,281,000, or 20%, 19% and 25%, respectively, of the Company's consolidated revenues. 2. HOMEOWNERS/RESIDENTIAL PROPERTY. In 1997, the Company assumed a 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 totaled $8,712,000, $6,850,000 and $9,689,000, or 3%, 3% and 6% of the Company's consolidated revenues for 2000, 1999 and 1998, respectively. 3. OTHER. The Company acquired property business as a part of the acquisition of Underwriters Indemnity Holdings on January 29, 1999. All property coverages associated with this business are being non-renewed in 3 accordance with allowed policy provisions. In 1999, net earned premiums totaled $622,000 or less than 1% of the Company's consolidated revenue. In 2000, net earned premiums were negative ($485,000), as reinsurance adjustments resulted in a reclass between premium earned and ceded commissions. This change resulted in no net impact to the company's bottom line. B. SURETY SEGMENT 3. SURETY. The Company underwrites this product line from the Home Office in Peoria and branch facilities in Atlanta, Boston, Chicago, Cleveland, Dallas, Houston, Kansas City, Los Angeles, New York, Philadelphia and Seattle. The division has recently expanded its commercial surety segment by hiring a professional group of underwriters that will focus on writing mid-market commercial surety accounts. The Company also continues to focus on writing contract bonds for small size contractors, energy-related business for oil and gas operators and a wide range of commercial surety bonds for small businesses. Net earned premium totaled $34,739,000, $25,412,000 and $18,307,000, or 13%, 11% and 11% of the Company's consolidated revenues for 2000, 1999 and 1998, respectively. C. CASUALTY SEGMENT 4. GENERAL LIABILITY. The Company writes general liability coverages through its Los Angeles, 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 risks. Net earned premiums totaled $34,891,000, $31,149,000 and $23,726,000, or 13%, 14% and 14% of the Company's consolidated revenues for the years 2000, 1999 and 1998, respectively. 5. COMMERCIAL AND PERSONAL UMBRELLA LIABILITY. The Company's commercial umbrella coverage is produced through its Overland Park, St. Paul, Alpharetta, Glastonbury, Los Angeles and Dallas branch offices. Commercial Umbrella was also written through an underwriting general agency in San Francisco until the agreement was discontinued late in 2000. 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 $62,879,000, $58,956,000 and $29,086,000, or 24%, 26% and 17% of the Company's consolidated revenues for the years 2000, 1999 and 1998, respectively. 6. EXECUTIVE PRODUCTS. The Company produces financial products such as Directors' and Officers' Liability through underwriting facilities in Dallas, Los Angeles and New York City. The Company offers Miscellaneous Professional Liability for a variety of low to moderate classes of risks. D&O is a relatively small component of the overall P&C market, which has been subject to severe competition. Underwriters have relinquished market share rather than accept inadequate pricing. The package of coverages offered has been expanded to include a variety of coverages of interest to corporations and executives, such as Employment Practices Liability and Fiduciary Liability. This is designed to give the product broader appeal. Net earned premiums totaled $2,987,000, $2,647,000 and $3,054,000, or 1%, 1% and 2% of the Company's consolidated revenues for the years 2000, 1999 and 1998, respectively. 7. PROGRAM BUSINESS. The Company began writing Program Business in 1998 through a broker in New Jersey. During 2000, the Program division's infrastructure was improved by adding experienced staff to manage existing and new program opportunities. This division continues to develop new programs for a variety of affinity groups. Coverages offered include: Commercial Property, General Liability, Commericial Automobile, Inland Marine, and Crime. Often, these coverages are combined into a package or portfolio policy. The division establishes relationships with underwriting agencies that perform many of the underwriting and policy servicing functions under guidelines established by the Company's underwriting group. Net earned premiums totaled $4,580,000, $456,000 and $21,000 for 2000, 1999 and 1998, respectively. Earned premiums for 2000 represents 2% of the Company's consolidated revenue. 8. 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 4 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 produce business through independent agents and brokers nationwide. Net earned premiums totaled $14,168,000, $9,647,000 and $3,806,000, or 5%, 4% and 2% of the Company's consolidated revenues for 2000, 1999 and 1998, respectively. 9. OTHER. Smaller programs offered by the Company include: excess medical, deductible buy-back, in-home business, personal automobile (Hawaii only), and employer's excess indemnity. Net earned premiums from these lines totaled $17,296,000, $15,617,000 and $12,354,000, or 7%, 6% and 6% of the Company's consolidated revenues for the years 2000, 1999 and 1998, respectively. COMPETITION The Company's specialty property and casualty insurance subsidiaries are part of an extremely competitive industry which is cyclical and historically 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 2,500 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 is a leader in using the internet to conduct e-business for products that lend themselves to that approach. 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, Puerto Rico, the Virgin Islands and Guam. 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 continued to be soft with some rate increases experienced in the property lines in California, Florida and the wind belt from 1993 through 1995. From 1996 to 1999, competition reasserted itself and the Company reduced rates somewhat. Towards the end of 1999, a favorable trend emerged of price firming on commercial business, driven in part by the reinsurance market. This trend has continued for the Company's commercial business throughout 2000. The Company has 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 to "A" (Excellent). During 2000, A.M. Best gave a group rating to the combined entity of both RLI Insurance Company and Mt. Hawley Insurance Company based on the similarities of management structure and strategy for the two firms. The rating for 2000 for the Group was reaffirmed as "A", and both companies were assigned a financial size category of "IX". Underwriters Indemnity Company's (an indirect subsidiary of the Company) A.M. Best rating for 2000 remained "A-" (Excellent). Planet Indemnity Company's (an indirect subsidiary of the Company) A.M. Best rating for 2000 remained "A-" (Excellent). During 1997, the Company, for the first time, applied for and received a claims-paying rating from Standard & Poor's. As a result, a rating of "A" (Good) was received for the combined insurance operation. In 1999, the "A" rating was upgraded to "A+", as Standard & Poor's cited the Company's strong operating performance, capitalization and risk management. In 2000, Standard & Poor's reaffirmed the Company's "A+" rating. A.M. Best ratings for the industry range from "A++" (Superior) to "F" (In Liquidation) with some companies not being rated. Standard & Poor's ratings for the industry range from "AAA" (Superior) to "CC" (Default Expected). Publications of both A.M. Best and Standard & Poor's indicate that "A" and "A+" ratings are assigned to those companies that, in their opinion, have achieved excellent overall performance when compared to the standards established by these firms 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, both firms review 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 and loss reserves, the adequacy of its surplus, its capital structure 5 and the experience and objectives of its management. These ratings are based on factors relevant to policyholders, agents, insurance brokers and intermediaries and are not directed to the protection of investors. As of December 31, 2000, the Company had no public debt outstanding; therefore, no debt rating existed. 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 $161,488,000, $129,886,000 and $135,269,000 in 2000, 1999 and 1998, 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. The Company attempts to purchase reinsurance from a 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, 2000, the Company had reinsurance recoverables on paid and unpaid losses and settlement expenses of $69,183,000 with American Re-Insurance Co. and $33,345,000 with General Cologne Re (both companies rated "A++" (Superior) by A.M. Best Company). 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 before reinsurance payables from such reinsurers as of December 31, 2000. Also shown are the amounts of written premium ceded by the Company to such reinsurers during 2000.
Gross Reinsurer Ceded Exposure as of Percent Premiums Percent December 31, 2000 of Total Written of Total ----------------- -------- ----------- -------- American Re-Insurance Co. $ 69,183,000 21.51% 26,648,000 15.05% General Cologne Re 33,345,000 10.37 20,763,000 11.73 Transatlantic Reinsurance 27,232,000 8.47 9,791,000 5.53 Employer's Reinsurance Corp. 19,743,000 6.14 11,703,000 6.61 St. Paul Fire & Marine UK 15,269,000 4.75 1,248,000 0.70 Lloyd's Underwriters 13,789,000 4.29 18,194,000 10.28 St. Paul Fire & Marine 13,045,000 4.06 10,297,000 5.82 Houston Casualty Co 8,433,000 2.62 (5,000) 0.00 Everest Reinsurance 7,125,000 2.22 5,610,000 3.17 Liberty Mutual Insurance Co. 6,414,000 1.99 5,198,000 2.94 All other reinsurers 108,045,000 33.58 67,566,000 38.17 ----------- ----- ---------- ----- Total ceded exposure $321,623,000 100.00% 177,013,000 100.00% ============ ======= =========== =======
As of December 31, 2000, the Company held $9,275,121 in irrevocable letters of credit, $7,948,534 under trust agreements and $1,829,395 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. 6 In 2000, the Company's underwriting was supported by up to $250,000,000 in traditional catastrophe reinsurance protection. The Company continuously monitors and quantifies its exposure to earthquake risk, the most significant catastrophe exposure to the Company, by means of catastrophe exposure models developed by independent experts in that field. For the application of the catastrophe exposure models, exposure and coverage detail is recorded at each risk location. The model results are used both in the underwriting analysis of individual risks, and at a corporate level for the aggregate book of catastrophe exposed business. From both perspectives, the Company considers the potential loss produced by events with a Richter magnitude (a measure of the energy released by an earthquake event) equivalent to the earthquake on those faults which represent the greatest loss potential to the Company, which are expected to recur at average intervals of 100 years, or 6.5 magnitude, whichever is greater. The probability that an earthquake event would exceed the Company's reinsurance cover (including facultative, excess of loss, surplus, and cat treaty) is 3.07%. In addition, the Company examines the portfolio exposure considering all possible earthquake events of all magnitudes and return periods, on all faults represented in the model. The probability that an earthquake event would exceed our reinsurance cover and 100% of our surplus is 0.42%. The total exposure of the Company, as measured by the catastrophe model output, is managed on a net of reinsurance basis to conform to the operating risk constraint adopted by the Company's Board of Directors. In 2000, the Company continued its innovative catastrophe reinsurance and loss financing program with Zurich Reinsurance NA (Zurich 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 Zurich 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 began as a multi-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 Zurich Re, then Zurich Re, in turn, has the option to reinsure certain business written by the Company on a prospective basis. This program, which began in 1996, was renewed in November of 2000 for an additional three-year period. 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 1970s, substantial underwriting losses in the early 1980s 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. Since 1993, the industry experienced improvement in underwriting losses, particularly in years with fewer catastrophe 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. For 2000, the industry's statutory combined ratio is estimated to be 109.7, which continues the deteriorating trend of recent years. 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 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 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 Surety, Commercial Umbrella and Commercial Automobile. This business is produced through wholesale and retail brokers who are not affiliated with the Company. 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. Homeowners Dwelling Fire and Personal Auto are produced through independent agents in Hawaii. 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 an underwriting general agency to underwrite contract surety business on behalf of RLI, primarily in Eastern states. An underwriting agency in San Francisco was authorized to underwrite commercial umbrella business in select Western states until late in 2000. An underwriting agency in New York is authorized to underwrite and handle claims for low limit deductible buy-backs on program business, primarily in the East. Other underwriting agencies have been designated to underwrite programs involving various selected commercial insurance products. These underwriting general agencies may 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. E-COMMERCE. The Company is actively employing e-commerce to produce and efficiently process and service business for all of these segments, including small commercial umbrella risks, liability insurance for artisan contractors, property insurance for religious organizations, surety bonding and selected professional liability and fiduciary liability coverages. RETENTION LIMITS. The Company limits its net retention of single and aggregate risks through the purchase of reinsurance (see "Business -- RLI Insurance Group 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 the handling and resolution of all claims and directs all outside legal and adjustment specialists on an individual claim and/or audit basis. 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 2000, 1999 and 1998 were 4%, 4% and 6%, respectively. ENVIRONMENTAL EXPOSURES. The Company is subject to environmental claims and exposures through its commercial umbrella, general liability and discontinued assumed reinsurance lines of business. Within these lines the Company's environmental exposures include environmental site cleanup, asbestos removal and mass tort liability. The majority of the exposure is in the excess layers of the Company's commercial umbrella and assumed reinsurance books of business. 8 The following table represents inception-to-date paid and unpaid environmental claims data (including incurred but not reported losses) for the periods ended 2000, 1999 and 1998:
---------------------------------------------------------------------------------------- Inception-to-date December 31 (in thousands) 2000 1999 1998 ------------------------ -------- -------- -------- Loss and Loss Adjustment Expense (LAE) payments Gross $ 23,720 $ 22,565 $ 15,269 Ceded (14,070) (13,671) (9,354) ---------------------------------------------------------------------------------------- Net $ 9,650 $ 8,894 $ 5,915 ======================================================================================== Unpaid losses and LAE at end of year Gross $ 17,110 $ 16,125 $ 18,226 Ceded (9,220) (8,566) (9,391) ---------------------------------------------------------------------------------------- Net $ 7,890 $ 7,559 $ 8,835 ========================================================================================
Although the Company's environmental exposure is limited as a result of entering liability lines after the industry had already recognized it as a problem, management cannot determine the Company's ultimate liability with 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 within 90 days of the receipt of the claim. The estimate reflects the informed judgment of professional claims personnel, based on the Company's reserving practices and the experience and knowledge of such personnel regarding the nature and value of the specific type of claim. Estimates for losses incurred but not yet reported are determined on the basis of statistical information, including the Company's past experience. The Company does not use discounting (recognition of the time value of money) in reporting its estimated reserves for losses and settlement expenses. The reserves are closely monitored and reviewed by management, with changes reflected as a component of earnings in the current accounting period. For lines of business without sufficiently large numbers of policies or that have not accumulated sufficient development statistics, industry average development patterns are used. To the extent that the industry average development experience improves or deteriorates, the Company adjusts prior accident years' reserves for the change in development patterns. Additionally, there may be future adjustments to reserves should the Company's actual experience prove to be better or worse than industry averages. As part of the reserving process historical data is reviewed and consideration is given to the anticipated impact of various factors, such as legal developments and economic conditions, including the effects of inflation. The reserving process provides implicit recognition of the impact of inflation and other factors affecting claims payments by taking into account changes in historic payment patterns and perceived probable trends. Changes in reserves from the prior years' estimates are calculated based on experience as of the end of each succeeding year (loss and settlement expense development). The estimate is increased or decreased as more information becomes known about the 9 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 settlement 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, 2000 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 2000, 1999 and 1998.
Year Ended December 31, ------------------------------------------------- (Dollars in thousands) 2000 1999 1998 Unpaid losses and settlement expenses at beginning of year: Gross $520,494 $415,523 $404,263 Ceded (245,580) (168,261) (155,711) --------- -------- -------- Net 274,914 247,262 248,552 ------- ------- ------- Unpaid losses and settlement expenses: UIH, Inc. - Acquisition Date: Gross 74,979 Ceded (67,642) ------- Net 7,337 ----- Increase (decrease) in incurred losses and settlements expenses: Current accident year 126,270 101,053 68,131 Prior accident years (1,684) (4,596) (3,403) ------- ------ ------- Total incurred 124,586 96,457 64,728 ------- ------ ------ Loss and settlement expense payments for claims incurred: Current accident year (34,373) (21,675) (14,762) Prior accident years (65,216) (53,892) (54,927) -------- ------- ------- Total paid (99,589) (75,567) (69,689) -------- ------- ------- Insolvent reinsurer charged off (recovered) 143 (1,000) 7,911 Loss reserves commuted 0 425 (4,240) - --- ------ Unpaid losses and settlement expenses at end of year: $300,054 $274,914 $247,262 ======== ======== ======== Unpaid losses and settlement expenses at end of year: Gross $539,750 $520,494 $415,523 Ceded (239,696) (245,580) (168,261) --------- -------- -------- Net $300,054 $274,914 $247,262 ======== ======== ========
10 Explanation of significant components of reserve development by calendar year are as follows: 1998 During 1998, the Company experienced $3,403,000 of favorable development on loss reserves. This development was the net result of several reserve adjustments among various programs. Reserve strengthening of $2,600,000 to the surety line of business in the third quarter was offset by favorable development in, primarily, the personal umbrella product. Favorable development of approximately $3,000,000 on a deductible buy-back program resulted in a corresponding increase in contingent commissions and subsequently no impact on earnings. 1999 During 1999, the Company experienced $4,596,000 of favorable development on loss reserves. This development resulted from approximately $2,917,000 of favorable development in the property lines of business and approximately $1,679,000 of favorable development in the casualty lines of business. The favorable property development is a continuing result of the Northridge Earthquake claims from the 1994 accident year settling for less than the open reserves. Favorable development of $1.1 million on casualty claims resulted from claim settlements and reevaluations of case reserves during the accounting period which were, in the aggregate, less than the IBNR and case reserves established at the beginning of the period. The remaining $579,000 of casualty favorable development resulted from balances due from insolvent reinsurers that had previously been written off. 2000 During 2000, the Company experienced $1,684,000 of favorable development on loss reserves. This development was primarily the net result of reserve adjustments to the Company's casualty segment. Indicated favorable loss experience on prior accident years resulted in a release of reserve redundancies. The table on the following page presents the development under generally accepted accounting principles of the Company's balance sheet reserves from 1990 through 2000. 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) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Net Liability for unpaid losses and Settlement expenses at end of year $119,411 $140,248 $175,491 $204,771 $232,308 $247,806 $248,552 $247,262 $274,914 $300,054 Paid (cumulative) as of: One year later 22,332 24,589 36,416 46,905 37,505 47,999 54,927 53,892 65,216 Two years later 37,763 46,342 63,675 73,972 75,485 85,342 98,188 88,567 Three years later 49,462 64,364 84,614 100,936 103,482 112,083 120,994 Four years later 57,085 78,994 96,741 121,834 121,312 129,846 Five years later 65,318 85,746 106,631 135,524 132,045 Six years later 70,270 92,689 114,777 143,377 Seven years later 75,668 97,164 120,760 Eight years later 80,700 101,254 Nine years later 82,637 Liability re-estimated as of: One year later 108,249 128,600 166,666 218,499 220,185 240,264 245,150 243,270 273,230 Two years later 105,747 132,850 164,218 214,352 228,636 242,865 248,762 233,041 Three years later 107,777 132,376 157,286 212,964 222,761 233,084 232,774 Four years later 106,326 127,426 168,782 217,790 210,876 219,888 Five years later 100,968 140,536 163,127 207,355 202,596 Six years later 117,529 134,950 156,210 199,632 Seven years later 107,103 127,738 150,381 Eight years later 100,518 123,395 Nine years later 99,920 Net cumulative redundancy (deficiency) $ 19,491 $ 16,853 $ 25,110 $ 5,139 $ 29,712 $ 27,918 $ 15,778 $ 14,221 $ 1,684 Gross liability $268,043 $310,767 $394,966 $418,986 $405,801 $404,263 $415,523 $520,494 $539,750 Reinsurance recoverable (127,795)(135,276) (190,195) (186,678) (157,995) (155,711)(168,261) (245,580)(239,696) -------- -------- -------- -------- -------- -------- -------- --------- --------- Net liability $140,248 $175,491 $204,771 $232,308 $247,806 $248,552 $247,262 $274,914 $300,054 Gross re-estimated liability $304,127 $425,194 $405,454 $397,161 $444,431 $417,008 $526,264 Re-estimated recoverable (153,746) (225,562) (202,858) (177,273) (211,657)(183,967) (253,034) --------- -------- ------- ------- ------- ------- ------- Net re-estimated liability $150,381 $199,632 $202,596 $219,888 $232,774 $233,041 $273,230 Gross cumulative redundancy (deficiency) $ 6,640 $(30,228) $ 13,532 $ 8,640 $(40,168)$ (1,485) $ (5,770)
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) 2000 1999 1998 1997 1996 ---- ---- ---- ---- --- Statutory net premiums written $260,853 $227,624 $145,701 $144,674 $130,908 Policyholders' surplus $309,945 $286,247 $314,484 $265,526 $207,787 Ratio .8 to 1 .8 to 1 .5 to 1 .5 to 1 .6 to 1
GAAP AND STATUTORY COMBINED RATIOS The underwriting experience of the Company is best indicated by its GAAP combined ratio, which is the sum of (a) the ratio of incurred losses and settlement expenses to net premiums earned (loss ratio) and (b) the ratio of policy acquisition costs and other operating expenses to net premiums earned (expense ratio).
Year Ended December 31, ------------------------------------------------------------------------------ GAAP 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- Loss ratio 53.8 49.4 45.4 43.2 52.2 Expense ratio 41.0 41.8 42.8 43.6 35.2 ---- ---- ---- ---- ---- Combined ratio 94.8 91.2 88.2 86.8 87.4 ==== ==== ==== ==== ====
13 The Company also calculates the statutory combined ratio, which is not indicative of GAAP underwriting profits due to accounting for 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 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Loss ratio 53.8 47.6 (3) 48.0 43.0 52.3 Expense ratio 42.0 42.5 (3) 40.4 47.4 36.8 ---- ---- ---- ---- ---- Combined ratio 95.8 90.1 (3) 88.4 90.4 89.1 ==== ==== ==== ==== ==== Industry combined ratio 109.7 (1) 108.1 (2) 106.0 (2) 101.9 (2) 106.0 (2) ----- ----- ----- ----- -----
(1) Source: Insurance Information Institute. Estimated for the year ended December 31, 2000. (2) Source: A.M. Best Aggregate & Averages -- Property-Casualty (2000 Edition). (3) The ratios presented include the results of UIC and PIC only from the date of acquisition, January 29, 1999. 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. The investment portfolio serves primarily as the funding source for loss reserves and secondly as a source of income and appreciation. For these reasons, the Company's primary investment criteria are quality and liquidity, followed by yield and potential for appreciation. Investments of the highest quality and marketability are critical for preserving the Company's claims paying ability. Virtually all of the Company's fixed income investments are U.S. Government or AA-rated or better taxable and tax-exempt securities. Common stock investments are limited to securities listed on the national exchanges and by the Securities Valuation Office of the National Association of Insurance Commissioners. During 2000, the majority of operating and portfolio cash flows were allocated to the purchase of intermediate-term U.S. Government and Agency securities and to a lesser extent to longer-term municipals. The Company's mix of tax-exempt and taxable instruments within the portfolio is decided at the time of purchase on the basis of available after-tax returns and overall taxability of all invested assets. Almost all securities reviewed for purchase are either high grade municipal or U.S. Government or Agency 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). As of December 31, 2000, 98% of the fixed income portfolio was rated AA or better. Interest rate risk is limited by restricting and managing acceptable call provisions among new security purchases. The municipal bond component of the fixed maturity portfolio increased $8.6 million, to $196.7 million; and comprised 49.0% of the company's total fixed maturity portfolio, down 6.0% from year-end 1999. The taxable U.S. Government and Agency portion of the fixed income portfolio increased by $50.1 million to $201.1 million, or 50.0% of the total versus 44.1% at year-end 1999. Investment grade corporate securities totaled $4.0 million compared to $3.4 million at year-end 1999. 14 The Company follows a program of matching assets to anticipated liabilities to ensure its ability to hold securities until maturity. These anticipated liabilities are then factored against ultimate payout patterns and the resulting payout streams are funded with the purchase of fixed-income securities of like maturity. Management believes that both liquidity and interest rate risk can best be minimized by such asset/liability matching. Aggregate maturities for the fixed maturity securities are as follows:
MATURITY PAR AMORTIZED FAIR CARRYING YEAR VALUE COST VALUE VALUE ---- ----- ---- ----- ----- 2001 $21,205,000 21,359,109 21,428,246 21,357,907 2002 24,905,000 25,414,736 25,583,810 25,411,306 2003 50,295,000 50,202,277 50,724,641 50,529,103 2004 43,530,000 43,133,484 43,997,115 43,514,857 2005 38,705,000 38,859,314 40,269,271 39,428,227 2006 29,225,000 29,165,247 30,118,837 29,177,310 2007 34,975,000 34,716,549 35,755,187 35,159,267 2008 35,355,000 34,901,081 35,810,077 35,301,145 2009 40,500,000 39,888,323 41,642,831 40,429,875 2010 29,005,000 29,136,997 30,134,457 29,200,915 2011 17,445,000 17,275,324 17,852,226 17,369,297 2012 14,085,000 14,045,348 14,399,499 14,134,543 2013 13,023,620 12,873,222 13,204,303 12,892,335 2014 3,728,858 3,686,734 3,799,178 3,685,496 2015 3,366,151 3,381,829 3,473,486 3,384,137 2016 0 0 0 0 2017 35,000 36,129 35,995 35,995 2018 0 0 0 0 2019 0 0 0 0 2020 0 0 0 0 2021 0 0 0 0 2022 0 0 0 0 2023 0 0 0 0 2024 0 0 0 0 2025 50,000 51,566 50,447 50,447 2026 0 0 0 0 2027 40,000 42,562 41,699 41,699 2028 209,446 212,496 210,427 210,427 2029 329,313 321,766 328,228 328,228 2030 174,558 173,827 178,976 178,976 ------- ------- ------- ------- $400,186,946 $398,877,920 $409,038,936 $401,821,492 ------------ ------------ ------------ ------------
At December 31, 2000, the Company's equity securities were valued at $306.2 million, an increase of $21.6 million from the $284.6 million held at the end of 1999. During 2000, pretax unrealized appreciation of equity securities totaled $17.1 million for the year. Equity securities represented 40.5% of cash and invested assets at the end of 2000, a decrease from the 41.2% at year-end 1999. As of the year-end, total equity investments held at the operating companies represented 92.3% of the combined statutory surplus of the insurance subsidiaries. Combined cash and short-term investments totaling $48.1 million at year-end 2000 represented 6.4% of cash and invested assets versus 9.3% last year. The Company's short-term investments consist of U.S. Government and Agency backed money market funds and the highest rated commercial paper. Under generally accepted accounting principles, equity and fixed income securities are carried at fair market value. However, 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. The Company has chosen to carry a large portion of its 15 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 their originally scheduled maturity dates. Consequently, fluctuations in the market value of such bonds are not reflected in the financial statements and do not affect shareholders' equity. The Company's investment results are summarized in the following table:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------ Average Invested Assets (1) $723,677 684,269 $640,576 $570,901 $504,773 Investment Income (2)(3) $29,046 $26,015 23,937 24,558 23,681 Realized Gains/(Losses) (3) $2,847 $4,467 1,853 2,982 1,017 Change in Unrealized Appreciation/(Depreciation) (3)(4) $20,537 ($16,263) 36,183 55,760 25,033 Annualized Return on Average 7.2% 2.1% 9.7% 14.6% 9.9% Invested Assets
(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 income and equity securities. REGULATION STATE REGULATION As an insurance holding company, RLI Corp., as well as its insurance subsidiaries, are subject to regulation by the states in which the insurance subsidiaries are domiciled or transact business. Holding company registration in each insurer's state of domicile requires reporting to the state regulatory authority the financial, operational and management data of the insurers within the holding company 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 regulators is required prior to the consummation of certain transactions affecting insurance subsidiaries of the holding company system. Other regulations 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. Regulations designed to ensure financial solvency of insurers and to require fair and adequate treatment and service for policyholders are enforced by filing, reporting and examination requirements. Market oversight is conducted by monitoring trade practices, approving policy forms, licensing of agents and brokers, and requiring fair and equitable premiums and commission rates. Financial solvency is monitored by minimum reserve and capital requirements, periodic reporting procedures (annually, quarterly, or more frequently if necessary), and periodic examinations. The quarterly and annual financial reports to the states utilize accounting principles which are different from the generally accepted accounting principles that show the business as a going concern. The statutory accounting principles used by regulators, in keeping with the intent to assure policyholder protection, are generally based on a liquidation concept. The National Association of Insurance Commissioners (NAIC) has recently developed a codified version of these statutory accounting principles. These standards became effective January 1, 2001 and should foster more consistency among the states for accounting guidelines and reporting. State 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 to operate in the state through a corporation. In a few states, licenses are issued only to individual residents. 16 COMMERCIAL LINES DEREGULATION -- The NAIC and several state legislatures have taken up the issue of commercial lines deregulation in an attempt to streamline specific areas of insurance regulation. A growing contingent in the regulatory community has acknowledged that some regulatory procedures and practices may be cumbersome and inappropriate for commercial buyers of insurance. Specifically, the large, sophisticated, multi-state or multinational businesses that employ their own teams of risk managers to evaluate, reduce and finance their loss exposures are less likely to need the form and rate protections that regulators provide consumers and small to medium business endeavors. And, while these large businesses may receive some benefit from the state financial regulation of licensed insurers, it has long been acknowledged that they do not need the protections addressed by the barriers to the surplus lines market and other nontraditional markets. Indisputably, deregulation of the licensed market will have an impact on the surplus lines insurance carriers, which have been free from form and rate requirements. USE OF CREDIT REPORTS IN UNDERWRITING -- Gains in access to electronic commerce, and the means to gather information more rapidly, have spurred regulators to take a second look at the use of consumer credit reports in underwriting and rate making. In some states, regulators charged with protecting insurance consumers from unfair trade practices are concerned that some consumers' risks may be underwritten based solely on their credit standing, and have sought to strengthen their laws and regulations to address this. This trend comes on the heels of Congress' re-tooling of the Fair Credit Reporting Act in 1997, which specifically addresses this issue, and permits the use of consumer credit reports in underwriting. The issue of federal preemption of state action in this arena has not been judicially addressed. FEDERAL REGULATION 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 federal preemption of state auto liability laws, tax reform measures, product liability and electronic commerce. The Company is also monitoring the following federal proposals: NATURAL DISASTER ACT--Recent natural disasters, including Atlantic Coast hurricanes, continue to fuel concern regarding the best way to provide affordable insurance coverage for such events. Congress has yet to pass legislation, but proposals to set up a system for federal relief to the industry continue to be discussed. Two Initiatives, "The Natural Disaster Protection and Insurance Act of 1997" (S.1361), and "The Homeowners Insurance Availability Act of 1997" (H.R. 21), focus on excess federal reinsurance. In 1999, both the House and Senate introduced versions of the "Policyholder Disaster Protection Act", which would permit insurers to build tax deferred catastrophe reserves. The Company will continue to monitor the progress of this issue. FINANCIAL SERVICES MODERNIZATION -- The Gramm-Leach-Bliley Act was signed into law by President Clinton on November 12, 1999. The principal focus of the Act is to facilitate affiliations among banks, securities firms and insurance companies. The Act amends the Federal Bank Holding Company Act by creating a new category of bank holding company known as a "financial holding company" to engage in activities that are "financial in nature," such as securities and insurance. The Act repealed the Glass-Steagall Act, which prohibited a Federal Reserve System member bank from being affiliated with a securities firm; repealed the Garn-St. Germain Act, which prohibited a bank holding company and its subsidiaries from selling or underwriting insurance; and repealed the Federal Bank Holding Company Act provisions that prohibited a director, officer or employee of a securities firm from serving as a director, officer or employee of a bank. 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 the Privacy Consumer Financial and Health Implementation regulation in response to the section of the Gramm-Leach-Bliley Act that requires financial institutions to protect private information of consumers. The Company is establishing procedures for compliance in accordance with individual state statutes that incorporate elements of the NAIC regulation. 17 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 subsidiaries' 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 producers by regulatory authorities in the states in which it operates. RLI Insurance Company obtained service mark registration of the letters "RLI" in 1998, and "eRLI" and "RLINK" in 2000, in the U.S. Patent and Trademark Office. Such registrations protect the marks nationwide from deceptively similar use by the Company's competitors. The duration of these registrations is ten years unless renewed. 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 519 associates. Of the 519 total associates, 60 are part-time and 459 are full-time. (d) Financial Information about Foreign and Domestic Operations and Export Sales. For purposes of this discussion, foreign operations are not considered material to the Company's overall operations. Item 2. PROPERTIES The Company owns a two-story, 80,000 square foot building in Peoria, Illinois, which serves as the Corporate Headquarters for RLI Corp., RLI Insurance Company, Mt. Hawley Insurance Company, Underwriters Indemnity Company and Planet Indemnity Company. One RLI Insurance Company Branch Office also leases 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 are used as office/conference space. 18 Additionally, the Company owns two other buildings located near the headquarter building. One, a 19,000 square foot building, is leased to a RLI Insurance Company Branch office, with the remaining 3,240 square feet being used for record and furniture storage. 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 56 of the Annual Report to Shareholders for the year ended December 31, 2000 attached in Exhibit 13. Item 6. SELECTED FINANCIAL DATA Refer to the Selected Financial Data on pages 54 through 55 of the Annual Report to Shareholders for the year ended December 31, 2000 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 18 through 27 of the Annual Report to Shareholders for the year ended December 31, 2000 attached in Exhibit 13. Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 18 through 27 of the Annual Report to Shareholders for the year ended December 31, 2000 attached in Exhibit 13. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Refer to the consolidated financial statements and supplementary data included on pages 28 through 50 of the Annual Report to Shareholders for the year ended December 31, 2000 attached in Exhibit 13. (See Index to Financial Statements and Schedules attached on page 23.) 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. 19 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 2000. (c) Exhibits. See Exhibit Index on pages 33-34. (d) Financial Statement Schedules. The schedules included on attached pages 23 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 2, 2001 ---------------------------------------------- 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/Jonathan E. Michael ----------------------------------------------- J.E. Michael, President, CEO (Principal Executive Officer) Date: March 2, 2001 ---------------------------------------------- * * * * * by /s/Joseph E. Dondanville ------------------------------------------------ J. E. Dondanville, Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 2, 2001 ---------------------------------------------- * * * * * By: /s/Gerald D. Stephens ----------------------------------------------- G. D. Stephens, Director Date: March 2, 2001 ----------------------------------------------- * * * * * By: /s/Richard H. Blum ----------------------------------------------- R.H. Blum, Director Date: March 2, 2001 ---------------------------------------------- * * * * * By: /s/Bernard J. Daenzer ----------------------------------------------- B. J. Daenzer, Director Date: March 2, 2001 ------------------------------------------------------- * * * * * 21 By: /s/William R. Keane ----------------------------------------------- W. R. Keane, Director Date: March 2, 2001 ---------------------------------------------- * * * * * By: /s/Gerald I. Lenrow ----------------------------------------------- G. I. Lenrow, Director Date: March 2, 2001 ---------------------------------------------- * * * * * By: /s/F. Lynn Mcpheeters ----------------------------------------------- F.L. McPheeters Date: March 2, 2001 ---------------------------------------------- * * * * * By: /s/Jonathan E. Michael ----------------------------------------------- J.E. Michael, Director Date: March 2, 2001 ---------------------------------------------- * * * * * By: /s/Edwin S. Overman ----------------------------------------------- E. S. Overman, Director Date: March 2, 2001 ---------------------------------------------- * * * * * By: /s/Edward F. Sutkowski ----------------------------------------------- E. F. Sutkowski, Director Date: March 2, 2001 ---------------------------------------------- * * * * * By: /s/Robert O. Viets ----------------------------------------------- R. O. Viets, Director Date: March 2, 2001 ---------------------------------------------- * * * * * 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 31,2000. 25 II. Condensed Financial Information of Registrant for the three years ended December 31,2000. 26-28 III. Supplementary Insurance Information for the three years ended December 31,2000. 29-30 IV. Reinsurance for the three years ended December 31, 2000. 31 V. Valuation and Qualifying Accounts 32
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 10, 2001, we reported on the consolidated balance sheets of RLI Corp. and Subsidiaries as of December 31, 2000 and 1999, 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, 2000, as contained in the 2000 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 2000. In connection with our audits of the aforementioned consolidated financial statements, we also 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 LLP Chicago, Illinois January 10, 2001 24 RLI CORP. AND SUBSIDIARIES SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2000
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 U.S. government $118,048,706 $120,636,195 $118,048,706 States, political subdivisions, and revenues 178,418,082 183,048,034 178,418,082 ----------------------------------------------------------------------------------------------------------------- Total held-to-maturity 296,466,788 303,684,229 296,466,788 ----------------------------------------------------------------------------------------------------------------- Trading U.S. government 4,163,568 4,240,546 4,240,546 Corporate 3,912,135 3,967,592 3,967,592 ----------------------------------------------------------------------------------------------------------------- Total trading 8,075,703 8,208,138 8,208,138 ----------------------------------------------------------------------------------------------------------------- Available-for-sale U.S. government 76,332,539 78,821,887 78,821,887 States, political subdivisions, and revenues 18,002,890 18,324,679 18,324,679 ----------------------------------------------------------------------------------------------------------------- Total available-for-sale 94,335,429 97,146,566 97,146,566 ----------------------------------------------------------------------------------------------------------------- Total fixed maturities 398,877,920 409,038,933 401,821,492 ----------------------------------------------------------------------------------------------------------------- Equity securities, available-for-sale: Common stock: Public utilities 32,433,194 66,525,796 66,525,796 Banks, trusts and insurance companies 12,821,604 35,953,155 35,953,155 Industrial, miscellaneous and all other 89,992,776 203,715,307 203,715,307 ----------------------------------------------------------------------------------------------------------------- Total equity securities 135,247,574 306,194,258 306,194,258 ----------------------------------------------------------------------------------------------------------------- Short-term investments 48,095,064 48,095,064 48,095,064 ----------------------------------------------------------------------------------------------------------------- Total investments $582,220,558 $763,328,255 $756,110,814 -----------------------------------------------------------------------------------------------------------------
Note: See notes 1C 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,
2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash $ (1,647) $ (23,389) Investments in subsidiaries/investees, at equity 337,384,004 303,763,329 Equity securities available-for-sale, at fair value (Cost--$7,586,444 in 2000 and $6,709,665 in 1999) 15,101,269 13,810,951 Other assets 1,009,071 116,198 ----------------------------------------------------------------------------------------------------------------------------------- Total assets $353,492,697 $317,667,089 =================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable, current $ 2,620,068 $ 1,058,556 Notes payable, short-term 19,640,568 19,640,568 Income taxes payable--current 269,644 1,046,258 Income taxes payable--deferred 4,111,440 2,624,172 Other liabilities 197,432 228,259 ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 26,839,152 24,597,813 ----------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock ($1 par value, authorized 50,000,000 shares, issued 12,806,446 shares in 2000 and 12,804,558 shares in 1999) 12,806,446 12,804,558 Paid in Capital 69,942,458 70,531,201 Accumulated other comprehensive earnings, net of tax 113,149,420 99,800,109 Retained earnings 212,158,781 189,250,013 Deferred compensation 5,389,402 4,705,536 Treasury shares at cost (3,002,484 shares in 2000 and 2,931,212 shares in 1999) (86,792,962) (84,022,141) ----------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 326,653,545 293,069,276 ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $353,492,697 $317,667,089 ===================================================================================================================================
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,
2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------- Net investment income $ 1,089,374 $ 490,468 $ 453,843 Selling, general and administrative expenses (3,388,177) (2,090,512) (3,914,954) Interest expense on debt (1,417,368) (1,048,395) (1,122,358) ----------------------------------------------------------------------------------------------------------------------- (3,716,171) (2,648,439) (4,583,469) Income tax benefit (473,203) (724,948) (1,383,099) ----------------------------------------------------------------------------------------------------------------------- Net loss before equity in net earnings of subsidiaries (3,242,968) (1,923,491) (3,200,370) Equity in net earnings of subsidiaries/investees 31,935,387 33,374,544 31,438,961 ----------------------------------------------------------------------------------------------------------------------- Net earnings $28,692,419 $31,451,053 $28,238,591 ======================================================================================================================= Other Comprehensive Earnings, net of tax Unrealized gains on securities: Unrealized holding gains arising during the period $ 814,249 $ 18,443 $ 1,217,174 Less: Reclassification adjustment for (gains) losses included in Net Earnings (545,411) (144,514) (122,659) ----------------------------------------------------------------------------------------------------------------------- Other Comprehensive Earnings--parent only 268,838 (126,071) 1,094,515 Equity in Other Comprehensive Earnings of Subsidiaries/Investees 13,080,473 (10,445,281) 22,424,283 ----------------------------------------------------------------------------------------------------------------------- Other Comprehensive Earnings 13,349,311 (10,571,352) 23,518,798 ----------------------------------------------------------------------------------------------------------------------- Comprehensive Earnings $42,041,730 $20,879,701 $51,757,389 =======================================================================================================================
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,
2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Losses before equity in net earnings of $ (3,242,968) $ (1,923,491) $ (3,200,370) subsidiaries/investees Adjustments to reconcile net losses to net cash provided by operating activities: Net realized investment (gains) (936,365) (222,329) (188,706) Other items, net (130,156) 415,574 (387,397) Change in: Affiliate balances payable 1,468,438 (3,226,757) 2,187,132 Federal income taxes 395,254 1,041,305 97,641 ----------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (2,445,797) (3,915,698) (1,491,700) ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Purchase of: Equity securities, available-for-sale (2,618,536) (675,182) (31,122) Unconsolidated investee ownership interest (88,750) Sale of: Equity securities, available-for-sale 2,678,121 716,288 368,672 Cash dividends received-subsidiaries/investees 11,894,822 24,926,533 13,384,443 ----------------------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 11,954,407 24,967,639 13,633,243 ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Proceeds from issuance of debt 65,568 12,075,000 Fractional share paid (16,099) CatEPut Payment (1,417,321) (210,616) (1,212,500) Shares issued under stock option plan 36,921 302,696 60,638 Unearned ESOP shares 2,500,999 (2,500,999) Treasury shares purchased (2,086,955) (18,197,576) (14,858,394) Cash dividends paid (6,019,513) (5,794,837) (5,566,416) ----------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (9,486,868) (21,333,766) (12,018,770) ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 21,742 (281,825) 122,773 Cash at beginning of year (23,389) 258,436 135,663 ----------------------------------------------------------------------------------------------------------------------- Cash at end of year $ (1,647) $ (23,389) $ 258,436 =======================================================================================================================
Interest paid on outstanding debt for 2000, 1999 and 1998 amounted to $5,218,178, $3,483,174 and $2,327,113, 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, 2000, 1999 AND 1998
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, 2000 Property segment $ 12,095,958 $ 39,505,479 $ 48,521,649 $ 60,063,428 $ 32,488,730 Surety segment 12,798,231 7,423,787 23,151,563 34,738,666 8,775,695 Casualty segment 18,392,839 253,124,207 75,945,106 136,800,415 85,005,042 RLI Insurance Group $ 43,287,028 $300,053,473 $147,618,318 $231,602,509 $126,269,467 ========================================================================================================================== Year ended December 31, 1999 Property segment $ 8,036,389 $ 33,182,976 $ 35,899,659 $ 51,390,298 $ 20,068,671 Surety segment 9,444,841 6,059,534 16,724,125 25,412,355 4,539,480 Casualty segment 16,876,401 235,671,799 65,744,130 118,471,537 76,444,745 RLI Insurance Group $ 34,357,631 $274,914,309 $118,367,914 $195,274,190 $101,052,896 ========================================================================================================================== Year ended December 31, 1998 Property segment $ 8,783,705 $ 29,634,175 $ 34,977,862 $ 52,281,163 $ 12,050,748 Surety segment 5,263,476 5,397,144 8,944,616 18,307,259 4,198,692 Casualty segment 8,462,960 212,230,257 38,320,680 71,735,513 51,882,019 RLI Insurance Group $ 22,510,141 $247,261,576 $ 82,243,158 $142,323,935 $ 68,131,459 ==========================================================================================================================
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, 2000, 1999 AND 1998
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, 2000 Property segment $ (241,379) $ 17,358,596 $ 5,467,408 $ 72,685,413 Surety segment (478,045) $ 20,304,477 $ 2,504,035 $ 41,166,105 Casualty segment (964,455) $ 38,790,950 $ 10,507,211 $147,001,734 RLI Insurance Group $ (1,683,879) $ 76,454,023 $ 18,478,654 $260,853,252 ======================================================================================================================= Year ended December 31, 1999 Property segment $ (4,313,840) $ 14,088,564 $ 4,482,798 $ 51,126,413 Surety segment 426,439 16,099,457 1,948,194 30,887,434 Casualty segment (708,214) 36,363,806 8,698,923 145,609,854 RLI Insurance Group $ (4,595,615) $ 66,551,827 $ 15,129,915 $227,623,701 ======================================================================================================================= Year ended December 31, 1998 Property segment $ (300,799) $ 14,394,458 $ 6,335,787 $ 46,029,088 Surety segment 2,430,308 10,990,793 1,406,353 19,133,037 Casualty segment (5,532,667) 18,895,582 8,783,745 80,539,155 RLI Insurance Group $ (3,403,158) $ 44,280,833 $ 16,525,885 $145,701,280 =======================================================================================================================
30 RLI CORP. AND SUBSIDIARIES SCHEDULE IV--REINSURANCE FOR THE YEARS ENDED 2000, 1999 AND 1998
Column A Column B Column C Column D Column E Column F Percentage Ceded to Assumed of Amount Direct Other From Other Net Assumed to Amount Companies Companies Amount Net ----------------------------------------------------------------------------------------------------------------------------------- 2000 Property $137,459,500 $ 85,483,761 $ 8,087,689 $ 60,063,428 13.46% Surety 36,746,835 2,180,535 172,366 34,738,666 .50% Casualty 209,932,332 73,823,824 691,907 136,800,415 .51% RLI Insurance Group Premiums earned $384,138,667 $ 161,488,120 $ 8,951,962 $ 231,602,509 3.87% =================================================================================================================================== 1999 Property $116,594,261 $ 75,114,048 $ 9,910,085 $ 51,390,298 19.28% Surety 29,604,063 4,730,231 538,523 25,412,355 2.12% Casualty 167,912,453 50,041,820 600,904 118,471,537 .51% RLI Insurance Group premiums earned $314,110,777 $129,886,099 $ 11,049,512 $195,274,190 5.66% =================================================================================================================================== 1998 Property $115,926,412 $ 65,712,932 $ 2,067,683 $ 52,281,163 3.95% Surety 29,149,915 11,157,925 315,269 18,307,259 1.72% Casualty 129,919,370 58,398,009 214,152 71,735,513 .30% RLI Insurance Group premiums earned $274,995,697 $135,268,866 $ 2,597,104 $142,323,935 1.82% ===================================================================================================================================
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, 2000, 1999 AND 1998
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 ------------------------------------------------------------------------------------------------------------------------------- 2000 Allowance for insolvent reinsurers $10,236,966 -- $ (72,428) -- $10,164,538 1999 Allowance for insolvent reinsurers $ 9,642,947 -- $ 571,814 $ 22,205 $10,236,966 1998 Allowance for insolvent reinsurers $17,057,194 -- $(574,934) $(6,839,313) $ 9,642,947
32 EXHIBIT INDEX
Exhibit No. Description of Document Reference (Page) ----------- ----------------------- ----------------- 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 Attached as Exhibit 3.2. 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 Compensation Plan* Quarterly 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 Trust Agreement* Quarterly 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 Option Plan* Registration Statement 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 Registration Statement on Form S-8 filed on June 6, 1997, File No. 333-28625. 10.7 RLI Corp. Executive Deferred Incorporated by reference to the Company's Compensation Agreement* Annual Form 10-K for the year ended December 31, 1998. 10.9 Reinsurance Agreements between the Incorporated by reference to the Company's Company and American Re-Insurance Annual Form 10-K/A for the year ended Company December 31, 1992. 10.10 Reinsurance Agreements between the Incorporated by reference to the Company's Company and Lloyd's of London Annual Form 10-K/A for the year ended December 31, 1992
33 EXHIBIT INDEX
Exhibit No. Description of Document Reference (Page) ----------- ----------------------- ----------------- 11.0 Statement re computation of per Refer to the Notes to Consolidated Financial share earnings Statements--Note 1K "Earnings per share", on page 38 of the Annual Report to Shareholders attached in Exhibit 13. 13.1 Refer to the Annual Report to Share- Attached Exhibit 13. holders for the year ended December 31, 2000, pages 18-50 and 54-56. 21.1 Subsidiaries of the Registrant Attached page 46. 23.1 Consent of KPMG LLP Attached page 47.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K. 34