PART I
Item 1.Business
RLI Corp. was founded in 1965. References to “the Company,” “we,” “our,” “us” or like terms refer to the business of RLI Corp. and its subsidiaries. We underwrite select property and casualty insurance through major subsidiaries collectively known as RLI Insurance Group. We conduct operations principally through three insurance companies. RLI Insurance Company (RLI Ins.), a subsidiary of RLI Corp. and our principal insurance subsidiary, writes multiple lines of insurance on an admitted basis in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. Mt. Hawley Insurance Company (Mt. Hawley), a subsidiary of RLI Ins., writes excess and surplus lines insurance on a non-admitted basis in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. Contractors Bonding and Insurance Company (CBIC), a subsidiary of RLI Ins., writes multiple lines of insurance on an admitted basis in all 50 states and the District of Columbia. Each of our insurance companies is domiciled in Illinois. We have no material foreign operations.
As a specialty insurance company with a niche focus, we offer insurance coverages in the specialty admitted and excess and surplus markets. We distribute our property and casualty insurance through our branch officeslocations across the country that market to wholesale and retail producers.brokers, independent agents and carrier partners. We offer limited coverages on a direct basis to select insureds, as well as various reinsurance coverages. In addition, from time to time, we producewrite a limited amount of business under agreements with managing general agents under the direction of our product vice presidents.leadership.
We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with or furnished to the Securities and Exchange Commission (SEC) available free of charge on our website (rlicorp.com). In addition, copies of our annual report are available without charge to any shareholder. Information contained on our website is not intended to be incorporated by reference in this annual report and you should not consider that information a part of this annual report. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding the Company.
In the ordinary course of business, we rely on other insurance companies to share risks through reinsurance. A large portion of the reinsurance is put into effect under contracts known as treaties and, in some instances, by negotiation on each individual risk (known as facultative reinsurance). We have quota share, excess of loss and catastrophe reinsurance contracts that protect against losses over stipulated amounts arising from any one occurrence or event. These arrangements allow the Company to pursue greater diversification of business and serve to limit the maximum net loss on catastrophes and large risks. Reinsurance is subject to certain risks, specifically market risk, which affect the cost of and the ability to secure these contracts, and credit risk, which is the risk that our reinsurers may not pay on losses in a timely fashion or at all. The following table illustrates the degree to which we have utilized reinsurance during the past three years. For an expanded discussion of the impact of reinsurance on our operations, see note 5 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.
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| | Year Ended December 31, |
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| Year Ended December 31, |
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(in thousands) |
| 2019 |
| 2018 |
| 2017 |
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| 2021 |
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| 2020 |
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| 2019 |
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PREMIUMS WRITTEN | | | | | | | | | | |
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Direct and Assumed | | $ | 1,065,002 | | $ | 983,216 | | $ | 885,312 | |
| $ | 1,347,354 |
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| $ | 1,136,432 |
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| $ | 1,065,002 |
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Reinsurance ceded | |
| (204,665) | |
| (160,041) | |
| (135,458) | |
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| (289,821 | ) |
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| (244,344 | ) |
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| (204,665 | ) |
Net | | $ | 860,337 | | $ | 823,175 | | $ | 749,854 | |
| $ | 1,057,533 |
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| $ | 892,088 |
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| $ | 860,337 |
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PREMIUMS EARNED | | | | | | | | | | |
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Direct and Assumed | | $ | 1,021,294 | | $ | 938,160 | | $ | 867,639 | |
| $ | 1,253,296 |
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| $ | 1,090,259 |
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| $ | 1,021,294 |
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Reinsurance ceded | |
| (182,183) | |
| (146,794) | |
| (129,702) | |
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| (272,393 | ) |
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| (224,512 | ) |
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| (182,183 | ) |
Net | | $ | 839,111 | | $ | 791,366 | | $ | 737,937 | |
| $ | 980,903 |
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| $ | 865,747 |
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| $ | 839,111 |
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SPECIALTY INSURANCE MARKET OVERVIEW
The specialty insurance market differs significantly from the standard market. In the standard market, products and coverage are largely uniform with relatively predictable exposures and companies tend to compete for customers on the basis of price. In contrast, the specialty market provides coverage for risks that do not fit the underwriting criteria of the standard carriers. Competition tends to focus less on price and more on availability, coverage, service and other value-based considerations. While specialty market exposures may have higher insurance risks than their standard admitted market counterparts, we manage these risks to achieve higher financial returns. To reach our financial and operational goals, we must have extensive knowledge of, and expertise in, our markets. Many of our risks are underwritten on an individual basis and tailored coverages are employed in order to respond to distinctive risk characteristics. We operate in the specialty admitted insurance market, the excess and surplus insurance market and the specialty reinsurance markets.
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SPECIALTY ADMITTED INSURANCE MARKET
We write business in the specialty admitted market. Many of these risks are unique and hard to place in the standard admitted market, but for marketing and regulatory reasons, they must remain with an admitted insurance company. The specialty admitted market is subject to greater state regulation than the excess and surplus market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as state guaranty funds and assigned risk plans. For 2019,2021, our specialty admitted operations produced gross premiums written of $690.2$845.3 million, representing approximately 6563 percent of our total gross premiums for the year.
EXCESS AND SURPLUS INSURANCE MARKET
The excess and surplus market focuses on hard-to-place risks. Participating in this market allows the Company to underwrite non-standard risks with more flexible policy forms and unregulated premium rates. This typically results in coverages that are more restrictive and more expensive than in the standard admitted market. The excess and surplus lines regulatory environment and production model also effectively filter submission flow and match market opportunities to our expertise and appetite. According to the 2019 edition of AM Best, Aggregate & Averages – Property/Casualty, United States & Canada, the excess and surplus market represented approximately $26 billion, or 4represents less than 10 percent of the entire $677 billion domestic property and casualty industry, in 2018, as measured by direct premiums written. Our excess and surplus operations wrote gross premiums of $351.6$469.6 million, or 3335 percent, of our total gross premiums written in 2019.2021.
SPECIALTY REINSURANCE MARKETSMARKET
We write business in the specialty reinsurance markets.market. This business is generally written on a portfolio (treaty) basis. We write contracts on an excess of loss and a proportional basis. Contract provisions are written and agreed upon between the company and its reinsurance clients. The business is typically more volatile as a result of unique underlying exposures and excess and aggregate attachments. For 2019,2021, our specialty reinsurance operations wrote gross premiums of $23.2$32.5 million, representing approximately 2 percent of our total gross premiums written for the year.
BUSINESS SEGMENT OVERVIEW
The segments of our insurance operations are casualty, property and surety. For additional information, see note 12 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.
CASUALTY SEGMENT
Commercial Excess and Personal Umbrella
Our commercial excess coverage is written in excess of primary liability insurance provided by other carriers and in excess of primary liability written by the Company. The personal umbrella coverage is generally written in excess of homeowners’ and automobile liability coverage provided by other carriers, except in Hawaii, where some underlying homeowners’ coverage is written by the Company.carriers. Net premiums earned from this business totaled $219.4 million, $178.2 million and $140.5 million, $124.4 million and $115.5 million, or 1722 percent, 1621 percent and 1617 percent of total net premiums earned for 2019, 20182021, 2020 and 2017,2019, respectively.
General Liability
Our general liability business consists primarily of coverage for third-party liability of commercial insureds including manufacturers, contractors, apartments and mercantile. We also offer coverages for security guards and in the specialized areas of onshore energy-related businesses and environmental liability for underground storage tanks, contractors and asbestos and environmental remediation specialists. Net premiums earned from our general liability business totaled $90.9 million, $91.7 million and $98.9 million, $93.9 millionor 9 percent, 11 percent and $90.3 million, or 12 percent of total net premiums earned for 2019, 20182021, 2020 and 2017,2019, respectively.
Commercial Transportation
Our transportation insurance provides commercial automobile liability and physical damage insurance to local, intermediate and long haul truckers, public transportation entities and equipment dealers, along with other types of specialty commercial automobile risks. We also offer incidental, related insurance coverages including general liability, excess liability
5
and motor truck cargo. We produce business through independent agents and brokers nationwide. Net premiums earned from this business totaled $83.2 million, $81.1 million and $78.1 million, or 10 percent, 10 percent and 11 percent of total net premiums earned for 2019, 2018 and 2017, respectively.
Professional Services
We offer professional liability coverages focused on providing errors and omission coverage to small to medium-sized design, technical, computer and other miscellaneous professionals. Our product suite for these customers also includes a full array of multi-peril package products including general liability, property, automobile, excess liability and workers’ compensation coverages. This business primarily markets its products through specialty retail agents nationwide. Net premiums earned from the professional services group totaled $88.9 million, $85.2 million and $81.3 million, $80.0 million and $78.5 million, or 109 percent, 10 percent and 1110 percent of total net premiums earned for 2019, 20182021, 2020 and 2017,2019, respectively.
Commercial Transportation
Our transportation insurance provides commercial automobile liability and physical damage insurance to local, intermediate and long haul truckers, public transportation entities and other types of specialty commercial automobile risks. We also offer incidental related insurance coverages including general liability, excess liability and motor truck cargo. We produce business through independent agents and brokers nationwide. Net premiums earned from this business totaled $83.4 million, $64.6 million and $83.2 million, or 8 percent, 7 percent and 10 percent of total net premiums earned for 2021, 2020 and 2019, respectively.
Small Commercial
Our small commercial business offers property and casualty insurance coverages to small contractors and other small to medium-sized retail businesses. The coverages included in these packages are predominantly general liability, but also have some inland marine coverages, as well as commercial automobile, property and umbrella coverage. These products are primarily marketed through retail agents. Net premiums earned from the small commercial business totaled $64.7 million, $63.4 million and $55.7 million, $51.5 million and $49.6 million, or 7 percent, 6 percent and 7 percent of total net premiums earned for 2019, 20182021, 2020 and 2017,2019, respectively.
Executive Products
We provide a suite of management liability coverages, such as directors and officers (D&O) liability insurance, fiduciary liability, employment practice liability and fidelity coverages, for a variety of risk classes, including both public and private businesses. Our publicly traded D&O appetite generally focuses on offering excess Side A D&O coverage (where corporations cannot indemnify the individual directors and officers) as well as excess full coverage D&O. Additionally, we offer representations and warranties coverage for companies involved in mergers and acquisitions, tax liability representations and warranties coverage for companies claiming certain tax credits andoffered excess cyber liability coverage to medium to large-sized public and private businesses.businesses, but exited this business on a runoff basis in 2021. Net premiums earned from the executive products business totaled $21.9 million, $26.5 million and $27.1 million, $21.3 million and $18.1 million, or 32 percent, 3 percent and 23 percent of total net premiums earned for 2019, 20182021, 2020 and 2017,2019, respectively.
Other Casualty
We offer a variety of other smaller products in our casualty segment, including home business insurance, which provides limited liability and property coverage on and off-site, for a variety of small business owners who work from their own home. We have a quota share reinsurance agreement with Prime Insurance Company and Prime Property and Casualty Insurance Inc., the two insurance subsidiaries of Prime Holdings Insurance Services, Inc. (Prime). We assume general liability, excess, commercial auto, property and professional liability coverages on hard-to-place risks that are written in the excess and surplus and admitted insurance markets. Additionally, we write mortgage reinsurance, which provides credit risk transfer on pools of mortgages, and offer general liability and package coverages through a general binding authority (GBA) group. We provided healthcare liability coverage focused on long-term care and medical professional liability insurance specializing in hard-to-place individuals and group physicians, but exited these businesses on a runoff basis in 2019. Net premiums earned from these lines totaled $71.8$64.6 million, $71.3$59.9 million and $48.5$71.8 million, or 8 percent, 97 percent and 68 percent of total net premiums earned for 2019, 20182021, 2020 and 2017,2019, respectively.
PROPERTY SEGMENT
MarineCommercial Property
Our commercial property coverage consists primarily of excess and surplus lines and specialty insurance such as fire, earthquake, wind and difference in conditions (DIC), which can include earthquake, flood and collapse coverages. We provide insurance for a wide range of commercial and industrial risks, such as office buildings, apartments, condominiums, builders’ risks and certain industrial and mercantile structures. Net premiums earned from the commercial property business totaled $107.9 million, $79.4 million and $68.3 million, or 11 percent, 9 percent and 8 percent of total net premiums earned for 2021, 2020 and 2019, respectively.
Marine
Our marine coverages include cargo, hull, protection and indemnity, marine liability, as well as inland marine coverages including builders’ risks and contractors’ equipment. Although the predominant exposures are located within the United States, there is some incidental international exposure written within these coverages. Net premiums earned from the marine business totaled $97.7 million, $81.9 million and $74.9 million, $59.8 million and $50.9 million, or 910 percent, 8 percent and 7 percent of total net premiums earned for 2019, 2018 and 2017, respectively.
6
Commercial Property
Our commercial property coverage consists primarily of excess and surplus lines and specialty insurance such as fire, earthquake and difference in conditions (DIC), which can include earthquake, wind, flood and collapse coverages. We provide insurance for a wide range of commercial and industrial risks, such as office buildings, apartments, condominiums, builders’ risks and certain industrial and mercantile structures. Net premiums earned from the commercial property business totaled $68.3 million, $71.5 million and $63.1 million, or 8 percent, 910 percent and 9 percent of total net premiums earned for 2019, 20182021, 2020 and 2017,2019, respectively.
Specialty Personal
We offer specialized homeowners’ insurance, in select locations, includingprimarily homeowners’ and dwelling fire insurance through retail agents in Hawaii. Net premiums earned from specialty personal coverages totaled $21.4 million, $19.6 million and $19.3 million, $16.9 million and $20.8 million, or 32 percent, 2 percent and 3 percent of total net premiums earned for 2021, 2020 and 2019, 2018 and 2017, respectively.
Other Property
Our other property coverages consist of newer product offerings, such as general binding authority, and lines which we have recently exited. Net premiums earned from these lines totaled $1.5$4.8 million, $1.1$2.8 million and $3.5$1.5 million, or less than 1 percent of total net premiums earned for 2019, 20182021, 2020 and 2017,2019, respectively.
SURETY SEGMENT
Miscellaneous
Our miscellaneous surety coverage includes small bonds for businesses and individuals written through independent insurance agencies throughout the United States. Examples of these types of bonds are license and permit, notary and court bonds. These bonds are usually individually underwritten and utilize extensive automation tools for theThe underwriting and bond delivery to our agents and principals.of these bonds is highly automated. Net premiums earned from miscellaneous surety coverages totaled $44.7$44.0 million, $47.0$42.3 million and $47.2$44.7 million, or 5 percent, 6 percent and 6 percent of total net premiums earned for 2019, 20182021, 2020 and 2017,2019, respectively.
Commercial
We offer a large variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries, including the financial, healthcare and on and offshore energy, petrochemical and refining industries. These risks are underwritten on an account basis and coverage is marketed through a select number of regional and national brokers with surety expertise. Net premiums earned from commercial surety coverages totaled $43.7 million, $42.9 million and $43.6 million, $43.4 million and $45.2 million, or 54 percent, 5 percent and 65 percent of total net premiums earned for 2019, 20182021, 2020 and 2017,2019, respectively.
Contract
We offer bonds for small to medium-sized contractors throughout the United States, underwritten on an account basis. Typically, these are performance and payment bonds for individual construction contracts. These bonds are marketed through a select number of insurance agencies that have surety and construction expertise. We also offer bonds for small and emerging contractors that are reinsured through the Federal Small Business Administration. Net premiums earned from contract surety coverages totaled $28.3$27.7 million, $28.2$27.3 million and $28.6$28.3 million, or 3 percent, 4 percent and 4 percent of total net premiums earned for 2019, 20182021, 2020 and 2017,2019, respectively.
MARKETING AND DISTRIBUTION
We distribute our coverages primarily throughacross the country, from our network of branch offices, throughout the country that market toprimarily through wholesale and retail brokers, independent agents and through independent agents.carrier partners.
7
BROKERS
The largest volume of broker-generated premium is in our commercial property, general liability, commercial surety, executive products, commercial excess and commercial transportation coverages. This business is produced through independent wholesale and retail brokers.
INDEPENDENT AGENTS
We target classes of insurance, such as homeowners’ and dwelling fire, home business, surety and personal umbrella through independent agents. Several of these products involve detailed eligibility criteria, which are incorporated into strict underwriting guidelines and prequalification of each risk using a system accessible by the independent agent. The independent agent cannot bind the risk unless they receive approval from our underwriters or through our automated systems.
UNDERWRITING AGENTS
We contract with certain underwriting agencies, which have limited authority to bind or underwrite business on our behalf. The underwriting agreements involve strict underwriting guidelines and the agents are subject to audits upon request. Theseregular audits.
CARRIER PARTNERS
We partner with other insurance carriers for home business and personal umbrella. The carriers place the business with us through their associated agencies may receive some compensation through contingent profit commission.when the underlying risk does not meet their underwriting appetite.
DIGITAL AND DIRECT
We utilize digital efforts to produce and efficiently process and service business including home businesses, high performance drivers,general binding authority, small commercial and personal umbrella risks and surety bonding. On a direct basis, we also assume premium on various reinsurance treaties.
COMPETITION
Our specialty property and casualty insurance subsidiaries are part of a very competitive industry that 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 2,600 companies actively market property and casualty coverages. Our primary competitors in the casualty segment include Arch, Aspen, Berkley, Chubb, CNA, Great American, Great West, Hartford, Hudson, James River, Kinsale, Lancer, Markel, Protective, RSUI, Sompo, Travelers, USLI Travelers and Zurich. Primary competitors in the property segment include Arch, Aspen, Chubb, CNA, Crum and Forster, Golden Bear, Great American, Lexington, Liberty Mutual, Palomar, Sompo and Travelers. Primary competitors in the surety segment are AIG, Arch, AXA XL, Berkley, Chubb, CNA, Great American, Hartford, HCC, Sompo and Travelers. The combination of coverages, service, pricing and other methods of competition vary from line to line. Our principal methods of meeting this competition are innovative coverages, marketing structureconsistency and quality service to the agents and policyholders at a fair price. We compete favorably, in part, because of our sound financial basecondition and reputation, as well as our broad, geographic footprint in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. In the casualty, property and surety areas, we have experienced underwriting and claim specialists in our branch and home offices. We continue to maintain our underwriting and marketing standards by not seeking market share at the expense of earnings.underwriting profit. We have a track record of withdrawing from markets when conditions become overly adverse and offering new coverages and programs where the opportunity exists to provide needed insurance coverage with exceptional service on a profitable basis.
FINANCIAL STRENGTH RATINGS
AM Best financialFinancial strength ratings forare an important factor in establishing the industry range from A++ (Superior) to F (In liquidation) with some companies not being rated. Standard & Poor’s financial strength ratings for the industry range from AAA (Extremely strong) to R (Regulatory action). Moody’s financial strength ratings for the industry range from Aaa (Exceptional) to C (Lowest). The following table illustrates the rangecompetitive position of ratings assigned by each of the three major rating companies that has issued a financial strength rating on our insurance companies:
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companies. Publications of AM Best, Standard & Poor’s and Moody’s indicate that A and A+ ratings are assigned to those companies that, in their opinion, have a superior ability to meet ongoing insurance obligations, a strong abilitycapacity to meet financial obligationscommitments or a low credit risk, respectively. In evaluatingThe ratings are independent opinions of an insurer’s financial strength and ability to meet ongoing insurance policy and contract obligations, based on a company’s financialcomprehensive quantitative and qualitative analysis of balance sheet strength, operating performance, each of the firms review the company’s profitability, leveragebusiness profile and liquidity, as well as the company’s spread ofenterprise 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, its risk management practices 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 specifically related to securities issued by the company.
At December 31, 2019,2021, the following ratings were assigned to our insurance companies:
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AM Best |
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RLI Ins., Mt. Hawley and CBIC* (group-rated) |
| A+, Superior |
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Standard & Poor’s |
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RLI Ins. and Mt. Hawley |
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RLI Ins. and Mt. Hawley |
| A2 |
* |
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*CBIC is only rated by AM Best
For AM Best Standard & Poor’s and Moody’s, the financial strength ratings represented above are affirmations of previously assigned ratings. AM Best, inDuring 2021, Standard & Poor’s lowered our rating to A from A+. In addition to assigning a financial strength rating, AM Best also assigns financial size categories. In November 2019,2021, RLI Ins., Mt. Hawley and CBIC, which are collectively rated as a group, were assigned a financial size category of XII (adjusted policyholders’ surplus of between $1 billion and $1.25 billion). As of December 31, 2019,2021, the policyholders’ statutory surplus of RLI Insurance Group totaled $1.0$1.2 billion, which continues to result in AM Best’s financial size category of XII.
REINSURANCE
We reinsure a portion of our insurance exposure, paying or ceding to the reinsurer a portion of the premiums received on such policies. Earned premiums ceded to non-affiliated reinsurers totaled $272.4 million, $224.5 million and $182.2 million $146.8 millionin 2021, 2020 and $129.7 million in 2019, 2018 and 2017, respectively. Insurance is ceded principally to reduce net liability on individual risks and to protect against catastrophic losses. We use reinsurance as an alternative to using our own capital to take risks and reduce volatility. Retention levels are evaluated each year to maintain a balance between the growth in surplus and the cost of reinsurance. 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.
9
Reinsurance is subject to certain risks, specifically market risk, which affects the cost and ability to secure reinsurance contracts, and credit risk, which relates to the ability to collect from the reinsurer on our claims. We strive to purchase reinsurance from financially strong reinsurers. We evaluate reinsurers’ ability to pay based on their financial results, level of surplus, financial strength ratings and other risk characteristics. A reinsurance committee, comprised of senior management, reviews and approves our security guidelines and reinsurer usage. More than 9489 percent of our reinsurance recoverables are due from companies with financial strength ratings of A or better by AM Best and Standard & Poor’s rating services.
We utilize both treaty and facultative reinsurance coverage for our risks. Treaty coverage refers to a reinsurance contract under which the company agrees to cede all risks within a defined class of business to the reinsurer, who agrees to provide coverage on all risks ceded without individual underwriting. Facultative coverage is applied to individual risks at the company’s discretion and is subject to underwriting by the reinsurer. It is used for a variety of reasons, including supplementing the limits provided by the treaty coverage or covering risks or perils excluded from treaty reinsurance.
Much of our reinsurance is purchased on an excess of loss basis. Under an excess of loss arrangement, we retain losses on a risk up to a specified amount and the reinsurers assume any losses above that amount. We may choose to participate in the reinsurance layers purchased by retaining a percentage of the layer. It is common to find conditions in excess of loss covers such as occurrence limits, aggregate limits and reinstatement premium charges. Occurrence limits cap our recovery for multiple losses caused by the same event. Aggregate limits cap our recovery for all losses ceded during the contract term. We may be required to pay additional premium to reinstate or have access to use the reinsurance limits for potential future recoveries during the same contract year. Some property and surety treaties include reinstatement provisions which require the Company, in certain circumstances, to pay reinstatement premiums after a loss has occurred in order to preserve coverage.
Excluding CATcatastrophe (CAT) reinsurance, the table below summarizes the reinsurance treaty coverage currently in effect. We may purchase facultative coverage in excess of the per risk limits shown.
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(in millions) |
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| Renewal |
| Attachment |
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| Maximum |
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Product Line(s) Covered |
| Contract Type |
| Date |
| Point |
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| Purchased |
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| Retention |
| * | |||
General liability |
| Excess of Loss |
| 1/1 |
| $ | 1.0 |
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| $ | 9.0 |
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| $ | 1.9 |
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Commercial excess |
| Excess of Loss |
| 1/1 |
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| 1.0 |
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| 9.0 |
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| 1.9 |
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Personal umbrella |
| Excess of Loss |
| 1/1 |
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| 1.0 |
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| 9.0 |
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| 1.9 |
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Commercial transportation |
| Excess of Loss |
| 1/1 |
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| 1.0 |
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| 9.0 |
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| 1.9 |
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Package - liability and workers' comp |
| Excess of Loss |
| 1/1 |
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| 1.0 |
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| 10.0 |
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| 2.4 |
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Workers' compensation catastrophe |
| Excess of Loss |
| 1/1 |
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| 11.0 |
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| 14.0 |
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| — |
| ** |
Professional services - professional liability |
| Excess of Loss |
| 4/1 |
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| 1.0 |
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| 9.0 |
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| 3.3 |
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Executive products |
| Quota Share |
| 7/1 |
| N/A |
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| 25.0 |
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| 6.3 |
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Property - risk cover |
| Excess of Loss |
| 1/1 |
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| 1.0 |
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| 24.0 |
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| 1.9 |
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Marine |
| Excess of Loss |
| 6/1 |
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| 2.5 |
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| 27.5 |
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| 2.5 |
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Surety |
| Excess of Loss |
| 4/1 |
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| 2.0 |
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| 73.0 |
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| 9.7 |
| *** |
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(in millions) | | | | Renewal | | Attachment | | Limit | | Maximum |
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Product Line(s) Covered | | Contract Type | | Date | | Point | | Purchased | | Retention | * | |||
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General liability |
| Excess of Loss |
| 1/1 | | $ | 1.0 | | $ | 9.0 | | $ | 1.9 | |
Commercial excess |
| Excess of Loss |
| 1/1 | |
| 1.0 | |
| 9.0 | |
| 1.9 | |
Personal umbrella |
| Excess of Loss |
| 1/1 | |
| 1.0 | |
| 9.0 | |
| 1.9 | |
Commercial transportation |
| Excess of Loss |
| 1/1 | |
| 1.0 | |
| 9.0 | |
| 1.9 | |
Package - liability and workers' comp |
| Excess of Loss |
| 1/1 | |
| 1.0 | |
| 10.0 | |
| 1.9 | |
Workers' compensation catastrophe | | Excess of Loss | | 1/1 | | | 11.0 | | | 14.0 | | | — | ** |
Professional services - professional liability |
| Excess of Loss |
| 4/1 | |
| 1.0 | |
| 9.0 | |
| 3.3 | |
Executive products |
| Quota Share |
| 7/1 | |
| N/A | |
| 25.0 | |
| 5.6 | |
Property - risk cover |
| Excess of Loss |
| 1/1 | |
| 1.0 | |
| 24.0 | |
| 1.2 | |
Marine |
| Excess of Loss |
| 6/1 | |
| 2.0 | |
| 28.0 | |
| 2.0 | |
Surety |
| Excess of Loss |
| 4/1 | |
| 2.0 | |
| 73.0 | |
| 9.7 | *** |
* | Maximum retention includes first-dollar retention plus any co-participation we retain through the reinsurance tower. |
** | The workers’ compensation catastrophe treaty responds after our package liability and workers’ compensation excess of loss treaty with no additional retention. |
*** | A limited number of commercial surety accounts are permitted to exceed the $75.0 million limit. These accounts are subject to additional levels of review and are monitored on a monthly basis. |
At each renewal, we consider any plans to change the underlying insurance coverage we offer, as well as updated loss activity, the level of RLI Insurance Group’s surplus, changes in our risk appetite and the cost and availability of reinsurance treaties. In the last renewal cycle, we maintained similar retentions on most lines of business.
PROPERTY REINSURANCE — CATASTROPHE COVERAGE
Our property catastrophe (CAT) reinsurance reduces the financial impact of a CATcatastrophe event involving multiple claims and policyholders, including earthquakes, hurricanes, floods, convective storms, terrorist acts and other aggregating events. Reinsurance limits purchased fluctuate due to changes in the amount of exposure we insure, reinsurance costs, insurance company surplus levels and our risk appetite. In addition, we monitor the expected rate of return for each of our CATcatastrophe lines of business. At high rates of return, we grow the book of business and may purchase additional reinsurance to increase our
10
capacity. As the rate of return decreases, we shrink the bookmay reduce exposure and may purchase less reinsurance as this capacity becomes unnecessary. Our reinsurance coverage for 20182020 through 20202022 are shown in the following table:
Catastrophe Coverages
(in millions)
| | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| ||||||||||||
|
| First- Dollar |
| | Limit |
| First- Dollar |
| | Limit |
| First- Dollar |
| | Limit |
| |||
California Earthquake | | $ | 25 |
| $ | 400 | | $ | 25 |
| $ | 400 | | $ | 25 |
| $ | 300 | |
Non-California Earthquake | |
| 25 |
| | 425 | |
| 25 |
| | 425 | |
| 25 |
| | 325 | |
Other Perils | |
| 25 |
| | 275 | |
| 25 |
| | 275 | |
| 25 |
| | 225 | |
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||||||||||||||
|
| First- Dollar Retention |
|
| Limit |
|
| First- Dollar Retention |
|
| Limit |
|
| First- Dollar Retention |
|
| Limit |
| ||||||
California Earthquake |
| $ | 25 |
|
| $ | 600 |
|
| $ | 25 |
|
| $ | 500 |
|
| $ | 25 |
|
| $ | 500 |
|
Non-California Earthquake |
|
| 25 |
|
|
| 625 |
|
|
| 25 |
|
|
| 525 |
|
|
| 25 |
|
|
| 525 |
|
Other Perils |
|
| 25 |
|
|
| 475 |
|
|
| 25 |
|
|
| 375 |
|
|
| 25 |
|
|
| 375 |
|
These CATcatastrophe limits are in addition to the per-occurrence coverage provided by facultative and other treaty coverages. We have participated in the CATcatastrophe layers purchased by retaining a percentage of each layer throughout this period. Our participation has varied based on price and the amount of risk transferred by each layer. All layers of the treaty include one prepaid reinstatement.
Our property CATcatastrophe program continues to be applied on an excess of loss basis. It attaches after all other reinsurance has been considered. Although covered in one program, limits and attachment points differ for California earthquakes and all other perils. The following charts use information from our CATcatastrophe modeling software to illustrate our pre-tax net retention resulting from particular events that would generate the gross losses.
California Earthquake |
|
| Earthquake outside of California, Wind, Other Perils |
| ||||||||||
(in millions) |
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| (in millions) |
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Modeled |
|
| Modeled |
|
| Modeled |
|
| Modeled |
| ||||
Gross Loss |
|
| Net Loss |
|
| Gross Loss |
|
| Net Loss |
| ||||
$ | 50 |
|
| $ | 21 |
|
| $ | 50 |
|
| $ | 26 |
|
100 |
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| 27 |
|
| 100 |
|
|
| 36 |
| ||
200 |
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| 36 |
|
| 200 |
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| 46 |
| ||
300 |
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| 43 |
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| 300 |
|
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| 55 |
| ||
400 |
|
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| 50 |
|
| 400 |
|
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| 58 |
| ||
500 |
|
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| 56 |
|
| 500 |
|
|
| 65 |
| ||
625 |
|
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| 64 |
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| |
Catastrophe - California Earthquake
(in millions)
| | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2019 | | 2018 | | ||||||||||||
Modeled |
| Ceded |
| Net |
| Ceded |
| Net |
| Ceded |
| Net | | |||||||
Gross Loss | | Losses | | Losses | | Losses | | Losses | | Losses | | Losses | | |||||||
$ | 50 | | $ | 29 | | $ | 21 | | $ | 29 | | $ | 21 | | $ | 29 | | $ | 21 | |
| 100 | |
| 73 | |
| 27 | |
| 73 | |
| 27 | |
| 72 | |
| 28 | |
| 200 | |
| 164 | |
| 36 | |
| 163 | |
| 37 | |
| 163 | |
| 37 | |
| 300 | |
| 258 | |
| 42 | |
| 257 | |
| 43 | |
| 256 | |
| 44 | |
| 450 | | | 397 | | | 53 | | | 396 | | | 54 | | | 391 | | | 59 | |
Catastrophe - Other (Earthquake outside of California, Wind, Other)
(in millions)
| | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2019 | | 2018 |
| ||||||||||||
Modeled |
| Ceded |
| Net |
| Ceded |
| Net |
| Ceded |
| Net |
| |||||||
Gross Loss | | Losses | | Losses | | Losses | | Losses | | Losses | | Losses |
| |||||||
$ | 25 | | $ | 7 | | $ | 18 | | $ | 7 | | $ | 18 | | $ | 6 | | $ | 19 | |
| 50 | |
| 24 | |
| 26 | |
| 24 | |
| 26 | |
| 24 | |
| 26 | |
| 100 | |
| 63 | |
| 37 | |
| 63 | |
| 37 | |
| 64 | |
| 36 | |
| 200 | |
| 145 | | | 55 | | | 144 | | | 56 | | | 143 | | | 57 | |
| 300 | |
| 225 | |
| 75 | | | 226 | |
| 74 | | | 224 | | | 76 | |
In the above table,tables, projected losses for 20202022 were estimated based on our exposure as of December 31, 2019,2021, utilizing the treaty structure in place as of January 1, 2020. All previous years were estimated similarly by utilizing the treaty structure in place at the start of the listed year and the exposure at the end of the previous year.
2022. The previous tables were generated using theoretical probabilities of events occurring in areas where our portfolio of in-force policies could generate the level of loss illustrated. Actual results could vary significantly from these tables as the actual nature or severity of a particular event cannot be predicted with any reasonable degree of accuracy. Reinsurance limits are purchased based on the anticipated losses from large events. The largest losses shown above are possible, but have a lowlower probability of actually occurring. However, there is a remote chance that a larger event could occur. If the actual event losses are larger than anticipated, we could retain additional losses above the limit of our CATcatastrophe reinsurance.
We continuouslyregularly monitor and quantify our exposure to catastrophes. In the normal course of business, we manage our concentrations of exposures to catastrophic events, primarily by limiting concentrations of locations insured to acceptable levels and by purchasing reinsurance. Exposure and coverage detail is recorded for each risk location. We quantify and monitor
11
the total policy limit insured in each geographical region. In addition, we use third-party CATcatastrophe exposure models and an internally developed analysis to assess each risk to ensure we include an appropriate charge for assumed CATcatastrophe risks.
CATCatastrophe exposure modeling is inherently uncertain due to the model’s reliance on an infrequent observation of actual events, and exposure data, increasing the importance of capturing accurate policy coverage data. The model results are used both in the underwriting analysis of individual risks and at a corporate level for the aggregate book of CAT-exposedcatastrophe-exposed business. From both perspectives, we consider the potential loss produced by individual events that represent moderate-to-high loss potential at varying probabilities and magnitudes. In calculating potential losses, we select appropriateuse assumptions including, but not limited to, loss amplification and loss adjustment expense. We establish risk tolerances at the portfolio level based on market conditions, the level of reinsurance available, changes to the assumptions in the CATcatastrophe models, rating agency capital constraints, underwriting guidelines and coverages and internal preferences. Our risk tolerances for each type of CAT,catastrophe, and for all perils in aggregate, change over time as these internal and external conditions change.
We are required to report to the rating agencies estimated loss to a single event that could include all potential earthquakes and hurricanes contemplated by the CATcatastrophe modeling software. This reported loss includes the impact of insured losses based on the estimated frequency and severity of potential events, loss adjustment expense, reinstatements paid after the loss, reinsurance recoveries and taxes. Based on the CATcatastrophe reinsurance treaty purchased on January 1, 2020,2022, there is a 99.6 percent likelihood that the net loss will be less than 15.14.6 percent of policyholders’ statutory surplus as of December 31, 2019.2021. The exposure levels are within our tolerances for this risk.
LOSSES AND SETTLEMENT EXPENSESOPERATING RATIOS
OVERVIEW
Loss and loss adjustment expense (LAE) reserves represent our best estimate of ultimate payments for losses and related settlement expenses from claims that have been reported but not paid (case reserves) and losses that have been incurred but not yet reported (IBNR) to the Company. Loss reserves do not represent an exact calculation of liability, but instead represent our estimates, generally utilizing individual claim estimates, actuarial expertise and estimation techniques at a given accounting date. The loss reserve estimates are expectations of what ultimate settlement and administration of claims will cost upon final resolution. These estimates are based on facts and circumstances then known to the Company, review of historical settlement patterns, estimates of trends in claims frequency and severity, projections of loss costs, expected interpretations of legal theories of liability and many other factors. In establishing reserves, we also take into account estimated recoveries from reinsurance, salvage and subrogation. The reserves are reviewed regularly by a team of actuaries we employ.
Net loss and loss adjustment reserves by product line at year-end 2019 and 2018 are illustrated in the following table. LAE is classified in the table as either allocated loss adjustment expense (ALAE) or unallocated loss adjustment expense (ULAE). ALAE refers to estimates of claim settlement expenses that can be identified with a specific claim or case, while ULAE cannot be identified with a specific claim. For a detailed discussion of loss reserves, refer to our critical accounting policy in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
12
| | | | | | | | | | | | | | | | | | | |
(as of December 31, in thousands) | | 2019 | | 2018 |
| ||||||||||||||
Product Line |
| Case |
| IBNR |
| Total |
| Case |
| IBNR |
| Total |
| ||||||
Casualty segment net loss and ALAE reserves |
| | |
| | |
| | |
| | |
| | |
| | | |
Commercial excess | | $ | 14,967 | | $ | 135,180 | | $ | 150,147 | | $ | 8,172 | | $ | 122,690 | | $ | 130,862 | |
Personal umbrella | |
| 32,390 | |
| 43,672 | |
| 76,062 | |
| 21,208 | |
| 42,203 | |
| 63,411 | |
General liability | |
| 58,236 | |
| 176,405 | |
| 234,641 | |
| 68,295 | |
| 171,640 | |
| 239,935 | |
Commercial transportation | |
| 83,619 | |
| 56,321 | |
| 139,940 | |
| 87,544 | |
| 46,015 | |
| 133,559 | |
Professional services | |
| 35,076 | |
| 85,518 | |
| 120,594 | |
| 35,127 | |
| 85,002 | |
| 120,129 | |
Small commercial | |
| 16,660 | |
| 47,030 | |
| 63,690 | |
| 19,351 | |
| 37,885 | |
| 57,236 | |
Executive products | |
| 24,921 | |
| 61,028 | |
| 85,949 | |
| 21,617 | |
| 47,581 | |
| 69,198 | |
Other casualty | |
| 35,442 | |
| 111,198 | |
| 146,640 | |
| 29,850 | |
| 70,266 | |
| 100,116 | |
Property segment net loss and ALAE reserves | | | | | | | | | | | | | | | | | | | |
Marine | |
| 13,506 | |
| 26,299 | |
| 39,805 | |
| 11,426 | |
| 20,189 | |
| 31,615 | |
Commercial property | |
| 10,461 | |
| 15,603 | |
| 26,064 | |
| 26,012 | |
| 13,021 | |
| 39,033 | |
Specialty personal | | | 1,746 | | | 4,794 | | | 6,540 | | | 2,465 | | | 3,490 | | | 5,955 | |
Other property | |
| 982 | |
| 3,266 | |
| 4,248 | |
| 2,060 | |
| 3,751 | |
| 5,811 | |
Surety segment net loss and ALAE reserves | | | | | | | | | | | | | | | | | | | |
Miscellaneous | |
| 712 | |
| 5,249 | |
| 5,961 | |
| 2,932 | |
| 3,769 | |
| 6,701 | |
Commercial | | | 1,425 | | | 8,889 | | | 10,314 | | | 2,332 | | | 8,726 | | | 11,058 | |
Contract | |
| 2,234 | |
| 7,264 | |
| 9,498 | |
| 4,311 | |
| 7,639 | |
| 11,950 | |
Latent liability net loss and ALAE reserves | |
| 4,553 | |
| 12,914 | |
| 17,467 | |
| 5,061 | |
| 13,828 | |
| 18,889 | |
Total net loss and ALAE reserves | | $ | 336,930 | | $ | 800,630 | | $ | 1,137,560 | | $ | 347,763 | | $ | 697,695 | | $ | 1,045,458 | |
ULAE reserves | |
| — | |
| 52,275 | |
| 52,275 | |
| — | |
| 50,891 | |
| 50,891 | |
Total net loss and LAE reserves | | $ | 336,930 | | $ | 852,905 | | $ | 1,189,835 | | $ | 347,763 | | $ | 748,586 | | $ | 1,096,349 | |
Following is a table of significant risk factors involved in estimating losses grouped by major product line. We distinguish between loss ratio risk and reserve estimation risk. Loss ratio risk refers to the possible dispersion of loss ratios from year to year due to inherent volatility in the business, such as high severity or aggregating exposures. Reserve estimation risk recognizes the difficulty in estimating a given year’s ultimate loss liability. As an example, our property CAT business (included below in other property) has significant variance in year over year results; however, its reserving estimation risk is relatively moderate.
13
Significant Risk Factors
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On a quarterly basis, actuaries perform a ground-up reserve study of the expected value of the unpaid loss and LAE derived using multiple standard actuarial methodologies. In addition, an emergence analysis is completed quarterly to determine if further adjustments are necessary. The purpose of this analysis is to provide validation of our carried loss reserves. These estimates are then compared to the carried loss reserves to determine the appropriateness of the current reserve balance.
The methodologies we have chosen to incorporate are a function of data availability and are reflective of our own book of business. From time to time, we evaluate the need to add supplementary methodologies. New methods are incorporated if it is believed they improve the estimate of our ultimate loss and LAE liability. All of the actuarial methods eventually converge to the same estimate as an accident year matures. Our core methodologies are listed below with a short description and their relative strengths and weaknesses:
Paid Loss Development — Historical payment patterns for prior claims are used to estimate future payment patterns for current claims. These patterns are applied to current payments by accident year to yield an expected ultimate loss.
14
Strengths: The method reflects only the claim dollars that have been paid and is not subject to case-basis reserve changes or changes in case reserve practices.
Weaknesses: External claims environment changes can impact the rate at which claims are settled and losses paid (e.g. increase in attorney involvement or change in legal precedent). Adjustments to reflect changes in payment patterns on a prospective basis are difficult to quantify. For losses that have occurred recently, payments can be minimal and thus early estimates are subject to significant instability.
Incurred Loss Development — Historical case-incurred patterns (paid losses plus case reserves) for past claims are used to estimate future case-incurred amounts for current claims. These patterns are applied to current case-incurred losses by accident year to yield an expected ultimate loss.
Strengths: Losses are reported more quickly than paid, therefore, the estimates stabilize sooner. The method reflects more information in the analysis than the paid loss development method.
Weaknesses: Method involves additional estimation risk if significant changes to case reserving practices have occurred.
Case Reserve Development — Patterns of historical development in reported losses relative to historical case reserves are determined. These patterns are applied to current case reserves by accident year and the result is combined with paid losses to yield an expected ultimate loss.
Strengths: Like the incurred development method, this method benefits from using the additional information available in case reserves that is not available from paid losses only. It also can provide a more reasonable estimate than other methods when the proportion of claims still open for an accident year is unusually high or low.
Weaknesses: It is subject to the risk of changes in case reserving practices or philosophy. It may provide unstable estimates when an accident year is immature and more of the IBNR is expected to come from unreported claims rather than development on reported claims and when accident years are very mature with infrequent case reserves.
Expected Loss Ratio — Historical loss ratios, in combination with projections of frequency and severity trends, as well as estimates of price and exposure changes, are analyzed to produce an estimate of the expected loss ratio for each accident year. The expected loss ratio is then applied to the earned premium for each year to estimate the expected ultimate losses. The current accident year expected loss ratio is also the prospective loss and ALAE ratio used in our initial IBNR generation process.
Strengths: Reflects an estimate independent of how losses are emerging on either a paid or a case reserve basis. This method is particularly useful in the absence of historical development patterns or where losses take a long time to emerge.
Weaknesses: Ignores how losses are actually emerging and thus produces the same estimate of ultimate loss regardless of favorable/unfavorable emergence.
Paid and Incurred Bornhuetter/Ferguson (BF) — This approach blends the expected loss ratio method with either the paid or incurred loss development method. In effect, the BF methods produce weighted average indications for each accident year. As an example, if the current accident year for commercial automobile liability is estimated to be 20 percent paid, then the paid loss development method would receive a weight of 20 percent and the expected loss ratio method would receive an 80 percent weight. Over time, this method will converge with the ultimate estimated by the respective loss development method.
Strengths: Reflects actual emergence that is favorable/unfavorable, but assumes remaining emergence will continue as previously expected. Does not overreact to the early emergence (or lack of emergence) where patterns are most unstable.
Weaknesses: Could potentially understate favorable or unfavorable development by putting weight on the expected loss ratio.
In most cases, multiple estimation methods will be valid for the particular facts and circumstances of the claim liabilities being evaluated. Each estimation method has its own set of assumption variables and its own advantages and disadvantages, with no single estimation method being better than the others in all situations, and no one set of assumption variables being meaningful for all product line components. The relative strengths and weaknesses of the particular estimation methods, when
15
applied to a particular group of claims, can also change over time. Therefore, the weight given to each estimation method will likely change by accident year and with each evaluation.
The actuarial central estimates typically follow a progression that places significant weight on the BF methods when accident years are younger and claim emergence is immature. As accident years mature and claims emerge over time, increasing weight is placed on the incurred development method, the paid development method and the case reserve development method. For product lines with faster loss emergence, the progression to greater weight on the incurred and paid development methods occurs more quickly.
For our long and medium-tail products, the BF methods are typically given the most weight for the first 36 months of evaluation. These methods are also predominant for the first 12 months of evaluation for short-tail lines. Beyond these time periods, our actuaries apply their professional judgment when weighting the estimates from the various methods deployed but place significant reliance on the expected stage of development in normal circumstances.
Judgment can supersede this natural progression if risk factors and assumptions change, or if a situation occurs that amplifies a particular strength or weakness of a methodology. Extreme projections are critically analyzed and may be adjusted, given less credence or discarded altogether. Internal documentation is maintained that records any substantial changes in methods or assumptions from one loss reserve study to another.
RESERVE SENSITIVITIES
There are three major parameters that have significant influence on our actuarial estimates of ultimate liabilities by product. They are the actual losses that are reported, the expected loss emergence pattern and the expected loss ratios used in the analyses. If the actual losses reported do not emerge as expected, it may cause the Company to challenge all or some of our previous assumptions. We may change expected loss emergence patterns, the expected loss ratios used in our analysis and/or the weights we place on a given actuarial method. The impact will be much greater and more leveraged for products with longer emergence patterns. Our general liability product is an example of a product with a relatively long emergence pattern. The following chart illustrates the sensitivity of our general liability reserve estimates to these key parameters. We believe the scenarios to be reasonable as similar favorable variations have occurred in recent years. For example, our general liability emergence has ranged from 8 percent to 22 percent favorable and our management liability emergence has ranged from 1 percent to 34 percent adverse over the last three years, while our overall emergence for all products combined has ranged from 9 percent to 33 percent favorable. The numbers below are the changes in estimated ultimate loss and ALAE in millions of dollars as of December 31, 2019, resulting from the change in the parameters shown. These parameters were applied to a general liability net loss and LAE reserve balance of $234.6 million, in addition to associated ULAE and latent liability reserves, at December 31, 2019.
| | | | | | | |
|
| Result from favorable |
| Result from unfavorable |
| ||
(in millions) | | change in parameter | | change in parameter |
| ||
| | | | | | |
|
+/-5 point change in expected loss ratio for all accident years | | $ | (13.8) | | $ | 13.8 | |
|
| | | | | | |
+/-10% change in expected emergence patterns | | $ | (6.2) | | $ | 5.9 | |
| | | | | | | |
+/-30% change in actual loss emergence over a calendar year | | $ | (10.0) | | $ | 10.0 | |
| | | | | | | |
Simultaneous change in expected loss ratio (5pts), expected emergence patterns (10%) and actual loss emergence (30%). | | $ | (29.5) | | $ | 30.1 | |
There are often significant inter-relationships between our reserving assumptions that have offsetting or compounding effects on the reserve estimate. Thus, in almost all cases, it is impossible to discretely measure the effect of a single assumption or construct a meaningful sensitivity expectation that holds true in all cases. The scenario above is representative of general liability, one of our largest and longest-tailed products. It is unlikely that all of our products would have variations as wide as illustrated in the example. It is also unlikely that all of our products would simultaneously experience favorable or unfavorable loss development in the same direction or at their extremes during a calendar year. Because our portfolio is made up of a
16
diversified mix of products, there would ordinarily be some offsetting favorable and unfavorable emergence by product as actual losses start to emerge and our loss estimates become more reliable.
OPERATING RATIOS
PREMIUMS TO SURPLUS RATIO
The following table shows, for the periods indicated, our insurance subsidiaries’ statutory ratios of net premiums written to policyholders’ surplus. While there is no statutory requirement applicable to the Company that establishes a permissible net premiums written to surplus ratio, guidelines established by the National Association of Insurance Commissioners (NAIC) provide that this ratio should generally be no greater than 3 to 1. While the NAIC provides this general guideline, rating agencies often require a more conservative ratio to maintain strong or superior ratings.
| | | | | | | | | | | | | | | | |||||||||||||||||||||
| | Year Ended December 31, |
| |||||||||||||||||||||||||||||||||
|
| Year Ended December 31, |
| |||||||||||||||||||||||||||||||||
(dollars in thousands) |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
| ||||||||||
Statutory net premiums written | | $ | 860,337 | | $ | 823,175 | | $ | 749,854 | | $ | 740,952 | | $ | 722,189 | |
| $ | 1,057,533 |
|
| $ | 892,088 |
|
| $ | 860,337 |
|
| $ | 823,175 |
|
| $ | 749,854 |
|
Policyholders’ surplus | |
| 1,029,671 | |
| 829,775 | |
| 864,554 | |
| 859,976 | |
| 865,268 | |
|
| 1,240,649 |
|
|
| 1,121,592 |
|
|
| 1,029,671 |
|
|
| 829,775 |
|
|
| 864,554 |
|
Ratio | |
| 0.8 to 1 | |
| 1.0 to 1 | |
| 0.9 to 1 | |
| 0.9 to 1 | |
| 0.8 to 1 | |
| 0.9 to 1 |
|
| 0.8 to 1 |
|
| 0.8 to 1 |
|
| 1.0 to 1 |
|
| 0.9 to 1 |
| |||||
COMBINED RATIO AND STATUTORY COMBINED RATIO
Our underwriting experience is best indicated by our 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). The difference between the combined ratio and 100 reflects the per-dollarper dollar rate of underwriting income or loss, with ratios below 100 indicating underwriting profit and ratios above 100 indicating underwriting loss.
| | | | | | | | | | | |
| | Year Ended December 31, |
| ||||||||
|
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
|
Loss ratio |
| 49.3 |
| 54.1 |
| 54.4 |
| 48.0 |
| 42.7 | |
Expense ratio |
| 42.6 |
| 40.6 |
| 42.0 |
| 41.5 |
| 41.8 | |
Combined ratio |
| 91.9 |
| 94.7 |
| 96.4 |
| 89.5 |
| 84.5 | |
| | | | | | | | | | | |
|
| Year Ended December 31, |
| |||||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||||
Loss ratio |
|
| 46.5 |
|
|
| 51.2 |
|
|
| 49.3 |
|
|
| 54.1 |
|
|
| 54.4 |
|
Expense ratio |
|
| 40.3 |
|
|
| 40.8 |
|
|
| 42.6 |
|
|
| 40.6 |
|
|
| 42.0 |
|
Combined ratio |
|
| 86.8 |
|
|
| 92.0 |
|
|
| 91.9 |
|
|
| 94.7 |
|
|
| 96.4 |
|
We also calculate the statutory combined ratio, which is not indicative of underwriting income due to accounting for policy acquisition costs differently for statutory accounting purposes. 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 (expense ratio). The difference between the combined ratio and 100 reflects the per-dollar rate of underwriting income or loss.
| | | | | | | | | | | |
| | Year Ended December 31, |
| ||||||||
Statutory |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
|
Loss ratio |
| 49.3 | | 54.1 | | 54.4 | | 48.0 | | 42.7 | |
Expense ratio |
| 41.8 | | 39.9 | | 41.8 | | 41.0 | | 41.2 | |
Combined ratio |
| 91.1 | | 94.0 | | 96.2 | | 89.0 | | 83.9 | |
| | | | | | | | | | | |
P&C industry combined ratio |
| 96.8 | * | 99.2 | ** | 103.9 | ** | 100.7 | ** | 97.9 | ** |
|
| Year Ended December 31, |
|
| |||||||||||||||||
Statutory |
| 2021 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| |||||
Statutory loss ratio |
|
| 46.5 |
|
|
| 51.0 |
|
|
| 49.3 |
|
|
| 54.1 |
|
|
| 54.4 |
|
|
Statutory expense ratio |
|
| 38.8 |
|
|
| 40.8 |
|
|
| 41.8 |
|
|
| 39.9 |
|
|
| 41.8 |
|
|
Statutory combined ratio |
|
| 85.3 |
|
|
| 91.8 |
|
|
| 91.1 |
|
|
| 94.0 |
|
|
| 96.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P&C industry combined ratio |
|
| 102.7 |
| * |
| 98.8 |
| ** |
| 98.9 |
| ** |
| 99.2 |
| ** |
| 103.9 |
| ** |
*Source: Conning (2019). Property-Casualty Forecast & Analysis: By Line of Insurance, Fourth Quarter 2019. Estimated for the year ended December 31, 2019.
* | Source: Conning (2021). Property-Casualty Forecast & Analysis: By Line of Insurance, Fourth Quarter 2021. Estimated for the year ended December 31, 2021. |
** | Source: AM Best (2021). Aggregate & Averages – Property/Casualty, United States & Canada. 2017 – 2020. |
**Source: AM Best (2019). Aggregate & Averages – Property/Casualty, United States & Canada. 2015 – 2018.INVESTMENTS
INVESTMENTS
Our investment portfolio serves as the primary resource for loss payments and secondly as a source of income to support operations. Our investment strategy is based on preservation of capital as the first priority, with a secondary focus on growing book value through total return. Investments of the highest quality and marketability are critical for preserving our claims-paying ability. Our portfolio contains no derivatives or off-balance sheet structured investments. In addition, we have a
17
diversified investment portfolio that distributes credit risk across many issuers and a policy that limits aggregate credit exposure. Despite periodic fluctuations in market value, our equity portfolio is part of a long-term asset allocation strategy and has contributed significantly to our growth in book value. Our portfolio does not contain derivatives.
Investment portfolios are managed both internally and externally by experienced portfolio managers. We follow an investment policy that is reviewed quarterly and revised periodically, with oversight conducted by our senior officers and board of directors.
Our investments include fixed income debt securities, common stock equity securities, exchange traded funds (ETFs) and a small number of limited partnership interests. The fixed income portfolio decreased to 77was 76 percent of the total portfolio, down 1% from the
prior year, while the equity allocation increased to 18was 19 percent of the overall portfolio.portfolio, the same as the previous year. Other invested assets represented 32 percent of the total portfolio and include investments in low income housing tax credit partnerships, membership stock in the Federal Home Loan Bank of Chicago and investments in private funds. The remaining 23 percent was made up of cash and cash equivalents. As of December 31, 2019, 852021, 79 percent of the fixed income portfolio was rated A or better and 6659 percent was rated AA or better.
We classify all of the securities in our fixed income portfolio as available-for-sale, which are carried at fair value. Beyond available operating cash flow, the portfolio provides an additional source of liquidity and can be used to address potential future changes in our asset/liability structure.
Aggregate maturities for the fixed-incomefixed income portfolio as of December 31, 2019,2021, are as follows:
| | | | | | | | | | | | | |
|
| Par |
| Amortized |
| Fair |
| Carrying |
| ||||
(in thousands) | | Value | | Cost | | Value | | Value |
| ||||
2020 | | $ | 49,993 | | $ | 49,951 | | $ | 50,170 | | $ | 50,170 | |
2021 | |
| 102,351 | |
| 102,828 | |
| 104,607 | |
| 104,607 | |
2022 | |
| 81,609 | |
| 82,273 | |
| 84,095 | |
| 84,095 | |
2023 | |
| 110,305 | |
| 110,813 | |
| 115,582 | |
| 115,582 | |
2024 | |
| 97,592 | |
| 99,142 | |
| 102,723 | |
| 102,723 | |
2025 | |
| 171,253 | |
| 172,202 | |
| 180,827 | |
| 180,827 | |
2026 | |
| 140,953 | |
| 140,534 | |
| 146,951 | |
| 146,951 | |
2027 | |
| 120,129 | |
| 120,787 | |
| 127,592 | |
| 127,592 | |
2028 | |
| 67,002 | |
| 69,415 | |
| 74,199 | |
| 74,199 | |
2029 | |
| 74,025 | |
| 77,372 | |
| 83,530 | |
| 83,530 | |
2030 | |
| 42,433 | |
| 45,920 | |
| 48,209 | |
| 48,209 | |
2031 | |
| 20,060 | |
| 21,216 | |
| 22,590 | |
| 22,590 | |
2032 | |
| 4,030 | |
| 4,641 | |
| 4,948 | |
| 4,948 | |
2033 | |
| 5,742 | |
| 6,675 | |
| 7,098 | |
| 7,098 | |
2034 | |
| 3,010 | |
| 3,039 | |
| 3,071 | |
| 3,071 | |
2035 and later | |
| 164,500 | |
| 173,830 | |
| 181,859 | |
| 181,859 | |
Total excluding Mtge/ABS/CMBS* | | $ | 1,254,987 | | $ | 1,280,638 | | $ | 1,338,051 | | $ | 1,338,051 | |
| | | | | | | | | | | | | |
Mtge/ABS/CMBS* | | $ | 627,652 | | $ | 634,640 | | $ | 645,035 | | $ | 645,035 | |
| | | | | | | | | | | | | |
Grand Total | | $ | 1,882,639 | | $ | 1,915,278 | | $ | 1,983,086 | | $ | 1,983,086 | |
(in thousands) |
| Amortized Cost |
|
| Fair Value |
| ||
Due in one year or less |
| $ | 57,625 |
|
| $ | 58,134 |
|
Due after one year through five years |
|
| 626,953 |
|
|
| 647,068 |
|
Due after five years through 10 years |
|
| 537,777 |
|
|
| 560,653 |
|
Due after 10 years |
|
| 496,778 |
|
|
| 512,791 |
|
ABS/CMBS/MBS* |
|
| 627,134 |
|
|
| 631,241 |
|
Total available-for-sale |
| $ | 2,346,267 |
|
| $ | 2,409,887 |
|
*Mortgage-backed, asset-backed and commercial mortgage-backed
* | Asset-backed, commercial mortgage-backed and mortgage-backed securities |
We had cash short-term investments and fixed income securities maturing within one year of $96.4$146.9 million at year-end 2019.2021. This total represented 45 percent of cash and investments, similar toa slight decrease from year-end 2018. Our short-term investments consist of investments with original maturities of 90 days or less, primarily AAA-rated prime and government money market funds.2020.
REGULATION
STATE REGULATION
As an insurance holding company, we as well asand our insurance company subsidiaries, are subject to regulation by the states and territories in which the insurance subsidiaries are domiciled or transact business. Registration in each insurer’s state of domicile requires periodic reporting to such state’s insurance regulatory authority of the financial, operational and
18
management information regarding the insurers within the holding company system. All transactions within a holding company system affecting insurers must have fair and reasonable terms, and the insurers’ policyholders’ surplus following any transaction must be both reasonable in relation to its outstanding liabilities and adequate for its needs. Notice to and, in some cases, consent from regulators is required prior to the consummationcompletion of certain transactions affecting insurance company subsidiaries of the holding company system. Each state and territory individually regulates the insurance operations of both insurance companies and insurance agents/brokers. Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other investors.
TwoThe primary focusesfocus of state regulation of insurance companies areis financial solvency and market conduct practices. Regulations designed to ensure the financial solvency of insurers are enforced by various filing, reporting and examination requirements. Marketplace oversight is conducted by monitoring and periodically examining trade practices, approving policy forms, licensing of agents and brokers and requiring the filing and, in some cases, approval of premiums and commission rates to ensure they are fair and adequate.
Because our insurance company subsidiaries operate in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam, we must comply with the individual insurance laws, regulations, rules and case law of each state and territory, including those regulating the filing of insurance rates and forms. Each of our three insurance company subsidiaries is domiciled in Illinois, with the Illinois Department of Insurance (IDOI) as its principal insurance regulator.
As a holding company, the amount of dividends we are able to pay depends upon the funds available for distribution, including dividends or distributions from our subsidiaries. The Illinois insurance laws applicable to our insurance company subsidiaries impose certain restrictions on their ability to pay dividends. The Illinois insurance holding company laws require that ordinary dividends paid by an insurance company be reported to the IDOI prior to payment of the dividend, and that extraordinary dividends may not be paid without such regulator’s prior approval (or non-disapproval)the absence of disapproval). An extraordinary dividend is generally defined under Illinois law as a dividend that, together with all other dividends made within the past 12 months, exceeds the greater of 100 percent of the insurer’s statutory net income for the 12-month period ending as of December 31 of the preceding year, or 10 percent of the insurer’s statutory policyholders’ surplus as of the preceding year-end. The IDOI has broad authority to prevent the reduction of statutory surplus to inadequate levels, and there is no assurance that extraordinary dividend payments would be permitted.
In addition, changes to the state insurance regulatory requirements are frequent, including changes caused by state legislation, regulations by the state insurance departments and court rulings. State insurance regulators are members of the National Association
of Insurance Commissioners (NAIC). The NAIC is a non-governmental regulatory support organization that seeks to promote uniformity and to enhance state regulation of insurance through various activities, initiatives and programs. Among other regulatory and insurance company support activities, the NAIC maintains a state insurance department accreditation program and proposes model laws, regulations and guidelines for adoption by state legislatures and insurance regulators. Such proposed laws and regulations cover areas including risk assessments, corporate governance and financial and accounting rules. To the extent such proposed model laws and regulations are adopted by states, they will apply to insurance carriers.
Illinois has adopted the Amended Holding Company Model Act, which imposes reporting obligations on parents and other affiliates of licensed insurers or reinsurers, with the purpose of protecting the licensed companies from enterprise risk. The Amended Holding Company Model Act requires the ultimate controlling person (in our case RLI Corp.) to file an annual enterprise risk report identifying the material risks within the insurance holding company system that could pose enterprise risk to the licensed companies. An enterprise risk is generally defined as an activity or event involving affiliates of an insurer that could have a material adverse effect on the insurer or the insurer’s holding company system. We report on these risks on an annual basis and are in compliance with this law.
Illinois has adopted the Own Risk and Solvency Assessment (ORSA) model act. ORSA is applicable to Illinois-domiciledIllinois domiciled insurance companies meetingthat meet certain size requirements, including ours. The ORSA program is a key component of an insurance company’s overall enterprise risk management (ERM) framework, whichand is the process by which organizations identify, measure, monitor and manage key risks affecting the entire enterprise. The Company files an ORSA summary report with the IDOI each year, which includes an internal identification, description and assessment of the risks associated with our business plan and the sufficiency of capital resources to support those risks.
The NAIC uses a risk-based capital (RBC) model to monitor and regulate the solvency of licensed property and casualty insurance companies. Illinois has adopted a version of the NAIC’s model law. The RBC calculation is used to measure an insurer’s capital adequacy with respect to: the risk characteristics of the insurer’s premiums written and unpaid losses and loss
19
adjustment expenses, rate of growth and quality of assets, among other measures. Depending on the results of the RBC calculation, insurers may be subject to varying degrees of regulatory action. RBC is calculated annually by insurers, as of December 31 of each year. As of December 31, 2019,2021, each of our insurance company subsidiaries had RBC levels significantly in excess of the company action level RBC, defined as being 200 percent of the authorized control level RBC, which would prompt corrective action under Illinois law. RLI Ins., our principal insurance company subsidiary, had an authorized control level RBC of $191.0$225.1 million compared to actual statutory capital and surplus of $1.0$1.2 billion as of December 31, 2019,2021, resulting in statutory capital that is more than five times the authorized control level. The calculation of RBC requires certain judgments to be made, and, accordingly, each of our insurance company subsidiaries’ current RBC may be greater or less than the RBC calculated as of any date of determination.
Each of our insurance company subsidiaries is required to file detailed annual reports, including financial statements, in accordance with prescribed statutory accounting rules, with regulatory officials in the jurisdictions in which they conduct business. The quarterly and annual financial reports filed with the states utilize statutory accounting principles (SAP) that are different from generally accepted accounting principles in the United States of America (GAAP). As a basis of accounting, SAP was developed to monitor and regulate the solvency of insurance companies. In developing SAP, insurance regulators were primarily concerned with assuring an insurer’s ability to pay all its current and future obligations to policyholders. As a result, statutory accounting focuses on conservatively valuing the assets and liabilities of insurers, generally in accordance with standards specified by the insurer’s domiciliary state. The values for assets, liabilities and equity reflected in financial statements prepared in accordance with GAAP are usually different from those reflected in financial statements prepared under SAP.
As part of their routine regulatory oversight process, state insurance departments conduct periodic detailed examinations, generally once every three to five years, of the books, records, accounts and operations of insurance companies that are domiciled in their states. Examinations are generally carried out in cooperation with the insurance departments of other, non-domiciliary states under guidelines promulgated by the NAIC. The most recent examination report of our insurance company subsidiaries completed by the IDOI was issued on November 27, 2018, for the five-year period ending December 31, 2017. The examination report is available to the public.
Each of our insurance company subsidiaries is subject to Illinois laws and regulations that impose restrictions on the amount and type of investments our insurance company subsidiaries may have. Such laws and regulations generally require diversification of the insurer’s investment portfolio and limit the amounts of investments in certain asset categories, such as below investment grade fixed income securities, real estate-related equity, other equity investments and derivatives. Failure to comply with these laws and regulations would generally cause investments that exceed regulatory limitations to be treated as non-admitted assets for measuring statutory surplus and, in some instances, could require the divestiture of such non-qualifying investments.
Many jurisdictions have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel or non-renew policies. Furthermore, certain states prohibit an insurer from withdrawing one or more lines of business from the state, except pursuant to a plan that is approved by the state insurance department. The state
insurance department may disapprove a withdrawal plan that may lead to marketplace disruption. Laws and regulations that limit cancellation and non-renewal, and that subject program withdrawals to prior approval requirements, may restrict our ability to exit unprofitable marketplaces in a timely manner.
Virtually all states require licensed insurers to participate in various forms of guaranty associations in order to bear a portion of the loss suffered by qualified policyholders of insurance companies that become insolvent. Depending upon state law, licensed insurers can be assessed a small percentage of the annual premiums written for the relevant lines of insurance in that state to contribute to paying the claims of insolvent insurers. These assessments may increase or decrease in the future, depending upon the rate of insurance company insolvencies. In some states, these assessments may be wholly or partially recovered through policy fees paid by insureds. We cannot predict the amount and timing of future assessments. Therefore, the liabilities we have currently established for these potential assessments may not be adequate and an assessment may materially impact our financial condition.
In addition, the insurance holding company laws require advance approval by state insurance commissioners of any change in control of an insurance company that is domiciled, or in some cases, having such substantial business that it is deemed to be commercially domiciled in that state. “Control” is generally presumed to exist through the ownership of 10 percent or more of the voting securities of a domestic insurance company or of any company that controls a domestic insurance company. In addition, insurance laws in many states contain provisions that require pre-notification to the insurance commissioners of a change in control of a non-domestic insurance company licensed in those states. Any future transactions
20
that would constitute a change in control of our insurance company subsidiaries, including a change of control of RLI Ins., would generally require the party acquiring control to obtain the prior approval by the insurance departments of the insurance company subsidiaries’ state of domicile (Illinois) or commercial domicile, if applicable. It may also require pre-acquisition notification in applicable states that have adopted pre-acquisition notification provisions. Obtaining these approvals could result in a material delay of, or deter, any such transaction.
In light of the number and severity of recent U.S. company data breaches, some states have enacted new insurance laws that require certain regulated entities to implement and maintain comprehensive information security programs to safeguard the personal information of insureds. In 2017, the New York State Department of Financial Services (NYDFS) enacted a cybersecurity regulation. This regulation requires banks, insurance companies and other financial services institutions regulated by the NYDFS to establish and maintain a cybersecurity program “designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry.” We have implemented the requirements of the regulation and are in compliance with it. We anticipate that the NYDFS will examine the cybersecurity programs of financial institutions in the future and that may result in additional regulatory scrutiny, expenditure of resources and possible regulatory actions and reputational harm.
In October 2017, the NAIC adopted a new Insurance Data Security Model Law. The law is intended to establish the standards for data security and standards for the investigation and notification of data breaches applicable to insurance companies domiciled in states adopting such law, with provisions that are generally consistent with the NYDFS cybersecurity regulation discussed above. As with all NAIC model laws, this model law must be adopted by a state before becoming law in the state. Illinois has not adopted a version of the Insurance Data Security Model Law. We expect cybersecurity risk management, prioritization and reporting to continue to be an area of significant regulatory focus by such regulatory bodies and self-regulatory organizations.
The NAIC adopted the Insurer Climate Risk Disclosure Data Survey to provide regulators with information about the assessment of risks posed by climate change to insurers and the actions insurers are taking in response to their understanding of climate change risks. In 2021, the Company provided responses for reporting year 2020 which may be accessed on the California Department of Insurance’s website.
The rates, policy terms and conditions of reinsurance agreements generally are not subject to regulation by any regulatory authority. However, the ability of a ceding insurer to take credit for the reinsurance purchased from reinsurance companies is a significant component of reinsurance regulation. Typically, a ceding insurer will only enter into a reinsurance agreement if it can obtain credit against its reserves on its statutory basis financial statements for the reinsurance ceded to the reinsurer. With respect to U.S.-domiciledU.S. domiciled ceding companies, credit is usually granted when the reinsurer is licensed or accredited in the state where the ceding company is domiciled. States also generally permit ceding insurers to take credit for reinsurance if the reinsurer is: (1) domiciled in a state with a credit for reinsurance law that is substantially similar to the credit for reinsurance law in the primary insurer’s state of domicile and (2) meets certain financial requirements. Credit for reinsurance purchased from a reinsurer that does not meet the foregoing conditions is generally allowed to the extent that such reinsurer secures its obligations with qualified collateral.
Insurers are also subject to state laws regulating claim handling practices. The NAIC created a model unfair claims practices law which most states have fully or partially adopted. These laws and regulations set the standards by which insurers must investigate and resolve claims; however, a private cause of action for violation is not available to claimants. These laws typically prohibit: (1) misrepresentation of policy provisions, (2) failing to adopt and act promptly when claims are presented and (3) refusing to pay claims without an investigation. Market conduct examinations or insurance regulator investigations may be prompted through annual reviews or excessive numbers of complaints against an insurer. After an investigation or market conduct review by an insurance regulator,
insurers found to be in violation of these laws and regulations face potential fines, cease and desist orders, remediation orders or loss of authority to write business in the particular state.
FEDERAL LEGISLATION AND REGULATION
The U.S. insurance industry is not currently subject to any significant federal regulation and instead is regulated principally at the state level. However, the federal Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and creation of the Federal Insurance Office (summarized below) include elements that affect the insurance industry, insurance companies and public companies such as ours.
The Sarbanes-Oxley Act established several significant corporate governance-related laws and SEC regulations applicable to public companies. The Dodd-Frank Act created significant changes in regulatory structures of banking and other financial institutions, created new governmental agencies (while merging and removing others), increased oversight of financial institutions and enhanced regulation of capital markets. The legislation also mandates new rules affecting executive compensation and corporate governance for public companies such as ours. Federal agencies have been given significant discretion in drafting the rules and regulations that implement the Dodd-Frank Act. We will continue to monitor, implement
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and comply with all Dodd-Frank Act-related changes to our regulatory environment. Changes in general political, economic or market conditions, including U.S. presidential and congressional elections, could affect the scope, timing and final implementation of the Dodd-Frank Act. We cannot predict if or when future legislation or administrative guidance will be enacted or issued or what impact any changing regulation may have on our operations.
In addition, the Dodd-Frank Act contains insurance industry-specific provisions, including establishment of the Federal Insurance Office (FIO) and streamlining the regulation and taxation of surplus lines insurance and reinsurance among the states. The FIO, part of the U.S. Department of the Treasury, has limited authority and no direct regulatory authority over the business of insurance. The FIO’s principal mandates include monitoring the insurance industry, monitoring the extent to which traditionally underserved communities and consumers have access to affordable non-health insurance products, collecting insurance industry information and data and representing the U.S. with international insurance regulators. Although the FIO does not provide substantive regulation of the insurance industry at this time, we will monitor its activities carefully for any regulatory impact on our company.
Furthermore, the Dodd-Frank Act authorized the U.S. Treasury Secretary and the Office of the U.S. Trade Representative to negotiate covered agreements. A covered agreement is an agreement between the U.S. and one or more foreign governments, authorities or regulatory entities, regarding prudential measures with respect to insurance or reinsurance. Pursuant to this authority, in September 2017, the U.S. and the European Union (EU) signed a covered agreement to address, among other things, reinsurance collateral requirements. We cannot predict with any certainty what the impact of such implementation will be on our business.
As part of the passage of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) in January 2015, the National Association of Registered Agents and Brokers (NARAB) was established by federal law, which is expected to streamline insurance agent/broker licensing. There has been little progress in implementing the provisions of NARAB to date.
Other federal laws and regulations apply to many aspects of our company and its business operations. This federal regulation includes, without limitation, laws affecting privacy and data security and credit reporting — examples of which include the Gramm-Leach-Bliley Act, Fair Credit Reporting Act and Fair and Accurate Credit Transactions Act. It also includes international economic and trade sanctions — examples of which include the Office of Foreign Asset Control (OFAC), Foreign Account Tax Compliance Act and the Iran Threat Reduction and Syrian Human Rights Act (ITR/SHR). ITR/SHR generally prohibits U.S. companies from engaging in certain transactions with the government of Iran or certain Iranian businesses, including the provision of insurance or reinsurance. Under ITR/SHR, we must disclose whether RLI Corp. or any of its affiliates knowingly engaged in certain specified activities identified in that law. For the year 2019,2021, neither RLI Corp. nor its affiliates have knowingly engaged in any transaction or dealing reportable under Section 13(r) of the Exchange Act, as required by the ITR/SHR.
LICENSES AND TRADEMARKS
We hold a U.S. federal service mark registration of our corporate logoname “RLI” and several other company service marks and trademarks with the U.S. Patent and Trademark Office. Such registrations protect our intellectual property nationwide from deceptively similar use. The duration of these registrations is 10 years, unless renewed. We monitor our trademarks and service marks and protect them from unauthorized use as necessary.
HUMAN CAPITAL
RLI is a specialty underwriting company whose achievement emanates from our entrepreneurial and ownership culture. We strive to hire top underwriting and claim talent, who work closely with our customers throughout the United States. Underwriters have the resources and authority to operate within established underwriting guidelines and share in the rewards when they succeed. Compensation plans are designed to reward profitability and shareholder value creation to better align compensation with the longer-
term nature of insurance products and stakeholder expectations. We solicit employee feedback to help ensure employees are engaged, feel valued and are contributing to our success.
EMPLOYEES
As of December 31, 2019,2021, the Company employed 913 associates throughout the United States, 890 of whom were full time, and the average employee tenure was 10.2 years. We prefer to utilize our own underwriting, claims and support staff, given the complex nature of our products. The niche markets we employed 905 associates. Ofoperate within require unique experience and deep knowledge to select appropriate risks and serve our customers. Ensuring a seamless transfer of knowledge as employees retire and developing newer talent continues to be a focus of the 905 total associates, 23Company. We enable employees to maintain and expand industry knowledge and technical expertise through education and training, as well as memberships in industry and trade associations. We leverage the services of a limited number of third-party contractors when it is difficult to hire employees that address a needed skill set outside of our core insurance functions or when efficiencies can be gained.
Human Capital Oversight
At the Board of Directors level, oversight of human capital is provided by the Human Capital and Compensation Committee (HCCC). Executive oversight for human capital is provided by the Company’s Vice President of Human Resources, who reports to the President & CEO. Key responsibilities of the Vice President of Human Resources include providing effective programs related to staffing and succession planning, employee recruiting and development, compensation and benefits, and compliance, which are monitored by the HCCC.
Compensation and Benefits
We compensate employees through a competitive compensation (Total Rewards) program that includes a base salary or hourly wage, annual incentives for all full-time employees, long-term incentives for management, retirement benefits, as well as health, disability and life insurance. We utilize various information sources, including local, regional and national compensation surveys, to establish competitive pay targets for each position in the company to ensure our Total Rewards program attracts and retains a talented workforce.
An important element of the Total Rewards program is to promote alignment of employee and shareholder interests, which is achieved through the Company’s Employee Stock Ownership Plan (ESOP) and long-term incentive plan (LTIP). The ESOP is a qualified retirement plan that provides shares of RLI Corp. stock to employees based on the profitability of the Company, while management is granted stock options and restricted stock units through the LTIP. Management, at the level of vice president and above, is subject to stock ownership guidelines requiring them to hold Company shares valued at a multiple of their base salary, depending on their role. As of December 31, 2021, 9 percent of RLI Corp. shares were part-timeowned by insiders.
Diversity and 882 were full-time.Inclusion
22We strive to cultivate an exceptional workforce to perpetuate our ownership culture, deliver excellent customer service and continue to achieve superior business results. Our goal is to attract, develop and retain the best talent from diverse backgrounds, while promoting a culture where different viewpoints are valued and individuals feel respected, are treated fairly and have an opportunity to excel in their chosen careers.
FORWARD LOOKING STATEMENTS
Forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 appear throughout this report. These statements relate to our current expectations, beliefs, intentions, goals or strategies regarding the future and are based on certain underlying assumptions by the Company. These forward looking statements generally include words such as “expect,” “predict,” “estimate,” “will,” “should,” “anticipate,” “believe” and similar expressions. Such assumptions are, in turn, based on information available and internal estimates and analyses of general economic conditions, competitive factors, conditions specific to the property and casualty insurance and reinsurance industries, claims development and the impact thereof on our loss reserves, the adequacy and financial security of our reinsurance programs, developments in the securities market and the impact on our investment portfolio, regulatory changes and conditions and other factors and are subject to various risks, uncertainties and other factors, including, without limitation those set forth below in “Item 1A Risk Factors.” Actual results could differ materially from those expressed in, or implied by, these forward looking statements. We assume no obligation to update any such statements. You should review the various risks, uncertainties and other factors listed from time to time in our Securities and Exchange Commission filings.
Item 1A. Risk Factors
Insurance Industry
Our results of operations and revenues may fluctuate as a result of many factors, including cyclical changes in the insurance industry, which may cause the price of our securities to be volatile.
The results of operations of companies in the property and casualty insurance industry historically have been subject to significant fluctuations and uncertainties. Our profitability can be affected significantly by:
• | Competitive pressures impacting our ability to write new business or retain existing business at an adequate rate, |
• | Rising levels of loss costs that we cannot anticipate at the time we price our coverages, including inflation in cost of materials, delays that cause increased business interruption losses and social inflation, |
• | Volatile and unpredictable developments, including man-made, weather-related and other natural CATs, terrorist attacks or significant price changes of the commodities we insure, |
• | Changes in the availability and level of reinsurance capacity, |
• | Changes in the amount of losses resulting from new types of claims and new or changing judicial interpretations relating to the scope of insurers’ liabilities and |
• | The ability of our underwriters to accurately select and price risk and our claim personnel to appropriately deliver fair outcomes. |
In addition, the demand for property and casualty insurance, both admitted and excess and surplus lines, can vary significantly, rising as the overall level of economic activity increases and falling as that activity decreases, causing our revenues to fluctuate. These fluctuations in results of operations and revenues may not reflect long-term results and may cause the price of our securities to be volatile.
Our business is concentrated in several key states and a change in our business in one of those states could disproportionately affect our financial condition or results of operations.
Although we operate in all 50 states, nearly 50 percent of our direct premiums earned were generated in four states in 2019:2021: California – 1617 percent; New York – 1412 percent: Florida – 1011 percent; and Texas – 910 percent. An interruption in our operations, or a negative change in the business environment, insurance market or regulatory environment in one or more of these states could have a disproportionate effect on our business and direct premiums earned.
We compete with a large number of companies in the insurance industry for underwriting revenues.to underwrite premium and their actions could ultimately impact our overall results.
We compete with a large number of other companies in our selected lines of business. We are vulnerable to the actions of other companies who may seek to write business without the appropriate regard for risk and profitability, especially during periods of intense competition for premium. During these times, it is very difficult to grow or maintain premium volume without sacrificing underwriting discipline and income.
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We face competition from specialty insurance companies, underwriting agencies and intermediaries, as well as diversified financial services companies that are significantly larger than we are, and that have significantly greater financial, marketing, management and other resources. We may also face competition from new sources of capital such as institutional investors seeking access to the insurance market, sometimes referred to as alternative capital, which may depress pricing or limit our opportunities to write business. Some of these competitors also have greater experience andstronger brand awareness than we do. We may incur increased costs in competing for underwriting revenues.premium. If we are unable to compete effectively in the markets in which we operate in or expandare not successful expanding our operations into new markets, our underwriting revenuesthe amount of premium we write may decline, as well as overall business results.
A number of new, proposed or potential legislative or industry developments could further increase competition in our industry. These developments include:industry, including:
• | An increase in capital-raising by companies in our lines of business, which could result in new entrants to our markets and an excess of capital in the industry, |
• | The deregulation of commercial insurance lines in certain states and the possibility of federal regulatory reform of the insurance industry, which could increase competition from standard carriers for our excess and surplus lines of insurance business, |
• | Programs in which state-sponsored entities provide property insurance in CAT-prone areas or other alternative markets types of coverage, |
• | Changing practices, which may lead to greater competition in the insurance business and |
• | The emergence of |
New competition from these developments could cause the supply and/or demand for insurance or reinsurance to change, which could affect our ability to price our coverages at attractive rates and thereby adversely affect our underwriting results.
A downgrade in our ratings from AM Best, Standard & Poor’s or Moody’s could negatively affect our business.
Financial strength ratings are an important factor in establishing the competitive position of insurance companies. Our insurance companies are rated for overall financial strength by AM Best, Standard & Poor’s and Moody’s. AM Best, Standard & Poor’s and Moody’s ratings reflect theirare independent opinions of ouran insurer’s financial strength operating performance, strategic position and ability to meet ourongoing insurance policy and contract obligations, based on a comprehensive quantitative and qualitative analysis of balance sheet strength, operating performance, business profile and enterprise risk management. These financial strength ratings are based on factors relevant to policyholders, agents, insurance brokers and intermediaries and are not evaluations directedspecifically related to investors.securities issued by the company. The view of required capital may differ between rating agencies, as well as from RLI Corp.’s own view of desired capital. Our ratings are subject to periodic review by such firms, and the criteria used in the rating methodologies is subject to change. As such, we cannot assure the continued maintenance of our current ratings. Rating agencies consider a number of factors in determining their ratings which often include their view of required capital to support our business. The view of required capital may differ between rating agencies as well as from RLI Corp.’s own view of desired capital.
All of our ratings were reviewed during 2019.2021. AM Best reaffirmed its A+, Superior rating for the combined entity of RLI Ins., Mt. Hawley and CBIC (group-rated). Standard & Poor’s reaffirmedlowered our A+, Strong rating for the group of RLI Ins. and Mt. Hawley and placed the group on negative outlook, indicating they believe the group may be downgraded over the next six to 24 months.A from A+. Moody’s reaffirmed our group rating of A2 Good for RLI Ins. and Mt. Hawley. Because these ratings have become an increasingly important factor in establishing the competitive position of insurance companies, ifIf our ratings are significantly reduced from their current levels by AM Best, Standard & Poor’s or Moody’s, our competitive position in the industry, and therefore our business, could be adversely affected. A measurablesignificant downgrade could result in a substantial loss of business, as policyholders might move to other companies with greater financial strength ratings.
We are subject to extensive governmental regulation, which may adversely affect our ability to achieve our business objectives. Moreover, if we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect our financial condition, results of operations and reputation.
Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other investors.stakeholders. These regulations, generally administered by a department of insurance in each state and territory in which we do business, relate to, among other things:
• | Approval of policy forms and premium rates, |
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• | Standards of solvency, including risk-based capital measurements, |
• | Licensing of insurers and their producers, |
• | Restrictions on agreements with our large revenue-producing agents, |
• | Cancellation and non-renewal of policies, |
• | Restrictions on the nature, quality and concentration of investments, |
• | Restrictions on the ability of our insurance company subsidiaries to pay dividends to the Company, |
• | Restrictions on transactions between insurance company subsidiaries and their affiliates, |
• | Restrictions on the size of risks insurable under a single policy, |
• | Requiring deposits for the benefit of policyholders, |
• | Requiring certain methods of accounting, |
• | Periodic examinations of our operations and finances, |
• | Prescribing the form and content of records of financial condition required to be filed and |
• | Requiring reserves for unearned premium, losses and other purposes. |
State insurance departments also conduct periodic examinations of the conduct and affairs of insurance companies and require the filing of annual, quarterly and other reports relating to financial condition, holding company issues and other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives.
In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. In some instances, we follow practices based on our interpretations of regulations or practices that we believe may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could initiate investigations or other proceedings, fine the Company, preclude or temporarily suspend the Company from carrying on some or all of its activities or otherwise penalize the Company. This could adversely affect our ability to operate our business. Further, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect our ability to operate our business as currently conducted.
In addition to regulations specific to the insurance industry, including the insurance laws of our principal state regulator (Illinois), as a public company we are also subject to the rules and regulations of the U.S. Securities and Exchange Commission and the New York Stock Exchange (NYSE), each of which regulate many areas such as financial and business disclosures, corporate governance and shareholder matters. We are also subject to the corporation laws of Delaware, where we are incorporated. At the federal level, among other laws, we are subject to the Sarbanes-Oxley Act and the Dodd-Frank Act, each of which regulate corporate governance, executive compensation and other areas, as well as laws relating to federal trade restrictions, privacy/data security and terrorism risk insurance laws. We monitor these laws, regulations and rules on an ongoing basis to ensure compliance and make appropriate changes as necessary. Implementing such changes may require adjustments to our business methods, increases to our costs and other changes that could cause the Company to be less competitive in the industry.
Our loss reserves are based on estimates and may be inadequate to cover our actual insured losses, which would negatively impact our profitability.
Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. Loss reserves are estimates of the ultimate cost of claims and do not represent an exact calculation of liability. These estimates are based on historical information and on estimates of future trends that may affect the frequency and severity of claims that may be reported in the future.
Estimating loss reserves is a difficult, complex and inherently uncertain process
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involving many variables and subjective judgments. Changes in industry practices, and in legal, legislative, regulatory, judicial, social and other conditions under which we operate may require us to pay claims we did not intend to cover when we wrote the policies. These changes may serve to extend the time for making claims, extend coverage and increase damages. These changes may not become apparent until after we have issued policies or bonds that are affected by the changes and, consequently, we may not know the extent of our liability and the impact to our financial performance until many years after a policy or bond was issued. The effects of these and other coverage issues are difficult to predict and could have a materially adverse effect on our financial performance.
As part of the reserving process, we review historical data and consider the impact of various factors such as:
• | Loss emergence and cedant reporting patterns, |
• | Underlying policy terms and conditions, |
• | Business and exposure mix, |
• | Emerging coverage issues, |
• | Trends in claim frequency and severity, |
• | Changes in operations, |
• | Emerging economic and social trends, |
• | State reviver statutes that permit claims after a statute of limitation has expired, |
• | Inflation in amounts awarded by courts and juries and |
• | Changes in the regulatory and litigation environments. |
This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. It also assumes adequate historical or other data exists upon which to make these judgments. For more information on the estimates used in the establishment of loss reserves, see the Loss and Settlement Expenses section of our Critical Accounting Policies contained within Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. However, there is no precise method for evaluating the impact of any specific factor on the adequacy of reserves and actual results are likely to differ from original estimates. If the actual amount of insured losses is greater than the amount we have reserved for these losses, our profitability could suffer.
Catastrophic losses including those caused by natural disasters, such as earthquakes and hurricanes, or man-made events such as terrorist attacks, are inherently unpredictable and could cause the Company to suffer material financial losses.
Our approachesinsurance coverages include exposure to catastrophic risk mitigation are largely based on estimates and modeling and, thus, may be inadequate to cover the losses from such events. Climate change could further increase the severity and volatility of weather-related losses.
We face the risk of property damage resulting from catastrophic events, particularly earthquakes on the West Coast and hurricanes and tropical storms affecting the continental U.S. or Hawaii. We also face riskWeather-related catastrophes may include meteorological events such as hurricanes, severe convective storms and winter weather; and climatological events such as drought, wildfires and heatwaves. In addition, catastrophe losses can occur from events such as lava flows in Hawaii impacting our homeowners business and from wildfires, particularly onterrorist events in the West Coast. Since the Northridge, California earthquake in 1994, most of our catastrophe-related claims have resulted from hurricanes and other seasonal storms such as tornadoes and hail storms.U.S.
The incidence and severity of CATscatastrophes are inherently unpredictable. The extent of losses from a CATcatastrophe is a function of both the total amount of insured values in the area affected by the event and the severity of the event. Most CATscatastrophes are restricted to fairly specific geographic areas. However, hurricanes and earthquakes may produce significant damage in large, heavily populated areas. In addition to hurricanes and earthquakes, CAT losses can be due to windstorms, severe winter weather and fires and may include terrorist events. In addition, climate change could have an impact on longer-term natural CAT trends. Extreme weather events that are linked to rising temperatures, changing global weather patterns, sea, land and air temperatures, as well as sea levels, rain and snow could result in increased occurrence and severity of CATs. CATs can cause losses in a variety of our property and casualty products, and itIt is possible that a catastrophic event or multiple catastrophic events could cause the Company to suffer material financial losses. In addition, CATcatastrophe claim costs may be higher than we originally estimate and could cause substantial volatility in our financial results for any fiscal quarter or year. Our ability
We use models to write new business could also be affected. We believe that increases in the value and geographic concentration of insured property, the effects of inflation and the growth of our workers’ compensation business could also increase the severity of claims from CAThelp assess exposure to catastrophic events in the future.
For information on our approaches to catastrophe risk mitigation, including reinsurance and catastrophe modeling, see the Property Reinsurance – Catastrophe Coverage section within Item 1. Business and note 1.S. to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data. However, since our CAT models cannot contemplate all possible CAT scenarios andagainst established thresholds. Models include underlying assumptions based on a limited set of actual events theand cannot contemplate all possible catastrophe scenarios. The losses we might
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incur from an actual catastrophe could be higher than our expectation of losses generated from modeled catastrophe scenarios, andwhich could have a materially adverse effect on our results of operations and financial condition. To address uncertainty related to catastrophe models, we also monitor against thresholds using non-modeled scenarios.
Changing climate and weather conditions may adversely affect our financial condition or profitability.
Climate change is a complex and evolving issue and we cannot predict the cumulative impact it may have on our results of operations or financial condition at this time. The effects on the Company could be materially and adversely affected.include:
| Changes in the frequency, severity and location of weather-related catastrophes, which may result in higher levels of losses, |
• | Additional uncertainty in third party catastrophe models, which could impair our ability to asses exposure and adequately price the catastrophe risks we insure, |
• | Flooding of coastal property, resulting from rising sea levels, making certain geographic areas uninhabitable, reducing demand for insurance products we offer in those areas, |
• | Increased losses from weather-related catastrophes may make it more difficult to obtain reinsurance at desired levels, or more expensive to acquire reinsurance coverage, which may reduce the amount of business we write and the revenues we generate, |
• | A transition from carbon-based energy to other sources of energy may decrease demand for insurance coverage we provide to the industries that produce or use carbon-based energy, or increase claims and losses related to those industries, affecting our profitability, |
• | Changes in legislation, regulation and court decisions could increase our compliance costs, impose liability on policyholders that we did not contemplate when we underwrote policies, or limit our ability to sell insurance coverage to certain policyholders and |
• | Losses on our invested assets that could have a material adverse impact on our results of operations and financial condition. |
Our reinsurers may not pay on losses in a timely fashion, or at all, which may increase our costs and have an adverse effect on our business.
We purchase reinsurance to transfer part of the risk we have assumed (known as ceding) to a reinsurance company in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to the Company to the extent the risk is transferred or ceded to the reinsurer, it does not relieve the Company (the reinsured) of its liability to its policyholders. Accordingly, we bear credit risk with respect to our reinsurers. That is, our reinsurers may not pay claims made by the Company on a timely basis, or they may not pay some or all of these claims for a variety of reasons. Either of these events would increase our costs and could have a materiallymaterial adverse effect on our business.
If we cannot obtain adequate reinsurance protection for the risks we have underwritten or at prices we deem acceptable, we may be exposed to greater losses from these risks or we may reduce the amount of business we underwrite, which would reduce our revenues..
Market conditions beyond our control determine the availability and cost of the reinsurance protection that we purchase. In addition, the historical results of reinsurance programs and the availability of capital also affect the availability of reinsurance. Our reinsurance agreements are generally subject to annual renewal. We cannot be sure that we can maintain our current reinsurance protection, obtain other reinsurance facilities in adequate amounts and at favorable rates, or diversify our exposure among an adequate number of high qualityhigh-quality reinsurance partners. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities on terms we deem acceptable, either our net exposures would increase—increase, which could increase the volatility of our results—results, or if we were unwilling to bear an increase in net exposures, we would have to reduce the level of our underwriting commitments when possible, which would reduce our revenues.
Financial and Investment
Adverse changes in the economy could lower the demand for our insurance products and could have an adverse effect on the revenue and profitability of our operations.
Factors such as business revenue, construction spending, government spending, the volatility and strength of the capital markets and inflation can all affect the business and economic environment. These same factors affect our ability to generate revenue and profits. Insurance premiums in our markets are heavily dependent on our customer revenues, payroll, value of goods transported, miles traveled and number of new projects initiated. In an economic downturn characterized by higher unemployment, declines in construction spending and reduced corporate revenues, the demand for insurance products is adversely affected. Adverse changes in the economy may lead our customers to have less need or desire for insurance coverage, to cancel existing insurance policies, to modify coverage or to not renew with the Company, all of which affect our ability to generate revenue. In addition, as approximately a third of our business relates to the construction industry, our results of operations could be significantly impacted in an economic downturn if the construction industry is affected disproportionally.
Access to capital and market liquidity may adversely affect our ability to take advantage of business opportunities as they arise.
Our ability to grow our business depends, in part, on our ability to access capital when needed. We cannot predict capital market liquidity or the availability of capital. We also cannot predict the extent and duration of future economic and market disruptions, the impact of government interventions into the market to address these disruptions and their combined impact on our industry, business and investment portfolios. If our company needs capital but cannot raise it, our business and future growth could be adversely affected.
We are an insurance holding company and therefore may not be able to receive adequate or timely dividends from our insurance subsidiaries.
RLI Corp. is the holding company for our three insurance operating companies. At the holding company level, our principal assets are the shares of capital stock of our insurance company subsidiaries. We rely largely on dividends from our insurance company subsidiaries to meet our obligations for paying principal and interest on outstanding debt, corporate expenses and dividends to RLI Corp. shareholders. Dividend payments to RLI Corp. from our principal insurance subsidiary are restricted by state insurance laws as to the amount that may be paid without prior approval of the IDOI. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts necessary to pay RLI Corp. obligations and
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desired dividends to shareholders. Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are subject to certain limitations based upon income, surplus and earned surplus. The maximum ordinary dividend distribution from our principal insurance subsidiary in a rolling 12-month period is limited by Illinois law to the greater of 10 percent of RLI Ins. policyholder surplus as of December 31 of the preceding year, or the net income of RLI Ins. for the 12-month period ending December 31 of the preceding year. Ordinary dividends are further restricted by the requirement that they be paid from earned surplus. Any dividend distribution in excess of the
ordinary dividend limits is deemed extraordinary and requires prior approval (or non-disapproval) from the IDOI. Because the limitations are based upon a rolling 12-month period, the presence, amount and impact of these restrictions vary over time.
We may not be able to, or might not choose to, continue paying dividends on our common stock.
We have a history of paying regular, quarterly dividends and in recent years have paid special dividends. Any determination to pay either type of dividend to our stockholders in the future will be at the discretion of our board of directors and will depend on our results of operations, financial condition and other factors deemed relevant by our board of directors. Our ability to pay dividends depends largely on our subsidiaries’ earnings and operating capital requirements, and is subject to the regulatory, contractual and other constraints of our subsidiaries, including the effect of any such dividends or distributions on the AM Best rating or other ratings of our insurance subsidiaries. In addition, we may choose to retain capital to support growth or further mitigate risk, instead of returning excess capital to our shareholders.
Our investment results and, therefore, our financial condition may be impacted by changes in the business, financial condition or operating results of the entities in which we invest, as well as changes in interest rates, government monetary policies, general economic conditions, liquidity and overall market conditions.
We invest the premiums we receive from customers until they are needed to pay expenses or policyholder claims. Funds remaining after paying expenses and claims remain invested and are included in retained earnings. The value of our investment portfolio can fluctuate as a result of changes in the business, financial condition or operating results of the entities in which we invest. In addition, fluctuations can result from changes in interest rates, credit risk, government monetary policies, liquidity of holdings and general economic conditions. The equity portfolio will fluctuate with movements in the overall stock market. While the equity portfolio has been constructed to have lower downside risk than the market, the portfolio is positively correlated with movements in domestic stocks. The bond portfolio is affected by interest rate changes and movement in credit spreads. We attempt to mitigate our interest rate and credit risks by constructing a well-diversified portfolio of high-quality securities with varied maturities. These fluctuations may negatively impact our financial condition.
Operational
Our success will depend on our ability to maintain and enhance effective operating procedures and manage risks on an enterprise wide basis.
Operational risk and losses can result from, among other things, fraud, errors, failure to document transactions properly, failure to obtain proper internal authorization, failure to comply with regulatory requirements, information technology failures or external events. We continue to enhance our operating procedures and internal controls to effectively support our business and our regulatory and reporting requirements. The NAIC and state legislatures have increased their focus on risks within an insurer’s holding company system that may pose enterprise risk to insurers. The Illinois legislature has adopted the Risk Management and ORSAOwn Risk and Solvency Assessment (ORSA) Law, which requires domestic insurers to maintain a risk management framework and establishes a legal requirement for domestic insurers to conduct an ORSA in accordance with the NAIC’s ORSA Guidance Manual. The ORSA Law also provides that, no less than annually, an insurer must submit an ORSA summary report. Under the Illinois insurance holding company laws, on an annual basis, we are also required to file with the IDOI an enterprise risk report with the IDOI, which is intended to identify the material risks within our insurance holding company system that could pose enterprise risk to our insurance company subsidiaries. We operate within an ERMenterprise risk management (ERM) framework designed to assess and monitor our risks. However, assurance that we can effectively review and monitor all risks or that all of our employees will operate within the ERM framework cannot be guaranteed. Assurances that our ERM framework will result in the Company accurately identifying all risks and accurately limiting our exposures based on our assessments also cannot be guaranteed.
We may not be able to effectively start up or integrate new product opportunities.
Our ability to grow our business depends, in part, on our creation, implementation or acquisition of new insurance products that are profitable and fit within our business model. Our ability to grow profitably requires that we identify market opportunities, which may include acquisitions, and that we attract and retain underwriting and claims expertise to support that
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growth. New product launches, as well as resources to integrate business acquisitions are subject to many obstacles, including ensuring we have sufficient business and systems processes, determining appropriate pricing, obtaining reinsurance, assessing opportunity costs and regulatory burdens and planning for internal infrastructure needs. If we cannot effectively or accurately assess and overcome these obstacles, or we improperly implement new insurance products, our ability to grow profitably could be impaired.
We may be unable to attract and retain qualified key employees.
We depend on our ability to attract and retain qualified executive officers, experienced underwriting and claim talent, who have deep knowledge of the niche business we write, and other skilled employees who are knowledgeable about our business. Providing suitable succession planning for such positions is also important.employees. If we cannot attract or retain top-performing executive officers, underwriters and other
employees, the quality of their performance decreases or we fail to implement succession plans for our key employees, we may be unable to maintain our current competitive position in the markets in which we operate or expand our operations into new markets.
We rely on third partythird-party vendors for a number of key components of our business.
We contract with a number of third partythird-party vendors to support our business. For example, we have license agreements for servicessoftware that includewe use to model natural catastrophe modeling, policy management,catastrophes, process claims, processing, producer management and accountingmanage policies, producers and financial management.processes. The vendors range from large national companies, who are dominant in their area of expertise and would be difficult to quickly replace, to smaller or start-up vendors with leading technology, but with shorter operating histories and fewer financial resources. Failures of certain vendors to provide services could adversely affect our ability to deliver products and services to our customers, disrupting our business and causing the Company to incur significant expense. If one or more of our vendors fail to protect personal information of our customers, claimants or employees, we may incur operational impairments, or could be exposed to litigation, compliance costs or reputation damage. We maintain a vendor management program to establish procurement policies and to monitor vendor risk, including the security and stability of our critical vendors.
Any significant interruption in the operation of our facilities, systems and business functions could adversely affect our financial condition and results of operations.
We rely on multiple computer systems to interact with producers and customers, issue policies, pay claims, run modeling functions, assess insurance risks and complete various important internal processes including accounting and bookkeeping. Our business is highly dependent on our ability to access these systems to perform necessary business functions. Additionally, some of these systems may include or rely upon third-party systems not located on our premises. Any of these systems may be exposed to unplanned interruption, unreliability or intrusion from a variety of causes, including among others, storms and other natural disasters, terrorist attacks, utility outages or complications encountered as existing systems are replaced or upgraded.
Any such issues could materially impact our company including the impairment of information availability, compromise of system integrity/accuracy, misappropriation of confidential information, reduction of our volume of transactions and interruption of our general business. Although we believe our computer systems are securely protectedsecure and continue to take steps to ensure they are protected against such risks, we cannot guarantee such problems will not occur. If they do, interruption to our business and damage to our reputation and related costs, could be significant, which could impair our profitability.
Epidemics, pandemics and public health outbreaks, including the ongoing coronavirus (COVID-19) pandemic, could adversely affect our business, including revenues, profitability, results of operations and/or cash flows, in a manner and to a degree that could be material.
Epidemics, pandemics and other public health outbreaks generally result in significant disruptions in economic activity and financial markets. The cumulative effects on the Company could include, without limitation:
• | Reduced demand for our insurance policies due to reduced economic activity, which could negatively impact our revenues, |
• | Reduced cash flows from our policyholders, delaying premium payments, |
• | Increased costs and disruption of operations due to employees working remotely or unavailability of our employees, |
• | Increased claims, losses, litigation and related expenses, |
• | Legislative, regulatory and judicial actions in response to the public health outbreak, including, but not limited to, actions prohibiting us from cancelling insurance policies in accordance with our policy terms, requiring us to cover losses when our underwriting intent in those policies was not to provide coverage or was to exclude coverage, ordering us to provide premium refunds, granting extended grace periods for payment of premiums and providing for extended periods of time to pay premiums that are past due, |
• | Policyholder losses from pandemic-related claims could be greater than our reserves for those losses, |
• | Volatility and declines in financial markets could reduce the fair market value, or result in the impairment, of invested assets held by the Company and |
• | Changes in interest rates, which could reduce future investment results. |
Although we have investigated and closed a substantial number of COVID-19-related claims without payment, state and federal courts could rule that such claims are covered under our policies. Court decisions upholding our position that these COVID-19 related
claims are not covered under our policies could also be overturned on appeal. These actions could result in an increase in claims and paid losses, which could have a materially adverse effect on our financial performance. Such appellate court decisions may take several years to become final and their ultimate outcome is uncertain at this time.
We experienced declines in premium in select product lines and established loss and defense reserves for others at the onset of the COVID-19 pandemic. While other impacts that could result from pandemics have not manifested to a significant degree for RLI through the end of 2021, circumstances continue to change and we could be affected in different ways in the future. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also heighten many of the other risks described herein.
If we are unable to keep pace with the technological advancements in the insurance industry, our ability to compete effectively could be impaired.
Our operations rely upon complex and expensive information technology systems for interacting with policyholders, brokers and other business partners. The pace at which information systems must be upgraded is continually increasing, requiring an ongoing commitment of significant resources to maintain or upgrade to current standards. We are committed to developingstandards and maintaining information technology systems that will allowserve our insurance subsidiaries to compete effectively. The development of current technology may result in our being competitively disadvantaged, especially with companies that have greater resources.customers. If we are unable to keep pace with the advancements being made in technology, our ability to compete with other insurance companies who have advanced technological capabilities will be negatively affected. Further,Furthermore, if we are unable to effectively update or replace our key legacy technology systems as they become obsolete or as emerging technology renders them competitively inefficient, our competitive position, security and our cost structure could be adversely affected.
29
Technology breaches or failures, including but not limited to cyber security incidents, could disrupt our operations, result in the loss of critical and confidential information and expose us to additional liabilities, which could adversely impact our reputation and results of operations.
Global cyber security threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology systems, and those of our business partners or service providers, to sophisticated and targeted measures known as advanced persistent threats. Like other companies, RLI Corp. is also subject to insider threats that may impact the confidentiality, integrity or availability of our data. While we,We, as well as our business partners and service providers, employ measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of information technology networks and systems and maintenance of backup and protective systems),. However, cyber security incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. Security breaches could expose the Company to a risk of loss or misuse of our or our customers’ information, litigation and potential liability. In addition, cyber incidents that impact the availability, reliability, speed, accuracy or other proper functioning of our technology systems could impact our operations. We may not have the resources or technical sophistication to anticipate or prevent every type of cyber attack. A significant cyber incident, including system failure, security breach, disruption by malware or other damage could interrupt or delay our operations, result in a violation of applicable privacy and other laws, damage our reputation, cause a loss of customers or give rise to remediation costs, monetary fines and other penalties, which could be significant. ItWe have cyber insurance, but it is possible that insurancethe coverage we have in place would not entirely protect the Company in the event that we experienced a cyber security incident, interruption or widespread failure of our information technology systems.
We may suffer losses from litigation, which could materially and adversely affect our financial condition and business operations.
As is typical in our industry, weWe continually face risks associated with litigation of various types, including general commercial and corporate litigation, and disputes relating to bad faith allegations that could result in the Company incurring losses in excess of policy limits. We are party to a variety of litigation matters throughout the year. Litigation is subject to inherent uncertainties, and if there were an outcome unfavorable to the Company,outcome, there exists the possibility of a material adverse impact on our results of operations and financial position in the period in which the outcome occurs. Even if an unfavorable outcome does not materialize, we still may face substantial expense and disruption associated with the litigation.
Anti-takeover provisions affecting the Company could prevent or delay a change of control that is beneficial to you.
Provisions of our certificate of incorporation and by-laws, as well as applicable Delaware law, federal and state regulations and insurance company regulations may discourage, delay or prevent a merger, tender offer or other change of control that holders of our securities may consider favorable. Some of these provisions impose various procedural and other requirements that could make it more difficult for shareholders to effectaffect certain corporate actions. These provisions could:
• | Have the effect of delaying, deferring or preventing a change in control of the Company, |
• | Discourage bids for our securities at a premium over the market price, |
• | Adversely affect the market price, the voting and other rights of the holders of our securities or |
• | Impede the ability of the holders of our securities to change our management. |
In particular, we are subject to Section 203 of the Delaware General Corporation Law which, under certain circumstances, restricts our ability to engage in a business combination, such as a merger or sale of assets, with any stockholder that, together with affiliates, owns 15 percent or more of our common stock, which similarly could prohibit or delay the accomplishment of a change of control transaction.
Item 1B.Unresolved Staff Comments - None.
Item 2. Properties
We own five commercial buildings totaling 173,000 square feet on our 23-acre campus that serves as our corporate headquarters in Peoria, Illinois. All of our branch offices and other company operations lease office space throughout the country. Management considers our office facilities suitable and adequate for our current levels of operations.
30
Item 3. Legal Proceedings
We are party to numerous claims, losses and litigation matters that arise in the normal course of our business. Many of such claims, losses or litigation matters involve claims under policies that we underwrite as an insurer. We believe that the resolution of these claims, losses and litigation matters is not reasonably likely to have a material adverse effect
Information on our financial condition, results of operations or cash flows. We are also involved in various other legal proceedings is set forth in note 10 to the Consolidated Financial Statements included under Item 8, Financial Statements and litigation unrelated to our insurance business from time to time that arise in the ordinary course of business operations. Management believes that any liabilities that may arise as a result of these legal matters is not reasonably likely to have a material adverse effect on our financial condition, results of operations or cash flows.Supplementary Data.
Item 4. Mine Safety Disclosures - Not applicable.
PART II
PART II
Item 5. Market for Registrant’s Common Equity,Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
RLI Corp. common stock trades on the New York Stock Exchange under the symbol RLI. RLI Corp. has paid dividends for 174182 consecutive quarters and increased quarterly dividends in each of the last 4446 years. In December 20192021 and 2018,2020, RLI Corp. paid special cash dividends of $2.00 and $1.00 per share to shareholders.shareholders, respectively. As of February 7, 2020,2, 2022, there were 809919 registered holders of the Company’s common stock.
Performance
The following graph provides a five-year comparison of RLI Corp.’s total return to shareholders compared to that of the S&P 500 and S&P 500 P&C Index:
| | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||
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| 2014 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
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| 2016 |
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| 2017 |
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| 2018 |
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| 2019 |
|
| 2020 |
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| 2021 |
| |||||||||||||||||||||||||||
RLI | | -------------- | | $ | 100 |
| $ | 131 | | $ | 140 | | $ | 140 | | $ | 164 | | $ | 218 | |
| -------------- |
| $ | 100 |
|
| $ | 100 |
|
| $ | 117 |
|
| $ | 156 |
|
| $ | 184 |
|
| $ | 204 |
|
S&P 500 | | •••••••••••••••• | | 100 |
| | 101 | | | 113 | | 138 | | 132 | | 174 | |
| •••••••••••••••• |
|
| 100 |
|
|
| 122 |
|
|
| 116 |
|
|
| 153 |
|
|
| 181 |
|
|
| 233 |
| ||||
S&P 500 P&C Index | | — — — | | 100 |
| | 110 | | | 127 | | 155 | | 148 | | 186 | |
| — — — |
|
| 100 |
|
|
| 122 |
|
|
| 117 |
|
|
| 147 |
|
|
| 156 |
|
|
| 183 |
| ||||
Assumes $100 invested on December 31, 2014,2016, in RLI, S&P 500 and S&P 500 P&C Index, with reinvestment of dividends. Comparison of five-year annualized total return — RLI: 16.9%15.3%, S&P 500: 11.7%18.4% and S&P 500 P&C Index: 13.2%12.9%.
Securities Authorized for Issuance under Equity Compensation Plans
Refer to Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” of this document for information on securities authorized for issuance under our equity compensation plan.
31
Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities - Not applicable.
Equity Repurchases
In 2010, our board of directors implemented a $100 million share repurchase program. We last repurchased shares in 2011. We have $87.5 million of remaining capacity from the repurchase program. The repurchase program may be suspended or discontinued at any time without prior notice.
32
Item 6.Selected Financial Data – Not applicable.
The following is selected financial data of RLI Corp. and subsidiaries for the five years ended December 31, 2019:
| | | | | | | | | | | | | | |
(in thousands, except per share data and ratios) |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| | 2015 | |
| |
OPERATING RESULTS |
| | | | | | | | | | | | | |
Gross premiums written | | $ | 1,065,002 |
| 983,216 |
| 885,312 |
| 874,864 |
| | 853,586 | |
|
Consolidated revenue (1) | | $ | 1,003,591 |
| 818,123 |
| 797,224 |
| 816,328 |
| | 794,634 | |
|
Net earnings (1) | | $ | 191,642 |
| 64,179 |
| 105,028 |
| 114,920 |
| | 137,544 | |
|
Comprehensive earnings | | $ | 258,687 |
| 30,182 |
| 140,337 |
| 113,756 |
| | 89,935 | |
|
Net cash provided by operating activities | | $ | 276,917 |
| 217,102 |
| 197,525 | | 174,463 | | | 152,586 | | |
| | | | | | | | | | | | | | |
FINANCIAL CONDITION | | | | | | | | | | | | | | |
Total investments and cash | | $ | 2,560,360 |
| 2,194,230 |
| 2,140,790 |
| 2,021,827 |
| | 1,951,543 | |
|
Total assets | | $ | 3,545,721 |
| 3,105,065 |
| 2,947,244 |
| 2,777,633 |
| | 2,735,465 | |
|
Unpaid losses and settlement expenses | | $ | 1,574,352 |
| 1,461,348 |
| 1,271,503 |
| 1,139,337 |
| | 1,103,785 | |
|
Total debt | | $ | 149,302 | | 149,115 | | 148,928 | | 148,741 | | | 148,554 | | |
Total shareholders’ equity | | $ | 995,388 |
| 806,842 |
| 853,598 |
| 823,572 |
| | 823,469 |
| |
Statutory surplus (2) | | $ | 1,029,671 |
| 829,775 |
| 864,554 |
| 859,976 |
| | 865,268 |
| |
| | | | | | | | | | | | | | |
SHARE INFORMATION | | | | | | | | | | | | | | |
Net earnings per share (1): | | | | | | | | | | | | | | |
Basic | | $ | 4.28 |
| 1.45 |
| 2.39 |
| 2.63 |
| | 3.18 |
| |
Diluted | | $ | 4.23 |
| 1.43 |
| 2.36 |
| 2.59 |
| | 3.12 |
| |
Comprehensive earnings per share: | | | | | | | | | | | | | | |
Basic | | $ | 5.78 |
| 0.68 |
| 3.19 |
| 2.60 |
| | 2.08 |
| |
Diluted | | $ | 5.72 |
| 0.67 |
| 3.15 |
| 2.56 |
| | 2.04 |
| |
Cash dividends declared per share: | | | | | | | | | | | | | | |
Regular | | $ | 0.91 |
| 0.87 |
| 0.83 |
| 0.79 |
| | 0.75 |
| |
Special | | $ | 1.00 |
| 1.00 |
| 1.75 |
| 2.00 |
| | 2.00 |
| |
Book value per share | | $ | 22.18 |
| 18.13 |
| 19.33 |
| 18.74 |
| | 18.91 |
| |
Closing stock price | | $ | 90.02 |
| 68.99 |
| 60.66 |
| 63.13 |
| | 61.75 |
| |
Weighted average shares outstanding: | | | | | | | | | | | | | | |
Basic | |
| 44,734 |
| 44,358 |
| 44,033 |
| 43,772 |
| | 43,299 |
| |
Diluted | |
| 45,257 |
| 44,835 |
| 44,500 |
| 44,432 |
| | 44,131 |
| |
Common shares outstanding | |
| 44,869 |
| 44,504 |
| 44,148 |
| 43,945 |
| | 43,544 |
| |
| | | | | | | | | | | | | | |
OTHER NON-GAAP FINANCIAL INFORMATION | | | | | | | | | | | | | | |
Net premiums written to statutory surplus (2) | |
| 84 | % | 99 | % | 87 | % | 86 | % | | 83 | % | |
Combined ratio (3) | |
| 91.9 |
| 94.7 |
| 96.4 |
| 89.5 |
| | 84.5 | |
|
Statutory combined ratio (2)(3) | |
| 91.1 |
| 94.0 |
| 96.2 |
| 89.0 | | | 83.9 | | |
33
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
OVERVIEW
RLI Corp. is a U.S.-based,U.S. based, specialty insurance company that underwrites select property and casualty insurance through major subsidiaries collectively known as RLI Insurance Group.Group (Group). Our focus is on niche markets and developing unique products that are tailored to customers’ needs. We hire underwriters and claim examiners with deep expertise and provide exceptional customer service and support. We maintain a highly diverse product portfolio and underwrite for profit in all market conditions. In 2019,2021, we achieved our 24th26th consecutive year of underwriting profitability. Over the 24 year26-year period, we averaged an 88.388.4 combined ratio. This drives our ability to provide shareholder returns in three different ways: the underwriting income itself, net investment income from our investment portfolio and long-term appreciation in our equity portfolio.
We measure the results of our insurance operations by monitoring growth and profitability across three distinct business segments: casualty, property and surety. Growth is measured in terms of gross premiums written, and profitability is analyzed through combined ratios, which are further subdivided into their respective loss and expense components.
GAAP, NON-GAAP AND PERFORMANCE MEASURES
Throughout this annual report, we include certain non-generally accepted accounting principles (non-GAAP) financial measures. Management believes that these non-GAAP measures further explain the Company’s results of operations and allow for a more complete understanding of the underlying trends in the Company’s business. These measures should not be viewed as a substitute for those determined in accordance with generally accepted accounting principles in the United States of America (GAAP). In addition, our definitions of these items may not be comparable to the definitions used by other companies.
Following is a list of non-GAAP measures found throughout this report with their definitions, relationships to GAAP measures and explanations of their importance to our operations.
Underwriting Income
Underwriting income or profit represents one measure of the pretax profitability of our insurance operations and is derived by subtracting losses and settlement expenses, policy acquisition costs and insurance operating expenses from net premiums earned, which are all GAAP financial measures. Each of these captions is presented in the statements of earnings but is not subtotaled. However, this information is available in total and by segment in note 12 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data. The nearest comparable GAAP measure is earnings before income taxes which, in addition to underwriting income, includes net investment income, net realized gains or losses, net unrealized gains or losses on equity securities, in 2019 and 2018, general corporate expenses, debt costs and our portion of earnings from unconsolidated investees. A reconciliation of net earnings to underwriting income follows:
|
| Year ended December 31, |
| |||||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Net earnings |
| $ | 279,354 |
|
| $ | 157,091 |
|
Income tax expense |
|
| 64,967 |
|
|
| 32,750 |
|
Earnings before income taxes |
| $ | 344,321 |
|
| $ | 189,841 |
|
Equity in earnings of unconsolidated investees |
|
| (37,060 | ) |
|
| (20,233 | ) |
General corporate expenses |
|
| 13,330 |
|
|
| 10,265 |
|
Interest expense on debt |
|
| 7,677 |
|
|
| 7,603 |
|
Net unrealized gains on equity securities |
|
| (65,258 | ) |
|
| (32,101 | ) |
Net realized gains |
|
| (64,222 | ) |
|
| (17,885 | ) |
Net investment income |
|
| (68,862 | ) |
|
| (67,893 | ) |
Underwriting income |
| $ | 129,926 |
|
| $ | 69,597 |
|
Combined Ratio
The combined ratio, which is derived from components of underwriting income, is a common industry performance measure of profitability for underwriting operations and is calculated in two components. First, the loss ratio is losses and settlement expenses divided by net premiums earned. The second component, the expense ratio, reflects the sum of policy acquisition costs and insurance operating expenses divided by net premiums earned. All items included in these components of the combined ratio are presented in our GAAP consolidated financial statements. The sum of the loss and expense ratios is the combined ratio. The difference between the combined ratio and 100 reflects the per-dollar rate of underwriting income or loss. For example, a combined ratio of 90 implies that for every $100 of premium we earn, we record $10 of underwriting income.
Net Unpaid Loss and Settlement Expenses
Unpaid losses and settlement expenses, as shown in the liabilities section of our consolidated balance sheets, represents the total obligations to claimants for both estimates of known claims and estimates for incurred but not reported (IBNR) claims. The related asset item, reinsurance balances recoverable on unpaid losses and settlement expenses, is the estimate of known claims and estimates of IBNR that we expect to recover from reinsurers. The net of these two items is generally referred to as net unpaid loss and settlement expenses and is commonly used in our disclosures regarding the process of establishing these various estimated amounts.
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CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.
The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and settlement expenses, investment valuation, and other-than-temporary impairment (OTTI), recoverability of reinsurance balances, deferred policy acquisition costs and deferred taxes.
LOSSES AND SETTLEMENT EXPENSES
Overview
Loss and loss adjustment expense (LAE) reserves represent our best estimate of ultimate payments for losses and related settlement expenses from claims that have been reported but not paid, and those losses that have occurredbeen incurred but have not yet been reported (IBNR) to the Company. Loss reserves do not represent an exact calculation of liability, but instead represent our estimates, generally utilizing individual claim estimates, actuarial expertise and estimation techniques at a given accounting date. The loss reserve estimates are expectations of what ultimate settlement and administration of claims will cost upon final resolution. These estimates are based on facts and circumstances then known to the Company, review of historical settlement patterns, estimates of trends in claims frequency and severity, projections of loss costs, expected interpretations of legal theories of liability and many other factors. In establishing reserves, we also take into account estimated recoveries from reinsurance, salvage and subrogation. The reserves are reviewed regularly by a team of actuaries we employ.
The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, claim personnel, economic inflation, legal trends and legislative changes, among others. The impact of many of these items on ultimate costs for loss and LAE is difficult to estimate. Loss reserve estimations also differ significantly by coverage due to differences in claim complexity, the volume of claims, the policy limits written, the terms and conditions of the underlying policies, the potential severity of individual claims, the determination of occurrence date for a claim and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process. We continually refine our loss reserve estimates as historical loss experience develops and additional claims are reported and settled. We rigorously attempt to consider all significant facts and circumstances known at the time loss reserves are established.
Due to inherent uncertainty underlying loss reserve estimates, including, but not limited to, the future settlement environment, final resolution of the estimated liability may be different from that anticipated at the reporting date. Therefore, actual paid losses in the future may yield a significantly different amount than currently reserved — favorable or unfavorable.
The amount by which currently estimated losses differ from those estimated for a period at a prior valuation date is known as development. Development is unfavorable when the losses ultimately settle for more than the levels at which they were reserved or subsequent estimates indicate a basis for reserve increases on unresolved claims. Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on unresolved claims. We reflect favorable or unfavorable developments of loss reserves in the results of operations in the period the estimates are changed.
We record two categories of loss and LAE reserves: case-specific reserves and IBNR reserves.
Within a reasonable period of time after a claim is reported, our claim department completes an initial investigation and establishes a case reserve. This case-specific reserve is an estimate of the ultimate amount we will have to pay for the claim, including related legal expenses and other costs associated with resolving and settling it. The estimate reflects all of the current information available regarding the claim, the informed judgment of our professional claim personnel regarding the nature and value of the specific type of claim and our reserving practices. During the life cycle of a particular claim, as more information becomes available, we may revise the estimate of the ultimate value of the claim either upward or downward. We may determine that it is appropriate to pay portions of the reserve to the claimant or related settlement expenses before final resolution of the claim. The amount of the individual case reserve will be adjusted accordingly and is based on the most recent information available.
35
We establish IBNR reserves to estimate the amount we will have to pay for claims that have occurred, but have not yet been reported to the Company, claims that have been reported to the Company that may ultimately be paid out differently than reflected in our case-specific reserves and claims that have been closed but may reopen and require future payment.
Our IBNR reserving process involves three steps: (1) an initial IBNR generation process that is prospective in nature, (2) a loss and LAE reserve estimation process that occurs retrospectively and (3) a subsequent discussion and reconciliation between our prospective and retrospective IBNR estimates, which includes changes in our provisions for IBNR where deemed appropriate. These three processes are discussed in more detail in the following sections.
LAE represents the cost involved in adjusting and administering losses from policies we issued. The LAE reserves are frequently separated into two components: allocated and unallocated. Allocated loss adjustment expense (ALAE) reserves represent an estimate of claims settlement expenses that can be identified with a specific claim or case. Examples of ALAE would be the hiring of an outside adjuster to investigate a claim or an outside attorney to defend our insured. The claim adjuster typically estimates this cost separately from the loss component in the case reserve. Unallocated loss adjustment expense (ULAE) reserves represent an estimate of claims settlement expenses that cannot be identified with a specific claim. An example of ULAE would be the cost of an internal claim examiner to manage or investigate claims.
Our best estimateThe process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claim handling procedures, claim personnel, economic inflation, legal trends and legislative changes, among others. The impact of many of these items on ultimate costs for loss and LAE is difficult to estimate. Loss reserve estimations also differ significantly by coverage due to differences in claim complexity, the volume of claims, the policy limits written, the terms and conditions of the underlying policies, the potential severity of individual claims, the determination of occurrence date for a claim and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process. We continually refine our loss reserve estimates as historical loss experience develops and additional claims are reported and settled. We rigorously attempt to consider all significant facts and circumstances known at the time loss reserves are proposedestablished.
Following is a table of significant risk factors involved in estimating losses grouped by major product line. We distinguish between loss ratio risk and reserve estimation risk. Loss ratio risk refers to the possible dispersion of loss ratios from year to year due to inherent volatility in the business, such as high severity or aggregating exposures. Reserve estimation risk recognizes the difficulty
in estimating a given year’s ultimate loss liability. As an example, our leadproperty catastrophe business (included below in other property) has significant variance in year over year results; however, its reserving actuary and approved by our Loss Reserve Committee (LRC). The LRCestimation risk is made up of various membersrelatively moderate.
Emergence | Expected loss | Reserve | ||||||||
Length of | patterns relied | ratio | estimation | |||||||
Product line | reserve tail | upon | Other risk factors | variability | variability | |||||
Commercial excess | Long | Internal | Low frequency | High | High | |||||
High severity | ||||||||||
Loss trend volatility | ||||||||||
Exposure growth | ||||||||||
Unforeseen tort potential | ||||||||||
Exposure changes/mix | ||||||||||
Personal umbrella | Medium | Internal | Low frequency | Medium | Medium | |||||
High severity | ||||||||||
Loss trend volatility | ||||||||||
Exposure growth | ||||||||||
Unforeseen tort potential | ||||||||||
General liability | Long | Internal | Exposure changes/mix | Medium | High | |||||
Unforeseen tort potential | ||||||||||
Professional services | Medium | Internal & external | Highly varied exposures | Medium | Medium | |||||
Loss trend volatility | ||||||||||
Unforeseen tort potential | ||||||||||
Commercial transportation | Medium | Internal | High severity | Medium | Medium | |||||
Exposure change/mix | ||||||||||
Loss trend volatility | ||||||||||
Unforeseen tort potential | ||||||||||
Small commercial | Long | Internal | Exposure growth/mix | Medium | Medium | |||||
Unforeseen tort potential | ||||||||||
Small volume | ||||||||||
Executive products | Long | Internal & significant external | Low frequency | High | High | |||||
High severity | ||||||||||
Loss trend volatility | ||||||||||
Economic volatility | ||||||||||
Unforeseen tort potential | ||||||||||
Exposure growth/mix | ||||||||||
Heavily reinsured | ||||||||||
Other casualty | Medium | Internal & external | Small volume | Medium | Medium | |||||
Marine | Medium | Internal & external | Exposure growth/mix | High | High | |||||
Other property | Short | Internal | CAT aggregation exposure | High | Medium | |||||
Low frequency | ||||||||||
High severity | ||||||||||
Surety | Medium | Internal | Economic volatility | Medium | Medium | |||||
Unique exposures | ||||||||||
Runoff including asbestos & environmental | Long | Internal & external | Loss trend volatility | High | High | |||||
Mass tort/latent exposure |
Due to inherent uncertainty underlying loss reserve estimates, including, but not limited to, the future settlement environment, final resolution of the management team includingestimated liability may be different from that anticipated at the lead reserving actuary, chief executive officer, chief operating officer, chief financial officer, chief legal officer and other selected executives. We do not use discounting (recognition ofreporting date. Therefore, actual paid losses in the time value of money) in reporting ourfuture may yield a significantly different amount than currently reserved — favorable or unfavorable.
The amount by which current estimated reserveslosses differ from those estimated for a period at a prior valuation date is known as development. Development is unfavorable when the losses and settlement expenses. Based on current assumptions used in calculating reserves, we believe that our reserveultimately settle for more than the levels at December 31, 2019, makewhich they were reserved or subsequent estimates indicate a reasonable provision to meetbasis for reserve increases on unresolved claims. Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on unresolved claims. We reflect favorable or unfavorable development of loss reserves in the results of operations in the period the estimates are changed.
Our IBNR reserving process involves three steps: (1) an initial IBNR generation process that is prospective in nature, (2) a loss and LAE reserve estimation process that occurs retrospectively and (3) a subsequent discussion and reconciliation between our future obligations.prospective and retrospective IBNR estimates, which includes changes in our provisions for IBNR where deemed appropriate.
Initial IBNR Generation Process
Initial carried IBNR reserves are determined through a reserve generation process. The intent of this process is to establish an initial total reserve that will provide a reasonable provision for the ultimate value of all unpaid loss and ALAE liabilities. For most casualty and surety products, this process involves the use of an initial loss and ALAE ratio that is applied to the earned premium for a given period. The result is our best initial estimate of the expected amount of ultimate loss and ALAE for the period by product. Payments and case reserves are subtracted from this initial estimate of ultimate loss and ALAE to determine a carried IBNR reserve.
For certain property products, we use an alternative method of determining an appropriate provision for initial IBNR. Since this segment is characterized by a shorter period of time between claim occurrence and claim settlement, the IBNR reserves are determined by IBNR percentages applied to premium earned. The percentages are determined based on expected loss ratios and loss development assumptions. The loss development assumptions are typically based on historical reporting patterns but could consider alternative sources of information. The IBNR percentages are reviewed and updated periodically. No deductions for paid or case reserves are made. This alternative method of determining initial IBNR allows incurred losses and ALAE to react more rapidly to the actual emergence, and is more appropriate for our property products where final claim resolution occurs over a shorter period of time.
We do not reserve for natural or man-made catastrophes until an event has occurred. Shortly after such occurrence, we review insured locations exposed to the event and industry loss estimates of the event. We also consider our knowledge of frequency and severity from early claim reports to determine an appropriate reserve for the catastrophe. These reserves are reviewed frequently to consider actual losses reported and appropriate changes to our estimates are made to reflect the new information.
The initial loss and ALAE ratios that are applied to earned premium are reviewed at least semi-annually. Prospective estimates are made based on historical loss experience adjusted for exposure mix, price change and loss cost trends. The initial loss and ALAE ratios also reflect our judgment as to estimation risk. We consider estimation risk by product and coverage within product, if applicable. A product with greater volatility and uncertainty has greater estimation risk. Products or coverages with higher estimation risk include, but are not limited to, the following characteristics:
• | Significant changes in underlying policy terms and conditions, |
• | A new business or one experiencing significant growth and/or high turnover, |
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• | Small volume or lacking internal data requiring significant utilization of external data, |
• | Unique reinsurance features including those with aggregate stop-loss, reinstatement clauses, commutation provisions or clash protection, |
• | Longer emergence patterns with exposures to latent unforeseen mass tort, |
• | Assumed reinsurance businesses where there is an extended reporting lag and/or a heavier utilization of ceding company data and claims and product expertise, |
• | High severity and/or low frequency, |
• | Operational processes undergoing significant change and/or |
• | High sensitivity to significant swings in loss trends, economic change or judicial change. |
The historical and prospective loss and ALAE estimates, along with the risks listed, are the basis for determining our initial and subsequent carried reserves. Adjustments in the initial loss ratio by product and segment are made where necessary and reflect updated assumptions regarding loss experience, loss trends, price changes and prevailing risk factors. The LRC approves changes in the initial loss and ALAE ratios.
Loss and LAE Reserve Estimation Process
Estimates of the expected value of the unpaid loss and LAE are derived using standard actuarial methodologies on a quarterly basis. In addition, an emergence analysis is completed quarterly to determine if further adjustments are necessary. These estimates are then compared to the carried loss reserves to determine the appropriateness of the current reserve balance.
The process of estimating ultimate payment for claims and claim expenses begins with the collection and analysis of current and historical claim data. Data on individual reported claims, including paid amounts and individual claim adjuster estimates, are grouped by common characteristics. There is judgment involved in this grouping. Considerations when grouping data include the volume of the data available, the credibility of the data available, the homogeneity of the risks in each cohort and both settlement and payment pattern consistency. We use this data to determine historical claim reporting and payment patterns, which are used in the analysis of ultimate claim liabilities. In some analyses, including business without sufficiently large numbers of policies or that have not accumulated sufficient historical statistics, our own data is supplemented with external or industry average data as available and when appropriate. For liabilities arising out of directors and officers, management liability, workers’ compensation and medical errors and omissions exposures, we utilize external data extensively.
In addition to the review of historical claim reporting and payment patterns, weWe also incorporate estimated losses relative to premium (loss ratios) by year into the analysis. The expected loss ratios are based on a review of historical loss performance, trends in frequency and severity and price level changes. The estimates are subject to judgment including consideration given to available internal and industry data, growth and policy turnover, changes in policy limits, changes in underlying policy provisions, changes in legal and regulatory interpretations of policy provisions and changes in reinsurance structure. For the most current year, these are equivalent with the ratios used in the initial IBNR generation process. Increased recognition is given to actual emergence as the years age.
We use historical development patterns, expected loss ratios and standard actuarial methods to derive an estimate of the ultimate level of loss and LAE payments necessary to settle all the claims occurring as of the end of the evaluation period.
Our reserve processes include multiple standard actuarial methods for determining estimates of IBNR reserves. Other supplementary methodologies are incorporated as necessary. Mass tort and latent liabilities are examples of exposures for which supplementary methodologies are used. Each method produces an estimate of ultimate loss by accident year. We review all of these various estimates and assign weights to each based on the characteristics of the product being reviewed.
The methodologies we have chosen to incorporate are a function of data availability and are reflective of our own book of business. From time to time, we evaluate the need to add supplementary methodologies. New methods are incorporated if it is believed they improve the estimate of our ultimate loss and LAE liability. All of the actuarial methods eventually converge to the same estimate as an accident year matures. Our core methodologies are listed below with a short description and their relative strengths and weaknesses:
Paid Loss Development — Historical payment patterns for prior claims are used to estimate future payment patterns for current claims. These patterns are applied to current payments by accident year to yield an expected ultimate loss.
Strengths: The method reflects only the claim dollars that have been paid and is not subject to case-basis reserve changes or changes in case reserve practices.
Weaknesses: External claims environment changes can impact the rate at which claims are settled and losses paid (e.g. increase in attorney involvement or change in legal precedent). Adjustments to reflect changes in payment patterns on a prospective basis are difficult to quantify. For losses that have occurred recently, payments can be minimal and thus early estimates are subject to significant instability.
Incurred Loss Development — Historical case-incurred patterns (paid losses plus case reserves) for past claims are used to estimate future case-incurred amounts for current claims. These patterns are applied to current case-incurred losses by accident year to yield an expected ultimate loss.
Strengths: Losses are reported more quickly than paid, therefore, the estimates stabilize sooner. The method reflects more information in the analysis than the paid loss development method.
Weaknesses: Method involves additional estimation risk if significant changes to case reserving practices have occurred.
Case Reserve Development — Patterns of historical development in reported losses relative to historical case reserves are determined. These patterns are applied to current case reserves by accident year and the result is combined with paid losses to yield an expected ultimate loss.
Strengths: Like the incurred development method, this method benefits from using the additional information available in case reserves that is not available from paid losses only. It also can provide a more reasonable estimate than other methods when the proportion of claims still open for an accident year is unusually high or low.
Weaknesses: It is subject to the risk of changes in case reserving practices or philosophy. It may provide unstable estimates when an accident year is immature and more of the IBNR is expected to come from unreported claims rather than development on reported claims and when accident years are very mature with infrequent case reserves.
Expected Loss Ratio — Historical loss ratios, in combination with projections of frequency and severity trends, as well as estimates of price and exposure changes, are analyzed to produce an estimate of the expected loss ratio for each accident year. The expected loss ratio is then applied to the earned premium for each year to estimate the expected ultimate losses. The current accident year expected loss ratio is also the prospective loss and ALAE ratio used in our initial IBNR generation process.
Strengths: Reflects an estimate independent of how losses are emerging on either a paid or a case reserve basis. This method is particularly useful in the absence of historical development patterns or where losses take a long time to emerge.
Weaknesses: Ignores how losses are actually emerging and thus produces the same estimate of ultimate loss regardless of favorable/unfavorable emergence.
Paid and Incurred Bornhuetter/Ferguson (BF) — This approach blends the expected loss ratio method with either the paid or incurred loss development method. In effect, the BF methods produce weighted average indications for each accident year. As an example, if the current accident year for commercial automobile liability is estimated to be 20 percent paid, then the paid loss development method would receive a weight of 20 percent and the expected loss ratio method would receive an 80 percent weight. Over time, this method will converge with the ultimate estimated by the respective loss development method.
Strengths: Reflects actual emergence that is favorable/unfavorable, but assumes remaining emergence will continue as previously expected. Does not overreact to the early emergence (or lack of emergence) where patterns are most unstable.
Weaknesses: Could potentially understate favorable or unfavorable development by putting weight on the expected loss ratio.
In most cases, multiple estimation methods will be valid for the particular facts and circumstances of the claim liabilities being evaluated. Each estimation method has its own set of assumption variables and its own advantages and disadvantages, with no single estimation method being better than the others in all situations, and no one set of assumption variables being meaningful for all product line components. The relative strengths and weaknesses of the particular estimation methods, when applied to a particular group of claims, can also change over time. Therefore, the weight given to each estimation method will likely change by accident year and with each evaluation.
The actuarial central estimates typically follow a progression that places significant weight on the BF methods when accident years are younger and claim emergence is immature. As accident years mature and claims emerge over time, increasing weight is placed on the incurred development method, the paid development method and the case reserve development method. For product lines with faster loss emergence, the progression to greater weight on the incurred and paid development methods occurs more quickly.
For our long and medium-tail products, the BF methods are typically given the most weight for more evaluation periods than the short-tailed lines. These methods are also predominant for the first 12 months of evaluation for short-tail lines. Beyond these time periods, our actuaries apply their professional judgment when weighting the estimates from the various methods deployed, but place significant reliance on the expected stage of development in normal circumstances.
Judgment can supersede this natural progression if risk factors and assumptions change, or if a situation occurs that amplifies a particular strength or weakness of a methodology. Extreme projections are critically analyzed and may be adjusted, given less credence or discarded altogether. Internal documentation is maintained that records any substantial changes in methods or assumptions from one loss reserve study to another.
Our estimates of ultimate loss and LAE reserves are subject to change as additional data emerges. This could occur as a result of change in loss development patterns, a revision in expected loss ratios, the emergence of exceptional loss activity, a change in weightings between actuarial methods, the addition of new actuarial methodologies, new information that merits inclusion or the emergence of internal variables or external factors that would alter our view.
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There is uncertainty in the estimates of ultimate losses. Significant risk factors to the reserve estimate include, but are not limited to, unforeseen or unquantifiable changes in:
• | Loss payment patterns, |
• | Loss reporting patterns, |
• | Frequency and severity trends, |
• | Underlying policy terms and conditions, |
• | Business or exposure mix, |
• | Operational or internal processes affecting the timing of loss and LAE transactions, |
• | Regulatory and legal environment and/or |
• | Economic environment. |
Our actuaries engage in discussions with senior management, underwriters and the claim department on a regular basis to ascertain any substantial changes in operations or other assumptions that are necessary to consider in the reserving analysis.
A considerable degree of judgment in the evaluation of all these factors is involved in the analysis of reserves. The human element in the application of judgment is unavoidable when faced with uncertainty. Different experts will choose different assumptions based on their individual backgrounds, professional experiences and areas of focus. Hence, the estimates selected by various qualified experts may differ significantly from each other. We consider this uncertainty by examining our historic reserve accuracy and through an internal and external review process.
Given the substantial impact of the reserve estimates on our financial statements, we subject the reserving process to significant diagnostic testing and reasonability checks. In addition, there are data validity checks and balances in our front-end processes. Data anomalies are researched and explained to reach a comfort level with the data and results. Leading indicators such as actual versus expected emergence and other diagnostics are also incorporated into the reserving processes.
Determination of Our Best Estimate
Upon completionOur best estimate of ourultimate loss and LAE estimation analysis,reserves are proposed by our lead reserving actuary and then discussed and approved by our Loss Reserve Committee (LRC). The LRC is made up of various members of the results are discussed withmanagement team including the LRC.lead reserving actuary, chief executive officer, chief operating officer, chief financial officer, chief legal officer and other selected executives. As part of thisthe discussion with the LRC, the analysis supporting the actuarial central estimate of the IBNR reserve by product is reviewed. The actuaries also present explanations supporting any changes to the underlying assumptions used to calculate the indicated central estimate. A review of the resulting variance between the indicated reserves and the carried reserves takes place. Our actuaries make a recommendation to management in regards to booked reserves that reflect both their analytical assessment and relevant qualitative factors, such as their view of estimation risk. After discussion of these analyses, recommendations and all relevant risk factors, the LRC determines whether the reserve balances require adjustment. Resulting reserve balances have always fallen within our actuaries’ reasonable range of estimates.
As a predominantly excess and surplus lines and specialty admitted insurer serving niche markets, we believe there are several reasons to carry, on an overall basis, reserves above the actuarial central estimate. We believe we are subject to above-average variation in estimates and that this variation is not symmetrical around the actuarial central estimate.
One reason for the variation is the above-average policyholder turnover and changes in the underlying mix of exposures typical of an excess and surplus lines business. This constant change can cause estimates based on prior experience to be less reliable than estimates for more stable, admitted books of business. Also, as a niche market insurer, there is little industry-level information for direct comparisons of current and prior experience and other reserving parameters. These unknowns create greater-than-average variation in the actuarial central estimates.
Actuarial methods attempt to quantify future outcomes. However, insurance companies are subject to unique exposures that are difficult to foresee at the pointwhen coverage is initiated and, often, many years subsequent.initiated. Judicial and regulatory bodies involved in interpretation of insurance contracts have increasingly found opportunities to expand coverage beyond that which was intended or contemplated at the time the policy was issued. Many of these policies offer broad coverages (with named exclusion) and are issued on an “all risk” and occurrence basis. Claimants have at times sought coverage beyond the insurer’s original intent, including seeking to void or limit exclusionary language.
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We believe that because of the inherent variation and the likelihood that there are unforeseen and under-quantified liabilities absent from the actuarial estimate, we believe there are circumstances where it is prudent to carry loss reserves aboveenhance our normal reserving process. Generally, these are circumstances where we have qualitative information and knowledge of increased risk, but those circumstances have not occurred within the actuarial central estimate. Mosthistory of our variance between the carriedquantitative data. In these situations, we will rely on that qualitative information, usually from our claim team or underwriting staff, and make an enhancement to our normal process. In general, these enhancements will result in an increased overall reserve and the actuarial central estimate is in the most recent accident years for our casualty segment, where the most significant estimation risks reside. These estimation risks are considered when setting the initial loss ratios.level compared to reserves based only on quantitative information. In the cases where these risks fail to materialize,
favorable loss development will likely occur overin subsequent accounting periods. It is also possible that the risks materialize above the amount we considered when booking our initial loss reserves. In thisenhanced reserve level, in which case unfavorable loss development iswill likely to occur overin subsequent accounting periods.
Our best estimate of loss and LAE reserves may change as a result of a revision in the actuarial central estimate, the actuary’s certainty in the estimates and processes and our overall view of the underlying risks. From time to time, we benchmark our reserving policies and procedures and refine them by adopting industry best practices where appropriate. A detailed, ground-up analysis of the reserve estimation risks associated with each of our products and segments, including an assessment of industry information, is performed annually. This information is used when determining management’s best estimate of booked reserves.
We do not use discounting (recognition of the time value of money) in reporting our estimated reserves for losses and settlement expenses.
Loss reserve estimates are subject to a high degree of variability due to the inherent uncertainty of ultimate settlement values. Periodic adjustments to these estimates will likely occur as the actual loss emergence reveals itself over time. Our loss reserving processes reflect accepted actuarial practices and our methodologies result in a reasonable provision for reserves as of December 31, 2019.2021.
Reserve Sensitivities
There are three major parameters that have significant influence on our actuarial estimates of ultimate liabilities by product. They are the actual losses that are reported, the expected loss emergence pattern and the expected loss ratios used in the analyses. If the actual losses reported do not emerge as expected, it may cause the Company to challenge all or some of our previous assumptions. We may change expected loss emergence patterns, the expected loss ratios used in our analysis and/or the weights we place on a given actuarial method. The impact will be much greater and more leveraged for products with longer emergence patterns. Our general liability product is an example of a product with a relatively long emergence pattern. The following chart illustrates the sensitivity of our general liability reserve estimates to these key parameters. We believe the scenarios to be reasonable, as similar favorable variations have occurred in recent years. For example, our general liability emergence has ranged from 16 percent to 22 percent favorable and our management liability emergence has ranged from 34 percent adverse to 61 percent favorable over the last three years, while our overall emergence for all products combined has ranged from 27 percent to 33 percent favorable. The numbers below are the changes in estimated ultimate loss and ALAE in millions of dollars as of December 31, 2021, resulting from the change in the parameters shown. These parameters were applied to a general liability net loss and LAE reserve balance of $227.7 million, in addition to associated ULAE and latent liability reserves, at December 31, 2021.
|
| Result from favorable |
|
| Result from unfavorable |
| ||
(in millions) |
| change in parameter |
|
| change in parameter |
| ||
+/-5 point change in expected loss ratio for all accident years |
| $ | (12.6 | ) |
| $ | 13.0 |
|
+/-10% change in expected emergence patterns |
| $ | (5.9 | ) |
| $ | 6.0 |
|
+/-30% change in actual loss emergence over a calendar year |
| $ | (8.0 | ) |
| $ | 8.4 |
|
Simultaneous change in expected loss ratio (5pts), expected emergence patterns (10%) and actual loss emergence (30%). |
| $ | (26.6 | ) |
| $ | 27.4 |
|
There are often significant interrelationships between our reserving assumptions that have offsetting or compounding effects on the reserve estimate. Thus, in almost all cases, it is impossible to discretely measure the effect of a single assumption or construct a meaningful sensitivity expectation that holds true in all cases. The scenario above is representative of general liability, one of our largest and longest-tailed products. It is unlikely that all of our products would have variations as wide as illustrated in the example. It is also unlikely that all of our products would simultaneously experience favorable or unfavorable loss development in the same direction or at their extremes during a calendar year. Because our portfolio is made up of a diversified mix of products, there would ordinarily be some offsetting favorable and unfavorable emergence by product as actual losses start to emerge and our loss estimates become more reliable.
INVESTMENT VALUATION AND OTTI
Throughout each year, we and our investment managers buy and sell securities to achieve investment objectives in accordance with investment policies established and monitored by our board of directors and executive officers.
Equity securities are carried at fair value with unrealized gains and losses recorded within net earnings in 2019 and 2018. Prior to 2018, unrealized gains and losses on equity securities were recognized through other comprehensive earnings. We classify our investments in fixed income securities into one of three categories: trading, held-to-maturity or available-for-sale. We do not hold any securities classified as trading or held-to-maturity. Available-for-sale securities are carried at fair value with unrealized gains and losses recorded as a component of comprehensive earnings and shareholders’ equity, net of deferred income taxes.
Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date.
We determined the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
We regularly evaluate our fixed income securities using both quantitative and qualitative criteria to determine impairment losses for other-than-temporary declines in the fair value of the investments. The following are some of the key factors we consider for determining if a security is other-than-temporarily impaired:
Quantitative criteria considered during this process include, but are not limited to: the degree and duration of current fair value as compared to the amortized cost of the security, degree and duration of the security’s fair value being below cost and whether the issuer is in compliance with the terms and covenants of the security. Qualitative criteria include the credit quality, current economic conditions, the anticipated speed of cost recovery, the financial health of and specific prospects for the issuer,
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as well as the absence of intent to sell or requirement to sell securities prior to recovery. In addition, we consider price declines in our OTTI analysis when they provide evidence of declining credit quality, and we distinguish between price changes caused by credit deterioration as opposed to rising interest rates.
Key factors that we consider in the evaluation of credit quality include:
For mortgage-backed securities and asset-backed securities that have significant unrealized loss positions and major rating agency downgrades, credit impairment is assessed using a cash flow model that estimates likely payments using security-specific collateral and transaction structure. All of our mortgage-backed and asset-backed securities remain AAA-rated by one of the major rating agencies and the fair value is not significantly less than amortized cost.
Under current accounting standards, an OTTI write-down of debt securities, where fair value is below amortized cost, is triggered by circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income.
Part of our evaluation of whether particular securities are other-than-temporarily impaired involves assessing whether we have both the intent and ability to continue to hold equity securities in an unrealized loss position. For fixed income securities, we consider our intent to sell a security (which is determined on a security-by-security basis) and whether it is more likely than not we will be required to sell the security before the recovery of our amortized cost basis. Significant changes in these factors could result in a charge to net earnings for impairment losses. Impairment losses result in a reduction of the underlying investment’s cost basis.
RECOVERABILITY OF REINSURANCE BALANCES
Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets, rather than being netted with the related liabilities, since reinsurance does not relieve the Company of its liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. Additionally, the same uncertainties associated with estimating unpaid losses and settlement expenses impact the estimates for the ceded portion of such liabilities. We continually monitor the financial condition of our reinsurers.reinsurers and actively follow up on any past due or disputed amounts. As part of our monitoring efforts, we review their annual financial statements and Securities and Exchange Commission (SEC) filings for reinsurers that are publicly traded, AM Best and S&P rating developments andtraded. We also review insurance industry developments that may impact the financial condition of our reinsurers. In addition, we subjectWe analyze the credit risk associated with our reinsurance recoverablesbalances recoverable by monitoring the AM Best and Standard & Poor’s (S&P) ratings of our reinsurers. Additionally, we perform an in-depth reinsurer financial condition analysis prior to detailed recoverability tests, including one based on average default by S&P rating. Based uponthe renewal of our reviewreinsurance placements.
Once regulatory action (such as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and testing, our policy is to chargeunpaid balance recoverable from the reinsurer are specifically identified and charged to earnings in the form of an allowance for uncollectible amounts. We subject our remaining reinsurance balances receivable to detailed recoverability tests, including a segment-based analysis using the average default rating percentage by S&P rating, and record an estimate ofadditional allowance for unrecoverable amounts from reinsurers. This credit allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that we may be unable to recover.
DEFERRED POLICY ACQUISITION COSTS
We defer incremental direct costs that relate to the successful acquisition of new or renewal insurance contracts, including commissions and premium taxes. Acquisition-related costs may be deemed ineligible for deferral when they are based on contingent or performance criteria beyond the basic acquisition of the insurance contract, or when efforts to obtain or renew the insurance contract are unsuccessful. All eligible costs are capitalized and charged to expense in proportion to
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premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. This process contemplates the premiums to be earned, anticipated losses and settlement expenses and certain other costs expected to be incurred, but does not consider investment income. Judgments as to the ultimate recoverability of such deferred costs are reviewed on a segment basis and are highly dependent upon estimated future loss costs associated with the premiums written. This deferral methodology applies to both gross and ceded premiums and acquisition costs.
DEFERRED TAXES
We record deferred tax assets and liabilities to the extent that temporary differences between the tax basis and GAAP basis of an asset or liability result in future taxable or deductible amounts. Our deferred tax assets relate to expected future tax deductions arising from claim reserves and future taxable income related to changes in our unearned premium. We also have a significant amount of deferred tax liabilities from unrealized gains on the investment portfolio and deferred acquisition costs.
Periodically, management reviews our deferred tax positions to determine if it is more likely than not that the assets will be realized. These reviews include, among other things, the nature and amount of the taxable income and expense items, the expected timing of when assets will be used or liabilities will be required to be reported, as well as the reliability of historical profitability of businesses expected to provide future earnings. Furthermore, management considers tax-planningtax planning strategies it can use to increase the likelihood that the tax assets will be realized. After conducting the periodic review, if management determines that the realization of the tax asset does not meet the more likely than not criteria, an offsetting valuation allowance is recorded, thereby reducing net earnings and the deferred tax asset in that period. In addition, management must make estimates of the tax rates expected to apply in the periods in which future taxable items are realized. Such estimates include determinations and judgments as to the expected manner in which certain temporary differences, including deferred amounts related to our equity method investment, will be recovered. These estimates enter into the determination of the applicable tax rates and are subject to change based on the circumstances.
We consider uncertainties in income taxes and recognize those in our financial statements as required. As it relates to uncertainties in income taxes, our unrecognized tax benefits, including interest and penalty accruals, are not considered material to the consolidated financial statements. Also, no tax uncertainties are expected to result in significant increases or decreases to unrecognized tax benefits within the next 12-month period. Penalties and interest related to income tax uncertainties, should they occur, would be included in income tax expense in the period in which they are incurred.
Additional discussion of other significant accounting policies may be found in note 1 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.
IMPACT OF COVID-19
Our processes and controls continue to operate effectively and we have been able to maintain the highest service and support levels possible for our customers throughout the COVID-19 pandemic. It is difficult to predict how and to what extent COVID-19, and its effects on the economy, will impact our revenues in the coming quarters. In 2020, the product line that experienced the greatest impact was public transportation. Many of our passenger transportation customers were unable to effectively operate under social-distancing protocols and stay-at-home orders. Although transportation premium was up from pre-pandemic levels in total in 2021, public transportation may continue to be challenged. Additionally, a number of our products support the construction industry, and revenues may be impacted if disruption in this sector does not continue to ease.
The loss exposure arising out of the spread of COVID-19 and the resulting shutdown will take time to resolve. We do not offer event cancellation, travel, trade credit or pandemic-related coverages, which would be more directly impacted by the COVID-19 pandemic. The derivative implications that COVID-19 had on the economy may have negative implications on products that are correlated with the credit cycle, including, but not limited to, some of our surety and executive products offerings. Additionally, the professional services and executive product groups may be affected by claims made against companies who are reopening or returning to work.
Actuarial models base future emergence on historic experience, with adjustments for current trends, and the appropriateness of these assumptions involved greater uncertainty as of December 31, 2021. We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages. The industry experienced new issues, including the postponement of civil court cases, the extension of various statutes of limitations and changes in settlement trends. Our booked reserves include consideration of these factors, but the duration and degree to which these issues persist, along with potential legislative, regulatory or judicial actions, could result in loss reserve deficiencies and reduce earnings in future periods.
Investment yields decreased throughout 2020, which resulted in lower reinvestment rates through most of 2021. As investment yields rise, the fair value of the fixed income portfolio will decline, as we observed with our $58.9 million of after-tax other comprehensive loss during 2021.
We produced solid operating results in 2021 and our financial position remains strong. We generated $384.9 million of net operating cash inflows and believe we have sufficient sources of liquidity to meet our anticipated needs over the next 12 to 24 months. Our revolving credit facility provides for a borrowing capacity of $60.0 million, which can be increased to $120.0 million under certain circumstances. Furthermore, our membership in the Federal Home Loan Bank system provides a secured lending facility with additional borrowing capacity.
Ultimately, the extent to which COVID-19 will affect our business will be influenced by its impact on the economy. We continue to evaluate all aspects of our operations and are making necessary adjustments to manage our business. Our diversified portfolio of products and financial strength have allowed us to remain on solid footing. We believe we have a strong and sustainable underwriting approach that will allow us to weather the economic environment and uncertainty we continue to experience.
RESULTS OF OPERATIONS
This section of this Form 10-K generally discusses 20192021 and 20182020 items and year-to-year comparisons between 20192021 and 2018.2020. Discussions of 20172019 items and year-to-year comparisons between 20182020 and 20172019 that are not included in this Form 10-K can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2020, incorporated herein by reference.
Consolidated revenue totaled $1.0 billion in 2019, compared to $0.8 billion in 2018. Increased levels of earned premium and net investment income, as well as unrealized gains on equity securities, led tofor 2021 increased consolidated revenue in 2019.$195.6 million from 2020. Net premiums earned for the Group increased 613 percent, asdriven by growth from products within our casualty and property segments, more than offsetwhile performance in the impact of our exit from certain underperforming products andequity portfolio also surpassed the reductionreturn generated in our participation on a quota share reinsurance agreement with Prime Holdings Insurance Services, Inc. (Prime).2020. Net investment income increased by 111 percent in 2019,2021, primarily due to a larger asset base relative tobase. Additionally, in the prior year. Wenormal course of portfolio rebalancing, we recorded net realized gains on our investment portfolio in both 20192021 and 2018, due to portfolio rebalancing. Additionally, net2020.
CONSOLIDATED REVENUE |
| Year ended December 31, |
| |||||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Net premiums earned |
| $ | 980,903 |
|
| $ | 865,747 |
|
Net investment income |
|
| 68,862 |
|
|
| 67,893 |
|
Net realized gains |
|
| 64,222 |
|
|
| 17,885 |
|
Net unrealized gains on equity securities |
|
| 65,258 |
|
|
| 32,101 |
|
Total consolidated revenue |
| $ | 1,179,245 |
|
| $ | 983,626 |
|
Net earnings for 2021 totaled $279.4 million, up from $157.1 million in 2020. Improved underwriting income was bolstered by an increase in unrealized gains on equity securities were recorded in 2019, as the overall equity market experienced positive returns. In contrast, equity markets experienced negative returns in 2018, resulting in net unrealized losses on equity securities.
NET EARNINGS |
| Year ended December 31, |
| |||||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Underwriting income |
| $ | 129,926 |
|
| $ | 69,597 |
|
Net investment income |
|
| 68,862 |
|
|
| 67,893 |
|
Net realized gains |
|
| 64,222 |
|
|
| 17,885 |
|
Net unrealized gains on equity securities |
|
| 65,258 |
|
|
| 32,101 |
|
Interest expense on debt |
|
| (7,677 | ) |
|
| (7,603 | ) |
General corporate expenses |
|
| (13,330 | ) |
|
| (10,265 | ) |
Equity in earnings of unconsolidated investees |
|
| 37,060 |
|
|
| 20,233 |
|
Earnings before income taxes |
| $ | 344,321 |
|
| $ | 189,841 |
|
Income tax expense |
|
| (64,967 | ) |
|
| (32,750 | ) |
Net earnings |
| $ | 279,354 |
|
| $ | 157,091 |
|
41
| | | | | | | |
CONSOLIDATED REVENUE | | Year ended December 31, |
| ||||
(in thousands) |
| 2019 |
| 2018 |
| ||
Net premiums earned | | $ | 839,111 | | $ | 791,366 | |
Net investment income | |
| 68,870 | |
| 62,085 | |
Net realized gains | |
| 17,520 | |
| 63,407 | |
Net unrealized gains (losses) on equity securities | | | 78,090 | | | (98,735) | |
Total consolidated revenue | | $ | 1,003,591 | | $ | 818,123 | |
Net earnings for 2019 totaled $191.6 million, up from $64.2 million in 2018. Improved underwriting income, net investment income and equity in earnings of unconsolidated investees contributed to the overall increase. Additionally, 2019 experienced a larger benefit from increased gains on equity securities.
| | | | | | | |
NET EARNINGS | | Year ended December 31, |
| ||||
(in thousands) |
| 2019 |
| 2018 |
| ||
Underwriting income | | $ | 67,568 | | $ | 41,632 | |
Net investment income | |
| 68,870 | |
| 62,085 | |
Net realized gains | |
| 17,520 | |
| 63,407 | |
Net unrealized gains (losses) on equity securities | | | 78,090 | | | (98,735) | |
Interest expense on debt | |
| (7,588) | |
| (7,437) | |
General corporate expenses | |
| (12,686) | |
| (9,427) | |
Equity in earnings of unconsolidated investees | |
| 20,960 | |
| 16,056 | |
Earnings before income taxes | | $ | 232,734 | | $ | 67,581 | |
Income tax expense | |
| (41,092) | |
| (3,402) | |
Net earnings | | $ | 191,642 | | $ | 64,179 | |
UNDERWRITING RESULTS
Gross premiums written increased by 8$210.9 million, or 19 percent, in 20192021 when compared to a record $1.1 billion. Excluding exited lines, such as2020. Growth was achieved in all three segments, though the medical professional liability productincrease was driven by products in the casualty and the reduction in our quota share reinsurance agreement with Prime, written premium increased by 15 percent.property segments. Positive rate movement across most of the casualty and property portfolio and market disruptionexpanded distribution provided for growth opportunities in established lines. Newer product initiatives within our casualty segment have also continued to gain scale.
The 2019 fiscal year benefited from a reduced level of catastrophe activityNet premiums earned increased $115.2 million, or 13 percent, in 2021 when compared to 2018. In 2019, we incurred $9.52020.
Underwriting results for 2021 included $33.6 million of pretax losses and $0.4 million of reinstatement premium from storms, which added 1.1 points to the combined ratio. Catastrophehurricanes, as well as $25.0 million of other storm losses. Comparatively, 2020 included $51.5 million of pretax losses totaled $40.5and $1.5 million of reinstatement premium from hurricanes, as well as $6.5 million of other storm and civil unrest losses. Additionally, $18.3 million of COVID-19 related loss and defense reserves were established in 2018, adding 5.1 points to the combined ratio, with Hurricane Michael responsible2020. Results for $23.0 million, Hurricane Florence responsible for $7.5 million and other storms and volcanic activity in Hawaii composing the balance. Aparteach period benefited, however, from the impact of catastrophes, results for both years reflected a combination of positive underwriting results for the current accident year and favorable loss reserve development on prior accident years. Favorable development in prior accident years’ loss reserves, was $75.3which provided additional pretax earnings of $125.5 million in 2019 and $50.02021, compared to $101.1 million in 2018.2020. Further discussion of reserve development can be found in note 6 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.
Incentive and profit-sharing amounts earned by executives, managers and associates are predominately influenced by corporate performance including operating return on equity, combined ratio and Market Value Potential (MVP). MVP is a compensation model that measures components of comprehensive earnings against a minimum required return on capital. MVP is the primary measure of executive bonus achievement and a significant component of manager and associate incentive targets. Incentive and profit sharing-relatedprofit-sharing related expenses attributable to the favorable reserve developments totaled $11.1$18.3 million and $7.8$14.2 million for 20192021 and 2018,2020, respectively. These performance-related expenses impact policy acquisition, insurance operating and general corporate expenses line items in the financial statements. Partially offsetting the 20192021 and 20182020 increases were $1.4$8.5 million and $6.1$11.2 million, respectively, in reductions to incentive and profit-sharing amounts earned due to losses associated with catastrophe activity.activity, as well as the reserves that were established for COVID-19 in 2020.
In total, underwriting income was $67.6$129.9 million on an 86.8 combined ratio in 2021, compared to $69.6 million on a 91.992.0 combined ratio in 2019,2020. The loss ratio was 46.5 in 2021, compared to $41.6 million on51.2 in 2020. The expense ratio decreased to 40.3 in 2021, from 40.8 in 2020. While higher levels of underwriting income and net earnings led to larger levels of bonus and profit-sharing expenses, the expense ratio declined as a 94.7 combined ratio in 2018. result of a larger earned premium base.
We achieved our 24th26th consecutive year of underwriting profit in 2019, with all three segments contributing to the positive performance.2021. Our ability to continue to produce underwriting income, and to do so at margins which have consistently outperformed the broader industry, is a testament to our underwriters’ discipline throughout the insurance cycle and our continued commitment to underwriting for a profit. We believe our underwriting discipline can
42
differentiate the Company from the broader insurance market by ensuring sound risk selection and appropriate pricing, which helps slow the pace of deterioration in our underwriting results.pricing.
The following tables and narrative provide a more detailed look at individual segment performance over the last two years.
| | | | | | | | | | | | | | | | | | | |
GROSS PREMIUMS WRITTEN AND NET PREMIUMS EARNED | | | | | | | | | | ||||||||||
| | | | | | | | | | | | | | | | | | | |
| | Gross Premiums Written | | Net Premiums Earned | | ||||||||||||||
(in thousands) |
| 2019 | | 2018 | | % Change | | 2019 |
| 2018 |
| % Change |
| ||||||
CASUALTY | | | | | | | | | | | | | | | | | | | |
Commercial excess and personal umbrella | | $ | 183,098 | | $ | 153,540 | | 19 | % | | $ | 140,483 | | $ | 124,350 | | 13 | % | |
General liability | | | 99,345 | | | 100,997 | | (2) | % | |
| 98,880 | |
| 93,928 | | 5 | % | |
Commercial transportation | | | 105,592 | | | 101,267 | | 4 | % | |
| 83,213 | |
| 81,053 | | 3 | % | |
Professional services | | | 89,347 | | | 87,243 | | 2 | % | |
| 81,329 | |
| 79,951 | | 2 | % | |
Small commercial | | | 63,925 | | | 53,432 | | 20 | % | |
| 55,701 | |
| 51,519 | | 8 | % | |
Executive products | | | 96,828 | | | 68,501 | | 41 | % | |
| 27,088 | |
| 21,326 | | 27 | % | |
Other casualty | | | 66,057 | | | 89,214 | | (26) | % | |
| 71,764 | |
| 71,345 | | 1 | % | |
Total | | $ | 704,192 | | $ | 654,194 | | 8 | % | | $ | 558,458 | | $ | 523,472 | | 7 | % | |
| | | | | | | | | | | | | | | | | | | |
PROPERTY | | | | | | | | | | | | | | | | | | | |
Marine | | $ | 91,315 | | $ | 71,784 | | 27 | % | | $ | 74,887 | | $ | 59,795 | | 25 | % | |
Commercial property | | | 126,358 | | | 110,974 | | 14 | % | | | 68,310 | | | 71,501 | | (4) | % | |
Specialty personal | | | 21,190 | | | 18,789 | | 13 | % | | | 19,316 | | | 16,901 | | 14 | % | |
Other property | | | 2,562 | | | 1,370 | | 87 | % | |
| 1,509 | |
| 1,064 | | 42 | % | |
Total | | $ | 241,425 | | $ | 202,917 | | 19 | % | | $ | 164,022 | | $ | 149,261 | | 10 | % | |
| | | | | | | | | | | | | | | | | | | |
SURETY | | | | | | | | | | | | | | | | | | | |
Miscellaneous | | $ | 42,614 | | $ | 47,461 | | (10) | % | | $ | 44,721 | | $ | 46,968 | | (5) | % | |
Commercial | | | 47,436 | | | 48,505 | | (2) | % | |
| 43,553 | |
| 43,469 | | 0 | % | |
Contract | | | 29,335 | | | 30,139 | | (3) | % | |
| 28,357 | |
| 28,196 | | 1 | % | |
Total | | $ | 119,385 | | $ | 126,105 | | (5) | % | | $ | 116,631 | | $ | 118,633 | | (2) | % | |
Grand total | | $ | 1,065,002 | | $ | 983,216 | | 8 | % | | $ | 839,111 | | $ | 791,366 | | 6 | % | |
CasualtyGROSS PREMIUMS WRITTEN AND NET PREMIUMS EARNED
|
| Gross Premiums Written |
| Net Premiums Earned | ||||||||||||||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| % Change |
| 2021 |
|
| 2020 |
|
| % Change | ||||||||||
CASUALTY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial excess and personal umbrella |
| $ | 283,242 |
|
| $ | 237,239 |
|
|
| 19 |
| % |
| $ | 219,437 |
|
| $ | 178,214 |
|
|
| 23 |
| % |
General liability |
|
| 99,017 |
|
|
| 94,307 |
|
|
| 5 |
| % |
|
| 90,853 |
|
|
| 91,653 |
|
|
| (1 | ) | % |
Professional services |
|
| 96,735 |
|
|
| 91,300 |
|
|
| 6 |
| % |
|
| 88,855 |
|
|
| 85,196 |
|
|
| 4 |
| % |
Commercial transportation |
|
| 106,432 |
|
|
| 63,345 |
|
|
| 68 |
| % |
|
| 83,352 |
|
|
| 64,624 |
|
|
| 29 |
| % |
Small commercial |
|
| 68,475 |
|
|
| 65,843 |
|
|
| 4 |
| % |
|
| 64,660 |
|
|
| 63,357 |
|
|
| 2 |
| % |
Executive products |
|
| 136,078 |
|
|
| 121,653 |
|
|
| 12 |
| % |
|
| 21,873 |
|
|
| 26,509 |
|
|
| (17 | ) | % |
Other casualty |
|
| 81,605 |
|
|
| 75,722 |
|
|
| 8 |
| % |
|
| 64,609 |
|
|
| 59,968 |
|
|
| 8 |
| % |
Total casualty |
| $ | 871,584 |
|
| $ | 749,409 |
|
|
| 16 |
| % |
| $ | 633,639 |
|
| $ | 569,521 |
|
|
| 11 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial property |
| $ | 202,855 |
|
| $ | 145,371 |
|
|
| 40 |
| % |
| $ | 107,941 |
|
| $ | 79,406 |
|
|
| 36 |
| % |
Marine |
|
| 112,721 |
|
|
| 98,027 |
|
|
| 15 |
| % |
|
| 97,745 |
|
|
| 81,852 |
|
|
| 19 |
| % |
Specialty personal |
|
| 24,672 |
|
|
| 20,962 |
|
|
| 18 |
| % |
|
| 21,385 |
|
|
| 19,596 |
|
|
| 9 |
| % |
Other property |
|
| 7,618 |
|
|
| 4,409 |
|
|
| 73 |
| % |
|
| 4,766 |
|
|
| 2,866 |
|
|
| 66 |
| % |
Total property |
| $ | 347,866 |
|
| $ | 268,769 |
|
|
| 29 |
| % |
| $ | 231,837 |
|
| $ | 183,720 |
|
|
| 26 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SURETY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous |
| $ | 46,599 |
|
| $ | 43,174 |
|
|
| 8 |
| % |
| $ | 43,982 |
|
| $ | 42,292 |
|
|
| 4 |
| % |
Commercial |
|
| 51,529 |
|
|
| 46,426 |
|
|
| 11 |
| % |
|
| 43,738 |
|
|
| 42,872 |
|
|
| 2 |
| % |
Contract |
|
| 29,776 |
|
|
| 28,654 |
|
|
| 4 |
| % |
|
| 27,707 |
|
|
| 27,342 |
|
|
| 1 |
| % |
Total surety |
| $ | 127,904 |
|
| $ | 118,254 |
|
|
| 8 |
| % |
| $ | 115,427 |
|
| $ | 112,506 |
|
|
| 3 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand total |
| $ | 1,347,354 |
|
| $ | 1,136,432 |
|
|
| 19 |
| % |
| $ | 980,903 |
|
| $ | 865,747 |
|
|
| 13 |
| % |
Casualty
Gross premiums written fromfor the casualty segment totaled $704.2were up $122.2 million up 8 percent from 2018. Excluding certain exits and repositioning on Prime, a majority of products within this segment posted top line growth. Premiumsfor 2021. Gross premiums from commercial excess and personal umbrella increased $29.6$46.0 million, due in part to rate increases and an expanded distribution base in personal umbrella, larger scale in the energy casualty space and overall exposure growth. Our executive products group grew $28.3 million as substantial rate increases were achieved, submissions were up and newer initiatives gained traction. Production from small commercial increased $10.5 million as opportunities arose from market disruption and certain offerings expanded geographically. The third consecutive year of double digit ratebase. Rate increases led to growth within commercial transportation.
As previously announced,a 12 percent increase in premiums for our executive products group. Growth in the amount of business written by Prime, with whom we reduced ourmaintain a quota share reinsurance agreement with Prime from 25 percenttreaty, led to 6 percent at the beginning of 2019 to better manage our exposure to their growth relative to our overall product portfolio. In addition, we exited from our medical professional liability lines due to unfavorable market conditions and poor underwriting performance. These actions account for the declinean increase in other casualty premium.
Commercial transportation was meaningfully affected by the stay-at-home orders associated with COVID-19, which resulted in a significant decrease in premium in 2020. Transportation premiums were up $43.1 million in 2021, when compared to 2020, and offset continued growth in our general binding authority (GBA) and mortgage reinsurance lines.were up from pre-pandemic levels.
Property
Gross premiums written from our property segment totaled $241.4were up $79.1 million in 2019, up 19 percent from 2018. Market disruption created new business opportunities for our marine product and, along with rate increases, led to a 27 percent increase in premiums.2021. Our commercial property business grew 14 percent in 2019,was up $57.5 million, as an improving market has allowed our underwriters to find more opportunities with acceptable rate levels. Rates on wind-prone exposures increased for the second
43
consecutive year, while rates on wind and earthquake exposures increased after consecutive yearscontinued to increase, building valuations rose and market disruption provided an opportunity to increase market share. Rate increases and improved retention led to $14.7 million of decreases. Specialty personal lines, which is primarily composed of homeowners’ insurance in Hawaii, grew 13 percent as a result of continued investment in relationships and distribution.growth for our marine product. Other property premium increased as a result of property exposedproperty-exposed GBA business that continuescontinued to gain scale.
Surety
Gross premiums written from our surety segment totaled $119.4were up $9.7 million in 2019, down 5 percent from 2018. Competitive market conditions2021. The expansion of existing accounts and selectively reducing exposures on high risk accounts, given the current stagenew business resulted in the credit cycle, led to the overall reduction. Exiting one programincreased premium for commercial surety. The increase in the miscellaneous surety bookpremium is attributable to growth in existing programs and decreasing offshore energy activity within commercialnew opportunities from market disruption. Contract surety also resulted in a decline in premiumbenefited from 2018.new construction opportunities.
| | | | | | | | ||||||||
UNDERWRITING INCOME | | | | |
|
|
|
|
|
|
|
|
| ||
(in thousands) |
| 2019 |
| 2018 | |
| 2021 |
|
| 2020 |
| ||||
Casualty | | $ | 20,601 | | $ | 11,140 | |
| $ | 95,519 |
|
| $ | 44,427 |
|
Property | |
| 18,143 | |
| 884 | |
|
| 11,300 |
|
|
| (3,182 | ) |
Surety | |
| 28,824 | |
| 29,608 | |
|
| 23,107 |
|
|
| 28,352 |
|
Total | | $ | 67,568 | | $ | 41,632 | |
| $ | 129,926 |
|
| $ | 69,597 |
|
| | | | | |
COMBINED RATIO |
| 2019 |
| 2018 |
|
Casualty |
| 96.3 |
| 97.9 | |
Property |
| 88.9 |
| 99.4 | |
Surety |
| 75.3 |
| 75.0 | |
Total |
| 91.9 |
| 94.7 | |
Casualty
COMBINED RATIO |
| 2021 |
|
| 2020 |
| ||
Casualty |
|
| 84.9 |
|
|
| 92.2 |
|
Property |
|
| 95.1 |
|
|
| 101.7 |
|
Surety |
|
| 80.0 |
|
|
| 74.8 |
|
Total |
|
| 86.8 |
|
|
| 92.0 |
|
Casualty
Underwriting income for the casualty segment was $20.6$95.5 million on an 84.9 combined ratio in 2021, compared to $44.4 million on a 96.392.2 combined ratio in 2019, compared to $11.1 million on a 97.9 combined ratio in 2018.2020. The improvement is the result of increased favorable development on prior accident years’ reserves. However, thereserves and improved current accident year combined ratio was modestly higher in 2019 due to a shift in business mix, our cautious approach to reserving for new initiatives and products with larger growth, along with increased bonus and profit sharing expenses, based on strong growth in overall earnings and book value.performance.
Favorable development on prior accident years’ loss reserves benefitedcontributed to underwriting earnings in each of the past two years. The total benefit from favorable development on prior years’ reserves was $62.5$108.6 million for 2019, with the largest amounts of the development coming from2021, which was experienced across accident years 20162014 through 2018.2020. Products which generated the majority of the favorable development include transportation, general liability, transportation, professional services, commercial excess and personal umbrella and small commercial. Partially offsetting these favorable impacts wasumbrella. No product experienced significant adverse development on executive products and medical professional liability.development. Comparatively, overall results for the casualty segment in 20182020 included favorable development of $33.3$75.1 million, with the bulk of the development attributable to transportation, general liability, commercial excess personal umbrella,and professional services general liability and small commercial across accident years 20152016 through 2017. Executive products2019. Hurricane and medical professional liability developed adverselystorm losses on casualty-oriented package policies that include property coverage resulted in 2018. Increased favorable development$4.1 million of losses in 2021. Comparatively, $4.4 million of hurricane losses were incurred in 2020 and $12.9 million of reserves were established for COVID-19 loss and defense costs on transportation was responsible for a significant amount of the difference between the release in 2019 and 2018.financial-related product lines.
The segment’s loss ratio was 59.149.2 in 2019,2021, compared to 63.056.6 in 2018.2020. The lower loss ratio in 20192021 was due to the higher amounts of favorable development on prior years’ reserves. The expense ratio for the casualty segment was 37.235.7 in 2019,2021, compared to 34.935.6 in 2018. The increase in expense ratio in 2019 was due to investments in technology and a larger amount of bonus and profit-sharing expenses.2020.
Property
Underwriting income from the property segment was $18.1$11.3 million on an 88.9a 95.1 combined ratio in 2019,2021, compared to $0.9$3.2 million of underwriting loss on a 99.4101.7 combined ratio in 2018. Catastrophe losses2020. Underwriting results for the property segment consisted of $8.82021 included $11.0 million of storm losses in 2019, compared to total catastrophe losses of $38.3 million in 2018, which included $28.9 million from Hurricanes Michael and Florence and $6.1 million from volcanic activity in Hawaii. Partially offsetting the impact of catastrophes, favorable development in prior years’ reserves benefited underwriting results in each of the past two years. Results for 2019 included $4.5 million of net favorable development on prior years’ reserves. Marine experienced $2.4loss and catastrophe reserves, primarily from the marine business, $32.2 million of the favorable development, primarily on accident years 2017hurricane losses and 2018. Specialty personal and commercial property also contributed to the
44
favorable development. Resultsother storm losses. Comparatively, results for 20182020 included $10.8$13.0 million of favorable development in prior years’ reserves, largely from marine, but commercial property products also contributed.$5.0 million of storm and civil unrest losses and $2.0 million of reserves related to COVID-19 investigative and defense costs. Additionally, hurricane activity resulted in $47.2 million of losses and $1.5 million of ceded reinstatement premium.
A larger earned premium base resulted in higher levels of underwriting income as well as lower loss and expense ratios. The segment’s loss ratio was 44.956.0 in 2019,2021, compared to 56.260.6 in 2018.2020. Catastrophe losses added 524 points to the loss ratio in 2019,2021, compared to 2630 points of impact from catastrophe losses in 2018. Partially offsetting this reduction were higher current accident year non-catastrophe losses from our commercial property and specialty personal lines, a shift in mix of business and lower favorable development on prior years’ reserves.2020. The expense ratio for the property segment was 44.0declined to 39.1 in 2019, compared to 43.22021, from 41.1 in 2018. Strong growth in overall earnings and book value led to an increase in bonus and profit-sharing expenses and a higher expense ratio, the impact of which was partially offset by a larger premium base.2020.
Surety
Underwriting income for the surety segment totaled $28.8$23.1 million on an 80.0 combined ratio in 2021, compared to $28.4 million on a 75.374.8 combined ratio in 2019, compared to $29.6 million on a 75.0 combined ratio in 2018.2020. Underwriting performance for each year reflects a combination of positive current accident year results and favorable development in prior accident years’ loss reserves. The current accident year combined ratio for each period has been in the low 80s, with each product line contributing to underwriting profit.mid 80s. Results for 20192021 included $8.3 million of favorable development inon prior accident years’ reserves, compared towhich decreased loss and settlement expenses for the segment by $5.9 million. Comparatively, 2020 results included favorable development on prior accident years’ loss reserves, which decreased the segment’s loss and settlement expenses by $13.0 million, and offset $3.4 million in 2018.reserves established for COVID-19 related losses.
The segment’s loss ratio was 8.313.0 in 2019,2021, compared to 12.38.4 in 2018.2020. A largerdecreased amount of favorable development on prior years’ reserves resulted in the lower2021 led to a higher loss ratio in 2019.ratio. The expense ratio for the surety segment was 67.0 in 2019,2021, compared to 62.766.4 in 2018. The increase in 2019 was due to increased investments in technology and higher bonus and profit-sharing expenses on a slightly lower premium base.2020.
NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS
During 2019,2021, net investment income increased by 111 percent. The increase was primarily due to a larger asset base relative to the prior year.base. The average annual yields on our investments were as follows for 20192021 and 2018:2020:
| | | | | | ||||||||||
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| 2019 |
| 2018 |
| ||||||||||
|
| 2021 |
|
|
| 2020 |
|
| |||||||
PRETAX YIELD | | | | | |
|
|
|
|
|
|
|
|
|
|
Taxable (on book value) |
| 3.39 | % | 3.31 | % |
|
| 2.76 |
| % |
|
| 3.10 |
| % |
Tax-exempt (on book value) |
| 2.77 | % | 2.71 | % |
|
| 2.63 |
| % |
|
| 2.69 |
| % |
Equities (on fair value) |
| 2.41 | % | 2.54 | % |
|
| 2.07 |
| % |
|
| 2.33 |
| % |
| | | | | | ||||||||||
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|
|
|
|
|
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|
|
|
| |||||
AFTER-TAX YIELD | | | | | |
|
|
|
|
|
|
|
|
|
|
Taxable (on book value) |
| 2.68 | % | 2.61 | % |
|
| 2.18 |
| % |
|
| 2.45 |
| % |
Tax-exempt (on book value) |
| 2.62 | % | 2.57 | % |
|
| 2.49 |
| % |
|
| 2.55 |
| % |
Equities (on fair value) |
| 2.09 | % | 2.21 | % |
|
| 1.80 |
| % |
|
| 2.02 |
| % |
The after-tax yield reflects the different tax rates applicable to each category of investment. Our taxable fixed income securities were subject to a corporate tax rate of 21.0 percent, our tax-exempt municipal securities were subject to a tax rate of 5.3 percent and our dividend income was generally subject to a tax rate of 13.1 percent. During 2019,2021, the average after-tax yield on the taxable fixed income portfolio was 2.72.2 percent, an increasea decrease from 2.62.5 percent in the prior year. The average after-tax yield on the tax-exempt portfolio remained at 2.6declined slightly to 2.5 percent.
The fixed income portfolio increased by $222.6$213.3 million during the year, as the majority of operating cash flows were allocated to the fixed income portfolio and a decline in interest rates was experienced during the year, increasing the fair value of fixed income securities.portfolio. The tax-adjusted total return on a mark-to-market basis was 8.3-0.3 percent. Our equity portfolio increased by $120.1$89.8 million to $460.6$613.8 million in 20192021 as a result of the strong equity market returns during the year. The total return for the year on the equity portfolio was 28.726.4 percent.
45
Our investment results for the last five years are shown in the following table:
| | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| |
| Tax |
|
| | | | | | | | | | | | | | Pre-tax | | Equivalent |
|
| | | | | | | | | | | | | | Annualized | | Annualized |
|
| | | | | | | | | | | Change in | | Return on | | Return on |
| |
| | Average | | Net | | | | Unrealized | | Avg. | | Avg. |
| ||||
| | Invested | | Investment | | Net Realized | | Appreciation | | Invested | | Invested |
| ||||
(in thousands) | | Assets (1) | | Income (2)(3) | | Gains (3) | | (3)(4) | | Assets | | Assets |
| ||||
2015 |
| $ | 1,957,914 |
| $ | 54,644 |
| $ | 39,829 |
| $ | (71,049) |
| 1.2 | % | 1.5 | % |
2016 |
| | 1,986,685 |
| | 53,075 |
| | 34,645 |
| | (2,313) |
| 4.3 | % | 4.6 | % |
2017 |
| | 2,081,309 |
| | 54,876 |
| | 4,411 |
| | 53,719 |
| 5.4 | % | 5.8 | % |
2018 |
| | 2,167,510 |
| | 62,085 |
| | 63,407 |
| | (140,513) |
| (0.7) | % | (0.6) | % |
2019 |
| | 2,377,295 |
| | 68,870 |
| | 17,520 |
| | 161,848 |
| 10.4 | % | 10.5 | % |
5-yr Avg. | | $ | 2,114,143 | | $ | 58,710 | | $ | 31,962 | | $ | 338 |
| 4.1 | % | 4.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Tax |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pre-tax |
|
|
| Equivalent |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Annualized |
|
|
| Annualized |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in |
|
| Return on |
|
|
| Return on |
|
| |||
|
| Average |
|
| Net |
|
|
|
|
|
| Unrealized |
|
| Avg. |
|
|
| Avg. |
|
| |||||
|
| Invested |
|
| Investment |
|
| Net Realized |
|
| Appreciation |
|
| Invested |
|
|
| Invested |
|
| ||||||
(in thousands) |
| Assets (1) |
|
| Income (2)(3) |
|
| Gains (3) |
|
| (3)(4) |
|
| Assets |
|
|
| Assets |
|
| ||||||
2017 |
| $ | 2,081,309 |
|
| $ | 54,876 |
|
| $ | 4,411 |
|
| $ | 53,719 |
|
|
| 5.4 |
| % |
|
| 5.8 |
| % |
2018 |
|
| 2,167,510 |
|
|
| 62,085 |
|
|
| 63,407 |
|
|
| (140,513 | ) |
|
| (0.7 | ) | % |
|
| (0.6 | ) | % |
2019 |
|
| 2,377,295 |
|
|
| 68,870 |
|
|
| 17,520 |
|
|
| 161,848 |
|
|
| 10.4 |
| % |
|
| 10.5 |
| % |
2020 |
|
| 2,698,721 |
|
|
| 67,893 |
|
|
| 17,885 |
|
|
| 99,451 |
|
|
| 6.9 |
| % |
|
| 6.9 |
| % |
2021 |
|
| 3,000,025 |
|
|
| 68,862 |
|
|
| 64,222 |
|
|
| (6,280 | ) |
|
| 4.2 |
| % |
|
| 4.3 |
| % |
5-yr Avg. |
| $ | 2,464,972 |
|
| $ | 64,517 |
|
| $ | 33,489 |
|
| $ | 33,645 |
|
|
| 5.2 |
| % |
|
| 5.4 |
| % |
(1) | Average amounts at beginning and end of year (inclusive of cash and short-term investments). |
(2) | Investment income, net of investment expenses. |
(3) | Before income taxes. |
(4) | Relates to available-for-sale fixed income and equity securities. |
We realized a total of $17.5 million in net gains in 2019. Included in this number is $14.4In 2021, we recognized $62.5 million in net realized gains in the equity portfolio, $3.2$1.9 million in net realized gains in the fixed income portfolio and $0.1$0.2 million in other net realized losses. In 2018,2020, we realized $63.4 million in net gains. Included in this number is $69.9recognized $15.8 million in net realized gains in the equity portfolio, $2.2$3.9 million in net realized lossesgains in the fixed income portfolio and $4.2$1.8 million in other net realized losses, $4.4 million of which related to a non-cash impairment charge on goodwill and definite-lived intangibles.losses.
We regularly evaluate the quality of our investment portfolio. When we determine that a fixed income security has suffered an other-than-temporary decline in value, the investment’s value is adjusted by reclassifying the decline from unrealized to realized losses. This has no impact on shareholders’ equity. We did not recognize any impairment losses in 2019. During 2018, we recognized $0.2 million in impairment losses on fixed income securities we no longer had the intent to hold until recovery.INVESTMENTS
The fixed income portfolio contained 154 positions at an unrealized loss as of December 31, 2019. Of these 154 securities, 65have been in an unrealized loss position for 12 consecutive months or longer and represent $0.9 million in unrealized losses. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Based on our analysis, our fixed income portfolio is of a high credit quality and we believe we will recover the amortized cost basis.
Key components to our OTTI procedures are discussed in our critical accounting policy on investment valuation and OTTI and in note 2 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data. Based on our analysis, we have concluded that the securities in an unrealized loss position were not other-than-temporarily impaired at December 31, 2019.
INVESTMENTS
We maintain a diversified investment portfolio with a prudent mix of fixed income and risk assets. We continually monitor economic conditions, our capital position and the insurance market to determine our tactical allocation. As of December 31, 2019,2021, the portfolio had a fair value of $2.6$3.2 billion, an increase of $366.1$325.9 million from the end of 2018.2020.
We determined the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. For additional information, see notes 1 and 2 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.
46