RLI Improves In Second Quarter

RLI Corp. reported second-quarter net income of nearly $50 million yesterday, attributing a big chunk of its $27 million jump in earnings over the comparative period last year to favorable loss reserve developments.

The Peoria, Ill.-based specialty insurer said net income was $49.9 million, or $2.04 per share in the second quarter, compared to $22.9 million, or 89 cents share, for the same quarter year.

Reserve takedowns for prior-year losses amounted to $20.5 million before taxes, or 54 cents per share in total, with 46 cents relating to casualty lines, and one cent relating to 2005 hurricanes. Surety and other property reserves accounted for the rest.

In contrast, during second-quarter 2006, favorable development–exclusively related to 2005 hurricanes–contributed only 3 cents per share.

Although the company also reported an 8.7 jump in investment income in the quarter, executives highlighted underwriting performance during a conference call this morning, noting that the quarter's combined ratio was 71.6, compared to 94.5 for second-quarter 2006.

Michael Stone, RLI's chief operating officer, said, “We are an underwriting company.” Noting that gross premiums fell during the quarter–roughly 7 percent to $212.1 million–he said, “We price risk based on exposure, not on the vagaries of the marketplace,” adding that RLI intentionally let business go in some segments, like habitat ional business, where the company had experienced past losses.

He said prices “are decaying,” adding that rate of decay accelerated in the quarter in most segments. For example, he said that property insurance for business in wind-prone areas reached its peak in fourth quarter 2006, with prices declining some 40 percent since then.

He also said RLI lost three large transportation accounts in the quarter, representing $6 million of premiums, as competitors priced the business 25-30 percent lower.

Overall, gross premiums for casualty (including transportation), representing 60 percent of the total RLI premiums, fell $7.4 million to $127.3 million, or 5.5 percent from the prior second quarter. Property premiums fell 14.1 percent to $66.3 million.

In surety, the smallest segment for the company, premiums increased 12.3 percent to $18.6 million.

Highlighting surety and marine property business–launched in 2005–as bright spots, Mr. Stone and Chief Executive Jonathan Michael said RLI seeks to build capabilities in new areas and expand its footprint in existing ones. They pointed to the launch of a new property facultative reinsurance business, RLI Re, also announced yesterday, which they expect will begin producing in third quarter, ultimately reaching $25-40 million in premiums within five years.

“The market is softening, but the sky isn't falling,” Mr. Michael said.

For the first six months, net income was $82.4 million, or $3.35 per share, compared to $48.6 million, or $1.86 per share, for the same period last year.