RLI Subs Get ‘A’ Rating

Fitch Ratings has assigned a ‘BBB’ long-term rating to RLI Corp. and a ‘BBB’ rating to RLI’s 5.95 percent senior unsecured notes due 2014. In addition, Fitch has assigned ‘A’ financial strength ratings to RLI’s subsidiaries, RLI Insurance Co. and Mt. Hawley Insurance Co. The rating outlook is stable.

Fitch’s ratings reflect RLI’s consistently strong underwriting profitability, moderate financial leverage, and strong earnings based and cash basis interest coverage.

Partially offsetting these positives is RLI’s high reinsurance leverage, concentrated premium production in the catastrophe exposed states of California and Texas, and potential surplus volatility derived from the company’s comparatively high investment portfolio allocation to equities.

Fitch views RLI as a moderately sized niche-oriented commercial insurer whose key competitors typically have more resources and larger capital bases. The company competes in this environment by tailoring products and coverages for underserved markets. RLI reported GAAP basis net premiums earned of $342 million through the first nine months of 2003 and GAAP basis equity of $527 million at Sept. 30, 2003.

RLI has historically reported very strong underwriting profitability and Fitch believes that these results are likely to continue in the near term. Between 1992 and 2002 the company’s statutory combined ratio averaged a low 95.4 percent and in recent years RLI’s combined ratio has consistently been 10-15 points lower than the commercial line’s industry average.

Fitch attributes RLI’s superior underwriting results to the company’s consistent focus on managing each of its various books of business to individually generate underwriting profits. Fitch also believes that RLI’s practice of employing experienced underwriters and basing their compensation, in part, on the profitability of their book of business over comparatively long periods of time, contributes to the company’s superior underwriting profitability.

RLI uses a significant amount of reinsurance to manage its capital and its exposure to large losses. This translates into above industry average surplus exposure to reinsurance recoverables and heightened exposure to reinsurance market competitive conditions.

In 2002 the company retained a comparatively low 59 percent of its gross premium and at year-end 2002, RLI’s ratio of reinsurance recoverables to surplus was 114 percent compared to the industry average of 57 percent. Fitch believes that this exposure is mitigated somewhat by the generally high credit-quality of RLI’s reinsurers. Fitch also notes that RLI has stated that one of the potential uses of the proceeds from its recent debt offer is to selectively reduce its reliance on reinsurance.

RLI generated 36 percent of its 2002 direct premiums written in California and Texas, which is significantly higher than the industry’s percentage of total premiums generated in these two states. As a result, Fitch believes that the company has comparatively high exposure to potential earthquake and hurricane related losses.

RLI has consistently invested a relatively large portion of its investment portfolio in equities. Fitch believes that this strategy is consistent with one of the company’s stated goals of growing book value over the long-term, but also believes that it exposes RLI’s surplus to greater volatility than a more conventional allocation. Fitch notes that RLI maintains strong liquidity characteristics due to its strong operating cash flow and high quality publicly traded bond portfolio.

RLI utilizes a moderate amount of financial leverage and generates very good interest coverage. Fitch estimates the company’s debt-to-capital ratio including its recently issued $100 million of senior debt on a pro forma basis at 22%. Fitch’s estimate includes approximately seven percentage points related to repurchase agreements that it considers more operating leverage in nature. Fitch believes that RLI’s near-term earnings-based interest coverage will be in a range of eight to 12 times.

Topics Underwriting Reinsurance