Best Upgrades RLI to ‘A+’; Outlook Stable

A.M. Best Co. announced that it has upgraded the financial strength rating of Peoria, Ill.-based property/casualty insurer RLI Group to “A+” (superior) from “A” (excellent) of RLI Group (RLI).

Additionally, RLI Indemnity Co.’s financial strength rating has been upgraded to “A+” (superior) from “A-” (excellent). Formerly a stand-alone rating, Best said RLI Indemnity is now group-rated based on a 90 percent quota share reinsurance arrangement with RLI Insurance Co., which is currently in place.

Best also has upgraded the debt rating to “a-” from “bbb+” of RLI Corp.’s existing $100 million 5.95 percent senior unsecured notes, due January 2014. The outlook for all ratings has been revised to stable from positive.

Best said the rating actions follow RLI’s sustained operating profitability, enhanced capitalization and the financial flexibility afforded by its access to the capital markets, as demonstrated by RLI Corp.’s successful $115 million secondary common stock offering in December 2002 and $100 million senior debt offering in December 2003.

Of these offerings, a significant portion of the proceeds were contributed to the insurance company subsidiaries with the remainder retained at RLI Corp. Consequently, RLI Corp.’s financial leverage (total debt to capital) at year-end 2003 grew to 21 percent up from 10.6 percent (in 2002), while overall capitalization among the insurance companies improved significantly.

Best said the actions also consider RLI’s business strategy and its position in the marketplace, which recognizes the benefits gained from its specialty insurance solutions approach, extensive product offerings and local branch office network. As part of its strategy, RLI provides insurance solutions to market segments that are generally underserved by the standard market due to their unique risk characteristics.

This strategy also incorporates the added operating flexibility provided by its ability to write on an admitted and excess and surplus lines basis, Best reported. Despite intense competition in recent years, RLI continues to demonstrate its ability to generate strong operating results through strict underwriting discipline and rate adequacy. The group also benefits from its high-risk, high-reward property (difference in conditions) business, which over the years, has provided a disproportionate share of RLI’s earnings.

Partially offsetting, Best said, are the challenges associated with RLI’s high equity leverage, increased debt service obligations (via dividends to RLI Corp.), reinsurance dependence and significant susceptibility to natural and man-made catastrophe losses. Additionally, approximately 24 percent of RLI’s overall premium writings is derived from California.

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