Annual Statements Open main menu

RLI CORP - Quarter Report: 2023 June (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2023

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                 to

Commission File Number:       001-09463

RLI Corp.

(Exact name of registrant as specified in its charter)

Delaware

37-0889946

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

9025 North Lindbergh Drive, Peoria, IL

61615

(Address of principal executive offices)

(Zip Code)

(309) 692-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock $0.01 par value

RLI

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of July 17, 2023, the number of shares outstanding of the registrant’s Common Stock was 45,596,196.

Table of Contents

Table of Contents

Page

Part I - Financial Information

3

Item 1.

Financial Statements

3

Condensed Consolidated Statements of Earnings and Comprehensive Earnings for the Three and Six-Month Periods Ended June 30, 2023 and 2022 (unaudited)

3

Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (unaudited)

4

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six-Month Periods Ended June 30, 2023 and 2022 (unaudited)

5

Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2023 and 2022 (unaudited)

6

Notes to Unaudited Condensed Consolidated Interim Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34

Item 4.

Controls and Procedures

34

Part II - Other Information

35

Item 1.

Legal Proceedings

35

Item 1a.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

35

Signatures

36

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.Financial Statements

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Earnings

(Unaudited)

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

(in thousands, except per share data)

 

2023

 

2022

 

2023

 

2022

Net premiums earned

$

322,280

$

282,810

$

630,003

$

551,962

Net investment income

28,788

18,472

55,872

36,355

Net realized gains

5,580

12,804

20,200

18,392

Net unrealized gains (losses) on equity securities

25,214

(100,994)

40,710

(128,804)

Consolidated revenue

$

381,862

$

213,092

$

746,785

$

477,905

Losses and settlement expenses

153,943

117,914

268,431

223,438

Policy acquisition costs

102,626

89,615

204,070

174,902

Insurance operating expenses

24,510

19,325

48,411

38,188

Interest expense on debt

2,047

2,011

4,055

4,021

General corporate expenses

4,219

2,435

8,433

5,798

Total expenses

$

287,345

$

231,300

$

533,400

$

446,347

Equity in earnings of unconsolidated investees

1,514

11,654

5,437

20,413

Earnings (loss) before income taxes

$

96,031

$

(6,554)

$

218,822

$

51,971

Income tax expense (benefit)

18,379

(4,315)

42,359

6,287

Net earnings (loss)

$

77,652

$

(2,239)

$

176,463

$

45,684

Other comprehensive earnings (loss), net of tax

(19,721)

(97,563)

17,986

(213,144)

Comprehensive earnings (loss)

$

57,931

$

(99,802)

$

194,449

$

(167,460)

Basic net earnings (loss) per share

$

1.70

$

(0.05)

$

3.87

$

1.01

Diluted net earnings (loss) per share

$

1.69

$

(0.05)

$

3.83

$

1.00

Weighted average number of common shares outstanding:

Basic

45,591

45,354

45,560

45,330

Diluted

46,044

45,354

46,045

45,748

See accompanying notes to the unaudited condensed consolidated interim financial statements.

3

Table of Contents

RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

June 30,

December 31,

(in thousands, except share and per share data)

 

2023

 

2022

ASSETS

Investments and cash:

Fixed income:

Available-for-sale, at fair value

$

2,689,100

$

2,666,950

(amortized cost of $2,946,920 and allowance for credit losses of $434 at 6/30/23)

(amortized cost of $2,945,273 and allowance for credit losses of $339 at 12/31/22)

Equity securities, at fair value (cost - $340,184 at 6/30/23 and $328,019 at 12/31/22)

552,566

498,382

Short-term investments, at cost which approximates fair value

271,296

36,229

Other invested assets

60,907

47,922

Cash

16,707

22,818

Total investments and cash

$

3,590,576

$

3,272,301

Accrued investment income

22,525

21,259

Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $18,768 at 6/30/23 and $18,696 at 12/31/22

229,471

189,501

Ceded unearned premium

112,353

138,457

Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $10,251 at 6/30/23 and $11,250 at 12/31/22

720,858

740,089

Deferred policy acquisition costs

148,336

127,859

Property and equipment, at cost, net of accumulated depreciation of $72,404 at 6/30/23 and $68,633 at 12/31/22

48,358

49,573

Investment in unconsolidated investees

55,250

58,275

Goodwill and intangibles

53,562

53,562

Income taxes-deferred

29,864

40,269

Other assets

54,693

75,923

TOTAL ASSETS

$

5,065,846

$

4,767,068

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities

Unpaid losses and settlement expenses

$

2,361,577

$

2,315,637

Unearned premiums

891,103

785,085

Reinsurance balances payable

35,931

61,100

Funds held

102,429

101,144

Income taxes-current

5,326

Current portion of long-term debt

199,956

199,863

Accrued expenses

70,220

94,869

Other liabilities

47,392

32,029

TOTAL LIABILITIES

$

3,713,934

$

3,589,727

Shareholders’ Equity

Common stock ($0.01 par value)

(Shares authorized - 200,000,000)

(68,526,410 shares issued, 45,596,196 shares outstanding at 6/30/23)

(68,399,966 shares issued, 45,469,752 shares outstanding at 12/31/22)

$

685

$

684

Paid-in capital

357,656

352,391

Accumulated other comprehensive earnings (loss)

(211,090)

(229,076)

Retained earnings

1,597,660

1,446,341

Deferred compensation

12,507

12,015

Less: Treasury shares, at cost (22,930,214 shares at 6/30/23 and 12/31/22)

(405,506)

(405,014)

TOTAL SHAREHOLDERS’ EQUITY

$

1,351,912

$

1,177,341

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

5,065,846

$

4,767,068

See accompanying notes to the unaudited condensed consolidated interim financial statements.

4

Table of Contents

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

 

 

 

 

Accumulated

 

 

 

Other

Total

Comprehensive

Treasury

Common

Shareholders’

Common

Paid-in

Earnings

Retained

Deferred

Shares

(in thousands, except share and per share data)

 

Shares

 

Equity

 

Stock

 

Capital

 

(Loss)

 

Earnings

 

Compensation

 

at Cost

Balance, January 1, 2022

 

45,289,337

$

1,229,361

$

682

$

343,742

$

49,826

$

1,228,110

$

9,642

$

(402,641)

Net earnings (loss)

 

47,923

47,923

Other comprehensive earnings (loss), net of tax

 

(115,581)

(115,581)

Deferred compensation

 

(973)

973

Share-based compensation

 

26,605

3,049

3,049

Dividends and dividend equivalents ($0.25 per share)

 

(11,330)

(11,330)

Balance, March 31, 2022

 

45,315,942

$

1,153,422

$

682

$

346,791

$

(65,755)

$

1,264,703

$

8,669

$

(401,668)

Net earnings (loss)

 

(2,239)

(2,239)

Other comprehensive earnings (loss), net of tax

 

(97,563)

(97,563)

Deferred compensation

 

276

(276)

Share-based compensation

 

52,862

2,371

1

2,370

Dividends and dividend equivalents ($0.26 per share)

 

(11,803)

(11,803)

Balance, June 30, 2022

 

45,368,804

$

1,044,188

$

683

$

349,161

$

(163,318)

$

1,250,661

$

8,945

$

(401,944)

Accumulated

Other

Total

Comprehensive

Treasury

Common

Shareholders’

Common

Paid-in

Earnings

Retained

Deferred

Shares

(in thousands, except share and per share data)

Shares

Equity

Stock

Capital

(Loss)

Earnings

Compensation

at Cost

Balance, January 1, 2023

 

45,469,752

$

1,177,341

$

684

$

352,391

$

(229,076)

$

1,446,341

$

12,015

$

(405,014)

Cumulative-effect adjustment from ASU 2023-02

(951)

(951)

Net earnings (loss)

 

98,811

98,811

Other comprehensive earnings (loss), net of tax

 

37,707

37,707

Deferred compensation

 

249

(249)

Share-based compensation

 

84,944

2,864

1

2,863

Dividends and dividend equivalents ($0.26 per share)

 

(11,851)

(11,851)

Balance, March 31, 2023

 

45,554,696

$

1,303,921

$

685

$

355,254

$

(191,369)

$

1,532,350

$

12,264

$

(405,263)

Net earnings (loss)

 

77,652

77,652

Other comprehensive earnings (loss), net of tax

 

(19,721)

(19,721)

Deferred compensation

 

243

(243)

Share-based compensation

 

41,500

2,402

2,402

Dividends and dividend equivalents ($0.27 per share)

 

(12,342)

(12,342)

Balance, June 30, 2023

 

45,596,196

$

1,351,912

$

685

$

357,656

$

(211,090)

$

1,597,660

$

12,507

$

(405,506)

See accompanying notes to the unaudited condensed consolidated interim financial statements.

5

Table of Contents

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

For the Six Months

Ended June 30,

(in thousands)

 

2023

 

2022

Net cash provided by operating activities

$

243,595

$

170,645

Cash Flows from Investing Activities

Purchase of:

Fixed income securities, available-for-sale

$

(365,976)

$

(292,056)

Equity securities

(25,454)

(36,605)

Property and equipment

(2,790)

(3,024)

Other

(2,669)

(6,326)

Proceeds from sale of:

Fixed income securities, available-for-sale

19,490

20,892

Equity securities

22,029

53,525

Equity method investments

14,134

Other

473

1,172

Proceeds from call or maturity of:

Fixed income securities, available-for-sale

349,714

137,476

Net proceeds from sale (purchase) of short-term investments

(235,067)

Net cash used in investing activities

$

(226,116)

$

(124,946)

Cash Flows from Financing Activities

Cash dividends paid

$

(24,172)

$

(23,115)

Proceeds from stock option exercises

582

1,656

Net cash used in financing activities

$

(23,590)

$

(21,459)

Net increase in cash

$

(6,111)

$

24,240

Cash at the beginning of the period

22,818

88,804

Cash at June 30,

$

16,707

$

113,044

See accompanying notes to the unaudited condensed consolidated interim financial statements.

6

Table of Contents

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF PRESENTATION

The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the disclosures required by GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our 2022 Annual Report on Form 10-K. Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at June 30, 2023 and the results of operations of RLI Corp. (the Company) and subsidiaries for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year. Certain reclassifications were made to 2022 to conform to the classifications used in the current year.

The preparation of the unaudited condensed consolidated interim financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements and the reported amounts of revenue and expenses during the period. These estimates are inherently subject to change and actual results could differ significantly from these estimates.

B. ADOPTED ACCOUNTING STANDARDS

2023-02—Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Method

The amendments in this ASU permit the use of the proportional amortization method for investments in tax credits if certain conditions are met. Under the proportional amortization method, the initial cost of an investment is amortized in proportion to the amount of tax credits and other tax benefits received, with the amortization and tax credits presented as a component of income tax expense. Under previous guidance, equity investments in tax credit structures, other than qualified affordable housing projects, were accounted for using the equity method of accounting, which required the presentation of income, gains and losses, and tax credits in their respective line items of the statement of earnings. This ASU allows entities to make an accounting policy election on an individual tax credit program basis for all equity investments whose primary purpose is receiving income tax credits or other income tax benefits. When the proportional amortization method is selected, this amendment also requires a liability be recognized for delayed equity contributions that are unconditional or for contingent contributions when the contingent event becomes probable.

We adopted ASU 2023-02 on January 1, 2023 using a modified-retrospective approach. Through 2022, our investment in historic tax credit partnerships was presented in the balance sheet as an investment in unconsolidated investee. On January 1, 2023, the $11 million investment was moved to the other invested assets line item, an unfunded commitment for the investment was recognized by establishing a $7 million liability and increasing other invested assets, and the asset and retained earnings were reduced by $1 million to reflect the difference between applying the equity method and the proportional method since the investment was entered into. While the amortization of the investment will be presented in income tax expense going forward, rather than in equity in earnings of unconsolidated investees, the impact to net earnings will not have a material impact on our financial statements.

C. PROSPECTIVE ACCOUNTING STANDARDS

There are no prospective accounting standards which would have a material impact on our financial statements as of June 30, 2023.

D. REINSURANCE

Ceded unearned premiums and reinsurance balances recoverable on unpaid losses and settlement expenses are reported separately as an asset, rather than being netted with the related liability, since reinsurance does not relieve the Company of our liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. We continually monitor the financial condition of our reinsurers and actively follow up on any past due or disputed amounts. As part of our

7

Table of Contents

monitoring efforts, we review reinsurers’ annual financial statements and Securities and Exchange Commission filings for those that are publicly traded. We also review insurance industry developments that may impact the financial condition of our reinsurers. We analyze the credit risk associated with our reinsurance balances recoverable by monitoring the AM Best and Standard & Poor’s (S&P) ratings of our reinsurers. In addition, we subject our reinsurance recoverables to detailed recoverability tests, including a segment-based analysis using the average default rating percentage by S&P rating, which assists the Company in assessing the sufficiency of its allowance. Additionally, we perform an in-depth reinsurer financial condition analysis prior to the renewal of each of our reinsurance placements.

Our policy is to charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers. This 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. Once regulatory action (such as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverables for the reinsurer are specifically identified and written off through use of our allowance for estimated unrecoverable amounts from reinsurers. When we write-off such a balance, it is done in full. We then re-evaluate the overall allowance and determine whether the balance is sufficient and, if needed, an additional allowance is recognized.

The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $16.2 million and $10.3 million, respectively, at June 30, 2023. At December 31, 2022, the amounts were $16.1 million and $11.3 million, respectively. Changes in the allowances were due to changes in the amount of reinsurance balances outstanding, the composition of reinsurers from whom the balances were recoverable and their associated S&P default ratings. No write-offs or recoveries were applied to the allowances in the first six months of 2023. We have no receivables with a due date that extends beyond one year that are not included in our allowance for uncollectible amounts.

E. INTANGIBLE ASSETS

The composition of goodwill and intangible assets at June 30, 2023 and December 31, 2022 is detailed in the following table:

June 30,

December 31,

(in thousands)

 

2023

 

2022

Goodwill

Surety

$

40,816

$

40,816

Casualty

5,246

5,246

Total goodwill

$

46,062

$

46,062

Indefinite-lived intangibles

7,500

7,500

Total goodwill and intangibles

$

53,562

$

53,562

Annual impairment assessments were performed on our goodwill and state insurance license indefinite-lived intangible assets during the second quarter of 2023. Based upon these reviews, none of the assets were impaired. In addition, there were no triggering events as of June 30, 2023 that would suggest an updated impairment test would be needed for our goodwill and intangible assets.

F. EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of these items increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding these items. The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements:

8

Table of Contents

For the Three Months

For the Three Months

Ended June 30, 2023

Ended June 30, 2022

Income

Shares

Per Share

Income

Shares

Per Share

(in thousands, except per share data)

 

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

Basic EPS

Earnings available to common shareholders

$

77,652

 

45,591

$

1.70

$

(2,239)

 

45,354

$

(0.05)

Effect of Dilutive Securities

Stock options and restricted stock units

 

453

 

Diluted EPS

Earnings available to common shareholders

$

77,652

 

46,044

$

1.69

$

(2,239)

 

45,354

$

(0.05)

Anti-dilutive securities excluded from diluted EPS

118

736

For the Six Months

For the Six Months

Ended June 30, 2023

Ended June 30, 2022

Income

Shares

Per Share

Income

Shares

Per Share

(in thousands, except per share data)

 

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

Basic EPS

Earnings available to common shareholders

$

176,463

 

45,560

$

3.87

$

45,684

 

45,330

$

1.01

Effect of Dilutive Securities

Stock options and restricted stock units

 

485

 

418

Diluted EPS

Earnings available to common shareholders

$

176,463

 

46,045

$

3.83

$

45,684

 

45,748

$

1.00

Anti-dilutive securities excluded from diluted EPS

118

436

G. COMPREHENSIVE EARNINGS

Our comprehensive earnings include net earnings plus after-tax unrealized gains and losses on our available-for-sale fixed income portfolio. In reporting the components of comprehensive earnings, we used the federal statutory tax rate of 21 percent. Other comprehensive earnings (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax benefit of $5 million for the second quarter of 2023, compared to $26 million of tax benefit for the same period in 2022. For the six-month period ended June 30, 2023, other comprehensive earnings (loss) is net of tax expense of $5 million, compared to $57 million of tax benefit for the same period in 2022.

Unrealized gains, net of tax, recognized in other comprehensive earnings (loss) were $18 million for the first six months of 2023, compared to $213 million of unrealized losses, net of tax, during the same period last year. The unrealized gains in 2023 were attributable to a decline in interest rates, which increased the fair value of securities held in the fixed income portfolio, compared to rising interest rates during 2022, which decreased the fair value of fixed income securities.

The following table illustrates the changes in the balance of each component of accumulated other comprehensive earnings (loss) for each period presented in the unaudited condensed consolidated interim financial statements:

(in thousands)

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

Unrealized Gains/Losses on Available-for-Sale Securities

 

2023

 

2022

 

2023

 

2022

Beginning balance

$

(191,369)

$

(65,755)

$

(229,076)

$

49,826

Other comprehensive earnings (loss) before reclassifications

(20,347)

(97,894)

15,908

(213,636)

Amounts reclassified from accumulated other comprehensive earnings

626

331

2,078

492

Net current-period other comprehensive earnings (loss)

$

(19,721)

$

(97,563)

$

17,986

$

(213,144)

Ending balance

$

(211,090)

$

(163,318)

$

(211,090)

$

(163,318)

Balance of securities for which an allowance for credit losses has been recognized in net earnings

$

1,053

$

1,083

Credit losses on or the sale of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings (loss) to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings (loss) by the respective line items of net earnings are presented in the following table:

9

Table of Contents

Amount Reclassified from Accumulated Other

(in thousands)

Comprehensive Earnings (Loss)

For the Three Months

For the Six Months

Component of Accumulated 

Ended June 30,

Ended June 30,

Affected line item in the

Other Comprehensive Earnings (Loss)

 

2023

 

2022

 

2023

 

2022

 

Statement of Earnings

Unrealized gains and losses on available-for-sale securities

$

(824)

$

(722)

$

(2,536)

$

(772)

Net realized gains (losses)

31

303

(95)

149

Credit gains presented within net realized gains

$

(793)

$

(419)

$

(2,631)

$

(623)

Earnings (loss) before income taxes

167

88

553

131

Income tax (expense) benefit

$

(626)

$

(331)

$

(2,078)

$

(492)

Net earnings (loss)

H. FAIR VALUE MEASUREMENTS

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.

The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level. Financial assets are classified based upon the lowest level of significant input that is used to determine fair value.

Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.

Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.

Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable.

As a part of management’s process to determine fair value, we utilize widely recognized, third-party pricing sources to determine our fair values. We have obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.

Corporate, Agencies, Government and Municipal Bonds: The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in approximate order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All corporate, agency, government and municipal securities are deemed Level 2.

Mortgage-backed Securities (MBS)/Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS): The pricing vendor evaluation methodology primarily includes interest rate movements and new issue data. Evaluation of the tranches (non-volatile, volatile or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, pre-payment assumptions and to incorporate collateral performance. To evaluate MBS and CMBS volatility, an option adjusted spread model is used in combination with models that simulate interest rate paths to determine market price information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects changes in yield curve, index rates, implied volatility, mortgage rates and recent trade activity. MBS/CMBS and ABS with corroborated, observable inputs are classified as Level 2. All of our MBS/CMBS and ABS are deemed Level 2.

Regulation D Private Placement Securities: All Regulation D privately-placed bonds are classified as corporate securities and deemed Level 3. The pricing vendor evaluation methodology for these securities includes a combination of

10

Table of Contents

observable and unobservable inputs. Observable inputs include public corporate spread matrices classified by sector, rating and average life, as well as investment and non-investment grade matrices created from fixed income indices. Unobservable inputs include a liquidity spread premium calculated based on public corporate spread and private corporate spread matrices. The quantitative detail of the liquidity spread premium is neither provided nor reasonably available to the Company. An increase to the credit spread assumptions would result in a lower fair value.

For all of our fixed income securities classified as Level 2, we periodically conduct a review to assess the reasonableness of the fair values provided by our pricing services. Our review consists of a two-pronged approach. First, we compare prices provided by our pricing services to those provided by an additional source. In some cases, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. If discrepancies are found in our comparisons, we compare our prices to actual reported trade data for like securities. No changes to the fair values supplied by our pricing services have occurred as a result of our reviews. Based on these assessments, we have determined that the fair values of our Level 2 fixed income securities provided by our pricing services are reasonable.

Equity Securities: As of June 30, 2023, nearly all of our equity holdings were traded on an exchange. Exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). Pricing for the equity securities not traded on an exchange is provided by a third-party pricing source using observable inputs and are classified as Level 2. Pricing for equity securities not traded on an exchange rely on one or more unobservable inputs and are classified as Level 3.

Due to the relatively short-term nature of cash, short-term investments, accounts receivable and accounts payable, their carrying amounts are reasonable estimates of fair value. Our investments in private funds, classified as other invested assets, are measured using the investments’ net asset value per share and are not categorized within the fair value hierarchy.

I. RISKS AND UNCERTAINTIES

Certain risks and uncertainties are inherent in our day-to-day operations. Adverse changes in the economy, including inflation; rising interest rates; volatile equity markets; and ongoing supply chain disruptions, could lower demand for our insurance products, result in increased levels of loss costs that we could not anticipate at the time we priced our coverages, or negatively impact our investment results, all of which could have an adverse effect on the profitability of our operations.

Catastrophe Exposures

Our catastrophe reinsurance treaty renewed on January 1, 2023. We purchased limits of $700 million in excess of $25 million first-dollar retention for earthquakes in California, $700 million in excess of $50 million first-dollar retention for earthquakes outside of California and $600 million in excess of $50 million first-dollar retention for all other perils, including wind. These amounts are subject to certain co-participations by the Company on losses in excess of the first-dollar retentions. On June 1, 2023, we purchased $150 million of additional catastrophe reinsurance protection on top of the previously described coverage. This increases the limits to $850 million in excess of $25 million first-dollar retention for earthquakes in California, $850 million in excess of $50 million first-dollar retention for earthquakes outside of California and $750 million in excess of $50 million first-dollar retention for all other perils, including wind, all of which are still subject to certain co-participations in excess of the retentions.

2. INVESTMENTS

Our investments are primarily composed of fixed income debt securities and common stock equity securities. We carry our equity securities at fair value and categorize all of our debt securities as available-for-sale, which are carried at fair value.

Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date. The following is a summary of the disposition of fixed income and equity securities for the six-month periods ended June 30, 2023 and 2022:

11

Table of Contents

Sales

Proceeds

Gross Realized

Net Realized

(in thousands)

 

From Sales

 

Gains

 

Losses

 

Gain (Loss)

2023

Fixed income securities - available-for-sale

$

20,729

$

99

$

(910)

$

(811)

Equity securities

22,029

8,841

(101)

8,740

2022

Fixed income securities - available-for-sale

$

19,390

$

215

$

(432)

$

(217)

Equity securities

53,525

19,244

(15)

19,229

Calls/Maturities

Gross Realized

Net Realized

(in thousands)

 

Proceeds

 

Gains

 

Losses

 

Gain (Loss)

2023

Fixed income securities - available-for-sale

$

349,734

$

37

$

(43)

$

(6)

2022

Fixed income securities - available-for-sale

$

137,499

$

76

$

(55)

$

21

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 are summarized below:

As of June 30, 2023

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

Fixed income securities - available-for-sale

U.S. government

$

$

315,976

$

$

315,976

U.S. agency

43,719

43,719

Non-U.S. government & agency

3,960

3,960

Agency MBS

372,030

372,030

ABS/CMBS/MBS*

252,330

252,330

Corporate

1,095,038

52,466

1,147,504

Municipal

553,581

553,581

Total fixed income securities - available-for-sale

$

$

2,636,634

$

52,466

$

2,689,100

Equity securities

550,986

1,580

552,566

Total

$

550,986

$

2,636,634

$

54,046

$

3,241,666

As of December 31, 2022

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

Fixed income securities - available-for-sale

U.S. government

$

$

454,021

$

$

454,021

U.S. agency

73,063

73,063

Non-U.S. government & agency

5,847

5,847

Agency MBS

331,806

331,806

ABS/CMBS/MBS*

240,736

240,736

Corporate

980,676

53,654

1,034,330

Municipal

527,147

527,147

Total fixed income securities - available-for-sale

$

$

2,613,296

$

53,654

$

2,666,950

Equity securities

496,731

39

1,612

498,382

Total

$

496,731

$

2,613,335

$

55,266

$

3,165,332

*

Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

12

Table of Contents

The following table summarizes changes in the balance of securities whose fair value was measured using significant unobservable inputs (Level 3).

(in thousands)

 

Level 3 Securities

Balance as of January 1, 2023

$

55,266

Net realized and unrealized gains (losses)

Included in other comprehensive earnings (loss)

551

Sales / Calls / Maturities

(1,771)

Balance as of June 30, 2023

$

54,046

Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in other comprehensive earnings (loss)

$

551

The amortized cost and fair value of available-for-sale fixed income securities by contractual maturity as of June 30, 2023 were as follows:

June 30, 2023

(in thousands)

 

Amortized Cost

 

Fair Value

Due in one year or less

$

195,245

$

193,554

Due after one year through five years

910,005

861,351

Due after five years through 10 years

567,327

529,864

Due after 10 years

573,985

479,971

ABS/CMBS/MBS*

700,358

624,360

Total available-for-sale

$

2,946,920

$

2,689,100

*

Asset-backed, commercial mortgage-backed and mortgage-backed securities

The amortized cost and fair value of available-for-sale securities at June 30, 2023 and December 31, 2022 are presented in the tables below. Amortized cost does not include the $22 million and $20 million of accrued interest receivable as of June 30, 2023 and December 31, 2022, respectively.

June 30, 2023

Cost or

Allowance

Gross

Gross

Amortized

for Credit

Unrealized

Unrealized

Fair

(in thousands)

 

Cost

 

Losses

 

Gains

 

Losses

 

Value

U.S. government

$

325,893

$

$

$

(9,917)

$

315,976

U.S. agency

45,937

(2,218)

43,719

Non-U.S. government & agency

4,799

(839)

3,960

Agency MBS

414,503

206

(42,679)

372,030

ABS/CMBS/MBS*

285,855

(5)

78

(33,598)

252,330

Corporate

1,227,628

(429)

1,872

(81,567)

1,147,504

Municipal

642,305

1,397

(90,121)

553,581

Total Fixed Income

$

2,946,920

$

(434)

$

3,553

$

(260,939)

$

2,689,100

December 31, 2022

Cost or

Allowance

Gross

Gross

Amortized

for Credit

Unrealized

Unrealized

Fair

(in thousands)

 

Cost

 

Losses

 

Gains

 

Losses

 

Value

U.S. government

$

462,884

$

$

8

$

(8,871)

$

454,021

U.S. agency

75,074

26

(2,037)

73,063

Non-U.S. government & agency

6,798

(951)

5,847

Agency MBS

373,687

336

(42,217)

331,806

ABS/CMBS/MBS*

276,126

(8)

62

(35,444)

240,736

Corporate

1,122,097

(331)

541

(87,977)

1,034,330

Municipal

628,607

1,265

(102,725)

527,147

Total Fixed Income

$

2,945,273

$

(339)

$

2,238

$

(280,222)

$

2,666,950

*

Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

13

Table of Contents

Allowance for Credit Losses and Unrealized Losses on Fixed Income Securities

A reversable allowance for credit losses is recognized on available-for-sale fixed income securities. Several criteria are reviewed to determine if securities in the fixed income portfolio should be included in the allowance for expected credit loss evaluation, including:

Changes in technology that may impair the earnings potential of the investment,

The discontinuance of a segment of business that may affect future earnings potential,

Reduction of or non-payment of interest and/or principal,

Specific concerns related to the issuer’s industry or geographic area of operation,

Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and

Downgrades in credit quality by a major rating agency.

If changes in interest rates and credit spreads do not reasonably explain the unrealized loss for an available-for-sale security or if any of the criteria above indicate a potential credit loss, the security is subjected to a discounted cash flow analysis. Inputs into the discounted cash flow analysis include prepayment assumptions for structured securities, default rates and recoverability rates based on credit rating. The allowance for any security is limited to the amount that the security’s fair value is below amortized cost. As of June 30, 2023, the discounted cash flow analysis resulted in an allowance for credit losses on 18 securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

 

2023

 

2022

 

2023

 

2022

Beginning balance

$

465

$

594

$

339

$

441

Increase to allowance from securities for which credit losses were not previously recorded

2

149

25

223

Reduction from securities sold during the period

(433)

(433)

Reductions from intent to sell securities

(17)

Net increase (decrease) from securities that had an allowance at the beginning of the period

(33)

(18)

70

78

Balance as of June 30,

$

434

$

292

$

434

$

292

During the first six months of 2023, net realized gains included $1.7 million of losses on fixed income securities for which the cost basis was written down to fair value due to a credit event and restructurings. We recognized $0.1 million of losses on securities for which we no longer had the intent to hold until recovery during the first six months of 2022.

As of June 30, 2023, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,474 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $261 million in associated unrealized losses represents 9 percent of the fixed income portfolio’s cost basis and 7 percent of total invested assets. Isolated to these securities, unrealized losses decreased through the first six months of 2023, as credit spreads have tightened modestly while interest rates stayed flat during the period. Of the total 1,474 securities, 995 have been in an unrealized loss position for 12 consecutive months or longer. The following table illustrates the total value of fixed income securities that were in an unrealized loss position as of June 30, 2023 and December 31, 2022 after factoring in the allowance for credit losses. All fixed income securities continue to pay the expected coupon payments and we believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position.

14

Table of Contents

June 30, 2023

December 31, 2022

(in thousands)

 

< 12 Mos.

 

12 Mos. &
Greater

 

Total

 

< 12 Mos.

 

12 Mos. &
Greater

 

Total

U.S. government

Fair value

$

220,227

$

95,748

$

315,975

$

399,361

$

8,828

$

408,189

Amortized cost

225,987

99,905

325,892

407,340

9,720

417,060

Unrealized loss

$

(5,760)

$

(4,157)

$

(9,917)

$

(7,979)

$

(892)

$

(8,871)

U.S. agency

Fair value

$

33,951

$

9,768

$

43,719

$

32,987

$

2,170

$

35,157

Amortized cost

34,975

10,962

45,937

34,627

2,567

37,194

Unrealized loss

$

(1,024)

$

(1,194)

$

(2,218)

$

(1,640)

$

(397)

$

(2,037)

Non-U.S. government

Fair value

$

658

$

3,302

$

3,960

$

3,626

$

2,221

$

5,847

Amortized cost

702

4,097

4,799

3,798

3,000

6,798

Unrealized Loss

$

(44)

$

(795)

$

(839)

$

(172)

$

(779)

$

(951)

Agency MBS

Fair value

$

141,545

$

216,878

$

358,423

$

197,252

$

117,851

$

315,103

Amortized cost

146,150

254,952

401,102

212,776

144,544

357,320

Unrealized loss

$

(4,605)

$

(38,074)

$

(42,679)

$

(15,524)

$

(26,693)

$

(42,217)

ABS/CMBS/MBS*

Fair value

$

20,483

$

219,639

$

240,122

$

96,754

$

136,149

$

232,903

Amortized cost

21,028

252,692

273,720

104,724

163,623

268,347

Unrealized loss

$

(545)

$

(33,053)

$

(33,598)

$

(7,970)

$

(27,474)

$

(35,444)

Corporate

Fair value

$

429,215

$

607,324

$

1,036,539

$

660,830

$

323,337

$

984,167

Amortized cost

441,843

676,263

1,118,106

697,437

374,707

1,072,144

Unrealized loss

$

(12,628)

$

(68,939)

$

(81,567)

$

(36,607)

$

(51,370)

$

(87,977)

Municipal

Fair value

$

131,486

$

362,776

$

494,262

$

228,827

$

204,324

$

433,151

Amortized cost

133,340

451,043

584,383

255,240

280,636

535,876

Unrealized loss

$

(1,854)

$

(88,267)

$

(90,121)

$

(26,413)

$

(76,312)

$

(102,725)

Total fixed income

Fair value

$

977,565

$

1,515,435

$

2,493,000

$

1,619,637

$

794,880

$

2,414,517

Amortized cost

1,004,025

1,749,914

2,753,939

1,715,942

978,797

2,694,739

Unrealized loss

$

(26,460)

$

(234,479)

$

(260,939)

$

(96,305)

$

(183,917)

$

(280,222)

*

Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

The following table shows the composition of the fixed income securities in unrealized loss positions, after factoring in the allowance for credit losses, at June 30, 2023 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings. The vast majority of the securities are rated by S&P and/or Moody’s.

Equivalent

Equivalent

(dollars in thousands)

NAIC

 

S&P

 

Moody’s

Amortized

Unrealized

Percent

Rating

 

Rating

 

Rating

 

Cost

 

Fair Value

 

Loss

 

to Total

1

AAA/AA/A

Aaa/Aa/A

$

2,269,819

$

2,052,151

$

(217,668)

83.4

%

2

BBB

Baa

404,162

366,729

(37,433)

14.4

%

3

BB

Ba

45,298

41,464

(3,834)

1.5

%

4

B

B

32,264

30,844

(1,420)

0.5

%

5

CCC

Caa

2,396

1,812

(584)

0.2

%

6

CC or lower

Ca or lower

0.0

%

Total

$

2,753,939

$

2,493,000

$

(260,939)

100.0

%

Other Invested Assets

We had $61 million of other invested assets at June 30, 2023, compared to $48 million at December 31, 2022. Other invested assets include investments in low income housing tax credit partnerships (LIHTC) and historic tax credit partnerships (HTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), and investments in private funds. Our LIHTC and

15

Table of Contents

HTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC, HTC and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investment’s net asset value.

Our LIHTC interests had a balance of $12 million at June 30, 2023, compared to $13 million on December 31, 2022. Our LIHTC interests recognized amortization of $0.8 million as a component of income tax expense and a total tax benefit of $0.8 million during the second quarter of 2023, compared to $0.8 million of amortization and $0.9 million of tax benefit during the same period in 2022. For the six-months ended June 30, 2023, our LIHTC interest recognized amortization of $1.6 million and a total benefit of $1.6 million, compared to $1.7 million of amortization and $1.7 million of tax benefit for the same period in 2022. Our unfunded commitment for our LIHTC investments totaled $1 million at June 30, 2023 and will be paid out in installments through 2035.

Our HTC investment had a balance of $15 million at June 30, 2023, compared to $11 million at December 31, 2022. Through 2022, the investment was accounted for as an investment in unconsolidated investee. Due to the adoption of ASU 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, the investment was reclassified as an other invested asset during 2023. A total tax benefit of $1.5 million was recognized from our HTC investment during the second quarter of 2023, compared to $1.3 million in the second quarter of 2022. For the six-months ended June 30, 2023, our HTC investment recognized a total benefit of $2.9 million, compared to $2.6 million for the same period in 2022. Our HTC investment recognized $1.1 million of amortization as a component of income tax expense during the second quarter of 2023 and $2.3 million of amortization during the first six months of 2023. Our unfunded commitment for our HTC investment totaled $4 million at June 30, 2023 and is expected be paid during 2023.

As of June 30, 2023, $56 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides. As of June 30, 2023, $50 million of borrowings were outstanding with the FHLBC.

Our investments in private funds totaled $27 million as of June 30, 2023, down from $28 million as of December 31, 2022, and had $5 million of associated unfunded commitments at June 30, 2023. Our interest in private funds is generally restricted from being transferred or otherwise redeemed without prior consent by the respective entities, and the timed dissolution of the partnerships would trigger redemption.

Investments in Unconsolidated Investees

We had $55 million of investments in unconsolidated investees at June 30, 2023, compared to $58 million at December 31, 2022. At June 30, 2023, our investment in Prime Holdings Insurance Services, Inc. (Prime) was $55 million and other investments in unconsolidated investees totaled less than $1 million. Through December 31, 2022, our $11 million HTC investment was accounted for as an unconsolidated investee, but was reclassified as an other invested asset during 2023 due to the adoption of ASU 2023-02.

Cash and Short-Term Investments

Cash consists of uninvested balances in bank accounts. Short-term investments consist of investments with original maturities of 90 days or less, primarily AAA-rated government money market funds. Short-term investments are carried at cost. We had a cash and short-term investment balance of $17 million and $271 million, respectively, at June 30, 2023, compared to $23 million and $36 million, respectively, at December 31, 2022.

16

Table of Contents

3. HISTORICAL LOSS AND LAE DEVELOPMENT

The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the first six months of 2023 and 2022:

For the Six Months

Ended June 30,

(in thousands)

 

2023

 

2022

Unpaid losses and LAE at beginning of year

Gross

$

2,315,637

$

2,043,555

Ceded

(740,089)

(608,086)

Net

$

1,575,548

$

1,435,469

Increase (decrease) in incurred losses and LAE

Current accident year

$

339,951

$

293,158

Prior accident years

(71,520)

(69,720)

Total incurred

$

268,431

$

223,438

Loss and LAE payments for claims incurred

Current accident year

$

(30,978)

$

(21,628)

Prior accident years

(172,282)

(153,490)

Total paid

$

(203,260)

$

(175,118)

Net unpaid losses and LAE at June 30,

$

1,640,719

$

1,483,789

Unpaid losses and LAE at June 30,

Gross

$

2,361,577

$

2,150,519

Ceded

(720,858)

(666,730)

Net

$

1,640,719

$

1,483,789

For the first six months of 2023, incurred losses and LAE included $72 million of favorable development on prior years’ loss reserves, largely from accident years 2018 through 2022. Commercial excess, professional services, surety, general liability, personal umbrella, marine and commercial property were drivers of the favorable development. No products experienced significant adverse development.

For the first six months of 2022, incurred losses and LAE included $70 million of favorable development on prior years’ loss reserves, largely from accident years 2018 through 2021. General liability, professional services, transportation, marine and surety were drivers of the favorable development. No products experienced significant adverse development.

4. INCOME TAXES

Our effective tax rate for the three and six months ended June 30, 2023 was 19.1 percent and 19.4 percent, respectively, compared to 65.8 percent and 12.1 percent, respectively, for the same period in 2022. Effective rates are dependent upon components of pretax earnings and the related tax effects. Tax-favored adjustments acting on pretax earnings resulted in a lower effective tax rate for the second quarter of 2023. The effective tax rate was higher for the six-month period in 2023, as higher pretax income decreased the percentage impact of tax-favored adjustments.

Income tax expense attributable to income from operations for the three and six-month period ended June 30, 2023 and 2022 differed from the amounts computed by applying the U.S. federal tax rate of 21 percent to pretax income by the items detailed in the below table. In interim periods, income taxes are adjusted to reflect the effective tax rate we anticipate for the year, with adjustments flowing through the other items, net line.

17

Table of Contents

For the Three Months Ended June 30, 2023

For the Six Months Ended June 30, 2023

2023

2022

2023

2022

(in thousands)

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

Provision for income taxes at the statutory rate of 21%

$

20,167

21.0

$

(1,376)

21.0

$

45,953

21.0

%

$

10,914

21.0

%

Increase (reduction) in taxes resulting from:

Excess tax benefit on share-based compensation

(878)

(0.9)

(761)

11.6

(2,868)

(1.3)

%

(2,175)

(4.2)

%

Tax exempt interest income

(274)

(0.3)

(288)

4.4

(557)

(0.3)

%

(570)

(1.1)

%

Dividends received deduction

(209)

(0.2)

(163)

2.5

(433)

(0.2)

%

(434)

(0.8)

%

Tax credit

(780)

(0.8)

(1,461)

22.3

(1,559)

(0.7)

%

(2,922)

(5.6)

%

ESOP dividends paid deduction

(144)

(0.2)

(138)

2.1

(281)

(0.1)

%

(268)

(0.5)

%

Nondeductible expenses

745

0.8

258

(3.9)

1,346

0.6

%

574

1.1

%

Other items, net

(248)

(0.3)

(386)

5.8

758

0.4

%

1,168

2.2

%

Total tax expense

$

18,379

19.1

$

(4,315)

65.8

$

42,359

19.4

%

$

6,287

12.1

%

We have recorded our deferred tax assets and liabilities using the statutory federal tax rate of 21 percent. We believe it is more likely than not that all deferred tax assets will be recovered, given the carry back availability as well as the result of future operations, which will generate sufficient taxable income to realize the deferred tax asset.

5. STOCK BASED COMPENSATION

Our RLI Corp. Long-Term Incentive Plan (2015 LTIP) was in place from 2015 to 2023. The 2015 LTIP provided for equity-based compensation, including stock options and restricted stock units, up to a maximum of 4,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2015 and 2023, we granted 3,291,388 awards under the 2015 LTIP. The 2015 LTIP was replaced in 2023.

In 2023, our shareholders approved the 2023 RLI Corp. Long-Term Incentive Plan (2023, LTIP), which provides for equity-based compensation. In conjunction with the adoption of the 2023 LTIP, effective May 4, 2023, awards are no longer granted under the 2015 LTIP. Awards under the 2023 LTIP may be in the form of restricted stock, restricted stock units, stock options (incentive or non-qualified), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2023 LTIP is limited to employees, directors, consultants and independent contractors of the Company or any affiliate. The granting of awards under the 2023 LTIP is solely at the discretion of the Human Capital and Compensation Committee of the board of directors or its delegate. The maximum number of shares of common stock available for distribution under the 2023 LTIP is 4,004,891 shares (subject to adjustment for changes in our capitalization and other events). Since the plan’s approval in 2023, we have granted 135,838 awards under the 2023 LTIP.

Compensation expense is based on the probable number of awards expected to vest. The total compensation expense related to equity awards was $2.2 million and $4.7 million in the three and six-month periods ended June 30, 2023, respectively, compared to $2.3 million and $3.7 million, respectively, for the same period in 2022. The total income tax benefit was $0.3 million and $0.8 million for the three and six-month periods ended June 30, 2023, compared to $0.4 million and $0.6 million, respectively, for the same periods in 2022. Total unrecognized compensation expense relating to outstanding and unvested awards was $8 million, which will be recognized over the weighted average vesting period of 2.77 years.

Stock Options

Under the 2023 LTIP, as under the 2015 LTIP, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant (subject to adjustments for changes in our capitalization, special dividends and other events as set forth in such plans). Options generally vest and become exercisable over a five-year period and expire eight years after grant.

For most participants, the requisite service period and vesting period will be the same. For participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75 or greater, the requisite service period is deemed to be met and options are immediately expensed on the date of grant. For participants who will become retirement eligible during the vesting period, the requisite service period over which expense is recognized is the period between the grant date and the attainment of retirement eligibility. Shares issued upon option exercise are newly issued shares.

18

Table of Contents

The following tables summarize option activity for the six-month period ended June 30, 2023:

Weighted

Aggregate

Weighted

Average

Intrinsic

Average

Remaining

Value

 

Options

 

Exercise Price

 

Contractual Life

 

(in 000’s)

Outstanding options at January 1, 2023

1,695,660

$

82.42

Options granted

144,375

135.72

Options exercised

(199,145)

56.17

Options canceled/forfeited

(1,000)

40.61

Outstanding options at June 30, 2023

1,639,890

$

90.33

5.01

$

75,687

Exercisable options at June 30, 2023

806,436

$

75.52

3.78

$

49,154

The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $16 million and $5 million during the first six months of 2023 and 2022, respectively.

The fair value of options was estimated using a Black-Scholes based option pricing model with the following weighted average grant-date assumptions and weighted average fair values as of June 30:

 

2023

 

2022

Weighted-average fair value of grants

$

26.79

$

21.05

Risk-free interest rates

3.44

%

2.84

%

Dividend yield

2.29

%

2.50

%

Expected volatility

22.95

%

22.89

%

Expected option life

4.94

years 

5.06

years

The risk-free rate was determined based on U.S. treasury yields that most closely approximated the option’s expected life. The dividend yield was determined based on the average annualized quarterly dividends paid during the most recent five-year period and incorporated a consideration for special dividends paid in recent history. The expected volatility was calculated based on the median of the rolling volatilities for the expected life of the options. The expected option life was determined based on historical exercise behavior and the assumption that all outstanding options will be exercised at the midpoint of the current date and remaining contractual term, adjusted for the demographics of the current year’s grant.

Restricted Stock Units

In addition to stock options, restricted stock units (RSUs) are granted with a value equal to the closing stock price of the Company’s stock on the dates the units are granted. For employees, these units generally have a three-year cliff vesting, but have an accelerated vesting feature for participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75 or greater. For directors, these units vest on the earlier of one year from the date of grant or the next annual shareholders meeting. In addition, the RSUs have dividend participation, which accrue as additional units and are settled with granted stock units at the end of the vesting period. The total fair value of restricted stock units that vested was $1 million and $2 million during the first six months of 2023 and 2022, respectively.

Weighted

Average

Grant Date

 

RSUs

 

Fair Value

Nonvested at January 1, 2023

44,208

$

109.51

Granted

19,063

136.33

Reinvested

206

129.72

Vested

(6,748)

118.66

Forfeited

(732)

136.58

Nonvested at June 30, 2023

55,997

$

117.49

19

Table of Contents

6. OPERATING SEGMENT INFORMATION

Selected information by operating segment is presented in the table below. Additionally, the table reconciles segment totals to total earnings and total revenues.

For the Three Months

For the Six Months

Revenues

Ended June 30,

Ended June 30,

(in thousands)

 

2023

 

2022

 

2023

 

2022

Casualty

$

187,048

$

177,123

$

373,079

$

348,879

Property

101,841

74,690

190,608

142,130

Surety

33,391

30,997

66,316

60,953

Net premiums earned

$

322,280

$

282,810

$

630,003

$

551,962

Net investment income

28,788

18,472

55,872

36,355

Net realized gains

5,580

12,804

20,200

18,392

Net unrealized gains (losses) on equity securities

25,214

(100,994)

40,710

(128,804)

Total consolidated revenue

$

381,862

$

213,092

$

746,785

$

477,905

Net Earnings

(in thousands)

 

2023

 

2022

 

2023

 

2022

Casualty

$

6,977

$

21,442

$

38,808

$

49,089

Property

25,877

26,105

54,260

48,581

Surety

8,347

8,409

16,023

17,764

Net underwriting income

$

41,201

$

55,956

$

109,091

$

115,434

Net investment income

28,788

18,472

55,872

36,355

Net realized gains

5,580

12,804

20,200

18,392

Net unrealized gains (losses) on equity securities

25,214

(100,994)

40,710

(128,804)

General corporate expense and interest on debt

(6,266)

(4,446)

(12,488)

(9,819)

Equity in earnings of unconsolidated investees

1,514

11,654

5,437

20,413

Earnings (loss) before income taxes

$

96,031

$

(6,554)

$

218,822

$

51,971

Income tax expense (benefit)

18,379

(4,315)

42,359

6,287

Net earnings (loss)

$

77,652

$

(2,239)

$

176,463

$

45,684

The following table further summarizes revenues by major product type within each operating segment:

For the Three Months

For the Six Months

Net Premiums Earned

Ended June 30,

Ended June 30,

(in thousands)

 

2023

 

2022

 

2023

 

2022

Casualty

Commercial excess and personal umbrella

$

69,261

$

62,463

$

136,843

$

122,535

General liability

26,016

25,106

51,916

48,846

Commercial transportation

25,398

23,941

50,630

47,569

Professional services

24,602

23,861

48,959

47,416

Small commercial

18,455

16,813

36,396

33,458

Executive products

6,153

7,075

12,506

13,652

Other casualty

17,163

17,864

35,829

35,403

Total

$

187,048

$

177,123

$

373,079

$

348,879

Property

Commercial property

$

60,219

$

38,929

$

109,481

$

72,218

Marine

32,412

28,178

63,048

54,907

Other property

9,210

7,583

18,079

15,005

Total

$

101,841

$

74,690

$

190,608

$

142,130

Surety

Commercial

$

12,505

$

11,663

$

24,923

$

23,366

Miscellaneous

11,887

11,587

23,934

22,940

Contract

8,999

7,747

17,459

14,647

Total

$

33,391

$

30,997

$

66,316

$

60,953

Grand Total

$

322,280

$

282,810

$

630,003

$

551,962

20

Table of Contents

7. LEASES

Right-of-use (ROU) assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize operating lease ROU assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements may include options to extend or terminate. The options are exercised at our discretion and are included in operating lease liabilities if it is reasonably certain the option will be exercised. Lease agreements have lease and non-lease components, which are accounted for as a single lease component. Operating lease cost for future minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease cost is expensed in the period in which the obligation is incurred. Sublease income is recognized on a straight-line basis over the sublease term.

The Company’s operating lease obligations are for branch office facilities. The components of lease expense and other lease information as of and during the three and six-month periods ended June 30, 2023 and 2022 were as follows:

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

(in thousands)

 

2023

 

2022

 

2023

 

2022

Operating lease cost

$

1,239

$

1,256

$

2,508

$

2,414

Variable lease cost

444

349

882

695

Sublease income

(139)

(139)

(277)

(277)

Total lease cost

$

1,544

$

1,466

$

3,113

$

2,832

Cash paid for amounts included in measurement of lease liabilities

Operating cash outflows from operating leases

$

1,357

$

1,278

$

2,755

$

2,600

ROU assets obtained in exchange for new operating lease liabilities

$

943

$

2,431

$

984

$

2,431

Reduction to ROU assets resulting from reduction to lease liabilities

$

$

$

200

$

Other non-cash reductions to ROU assets

$

$

$

$

73

(in thousands)

 

June 30, 2023

 

December 31, 2022

Operating lease ROU assets

$

11,185

$

12,766

Operating lease liabilities

$

12,635

$

14,499

Weighted-average remaining lease term - operating leases

4.18

years 

4.21

years

Weighted-average discount rate - operating leases

1.97

%

2.11

%

Future minimum lease payments under non-cancellable leases as of June 30, 2023 were as follows:

(in thousands)

 

June 30, 2023

2023

$

2,636

2024

3,827

2025

2,551

2026

1,646

2027

997

2028

704

Thereafter

883

Total future minimum lease payments

$

13,244

Less imputed interest

(609)

Total operating lease liability

$

12,635

8. ACQUISITONS AND DISPOSTIONS

On September 30, 2022, RLI Corp. completed the sale of its equity method investment in Maui Jim, Inc. to Kering Eyewear for cash proceeds of $687 million. A net realized gain of $571 million was recognized during 2022 and the payout of

21

Table of Contents

the working capital escrow during the first quarter of 2023 resulted in the recognition of an additional $14 million realized gain. The gains were recorded in the net realized gain line item of the statement of earnings.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, surety 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. These assumptions are subject to various risks, uncertainties and other factors, including, without limitation those set forth in “Item 1A. Risk Factors” within the Annual Report on Form 10-K for the year ended December 31, 2022 and Part II within this report. 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.

OVERVIEW

RLI Corp. is a U.S.-based, specialty insurance company that underwrites select property, casualty and surety products through major subsidiaries. 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 2022, we achieved our 27th consecutive year of underwriting profitability. Over the 27-year period, we averaged an 88.2 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.

The property and casualty insurance business is cyclical and influenced by many factors, including price competition, economic conditions, natural or man-made disasters (for example, earthquakes, hurricanes, pandemics and terrorism), interest rates, state regulations, court decisions and changes in the law. One of the unique and challenging features of the property and casualty insurance business is that coverages must be priced before costs have fully developed, because premiums are charged before claims are incurred. This requires that liabilities be estimated and recorded in recognition of future loss and settlement obligations. Due to the inherent uncertainty in estimating these liabilities, there can be no assurance that actual liabilities will equal recorded amounts. If actual liabilities differ from recorded amounts, there will either be an adverse or favorable effect on net earnings.

The casualty portion of our business consists largely of commercial excess, personal umbrella, general liability, transportation and executive products coverages, as well as package business and other specialty coverages, such as professional liability and workers’ compensation for office-based professionals. We also assume a limited amount of hard-to-place risks through a quota share reinsurance agreement. The casualty business is subject to the risk of estimating losses and related loss reserves because the ultimate settlement of a casualty claim may take several years to fully develop. The casualty segment is also subject to inflation risk and may be affected by evolving legislation and court decisions that define the extent of coverage and the amount of compensation due for injuries or losses.

Our property segment is comprised primarily of commercial fire, earthquake, difference in conditions and marine coverages. We also offer select personal lines policies, including homeowners’ coverages. Property insurance results are subject to the variability introduced by perils such as earthquakes, fires, hurricanes and other storms. Our major catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast, and wind storms to commercial properties throughout the Gulf and East Coast, as well as to homes we insure in Hawaii. We limit our net aggregate exposure to a catastrophic event by managing the total policy limits written in a particular region, purchasing reinsurance and maintaining policy terms and conditions throughout insurance cycles. We also use computer-assisted modeling techniques to provide estimates that help the Company carefully manage the concentration of risks exposed to catastrophic events.

22

Table of Contents

The surety segment specializes in writing small to medium-sized contract surety coverages, including payment and performance bonds. We offer a variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries, including the financial, healthcare as well as on and offshore energy, petrochemical and refining industries. We also offer miscellaneous bonds including license and permit, notary and court bonds. Often, our surety coverages involve a statutory requirement for bonds. While these bonds typically maintain a relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of our insureds. The contract surety product guarantees the construction work of a commercial contractor for a specific project. Generally, losses occur due to the deterioration of a contractor’s financial condition. This line has historically produced marginally higher loss ratios than other surety lines during economic downturns.

The insurance marketplace is competitive across all of our segments. However, we believe that our business model is built to create underwriting income by focusing on sound risk selection and discipline. Our primary focus will continue to be on underwriting profitability, with a secondary focus on premium growth where we believe underwriting profit exists, as opposed to general premium growth or market share measurements.

Key Performance Measures

The following is a list of key performance 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 6 to the unaudited condensed consolidated interim financial statements in this quarterly report on Form 10-Q, and in note 12 to the consolidated financial statements in our 2022 Annual Report on Form 10-K, regarding operating segment information. 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, general corporate expenses, debt costs and our portion of earnings from unconsolidated investees. A reconciliation of net earnings to underwriting income follows:

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

(in thousands)

 

2023

 

2022

 

2023

 

2022

Net earnings (loss)

$

77,652

$

(2,239)

$

176,463

$

45,684

Income tax expense (benefit)

18,379

(4,315)

42,359

6,287

Earnings (loss) before income taxes

$

96,031

$

(6,554)

$

218,822

$

51,971

Equity in earnings of unconsolidated investees

(1,514)

(11,654)

(5,437)

(20,413)

General corporate expenses

4,219

2,435

8,433

5,798

Interest expense on debt

2,047

2,011

4,055

4,021

Net unrealized (gains) losses on equity securities

(25,214)

100,994

(40,710)

128,804

Net realized gains

(5,580)

(12,804)

(20,200)

(18,392)

Net investment income

(28,788)

(18,472)

(55,872)

(36,355)

Net underwriting income

$

41,201

$

55,956

$

109,091

$

115,434

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.

23

Table of Contents

Critical Accounting Policies

In preparing the unaudited condensed consolidated interim 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 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, recoverability of reinsurance balances, deferred policy acquisition costs and deferred taxes. For a detailed discussion of each of these policies, refer to our 2022 Annual Report on Form 10-K.

There have been no significant changes to critical accounting policies during the year.

RESULTS OF OPERATIONS

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Net premiums earned increased 14 percent, driven by growth from our property and casualty segments. Positive market performance resulted in $41 million of unrealized gains on equity securities in the first six months of 2023, while overall market declines resulted in $129 million of unrealized losses in our equity portfolio in 2022. Investment income was up 54 percent, due to an increased average asset base and higher interest rates relative to the prior year. Realized gains during the first six months of 2023 were comprised of $9 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $3 million of realized losses on the fixed income portfolio and $14 million of realized gains from the payout of the working capital escrow from our sale of Maui Jim, Inc. (Maui Jim). This compares to $19 million of realized gains on the equity portfolio and $1 million of realized losses on the fixed income portfolio in the previous year.

For the Six Months

Ended June 30,

Consolidated Revenues (in thousands)

 

2023

 

2022

Net premiums earned

$

630,003

$

551,962

Net investment income

55,872

36,355

Net realized gains

20,200

18,392

Net unrealized gains (losses) on equity securities

40,710

(128,804)

Total consolidated revenue

$

746,785

$

477,905

Net earnings for the first six months of 2023 totaled $176 million, compared to $46 million for the same period in 2022. The increase for 2023 was largely attributed to the $39 million of net after-tax realized and unrealized gains on equity securities, compared to $87 million of after-tax realized and unrealized losses in 2022. Underwriting results for 2023 were impacted by $22 million of pretax storm losses, compared to $5 million of pretax storm losses in the first six months of 2022. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $72 million in the first six months of 2023, compared to $70 million in 2022.

Bonus and profit-sharing amounts earned by executives, managers and associates are predominantly influenced by corporate performance, including operating earnings, combined ratio and return on capital. Favorable development and other drivers of growth in book value will increase bonus and profit-sharing expenses, while catastrophe losses, adverse development and decreased investment portfolio returns would lead to expense reductions. These performance-related expenses affect policy acquisition, insurance operating and general corporate expenses.

Underwriting income was $109 million on an 82.7 combined ratio for the first six months of 2023, compared to $115 million on a 79.1 combined ratio in the same period of 2022. The loss ratio increased to 42.6 from 40.5, due to higher levels of storm losses in 2023. The expense ratio increased to 40.1 from 38.6, as higher net earnings and growth in book value led to larger levels of bonus and profit-sharing expenses in 2023. We also increased investments in our people and technology to support growth, improve customer experience and drive efficiencies, which impacted all segments.

Our equity in earnings of unconsolidated investees primarily relates to our investment in Prime Holdings Insurance Services, Inc. (Prime), a specialty insurance company. In the first six months of 2023, we recognized $6 million of investee earnings from Prime. Comparatively, the first six months of 2022 reflected investee earnings of $6 million from Prime and $15 million from Maui Jim. Our interest in Maui Jim was sold in the third quarter of 2022.

24

Table of Contents

Comprehensive earnings totaled $194 million for the first six months of 2023, compared to $167 million of comprehensive loss for the first six months of 2022. Other comprehensive earnings (loss) primarily included net after-tax unrealized gains and losses from the fixed income portfolio. Other comprehensive earnings of $18 million in the first six months of 2023 was attributable to modestly tighter credit spreads while interest rates remained relatively flat, which increased the fair value of securities held in the fixed income portfolio. Comparatively, $213 million of other comprehensive loss was recognized in 2022, as interest rates increased.

Premiums

Gross premiums written increased $145 million for the first six months of 2023, compared to the same period of 2022. Growth was achieved in all three segments, though the increase was largely driven by products in the property segment. Net premiums earned increased $78 million, driven by products in our property and casualty segments.

Gross Premiums Written

Net Premiums Earned

For the Six Months

For the Six Months

Ended June 30,

Ended June 30,

(in thousands)

 

2023

 

2022

 

% Change

 

2023

 

2022

 

% Change

Casualty

Commercial excess and personal umbrella

$

176,840

$

163,298

8

%

$

136,843

$

122,535

12

%

General liability

55,612

59,192

(6)

%

51,916

48,846

6

%

Commercial transportation

58,715

60,592

(3)

%

50,630

47,569

6

%

Professional services

55,282

52,390

6

%

48,959

47,416

3

%

Small commercial

40,246

36,937

9

%

36,396

33,458

9

%

Executive products

40,345

45,622

(12)

%

12,506

13,652

(8)

%

Other casualty

41,851

46,105

(9)

%

35,829

35,403

1

%

Total

$

468,891

$

464,136

1

%

$

373,079

$

348,879

7

%

Property

Commercial property

$

284,945

$

162,148

76

%

$

109,481

$

72,218

52

%

Marine

74,970

64,996

15

%

63,048

54,907

15

%

Other property

20,820

18,302

14

%

18,079

15,005

20

%

Total

$

380,735

$

245,446

55

%

$

190,608

$

142,130

34

%

Surety

Commercial

$

27,039

$

25,230

7

%

$

24,923

$

23,366

7

%

Miscellaneous

25,821

25,814

0

%

23,934

22,940

4

%

Contract

20,490

17,322

18

%

17,459

14,647

19

%

Total

$

73,350

$

68,366

7

%

$

66,316

$

60,953

9

%

Grand Total

$

922,976

$

777,948

19

%

$

630,003

$

551,962

14

%

Casualty

Gross premiums written for the casualty segment were up $5 million in the first six months of 2023. Continued growth within our personal umbrella distribution base and positive rate movement across a large portion of our casualty segment offset challenging conditions some lines experienced during the first six months. As we mentioned in prior filings, we are running off our excess energy liability business, which resulted in a $9 million decrease within the commercial excess product and negatively impacted the production of our primary energy liability business within the general liability product. Increased competition led to a further reduction in commercial excess business. Additionally, executive products premium decreased as a result of a more competitive market, particularly with public directors and officers coverages. However, the benefit of our diversified book of business is that select products can work through challenges they may encounter while the success of other products allows us to achieve positive overall results.

Property

Gross premiums written for the property segment were up $135 million in the first six months of 2023. Our commercial property business was up $123 million, as wind rates continued to increase and limited exposure growth was experienced. Rate increases and new opportunities led to $10 million of premium growth for our marine product.

25

Table of Contents

Surety

Gross premiums written for the surety segment were up $5 million for the first six months of 2023. Contract surety benefited from new agency relationships and new construction projects. The expansion of existing accounts and new business resulted in increased premium for commercial surety.

Underwriting Income

For the Six Months

Ended June 30,

 

2023

 

2022

Underwriting Income (in thousands)

Casualty

$

38,808

$

49,089

Property

54,260

48,581

Surety

16,023

17,764

Total

$

109,091

$

115,434

Combined Ratio

Casualty

89.6

85.9

Property

71.5

65.8

Surety

75.8

70.9

Total

82.7

79.1

Casualty

The casualty segment recorded underwriting income of $39 million in the first six months of 2023, compared to $49 million for the same period last year. Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $47 million, primarily on accident years 2018 through 2022. Favorable development was widespread, with notable amounts from commercial excess, professional services, general liability and personal umbrella. In comparison, $45 million of prior accident years’ reserves were released in the first six months of 2022. General liability, professional services and transportation were drivers of the favorable development. Offsetting the favorable development, storm losses on casualty-oriented package policies that include property coverage resulted in $1.7 million of losses in 2023 and $0.5 million of losses in 2022.

The combined ratio for the casualty segment was 89.6 in 2023, compared to 85.9 in 2022. The segment’s loss ratio was 52.2 in 2023, up from 51.0 in 2022. A higher earned premium base, which reduced the loss ratio impact of favorable prior years’ reserve development, and an increased level of storm losses resulted in the higher loss ratio in 2023. The expense ratio for the casualty segment was 37.4, up from 34.9 for the same period last year. Higher net earnings and growth in book value led to larger levels of bonus and profit-sharing expenses in 2023 for all segments.

Property

The property segment recorded underwriting income of $54 million for the first six months of 2023, compared to $49 million for the same period last year. Underwriting results for 2023 included $17 million of favorable development on prior years’ loss and catastrophe reserves and $20 million of storm losses. Comparatively, the 2022 underwriting results included $17 million of favorable development on prior years’ loss and catastrophe reserves and $5 million of storm losses.

Underwriting results for the first six months of 2023 translated into a combined ratio of 71.5, compared to 65.8 for the same period last year. The segment’s loss ratio was 35.5 in 2023, up from 28.7 in 2022, due to an increase in storm losses. The segment’s expense ratio decreased to 36.0 in 2023 from 37.1 in the prior year, as the growth in the earned premium base exceeded the growth in expense.

Surety

The surety segment recorded underwriting income of $16 million for the first six months of 2023, compared to $18 million for the same period last year. Both periods reflected positive current accident year underwriting performance and benefited from favorable development on prior years’ loss reserves. Results for 2023 included favorable development on prior

26

Table of Contents

accident years’ reserves, which decreased loss and settlement expenses for the segment by $7.5 million. Results for 2022 also included $7.5 million of favorable development on prior accident years’ reserves.

The combined ratio for the surety segment totaled 75.8 for the first six months of 2023, compared to 70.9 for the same period in 2022. The segment’s loss ratio increased to 9.0 in 2023, up from 7.4 in 2022, as a higher earned premium base reduced the loss ratio impact of favorable prior accident years’ reserve development. The expense ratio was 66.8, up from 63.5 in the prior year.

Investment Income

Our investment portfolio generated net investment income of $56 million during the first six months of 2023, an increase of 54 percent from that reported for the same period in 2022. The increase in investment income was due to higher interest rates as well as an increased average asset base relative to the prior year.

Yields on our fixed income investments for the first six months of 2023 and 2022 were as follows:

 

2023

 

 

2022

Pretax Yield

Taxable

3.40

%

2.75

%

Tax-Exempt

2.78

%

2.66

%

After-Tax Yield

Taxable

2.69

%

2.17

%

Tax-Exempt

2.63

%

2.52

%

The following table depicts the composition of our investment portfolio at June, 2023 as compared to December 31, 2022:

(in thousands)

 

June 30, 2023

 

December 31, 2022

Fixed income

$

2,689,100

 

74.9

%

$

2,666,950

 

81.5

%

Equity securities

552,566

15.4

%

498,382

15.2

%

Short-term investments

271,296

7.5

%

36,229

1.1

%

Other invested assets

60,907

1.7

%

47,922

1.5

%

Cash

16,707

0.5

%

22,818

0.7

%

Total investments and cash

$

3,590,576

100.0

%

$

3,272,301

100.0

%

We believe our overall asset allocation supports our strategy to preserve capital for policyholders, provide sufficient income to support insurance operations and effectively grow book value over a long-term investment horizon.

The fixed income portfolio increased by $22 million in the first six months of 2023. Average fixed income duration was 4.6 years at June 30, 2023, reflecting our liability structure and sound capital position. The equity portfolio increased by $54 million during the first six months of 2023, due to the positive performance of equity markets. Short-term investments increased by $235 million, as improved yields made AAA-rated government money market funds an investable asset class that also allowed us to maximize liquidity for events in the second half of the year.

Income Taxes

Our effective tax rate for the first six months of 2023 was 19.4 percent, compared to 12.1 percent for the same period in 2022. Effective rates are dependent upon components of pretax earnings or losses and the related tax effects. The effective tax rate was higher for the six-month period in 2023, as higher pretax income decreased the percentage impact of tax-favored adjustments, such as tax credits and excess tax benefits on share-based compensation.

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Net premiums earned increased 14 percent, driven by growth from our property and casualty segments. Positive market performance resulted in $25 million of unrealized gains on equity securities in the second quarter of 2023, while overall market declines resulted in $101 million of unrealized losses in our equity portfolio in the second quarter of 2022. Investment income was up 56 percent, due to an increased average asset base and higher interest rates relative to the prior year. Realized gains

27

Table of Contents

during the second quarter of 2023 were comprised of $6 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, and less than $1 million of realized losses on the fixed income portfolio. This compares to $13 million of realized gains on the equity portfolio and less than $1 million of realized losses on the fixed income portfolio in the same period of 2022.

For the Three Months

Ended June 30,

Consolidated Revenues (in thousands)

 

2023

 

2022

Net premiums earned

$

322,280

$

282,810

Net investment income

28,788

18,472

Net realized gains

5,580

12,804

Net unrealized gains (losses) on equity securities

25,214

(100,994)

Total consolidated revenue

$

381,862

$

213,092

Net earnings for the second quarter of 2023 totaled $78 million, compared to a net loss of $2 million for the same period in 2022. The increase for 2023 was largely attributed to the $25 million of net after-tax realized and unrealized gains on equity securities, compared to $69 million of after-tax realized and unrealized losses in the second quarter of 2022. Underwriting results for 2023 were impacted by $18 million of pretax storm losses, compared to $3 million of pretax storm losses in the second quarter of 2022. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $20 million in the second quarter of 2023, compared to $24 million in 2022.

Bonus and profit-sharing amounts earned by executives, managers and associates are predominantly influenced by corporate performance, including operating earnings, combined ratio and return on capital. Favorable development and other drivers of growth in book value will increase bonus and profit-sharing expenses, while catastrophe losses, adverse development and decreased investment portfolio returns would lead to expense reductions. These performance-related expenses affect policy acquisition, insurance operating and general corporate expenses.

Underwriting income was $41 million on an 87.2 combined ratio for the second quarter of 2023, compared to $56 million on an 80.2 combined ratio in the same period of 2022. The loss ratio increased to 47.8 from 41.7, due to higher storm losses and lower levels of favorable development on prior years’ loss reserves in 2023. The expense ratio increased to 39.4 from 38.5, as higher net earnings and growth in book value led to larger levels of bonus and profit-sharing expenses in 2023. We also increased investments in our people and technology to support growth, improve customer experience and drive efficiencies, which impacted all segments.

In the second quarter of 2023, we recognized $2 million of investee earnings from Prime. Comparatively, the second quarter of 2022 reflected investee earnings of $4 million from Prime and $9 million from Maui Jim. Our interest in Maui Jim was sold in the third quarter of 2022.

Comprehensive earnings totaled $58 million for the second quarter of 2023, compared to $100 million of comprehensive loss for the second quarter of 2022. Other comprehensive earnings (loss) primarily included net after-tax unrealized gains and losses from the fixed income portfolio. Other comprehensive loss of $20 million in the second quarter of 2023 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio. Comparatively, $98 million of other comprehensive loss was recognized in 2022, as interest rates increased.

Premiums

Gross premiums written increased $89 million for the second quarter of 2023, compared to the same period of 2022. Growth was achieved in all three segments, though the increase was largely driven by products in the property segment. Net premiums earned increased $39 million, driven by products in our property and casualty segments.

28

Table of Contents

Gross Premiums Written

Net Premiums Earned

For the Three Months

For the Three Months

Ended June 30,

Ended June 30,

(in thousands)

 

2023

 

2022

 

% Change

 

2023

 

2022

 

% Change

Casualty

Commercial excess and personal umbrella

$

95,409

$

85,512

12

%

$

69,261

$

62,463

11

%

General liability

30,823

31,298

(2)

%

26,016

25,106

4

%

Commercial transportation

35,842

38,291

(6)

%

25,398

23,941

6

%

Professional services

29,093

27,880

4

%

24,602

23,861

3

%

Small commercial

20,287

18,799

8

%

18,455

16,813

10

%

Executive products

22,518

24,941

(10)

%

6,153

7,075

(13)

%

Other casualty

17,085

21,594

(21)

%

17,163

17,864

(4)

%

Total

$

251,057

$

248,315

1

%

$

187,048

$

177,123

6

%

Property

Commercial property

$

173,006

$

93,068

86

%

$

60,219

$

38,929

55

%

Marine

37,781

32,913

15

%

32,412

28,178

15

%

Other property

11,102

9,867

13

%

9,210

7,583

21

%

Total

$

221,889

$

135,848

63

%

$

101,841

$

74,690

36

%

Surety

Commercial

$

11,943

$

12,567

(5)

%

$

12,505

$

11,663

7

%

Miscellaneous

12,474

12,452

0

%

11,887

11,587

3

%

Contract

10,601

9,607

10

%

8,999

7,747

16

%

Total

$

35,018

$

34,626

1

%

$

33,391

$

30,997

8

%

Grand Total

$

507,964

$

418,789

21

%

$

322,280

$

282,810

14

%

Casualty

Gross premiums written for the casualty segment were up $3 million in the second quarter of 2023. Continued momentum with our personal umbrella distribution base offset challenging conditions some lines experienced during the second quarter. The runoff of our excess energy liability business resulted in a $5 million decrease within the commercial excess product for the quarter and negatively impacted the production of our primary energy liability business within the general liability product. Commercial transportation was down, as the trucking market continues to be highly competitive and trucking companies’ revenues are down compared to last year. Additionally, executive products premium decreased as a result of a more competitive market, particularly with directors and officers coverages.

Property

Gross premiums written for the property segment were up $86 million in the second quarter of 2023. Our commercial property business was up $80 million. Continued rate increases on wind exposures has allowed us to achieve this result with limited exposure growth, while also strengthening terms and conditions. Rate increases and new opportunities led to $5 million of premium growth for our marine product.

Surety

Gross premiums written for the surety segment were up $0.4 million for the second quarter of 2023. The growth in contract surety was driven by new agency relationships, while the decline in commercial surety was due to accounts having non-recurring activity within select accounts that bolstered premium in 2022.

29

Table of Contents

Underwriting Income

For the Three Months

Ended June 30,

 

2023

 

2022

Underwriting Income (in thousands)

Casualty

$

6,977

$

21,442

Property

25,877

26,105

Surety

8,347

8,409

Total

$

41,201

$

55,956

Combined Ratio

Casualty

96.3

87.9

Property

74.6

65.0

Surety

75.0

72.9

Total

87.2

80.2

Casualty

The casualty segment recorded underwriting income of $7 million in the second quarter of 2023, compared to $21 million for the same period last year. Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $11 million, primarily on accident years 2020 through 2022. Favorable development was widespread, with notable amounts from small commercial, commercial excess and personal umbrella. In comparison, $17 million of prior accident years’ reserves were released in the second quarter of 2022. General liability, professional services and transportation were drivers of the favorable development. Storm losses on casualty-oriented package policies that include property coverage offset the favorable development and resulted in $1.3 million of losses in 2023 and $0.5 million of losses in 2022.

The combined ratio for the casualty segment was 96.3 in 2023, compared to 87.9 in 2022. The segment’s loss ratio was 58.9 in 2023, up from 53.2 in 2022. The increase in loss ratio was attributable to lower levels of reserve releases on prior accident years, as well as increased storm losses and modest additions to the current accident year for energy casualty. The expense ratio for the casualty segment was 37.4, up from 34.7 for the same period last year. Higher net earnings and growth in book value led to larger levels of bonus and profit-sharing expenses in 2023 for all segments.

Property

The property segment recorded underwriting income of $26 million for the second quarter of 2023 and 2022. Underwriting results for 2023 included $4 million of favorable development on prior years’ loss and catastrophe reserves and $17 million of storm losses. Comparatively, the 2022 underwriting results included $4 million of favorable development on prior years’ loss and catastrophe reserves and $3 million of storm losses.

Underwriting results for the second quarter of 2023 translated into a combined ratio of 74.6, compared to 65.0 for the same period last year. The segment’s loss ratio was 40.4 in 2023, up from 27.4 in 2022, due to the increase in storm losses. The segment’s expense ratio decreased to 34.2 in 2023 from 37.6 in the prior year, as the growth in the earned premium base exceeded the growth in expense.

Surety

The surety segment recorded underwriting income of $8 million for the second quarter of 2023 and 2022. Both periods reflected positive current accident year underwriting performance and benefited from favorable development on prior years’ loss reserves. Results for 2023 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $4 million, compared to $3 million in 2022.

The combined ratio for the surety segment totaled 75.0 for the second quarter of 2023, compared to 72.9 for the same period in 2022. The segment’s loss ratio was 7.8 in 2023, down from 10.3 in 2022, due to higher levels of prior accident year reserve releases. The expense ratio was 67.2, up from 62.6 in the prior year.

30

Table of Contents

Investment Income

Our investment portfolio generated net investment income of $29 million during the second quarter of 2023, an increase of 56 percent from that reported for the same period in 2022. The increase in investment income was due to higher interest rates, as well as an increased average asset base relative to the prior year.

Yields on our fixed income investments for the second quarter of 2023 and 2022 were as follows:

 

2023

 

2022

Pretax Yield

Taxable

3.41

%

2.79

%

Tax-Exempt

2.79

%

2.69

%

After-Tax Yield

Taxable

2.69

%

2.20

%

Tax-Exempt

2.64

%

2.55

%

Income Taxes

Our effective tax rate for the second quarter of 2023 was 19.1 percent, compared to 65.8 percent for the same period in 2022. Effective rates are dependent upon components of pretax earnings or losses and the related tax effects. Tax-favored adjustments acting on pretax income decreased the effective tax rate in 2023, whereas tax-favored adjustments acting on pretax loss increased the effective tax rate in 2022.

LIQUIDITY AND CAPITAL RESOURCES

We have three primary types of cash flows: (1) cash flows from operating activities, which consist mainly of cash generated by our underwriting operations and income earned on our investment portfolio, (2) cash flows from investing activities related to the purchase, sale and maturity of investments and (3) cash flows from financing activities that impact our capital structure, such as shareholder dividend payments and changes in debt and shares outstanding.

The following table summarizes cash flows provided by (used in) our activities for the six-month periods ended June 30, 2023 and 2022:

(in thousands)

 

2023

 

2022

Operating cash flows

$

243,595

$

170,645

Investing cash flows

(226,116)

(124,946)

Financing cash flows

(23,590)

(21,459)

Total

$

(6,111)

$

24,240

Our largest source of cash is premiums received from customers and our largest cash outflow is claim payments on insured losses. Cash flows from operating activities can vary among periods due to the timing in which these payments are made or received. Operating cash flows in the first six months of 2023 benefited from increased premium receipts relative to the first six months of 2022.

We have $200 million in debt outstanding. On October 2, 2013, we completed a public debt offering, issuing $150 million in senior notes maturing September 15, 2023 (a 10-year maturity), and paying interest semi-annually at the rate of 4.875 percent per annum. The notes were issued at a discount resulting in proceeds, net of discount and commission, of $149 million. The estimated fair value for the senior notes at June 30, 2023 was $150 million. The fair value of our debt is estimated based on the limited observable prices that reflect thinly traded securities. Additionally, RLI Insurance Company borrowed $50 million from the Federal Home Loan Bank of Chicago (FHLBC) on November 10, 2021. The borrowing matures on November 10, 2023 and has an option to be paid off prior to maturity. Interest is paid monthly at an annualized rate of 0.84 percent.

As of June 30, 2023, we had cash and other investments maturing within one year of approximately $482 million and an additional $896 million maturing between one to five years. Whereas our strategy is to be fully invested at all times, short-term investments in excess of demand deposit balances are considered a component of investment activities, and thus are classified as investments in our consolidated balance sheets.

31

Table of Contents

We also maintain a revolving line of credit with PNC Bank, N.A., which permits us to borrow up to an aggregate principal amount of $100 million. This facility was entered into during the first quarter of 2023 and replaced the previous $60 million facility with Bank of Montreal, Chicago Branch, which expired on March 27, 2023. Under certain conditions, the line may be increased up to an aggregate principal amount of $130 million. The facility has a three-year term that expires on May 29, 2026. As of and during the six-month period ended June 30, 2023, no amounts were outstanding on either facility.

Additionally, two of our insurance companies, RLI Insurance Company (RLI Ins.) and Mt. Hawley Insurance Company, are members of the FHLBC. Membership in the Federal Home Loan Bank system provides both companies access to an additional source of liquidity via a secured lending facility. Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing. As of June 30, 2023, $56 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility.

We believe that cash generated by operations and investments will provide sufficient sources of liquidity to meet our anticipated needs over the next 12 to 24 months. In the event they are not sufficient, we believe cash available from financing activities and other sources will provide sufficient additional liquidity.

We maintain a diversified investment portfolio representing policyholder funds that have not yet been paid out as claims, as well as the capital we hold for our shareholders. Invested assets at June 30, 2023 have increased $318 million from December 31, 2022. As of June 30, 2023, our investment portfolio had the following asset allocation breakdown:

Cost or

Fair

Unrealized

% of Total

(in thousands)

 

Amortized Cost

 

Value

 

Gain/(Loss)

 

Fair Value

 

 

Quality*

U.S. government

$

325,893

$

315,976

$

(9,917)

8.8

%

AAA

U.S. agency

45,937

43,719

(2,218)

1.2

%

AAA

Non-U.S. government & agency

4,799

3,960

(839)

0.1

%

BBB+

Agency MBS

414,503

372,030

(42,473)

10.4

%

AAA

ABS/CMBS/MBS**

285,855

252,330

(33,525)

7.0

%

AA+

Corporate

1,227,628

1,147,504

(80,124)

32.0

%

A-

Municipal

642,305

553,581

(88,724)

15.4

%

AA

Total fixed income

$

2,946,920

$

2,689,100

$

(257,820)

74.9

%

AA-

Equity

340,184

552,566

212,382

15.4

%

Short-term investments

271,296

271,296

7.5

%

Other invested assets

58,275

60,907

2,632

1.7

%

Cash

16,707

16,707

0.5

%

Total portfolio

$

3,633,382

$

3,590,576

$

(42,806)

100.0

%

*

Quality ratings provided by Moody’s, S&P and Fitch

**

Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

Quality is an average of each bond’s credit rating, adjusted for its relative weighting in the portfolio. As of June 30, 2023, our fixed income portfolio had the following rating distribution:

AAA

 

38.2

%

AA

19.2

%

A

 

22.3

%

BBB

12.2

%

BB

2.8

%

B

2.3

%

CCC

0.1

%

D

0.0

%

NR

2.9

%

Total

100.0

%

As of June 30, 2023, our fixed income portfolio remained well diversified, with 1,751 individual issues.

32

Table of Contents

Our investment portfolio has limited exposure to structured asset-backed securities. As of June 30, 2023, we had $136 million in ABS, which are pools of assets collateralized by cash flows from several types of loans, including home equity, credit cards, autos and structured bank loans in the form of collateralized loan obligations (CLOs).

As of June 30, 2023, we had $116 million in commercial mortgage-backed securities and $372 million in mortgage-backed securities backed by government sponsored enterprises (GSEs - Freddie Mac, Fannie Mae and Ginnie Mae). Excluding the GSE-backed MBS, our exposure to ABS and CMBS was 7.0 percent of our investment portfolio at quarter end.

We had $1,148 million in corporate fixed income securities as of June 30, 2023, which includes $110 million invested in a high-yield credit strategy. This high-yield portfolio consists of floating rate bank loans and bonds that are below investment grade in credit quality and offer incremental yield over our core fixed income portfolio.

The municipal portfolio includes approximately 56 percent taxable securities and 44 percent tax-exempt securities. Approximately 90 percent of our municipal bond portfolio maintains an ‘AA’ or better rating, while 100 percent of the municipal bond portfolio is rated ‘A’ or better.

Securities within the equity portfolio are well diversified and are primarily invested in broad index exchange traded funds (ETFs). Our actively managed equity strategy has a preference for dividend income and value oriented security selection with low turnover, which minimizes transaction costs and taxes throughout our long investment horizon.

As of June 30, 2023, our equity portfolio had a dividend yield of 2.0 percent, compared to 1.5 percent for the S&P 500 index. Because of the corporate dividend-received-deduction applicable to our dividend income, we pay an effective tax rate of 13.1 percent on dividends, compared to 21.0 percent on taxable interest and 5.3 percent on municipal bond interest income. The equity portfolio is managed in a diversified and granular manner, with 85 individual securities and four ETF positions. No single company exposure in the equity portfolio represents more than 1 percent of invested assets.

Other invested assets include investments in low income housing tax credit and historic tax credit partnerships, membership in the FHLBC and investments in private funds.

We had $55 million of investments in unconsolidated investees at June 30, 2023, compared to $58 million at December 31, 2022.

Our investment portfolio does not have any exposure to derivatives.

Our capital structure is comprised of equity and debt outstanding. As of June 30, 2023, our capital structure consisted of $200 million in long-term debt and $1.4 billion of shareholders’ equity. Debt outstanding comprised 13 percent of total capital as of June 30, 2023. Interest and fees on debt obligations totaled $4 million for the first six months of 2023 and 2022. We incurred interest expense on debt at an average annual interest rate of 3.89 percent during the first six months of 2023 and 2022.

We paid a regular quarterly cash dividend of $0.27 per share on June 20, 2023, an increase of $0.01 from the prior quarter. We have increased dividends in each of the last 48 years.

Our three insurance companies are subsidiaries of RLI Corp, with RLI Ins. as the first-level, or principal, insurance company. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance subsidiaries to meet our obligations for paying principal and interest on outstanding debt, corporate expenses and dividends to RLI Corp. shareholders. As discussed further below, 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 insurance regulatory authorities of Illinois. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts necessary to pay desired dividends to RLI Corp. shareholders. On a GAAP basis, as of June 30, 2023, our holding company had $1.4 billion in equity. This includes amounts related to the equity of our insurance subsidiaries, which is subject to regulatory restrictions under state insurance laws. The unrestricted portion of holding company net assets is comprised primarily of investments and cash, including $262 million in liquid assets, which was elevated by the cash proceeds received from the sale of Maui Jim. Unrestricted funds at the holding company are available to fund debt interest, general corporate obligations and dividend payments to our shareholders. If necessary, the holding company also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as access to capital markets.

33

Table of Contents

Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are subject to certain limitations based upon statutory 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 from the Illinois Department of Insurance (IDOI). In the first six months of 2023, RLI Ins. paid $30 million in ordinary dividends to RLI Corp. In 2022, our principal insurance subsidiary paid ordinary dividends totaling $13 million. As of June 30, 2023, $120 million of the net assets of our principal insurance subsidiary were not restricted and could be distributed to RLI Corp. as ordinary dividends without prior approval from the IDOI. Because the limitations are based upon a rolling 12-month period, the amount and impact of these restrictions vary over time. In addition to restrictions from our principal subsidiary’s insurance regulator, we also consider internal models and how capital adequacy is defined by our rating agencies in determining amounts available for distribution.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign currency exchange rates and commodity prices. Historically, our primary market risks have been equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities. We have limited exposure to both foreign currency risk and commodity risk.

Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations. We monitor our portfolio to ensure that credit risk does not exceed prudent levels. We have consistently invested in high credit quality, investment grade securities. Our fixed maturity portfolio has an average rating of AA-, with 80 percent rated A or better by at least two nationally recognized rating organizations.

On an overall basis, our exposure to market risk has not significantly changed from that reported in our 2022 Annual Report on Form 10-K.

Item 4.Controls and Procedures

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective, as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objective, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe that our disclosure controls and procedures provide such reasonable assurance.

No changes were made to our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

34

Table of Contents

PART II - OTHER INFORMATION

Item 1.Legal Proceedings – There were no material changes to report.

Item 1A. Risk Factors – There were no material changes to report.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds -

Items 2(a) and (b) are not applicable.

In 2010, our Board of Directors implemented a $100 million share repurchase program. We did not repurchase any shares during 2023. 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.

Item 3.Defaults Upon Senior Securities - Not Applicable.

Item 4.Mine Safety Disclosures - Not Applicable.

Item 5.Other Information –

Securities Trading Plans of Executive Officers and Directors

Rule 10b5-1 under the Exchange Act provides an affirmative defense that enables prearranged transactions in Company securities in a manner that avoids concerns about initiating transactions at a future date while possibly in possession of material nonpublic information. Our Insider Trading Policy permits our executive officers and directors to enter into trading plans designed to comply with Rule 10b5-1.

During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K.

Item 6.Exhibits

Exhibit No.

    

Description of Document

    

Reference

3.1

Amended and Restated Certificate of Incorporation

Attached as Exhibit 3.1.

10.1

RLI Corp. Nonemployee Directors’ Deferred Compensation Plan, as amended*

Attached as Exhibit 10.1.

10.2

RLI Corp. Executive Deferred Compensation Plan, as amended*

Attached as Exhibit 10.2.

10.3

RLI Corp. 2023 Long-Term Incentive Plan*

Attached as Exhibit 10.3.

10.4

RLI Corp. 2023 Long-Term Incentive Plan Stock Option Agreement*

Attached as Exhibit 10.4.

10.5

RLI Corp. 2023 Long-Term Incentive Plan Non-Employee Director Restricted Stock Unit Agreement*

Attached as Exhibit 10.5.

31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Attached as Exhibit 31.1.

31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Attached as Exhibit 31.2.

32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Attached as Exhibit 32.1.

32.2

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Attached as Exhibit 32.2.

101

iXBRL-Related Documents

Attached as Exhibit 101.

104

Cover Page Interactive Data File

Embedded in Inline XBRL and contained in Exhibit 101.

*

Management contract or compensatory plan.

35

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

RLI Corp.

/s/ Todd W. Bryant

Todd W. Bryant

Chief Financial Officer

(Principal Financial and Chief Accounting Officer)

Date: July 26, 2023

36