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RLI CORP - Quarter Report: 2023 September (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 September 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 October 16, 2023, the number of shares outstanding of the registrant’s Common Stock was 45,625,771.

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 Nine-Month Periods Ended September 30, 2023 and 2022 (unaudited)

3

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

4

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

5

Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 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 Nine Months

Ended September 30,

Ended September 30,

(in thousands, except per share data)

 

2023

 

2022

 

2023

 

2022

Net premiums earned

$

318,409

$

291,468

$

948,412

$

843,430

Net investment income

31,963

21,270

87,835

57,625

Net realized gains

6,558

573,170

26,758

591,562

Net unrealized gains (losses) on equity securities

(25,236)

(26,414)

15,474

(155,218)

Consolidated revenue

$

331,694

$

859,494

$

1,078,479

$

1,337,399

Losses and settlement expenses

189,558

165,089

457,989

388,527

Policy acquisition costs

103,013

96,977

307,083

271,879

Insurance operating expenses

21,591

20,606

70,002

58,794

Interest expense on debt

1,873

2,013

5,928

6,034

General corporate expenses

2,372

2,755

10,805

8,553

Total expenses

$

318,407

$

287,440

$

851,807

$

733,787

Equity in earnings (loss) of unconsolidated investees

1,732

(17,352)

7,169

3,061

Earnings before income taxes

$

15,019

$

554,702

$

233,841

$

606,673

Income tax expense

1,483

114,809

43,842

121,096

Net earnings

$

13,536

$

439,893

$

189,999

$

485,577

Other comprehensive earnings (loss), net of tax

(56,834)

(81,248)

(38,848)

(294,392)

Comprehensive earnings (loss)

$

(43,298)

$

358,645

$

151,151

$

191,185

Basic net earnings per share

$

0.30

$

9.69

$

4.17

$

10.71

Diluted net earnings per share

$

0.29

$

9.61

$

4.12

$

10.61

Weighted average number of common shares outstanding:

Basic

45,622

45,379

45,581

45,347

Diluted

46,065

45,775

46,067

45,775

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

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RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

September 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

$

2,717,627

$

2,666,950

(amortized cost of $3,046,785 and allowance for credit losses of $704 at 9/30/23)

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

Equity securities, at fair value (cost - $347,772 at 9/30/23 and $328,019 at 12/31/22)

534,436

498,382

Short-term investments, at cost which approximates fair value

125,032

36,229

Other invested assets

59,730

47,922

Cash

18,445

22,818

Total investments and cash

$

3,455,270

$

3,272,301

Accrued investment income

25,328

21,259

Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $19,415 at 9/30/23 and $18,696 at 12/31/22

225,821

189,501

Ceded unearned premium

111,072

138,457

Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $11,131 at 9/30/23 and $11,250 at 12/31/22

820,954

740,089

Deferred policy acquisition costs

150,666

127,859

Property and equipment, at cost, net of accumulated depreciation of $74,416 at 9/30/23 and $68,633 at 12/31/22

48,596

49,573

Investment in unconsolidated investees

56,110

58,275

Goodwill and intangibles

53,562

53,562

Income taxes-deferred

51,403

40,269

Other assets

84,744

75,923

TOTAL ASSETS

$

5,083,526

$

4,767,068

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities

Unpaid losses and settlement expenses

$

2,488,695

$

2,315,637

Unearned premiums

906,139

785,085

Reinsurance balances payable

56,570

61,100

Funds held

103,424

101,144

Income taxes-current

5,546

Debt

100,000

199,863

Accrued expenses

85,640

94,869

Other liabilities

38,421

32,029

TOTAL LIABILITIES

$

3,784,435

$

3,589,727

Shareholders’ Equity

Common stock ($0.01 par value)

(Shares authorized - 200,000,000)

(68,555,985 shares issued, 45,625,771 shares outstanding at 9/30/23)

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

$

686

$

684

Paid-in capital

360,453

352,391

Accumulated other comprehensive earnings (loss)

(267,924)

(229,076)

Retained earnings

1,598,875

1,446,341

Deferred compensation

12,617

12,015

Less: Treasury shares, at cost (22,930,214 shares at 9/30/23 and 12/31/22)

(405,616)

(405,014)

TOTAL SHAREHOLDERS’ EQUITY

$

1,299,091

$

1,177,341

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

5,083,526

$

4,767,068

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

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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

 

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

 

(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)

Net earnings

 

439,893

439,893

Other comprehensive earnings (loss), net of tax

 

(81,248)

(81,248)

Deferred compensation

 

102

(102)

Share-based compensation

 

9,367

2,968

2,968

Dividends and dividend equivalents ($0.26 per share)

 

(11,808)

(11,808)

Balance, September 30, 2022

 

45,378,171

$

1,393,993

$

683

$

352,129

$

(244,566)

$

1,678,746

$

9,047

$

(402,046)

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

 

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

 

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)

Net earnings

 

13,536

13,536

Other comprehensive earnings (loss), net of tax

 

(56,834)

(56,834)

Deferred compensation

 

110

(110)

Share-based compensation

 

29,575

2,798

1

2,797

Dividends and dividend equivalents ($0.27 per share)

 

(12,321)

(12,321)

Balance, September 30, 2023

 

45,625,771

$

1,299,091

$

686

$

360,453

$

(267,924)

$

1,598,875

$

12,617

$

(405,616)

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

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RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

For the Nine Months

Ended September 30,

(in thousands)

 

2023

 

2022

Net cash provided by operating activities

$

342,192

$

282,886

Cash Flows from Investing Activities

Purchase of:

Fixed income securities, available-for-sale

$

(560,192)

$

(531,894)

Equity securities

(40,571)

(42,490)

Property and equipment

(5,451)

(4,432)

Other

(8,535)

(7,940)

Proceeds from sale of:

Fixed income securities, available-for-sale

26,158

46,448

Equity securities

36,708

59,264

Equity method investments

14,134

686,666

Other

550

2,298

Proceeds from call or maturity of:

Fixed income securities, available-for-sale

414,529

176,616

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

(88,803)

Net cash provided by (used in) investing activities

$

(211,473)

$

384,536

Cash Flows from Financing Activities

Proceeds from issuance of debt

$

50,000

$

Payment of debt

(150,000)

Cash dividends paid

(36,490)

(34,913)

Proceeds from stock option exercises

1,398

2,198

Net cash used in financing activities

$

(135,092)

$

(32,715)

Net increase (decrease) in cash

$

(4,373)

$

634,707

Cash at the beginning of the period

22,818

88,804

Cash at September 30,

$

18,445

$

723,511

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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.BASIS OF PRESENTATION AND 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 September 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 September 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

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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 $19 million and $11 million, respectively, at September 30, 2023. At December 31, 2022, the amounts were $16 million and $11 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 nine 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 September 30, 2023 and December 31, 2022 is detailed in the following table:

September 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 September 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:

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For the Three Months

For the Three Months

Ended September 30, 2023

Ended September 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

$

13,536

 

45,622

$

0.30

$

439,893

 

45,379

$

9.69

Effect of Dilutive Securities

Stock options and restricted stock units

 

443

 

396

Diluted EPS

Earnings available to common shareholders

$

13,536

 

46,065

$

0.29

$

439,893

 

45,775

$

9.61

Anti-dilutive securities excluded from diluted EPS

145

435

For the Nine Months

For the Nine Months

Ended September 30, 2023

Ended September 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

$

189,999

 

45,581

$

4.17

$

485,577

 

45,347

$

10.71

Effect of Dilutive Securities

Stock options and restricted stock units

 

486

 

428

Diluted EPS

Earnings available to common shareholders

$

189,999

 

46,067

$

4.12

$

485,577

 

45,775

$

10.61

Anti-dilutive securities excluded from diluted EPS

145

459

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 $15 million for the third quarter of 2023, compared to $22 million for the same period in 2022. For the nine-month period ended September 30, 2023, other comprehensive earnings (loss) is net of tax benefit of $10 million, compared to $78 million for the same period in 2022.

Unrealized losses, net of tax, recognized in other comprehensive earnings (loss) were $39 million for the first nine months of 2023, compared to $294 million during the same period last year. The unrealized losses in each period were attributable to an increase in interest rates, which decreased the fair value of securities held in the fixed income portfolio.

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 Nine Months

Ended September 30,

Ended September 30,

Unrealized Gains/Losses on Available-for-Sale Securities

 

2023

 

2022

 

2023

 

2022

Beginning balance

$

(211,090)

$

(163,318)

$

(229,076)

$

49,826

Other comprehensive earnings (loss) before reclassifications

(57,261)

(82,785)

(41,355)

(296,422)

Amounts reclassified from accumulated other comprehensive earnings

427

1,537

2,507

2,030

Net current-period other comprehensive earnings (loss)

$

(56,834)

$

(81,248)

$

(38,848)

$

(294,392)

Ending balance

$

(267,924)

$

(244,566)

$

(267,924)

$

(244,566)

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

$

2,005

$

1,520

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:

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Amount Reclassified from Accumulated Other

(in thousands)

Comprehensive Earnings (Loss)

For the Three Months

For the Nine Months

Component of Accumulated 

Ended September 30,

Ended September 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

$

(271)

$

(1,912)

$

(2,808)

$

(2,684)

Net realized gains (losses)

(270)

(34)

(365)

115

Credit gains (losses) presented within net realized gains

$

(541)

$

(1,946)

$

(3,173)

$

(2,569)

Earnings (loss) before income taxes

114

409

666

539

Income tax (expense) benefit

$

(427)

$

(1,537)

$

(2,507)

$

(2,030)

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

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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 September 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 the 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 nine-month periods ended September 30, 2023 and 2022:

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Sales

Proceeds

Gross Realized

Net Realized

(in thousands)

 

From Sales

 

Gains

 

Losses

 

Gain (Loss)

2023

Fixed income securities - available-for-sale

$

25,983

$

145

$

(1,035)

$

(890)

Equity securities

36,708

15,990

(101)

15,889

2022

Fixed income securities - available-for-sale

$

48,559

$

286

$

(2,481)

$

(2,195)

Equity securities

59,264

20,410

(609)

19,801

Calls/Maturities

Gross Realized

Net Realized

(in thousands)

 

Proceeds

 

Gains

 

Losses

 

Gain (Loss)

2023

Fixed income securities - available-for-sale

$

434,263

$

38

$

(236)

$

(198)

2022

Fixed income securities - available-for-sale

$

176,991

$

142

$

(55)

$

87

FAIR VALUE MEASUREMENTS

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

As of September 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

$

$

321,611

$

$

321,611

U.S. agency

48,368

48,368

Non-U.S. government & agency

3,811

3,811

Agency MBS

399,381

399,381

ABS/CMBS/MBS*

265,779

265,779

Corporate

1,097,093

56,291

1,153,384

Municipal

525,293

525,293

Total fixed income securities - available-for-sale

$

$

2,661,336

$

56,291

$

2,717,627

Equity securities

532,856

1,580

534,436

Total

$

532,856

$

2,661,336

$

57,871

$

3,252,063

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

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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)

(377)

Purchases

5,475

Sales / Calls / Maturities

(2,493)

Balance as of September 30, 2023

$

57,871

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

$

(377)

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

September 30, 2023

(in thousands)

 

Amortized Cost

 

Fair Value

Due in one year or less

$

176,148

$

174,377

Due after one year through five years

909,286

858,578

Due after five years through 10 years

653,649

596,523

Due after 10 years

547,547

422,989

ABS/CMBS/MBS*

760,155

665,160

Total available-for-sale

$

3,046,785

$

2,717,627

*

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

The amortized cost and fair value of available-for-sale securities at September 30, 2023 and December 31, 2022 are presented in the tables below. Amortized cost does not include the $23 million and $20 million of accrued interest receivable as of September 30, 2023 and December 31, 2022, respectively.

September 30, 2023

Cost or

Allowance

Gross

Gross

Amortized

for Credit

Unrealized

Unrealized

Fair

(in thousands)

 

Cost

 

Losses

 

Gains

 

Losses

 

Value

U.S. government

$

334,650

$

$

$

(13,039)

$

321,611

U.S. agency

51,477

(3,109)

48,368

Non-U.S. government & agency

4,800

(989)

3,811

Agency MBS

457,496

7

(58,122)

399,381

ABS/CMBS/MBS*

302,659

(4)

65

(36,941)

265,779

Corporate

1,253,152

(700)

952

(100,020)

1,153,384

Municipal

642,551

85

(117,343)

525,293

Total Fixed Income

$

3,046,785

$

(704)

$

1,109

$

(329,563)

$

2,717,627

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

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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 September 30, 2023, the discounted cash flow analysis resulted in an allowance for credit losses on 19 securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

 

2023

 

2022

 

2023

 

2022

Beginning balance

$

434

$

292

$

339

$

441

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

281

168

25

292

Reduction from securities sold during the period

(166)

(619)

Reductions from intent to sell securities

(17)

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

(11)

33

340

230

Balance as of September 30,

$

704

$

327

$

704

$

327

During the first nine months of 2023, $2 million of realized losses were recognized on fixed income securities for which the cost basis was written down to fair value due to a credit event, restructurings and losses on securities for which we no longer had the intent to hold until recovery. We recognized less than $1 million of losses on securities for which we no longer had the intent to hold until recovery during the first nine months of 2022.

As of September 30, 2023, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,547 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $330 million in associated unrealized losses represents 11 percent of the fixed income portfolio’s cost basis and 10 percent of total invested assets. Isolated to these securities, unrealized losses increased through the first nine months of 2023, as interest rates increased during the period. Of the total 1,547 securities, 1,200 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 September 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.

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Table of Contents

September 30, 2023

December 31, 2022

(in thousands)

 

< 12 Mos.

 

12 Mos. &
Greater

 

Total

 

< 12 Mos.

 

12 Mos. &
Greater

 

Total

U.S. government

Fair value

$

82,683

$

238,928

$

321,611

$

399,361

$

8,828

$

408,189

Amortized cost

86,186

248,464

334,650

407,340

9,720

417,060

Unrealized loss

$

(3,503)

$

(9,536)

$

(13,039)

$

(7,979)

$

(892)

$

(8,871)

U.S. agency

Fair value

$

15,658

$

32,710

$

48,368

$

32,987

$

2,170

$

35,157

Amortized cost

16,304

35,173

51,477

34,627

2,567

37,194

Unrealized loss

$

(646)

$

(2,463)

$

(3,109)

$

(1,640)

$

(397)

$

(2,037)

Non-U.S. government

Fair value

$

$

3,811

$

3,811

$

3,626

$

2,221

$

5,847

Amortized cost

4,800

4,800

3,798

3,000

6,798

Unrealized Loss

$

$

(989)

$

(989)

$

(172)

$

(779)

$

(951)

Agency MBS

Fair value

$

138,173

$

260,503

$

398,676

$

197,252

$

117,851

$

315,103

Amortized cost

143,662

313,136

456,798

212,776

144,544

357,320

Unrealized loss

$

(5,489)

$

(52,633)

$

(58,122)

$

(15,524)

$

(26,693)

$

(42,217)

ABS/CMBS/MBS*

Fair value

$

41,219

$

217,289

$

258,508

$

96,754

$

136,149

$

232,903

Amortized cost

41,882

253,567

295,449

104,724

163,623

268,347

Unrealized loss

$

(663)

$

(36,278)

$

(36,941)

$

(7,970)

$

(27,474)

$

(35,444)

Corporate

Fair value

$

274,290

$

804,638

$

1,078,928

$

660,830

$

323,337

$

984,167

Amortized cost

287,456

891,492

1,178,948

697,437

374,707

1,072,144

Unrealized loss

$

(13,166)

$

(86,854)

$

(100,020)

$

(36,607)

$

(51,370)

$

(87,977)

Municipal

Fair value

$

154,928

$

358,021

$

512,949

$

228,827

$

204,324

$

433,151

Amortized cost

159,582

470,710

630,292

255,240

280,636

535,876

Unrealized loss

$

(4,654)

$

(112,689)

$

(117,343)

$

(26,413)

$

(76,312)

$

(102,725)

Total fixed income

Fair value

$

706,951

$

1,915,900

$

2,622,851

$

1,619,637

$

794,880

$

2,414,517

Amortized cost

735,072

2,217,342

2,952,414

1,715,942

978,797

2,694,739

Unrealized loss

$

(28,121)

$

(301,442)

$

(329,563)

$

(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 September 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

$

2,440,094

$

2,160,142

$

(279,952)

85.0

%

2

BBB

Baa

431,695

388,396

(43,299)

13.1

%

3

BB

Ba

48,627

44,282

(4,345)

1.3

%

4

B

B

29,382

28,045

(1,337)

0.4

%

5

CCC

Caa

2,616

1,986

(630)

0.2

%

6

CC or lower

Ca or lower

0.0

%

Total

$

2,952,414

$

2,622,851

$

(329,563)

100.0

%

Other Invested Assets

We had $60 million of other invested assets at September 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

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LIHTC and 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 $11 million at September 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 third 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 nine-months ended September 30, 2023, our LIHTC interest recognized amortization of $2.3 million and a total benefit of $2.4 million, compared to $2.5 million of amortization and $2.6 million of tax benefit for the same period in 2022. Our unfunded commitment for our LIHTC investments was less than $1 million at September 30, 2023 and will be paid out in installments through 2035.

Our HTC investment had a balance of $14 million at September 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 $1.4 million was recognized from our HTC investment during the third quarter of 2023, compared to $1.3 million in the third quarter of 2022. For the nine-months ended September 30, 2023, our HTC investment recognized a total benefit of $4.3 million, compared to $3.9 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 third quarter of 2023 and $3.4 million of amortization during the first nine months of 2023. Our unfunded commitment for our HTC investment totaled $1 million at September 30, 2023 and is expected be paid during 2023.

As of September 30, 2023, $57 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 September 30, 2023, $50 million of borrowings were outstanding with the FHLBC.

Our investments in private funds totaled $27 million as of September 30, 2023, down from $28 million as of December 31, 2022, and had $5 million of associated unfunded commitments at September 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 $56 million of investments in unconsolidated investees at September 30, 2023, compared to $58 million at December 31, 2022. At September 30, 2023, our investment in Prime Holdings Insurance Services, Inc. (Prime) was $56 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 $18 million and $125 million, respectively, at September 30, 2023, compared to $23 million and $36 million, respectively, at December 31, 2022.

3. DEBT

As of September 30, 2023, we had $100 million in debt outstanding. On September 15, 2023, we retired $150 million in senior notes that were originally issued in 2013. Additionally, on September 15, 2023, we accessed $50 million from our revolving line of credit with PNC Bank, N.A. (PNC). The borrowing may be repaid at any time and carries a floating interest rate of 7.07 percent which will reset during the first quarter of 2024. The credit facility with PNC 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. The line of credit permits us to borrow up to an aggregate principal amount of $100 million, but may be increased up to an aggregate principal amount of $130 million under certain conditions. The facility has a three-year term that expires on May 29, 2026. Further, 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.

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4. HISTORICAL LOSS AND LAE DEVELOPMENT

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

For the Nine Months

Ended September 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

$

551,975

$

491,559

Prior accident years

(93,986)

(103,032)

Total incurred

$

457,989

$

388,527

Loss and LAE payments for claims incurred

Current accident year

$

(113,010)

$

(52,435)

Prior accident years

(252,786)

(219,682)

Total paid

$

(365,796)

$

(272,117)

Net unpaid losses and LAE at September 30,

$

1,667,741

$

1,551,879

Unpaid losses and LAE at September 30,

Gross

$

2,488,695

$

2,322,737

Ceded

(820,954)

(770,858)

Net

$

1,667,741

$

1,551,879

For the first nine months of 2023, incurred losses and LAE included $94 million of favorable development on prior years’ loss reserves, largely from accident years 2016 through 2018 and 2020 through 2022. Commercial excess, executive products, general liability, professional services, personal umbrella, surety and commercial property were drivers of the favorable development. No products experienced significant adverse development.

For the first nine months of 2022, incurred losses and LAE included $103 million of favorable development on prior years’ loss reserves, largely from accident years 2018 through 2021. General liability, professional services, transportation, executive products, commercial excess, marine and surety were drivers of the favorable development. No products experienced significant adverse development.

5. INCOME TAXES

Our effective tax rate for the three and nine months ended September 30, 2023 was 9.9 percent and 18.7 percent, respectively, compared to 20.7 percent and 20.0 percent, respectively, for the same period in 2022. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective tax rate was lower for the three and nine-month periods in 2023, as lower pretax income increased the percentage impact of tax-favored adjustments.

Income tax expense attributable to income from operations for the three and nine-month period ended September 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.

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For the Three Months Ended September 30, 2023

For the Nine Months Ended September 30, 2023

2023

2022

2023

2022

(in thousands)

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

Provision for income taxes at the statutory rate of 21%

$

3,154

21.0

$

116,487

21.0

$

49,107

21.0

%

$

127,401

21.0

%

Increase (reduction) in taxes resulting from:

Excess tax benefit on share-based compensation

(395)

(2.6)

(95)

(0.0)

(3,263)

(1.4)

%

(2,270)

(0.4)

%

Tax exempt interest income

(270)

(1.8)

(280)

(0.1)

(827)

(0.4)

%

(850)

(0.1)

%

Dividends received deduction

(164)

(1.1)

(240)

(0.0)

(597)

(0.3)

%

(673)

(0.1)

%

Tax credit

(779)

(5.2)

(1,461)

(0.3)

(2,338)

(1.0)

%

(4,383)

(0.7)

%

ESOP dividends paid deduction

(142)

(1.0)

(136)

(0.0)

(423)

(0.2)

%

(404)

(0.0)

%

Nondeductible expenses

158

1.1

34

0.0

1,505

0.6

%

608

0.1

%

Other items, net

(79)

(0.5)

500

0.1

678

0.4

%

1,667

0.2

%

Total tax expense

$

1,483

9.9

$

114,809

20.7

$

43,842

18.7

%

$

121,096

20.0

%

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.

6. 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 165,063 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 $2.0 million and $6.6 million in the three and nine-month periods ended September 30, 2023, respectively, compared to $2.4 million and $6.2 million, respectively, for the same period in 2022. The total income tax benefit was $0.3 million and $1.1 million for the three and nine-month periods ended September 30, 2023, compared to $0.4 million and $1.0 million, respectively, for the same periods in 2022. Total unrecognized compensation expense relating to outstanding and unvested awards was $7 million, which will be recognized over the weighted average vesting period of 2.97 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.

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The following tables summarize option activity for the nine-month period ended September 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

172,250

135.51

Options exercised

(219,905)

57.15

Options canceled/forfeited

(8,585)

96.99

Outstanding options at September 30, 2023

1,639,420

$

91.31

4.83

$

73,168

Exercisable options at September 30, 2023

849,997

$

76.60

3.64

$

50,400

The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $17 million and $6 million during the first nine 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 September 30:

 

2023

 

2022

Weighted-average fair value of grants

$

26.71

$

20.99

Risk-free interest rates

3.41

%

2.86

%

Dividend yield

2.29

%

2.50

%

Expected volatility

22.96

%

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 options’ 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 $3 million and $2 million during the first nine months of 2023 and 2022, respectively.

Weighted

Average

Grant Date

 

RSUs

 

Fair Value

Nonvested at January 1, 2023

44,208

$

109.51

Granted

20,413

136.19

Reinvested

288

132.60

Vested

(19,957)

103.61

Forfeited

(1,795)

116.10

Nonvested at September 30, 2023

43,157

$

124.74

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7. 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 Nine Months

Revenues

Ended September 30,

Ended September 30,

(in thousands)

 

2023

 

2022

 

2023

 

2022

Casualty

$

189,305

$

179,615

$

562,384

$

528,494

Property

94,988

80,844

285,596

222,974

Surety

34,116

31,009

100,432

91,962

Net premiums earned

$

318,409

$

291,468

$

948,412

$

843,430

Net investment income

31,963

21,270

87,835

57,625

Net realized gains

6,558

573,170

26,758

591,562

Net unrealized gains (losses) on equity securities

(25,236)

(26,414)

15,474

(155,218)

Total consolidated revenue

$

331,694

$

859,494

$

1,078,479

$

1,337,399

Net Earnings

(in thousands)

 

2023

 

2022

 

2023

 

2022

Casualty

$

18,670

$

11,329

$

57,478

$

60,418

Property

(20,671)

(8,308)

33,589

40,273

Surety

6,248

5,775

22,271

23,539

Net underwriting income (loss)

$

4,247

$

8,796

$

113,338

$

124,230

Net investment income

31,963

21,270

87,835

57,625

Net realized gains

6,558

573,170

26,758

591,562

Net unrealized gains (losses) on equity securities

(25,236)

(26,414)

15,474

(155,218)

General corporate expense and interest on debt

(4,245)

(4,768)

(16,733)

(14,587)

Equity in earnings (loss) of unconsolidated investees

1,732

(17,352)

7,169

3,061

Earnings before income taxes

$

15,019

$

554,702

$

233,841

$

606,673

Income tax expense

1,483

114,809

43,842

121,096

Net earnings

$

13,536

$

439,893

$

189,999

$

485,577

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

For the Three Months

For the Nine Months

Net Premiums Earned

Ended September 30,

Ended September 30,

(in thousands)

 

2023

 

2022

 

2023

 

2022

Casualty

Commercial excess and personal umbrella

$

72,559

$

65,131

$

209,402

$

187,666

General liability

25,250

25,284

77,166

74,130

Commercial transportation

25,843

24,205

76,473

71,774

Professional services

24,882

24,174

73,841

71,590

Small commercial

18,096

17,005

54,492

50,463

Executive products

5,943

6,556

18,449

20,208

Other casualty

16,732

17,260

52,561

52,663

Total

$

189,305

$

179,615

$

562,384

$

528,494

Property

Commercial property

$

63,783

$

43,201

$

173,264

$

115,419

Marine

33,436

29,592

96,484

84,499

Other property

(2,231)

8,051

15,848

23,056

Total

$

94,988

$

80,844

$

285,596

$

222,974

Surety

Commercial

$

12,653

$

12,057

$

37,576

$

35,423

Miscellaneous

11,966

10,751

35,900

33,691

Contract

9,497

8,201

26,956

22,848

Total

$

34,116

$

31,009

$

100,432

$

91,962

Grand Total

$

318,409

$

291,468

$

948,412

$

843,430

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8. 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 costs for future minimum lease payments are recognized on a straight-line basis over the lease terms. Variable lease costs are expensed in the period in which the obligations are 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 nine-month periods ended September 30, 2023 and 2022 were as follows:

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

(in thousands)

 

2023

 

2022

 

2023

 

2022

Operating lease cost

$

1,235

$

1,272

$

3,743

$

3,686

Variable lease cost

320

339

1,202

1,073

Sublease income

(139)

(139)

(416)

(416)

Total lease cost

$

1,416

$

1,472

$

4,529

$

4,343

Cash paid for amounts included in measurement of lease liabilities

Operating cash outflows from operating leases

$

1,431

$

1,387

$

4,186

$

3,987

ROU assets obtained in exchange for new operating lease liabilities

$

319

$

54

$

1,303

$

2,485

Reduction to ROU assets resulting from reduction to lease liabilities

$

$

$

200

$

Other non-cash reductions to ROU assets

$

$

$

$

73

(in thousands)

 

September 30, 2023

 

December 31, 2022

Operating lease ROU assets

$

10,339

$

12,766

Operating lease liabilities

$

11,593

$

14,499

Weighted-average remaining lease term - operating leases

4.16

years 

4.21

years

Weighted-average discount rate - operating leases

2.06

%

2.11

%

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

(in thousands)

 

September 30, 2023

2023

$

1,205

2024

3,919

2025

2,709

2026

1,744

2027

997

2028

704

Thereafter

884

Total future minimum lease payments

$

12,162

Less imputed interest

(569)

Total operating lease liability

$

11,593

9. 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

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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 management liability 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 in Hawaii. 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.

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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 onshore and offshore energy, petrochemical and refining industries. We also offer a variety of miscellaneous bonds including, but not limited to: 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 commercial contractors’ contractual obligations for a specific construction 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 7 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 Nine Months

Ended September 30,

Ended September 30,

(in thousands)

 

2023

 

2022

 

2023

 

2022

Net earnings

$

13,536

$

439,893

$

189,999

$

485,577

Income tax expense

1,483

114,809

43,842

121,096

Earnings before income taxes

$

15,019

$

554,702

$

233,841

$

606,673

Equity in (earnings) loss of unconsolidated investees

(1,732)

17,352

(7,169)

(3,061)

General corporate expenses

2,372

2,755

10,805

8,553

Interest expense on debt

1,873

2,013

5,928

6,034

Net unrealized (gains) losses on equity securities

25,236

26,414

(15,474)

155,218

Net realized gains

(6,558)

(573,170)

(26,758)

(591,562)

Net investment income

(31,963)

(21,270)

(87,835)

(57,625)

Net underwriting income

$

4,247

$

8,796

$

113,338

$

124,230

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.

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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, 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

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Net premiums earned increased 12 percent, with all segments contributing to the growth. Positive market performance resulted in $15 million of unrealized gains on equity securities in the first nine months of 2023, while overall market declines resulted in $155 million of unrealized losses in 2022. Investment income was up 52 percent, due to an increased average asset base and higher interest rates relative to the prior year. Realized gains during the first nine months of 2023 were comprised of $16 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 $20 million of realized gains on the equity portfolio, $3 million of realized losses on the fixed income portfolio and $574 million of realized gains from the sale of our investment in Maui Jim in the previous year.

For the Nine Months

Ended September 30,

Consolidated Revenues (in thousands)

 

2023

 

2022

Net premiums earned

$

948,412

$

843,430

Net investment income

87,835

57,625

Net realized gains

26,758

591,562

Net unrealized gains (losses) on equity securities

15,474

(155,218)

Total consolidated revenue

$

1,078,479

$

1,337,399

Net earnings for the first nine months of 2023 totaled $190 million, compared to $486 million for the same period in 2022. The decrease for 2023 was primarily attributed to the $437.7 million of after-tax earnings recognized from the sale of our equity method investment in Maui Jim in 2022. The impact was partially offset by the $25 million of net after-tax realized and unrealized gains on equity securities, compared to $107 million of after-tax realized and unrealized losses in 2022. Underwriting results for 2023 were impacted by $52 million of pretax losses and $14 million of reinstatement premium from the Hawaiian wildfires, as well as $27 million of storm losses. Comparatively, 2022 included $40 million of pretax hurricane losses and $5 million of pretax storm losses. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $94 million in the first nine months of 2023, compared to $103 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 $113 million on an 88.0 combined ratio for the first nine months of 2023, compared to $124 million on an 85.3 combined ratio in the same period of 2022. The loss ratio increased to 48.3 from 46.1, due to higher levels of catastrophe losses in 2023. The expense ratio increased to 39.7 from 39.2, as improved year to date metrics 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 experiences and drive efficiencies, which impacted all segments.

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Table of Contents

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 nine months of 2023, we recognized $7 million of investee earnings from Prime. Comparatively, the first nine months of 2022 reflected $9 million of investee earnings from Prime and $3 million of investee losses for Maui Jim, primarily due to transaction related expenses from the sale of Maui Jim in the third quarter of 2022.

Comprehensive earnings totaled $151 million for the first nine months of 2023, compared to $191 million for the first nine months of 2022. Other comprehensive earnings (loss) primarily included net after-tax unrealized losses from the fixed income portfolio. Other comprehensive loss of $39 million in the first nine months of 2023 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio. Comparatively, $294 million of other comprehensive loss was recognized in 2022, as interest rates increased.

Premiums

Gross premiums written increased $191 million for the first nine 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 $105 million, driven by products in our property and casualty segments.

Gross Premiums Written

Net Premiums Earned

For the Nine Months

For the Nine Months

Ended September 30,

Ended September 30,

(in thousands)

 

2023

 

2022

 

% Change

 

2023

 

2022

 

% Change

Casualty

Commercial excess and personal umbrella

$

276,592

$

247,750

12

%

$

209,402

$

187,666

12

%

General liability

80,160

84,405

(5)

%

77,166

74,130

4

%

Commercial transportation

96,156

98,691

(3)

%

76,473

71,774

7

%

Professional services

83,634

79,406

5

%

73,841

71,590

3

%

Small commercial

59,655

55,529

7

%

54,492

50,463

8

%

Executive products

66,581

73,307

(9)

%

18,449

20,208

(9)

%

Other casualty

60,420

65,414

(8)

%

52,561

52,663

(0)

%

Total

$

723,198

$

704,502

3

%

$

562,384

$

528,494

6

%

Property

Commercial property

$

395,979

$

241,800

64

%

$

173,264

$

115,419

50

%

Marine

111,205

100,923

10

%

96,484

84,499

14

%

Other property

32,141

28,806

12

%

15,848

23,056

(31)

%

Total

$

539,325

$

371,529

45

%

$

285,596

$

222,974

28

%

Surety

Commercial

$

40,968

$

39,560

4

%

$

37,576

$

35,423

6

%

Miscellaneous

38,554

38,394

0

%

35,900

33,691

7

%

Contract

30,255

27,713

9

%

26,956

22,848

18

%

Total

$

109,777

$

105,667

4

%

$

100,432

$

91,962

9

%

Grand Total

$

1,372,300

$

1,181,698

16

%

$

948,412

$

843,430

12

%

Casualty

Gross premiums written for the casualty segment increased $19 million in the first nine months of 2023. Continued new business growth across our personal umbrella and small commercial distribution channels, as well as positive rate movement across a large portion of our casualty segment, offset challenging conditions some lines experienced during the first nine months. We are running off our energy liability business, which resulted in a $19 million decrease within the commercial excess and general liability products. Executive products premium decreased as a result of a more competitive market, particularly with public directors and officers coverages. Additionally, commercial transportation premium decreased, as trucking companies’ revenues are down compared to last year and there is some consolidation underway in the bus industry. 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.

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Table of Contents

Property

Gross premiums written for the property segment increased $168 million in the first nine months of 2023. Our commercial property business was up $154 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.

Surety

Gross premiums written for the surety segment increased $4 million for the first nine 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 Nine Months

Ended September 30,

 

2023

 

2022

Underwriting Income (in thousands)

Casualty

$

57,478

$

60,418

Property

33,589

40,273

Surety

22,271

23,539

Total

$

113,338

$

124,230

Combined Ratio

Casualty

89.8

88.6

Property

88.2

81.9

Surety

77.8

74.4

Total

88.0

85.3

Casualty

The casualty segment recorded underwriting income of $57 million in the first nine months of 2023, compared to $60 million for the same period last year. Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $69 million, primarily on accident years 2015 through 2018 and 2020 through 2022. Favorable development was widespread, with notable amounts from commercial excess, executive products, general liability, personal umbrella and professional services. In comparison, $73 million of prior accident years’ reserves were released in the first nine months of 2022. General liability, professional services, transportation, executive products and commercial excess were drivers of the favorable development in 2022. Offsetting the favorable development, storm losses on casualty-oriented package policies that include property coverage resulted in $2 million of losses in 2023 and $8 million of losses in 2022.

The combined ratio for the casualty segment was 89.8 in 2023, compared to 88.6 in 2022. The segment’s loss ratio was 52.7 in 2023, down from 52.8 in 2022. The expense ratio for the casualty segment was 37.1, up from 35.8 for the same period last year. The increase in expense ratio was the result of continued investments in technology and people to support growth and improve customer experiences.

Property

The property segment recorded underwriting income of $34 million for the first nine months of 2023, compared to $40 million for the same period last year. Underwriting results for 2023 included $17 million of favorable development on prior years’ loss and catastrophe reserves, $25 million of storm losses, as well as $52 million of losses and $14 million of reinstatement premium from the Hawaiian wildfires. Comparatively, the 2022 underwriting results included $21 million of favorable development on prior years’ loss and catastrophe reserves, $33 million of hurricane losses and $5 million of other storm losses.

Underwriting results for the first nine months of 2023 translated into a combined ratio of 88.2, compared to 81.9 for the same period last year. The segment’s loss ratio was 52.3 in 2023, up from 44.9 in 2022, due to an increase in catastrophe losses. The segment’s expense ratio decreased to 35.9 in 2023 from 37.0 in the prior year, as the growth in the earned premium base exceeded the growth in expense.

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Table of Contents

Surety

The surety segment recorded underwriting income of $22 million for the first nine months of 2023, compared to $24 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 accident years’ reserves, which decreased loss and settlement expenses for the segment by $8 million. Results for 2022 included $9 million of favorable development on prior accident years’ reserves.

The combined ratio for the surety segment totaled 77.8 for the first nine months of 2023, compared to 74.4 for the same period in 2022. The segment’s loss ratio increased to 11.8 in 2023, up from 10.4 in 2022, due to lower levels of favorable prior accident years’ reserve development. The expense ratio was 66.0, up from 64.0 in the prior year.

Investment Income

Our investment portfolio generated net investment income of $88 million during the first nine months of 2023, an increase of 52 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 nine months of 2023 and 2022 were as follows:

 

2023

 

 

2022

Pretax Yield

Taxable

3.45

%

2.82

%

Tax-Exempt

2.79

%

2.67

%

After-Tax Yield

Taxable

2.73

%

2.23

%

Tax-Exempt

2.64

%

2.53

%

The following table depicts the composition of our investment portfolio at September 30, 2023 as compared to December 31, 2022:

(in thousands)

 

September 30, 2023

 

December 31, 2022

Fixed income

$

2,717,627

 

78.7

%

$

2,666,950

 

81.5

%

Equity securities

534,436

15.5

%

498,382

15.2

%

Short-term investments

125,032

3.6

%

36,229

1.1

%

Other invested assets

59,730

1.7

%

47,922

1.5

%

Cash

18,445

0.5

%

22,818

0.7

%

Total investments and cash

$

3,455,270

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 $51 million in the first nine months of 2023. Average fixed income duration was 4.6 years at September 30, 2023, reflecting our liability structure and sound capital position. The equity portfolio increased by $36 million during the first nine months of 2023, due to the positive performance of equity markets. Short-term investments increased by $89 million, as improved yields made AAA-rated government money market funds an investable asset class.

Income Taxes

Our effective tax rate for the first nine months of 2023 was 18.7 percent, compared to 20.0 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 lower for the nine-month period in 2023, as lower pretax income increased the percentage impact of tax-favored adjustments, such as tax credits and excess tax benefits on share-based compensation.

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Table of Contents

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

Net premiums earned increased 9 percent, with all segments contributing to the growth. Overall equity market declines resulted in $25 million of unrealized losses on equity securities in the third quarter of 2023, compared to $26 million in the third quarter of 2022. Investment income was up 50 percent, due to an increased average asset base and higher interest rates relative to the prior year. Realized gains during the third quarter of 2023 were comprised of $7 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 less than $1 million of realized gains on the equity portfolio, $2 million of realized losses on the fixed income portfolio and a $574 million gain from the sale of Maui Jim in the same period of 2022.

For the Three Months

Ended September 30,

Consolidated Revenues (in thousands)

 

2023

 

2022

Net premiums earned

$

318,409

$

291,468

Net investment income

31,963

21,270

Net realized gains

6,558

573,170

Net unrealized gains (losses) on equity securities

(25,236)

(26,414)

Total consolidated revenue

$

331,694

$

859,494

Net earnings for the third quarter of 2023 totaled $14 million, compared to $440 million for the same period in 2022. The decrease for 2023 was primarily attributed to the $437.7 million of after-tax earnings recognized from the sale of our equity method investment in Maui Jim in 2022. Underwriting results for 2023 were impacted by $52 million of pretax losses and $14 million of reinstatement premium from the Hawaiian wildfires, as well as $5 million of storm losses. Comparatively, 2022 included $40 million of pretax hurricane losses. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $22 million in the third quarter of 2023, compared to $33 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 $4 million on a 98.7 combined ratio for the third quarter of 2023, compared to $9 million on a 97.0 combined ratio in the same period of 2022. The loss ratio increased to 59.5 from 56.6, due to higher net retained catastrophe losses and lower levels of favorable development on prior years’ loss reserves in 2023. The expense ratio decreased to 39.2 from 40.4, with 2023 benefiting from a larger earned premium base.

In the third quarter of 2023, we recognized $2 million of investee earnings from Prime. Comparatively, the third quarter of 2022 reflected investee earnings of $3 million from Prime and $18 million of investee losses from Maui Jim, primarily due to transaction related expenses from the sale of the company in the third quarter of 2022.

Comprehensive loss totaled $43 million for the third quarter of 2023, compared to $359 million in comprehensive earnings for the same period of 2022. Other comprehensive earnings (loss) primarily included net after-tax unrealized losses from the fixed income portfolio. Other comprehensive loss of $57 million in the third quarter of 2023 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio. Comparatively, $81 million of other comprehensive loss was recognized in 2022, as interest rates increased.

Premiums

Gross premiums written increased $46 million for the third quarter of 2023, compared to the same period of 2022. Growth was achieved from the property and casualty segments. Net premiums earned increased $27 million, driven by products in our property and casualty segments.

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Table of Contents

Gross Premiums Written

Net Premiums Earned

For the Three Months

For the Three Months

Ended September 30,

Ended September 30,

(in thousands)

 

2023

 

2022

 

% Change

 

2023

 

2022

 

% Change

Casualty

Commercial excess and personal umbrella

$

99,752

$

84,452

18

%

$

72,559

$

65,131

11

%

General liability

24,548

25,213

(3)

%

25,250

25,284

(0)

%

Commercial transportation

37,441

38,099

(2)

%

25,843

24,205

7

%

Professional services

28,352

27,016

5

%

24,882

24,174

3

%

Small commercial

19,409

18,592

4

%

18,096

17,005

6

%

Executive products

26,236

27,685

(5)

%

5,943

6,556

(9)

%

Other casualty

18,569

19,309

(4)

%

16,732

17,260

(3)

%

Total

$

254,307

$

240,366

6

%

$

189,305

$

179,615

5

%

Property

Commercial property

$

111,034

$

79,652

39

%

$

63,783

$

43,201

48

%

Marine

36,235

35,927

1

%

33,436

29,592

13

%

Other property

11,321

10,504

8

%

(2,231)

8,051

(128)

%

Total

$

158,590

$

126,083

26

%

$

94,988

$

80,844

17

%

Surety

Commercial

$

13,929

$

14,330

(3)

%

$

12,653

$

12,057

5

%

Miscellaneous

12,733

12,580

1

%

11,966

10,751

11

%

Contract

9,765

10,391

(6)

%

9,497

8,201

16

%

Total

$

36,427

$

37,301

(2)

%

$

34,116

$

31,009

10

%

Grand Total

$

449,324

$

403,750

11

%

$

318,409

$

291,468

9

%

Casualty

Gross premiums written for the casualty segment increased $14 million in the third quarter of 2023. Continued momentum with our personal umbrella distribution base offset challenging conditions some lines experienced during the third quarter. The runoff of our energy liability business resulted in a $5 million decrease within the commercial excess and general liability products for the quarter. 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 increased $33 million in the third quarter of 2023. Our commercial property business grew by $31 million. Continued rate increases on wind exposures has allowed us to achieve this result with limited exposure growth, while also strengthening terms and conditions. Net premiums earned are negative for other property in 2023, as a result of the $14 million of reinstatement premium recorded for Hawaiian wildfires.

Surety

Gross premiums written for the surety segment decreased $1 million for the third quarter of 2023. The decline in commercial surety was due to the timing of select renewals that shifted to the fourth quarter. While public sector construction appears to be holding steady, private sector construction has slowed, which led to declines in contract surety.

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Table of Contents

Underwriting Income (Loss)

For the Three Months

Ended September 30,

 

2023

 

2022

Underwriting Income (Loss) (in thousands)

Casualty

$

18,670

$

11,329

Property

(20,671)

(8,308)

Surety

6,248

5,775

Total

$

4,247

$

8,796

Combined Ratio

Casualty

90.1

93.7

Property

121.8

110.3

Surety

81.7

81.4

Total

98.7

97.0

Casualty

The casualty segment recorded underwriting income of $19 million in the third quarter of 2023, compared to $11 million for the same period last year. Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $22 million, primarily on accident years 2015 through 2017 and 2020 through 2022. Favorable development was widespread, with notable amounts from our executive products, commercial excess, general liability and personal umbrella products. In comparison, $28 million of prior accident years’ reserves were released in the third quarter of 2022. General liability, commercial excess and executive products were drivers of the favorable development in 2022. Storm losses on casualty-oriented package policies that include property coverage offset the favorable development and resulted in $0.5 million of losses in 2023 and $7.0 million of losses in 2022.

The combined ratio for the casualty segment was 90.1 in 2023, compared to 93.7 in 2022. The segment’s loss ratio was 53.7 in 2023, down from 56.1 in 2022. The decrease in loss ratio was attributable to improved results in the current accident year, which included lower levels of storm losses. The expense ratio for the casualty segment was 36.4, down from 37.6 for the same period last year, as the growth in the earned premium base exceeded the growth in expense for all segments.

Property

The property segment recorded $21 million of underwriting loss for the third quarter of 2023, compared to $8 million of underwriting loss for the same period last year. Underwriting results for 2023 included $0.4 million of unfavorable development on prior years’ loss and catastrophe reserves, $5 million of storm losses, as well as $52 million of losses and $14 million of reinstatement premium from the Hawaiian wildfires. Comparatively, the 2022 underwriting results included $3 million of favorable development on prior years’ loss and catastrophe reserves and $33 million of hurricane losses.

Underwriting results for the third quarter of 2023 translated into a combined ratio of 121.8, compared to 110.3 for the same period last year. The segment’s loss ratio was 86.3 in 2023, up from 73.4 in 2022, due to the increase in catastrophe losses. The segment’s expense ratio decreased to 35.5 in 2023 from 36.9 in the prior year.

Surety

The surety segment recorded underwriting income of $6 million for the third 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 $1 million, compared to $2 million in 2022.

The combined ratio for the surety segment totaled 81.7 for the third quarter of 2023, compared to 81.4 for the same period in 2022. The segment’s loss ratio was 17.2 in 2023, up from 16.2 in 2022, due to lower levels of prior accident year reserve releases. The expense ratio was 64.5, down from 65.2 in the prior year.

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Table of Contents

Investment Income

Our investment portfolio generated net investment income of $32 million during the third quarter of 2023, an increase of 50 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 third quarter of 2023 and 2022 were as follows:

 

2023

 

2022

Pretax Yield

Taxable

3.54

%

2.91

%

Tax-Exempt

2.81

%

2.69

%

After-Tax Yield

Taxable

2.80

%

2.30

%

Tax-Exempt

2.66

%

2.55

%

Income Taxes

Our effective tax rate for the third quarter of 2023 was 9.9 percent, compared to 20.7 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 lower for the third quarter of 2023, as lower pretax income increased the percentage impact of tax-favored adjustments, such as tax credits and excess tax benefits on share-based compensation.

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 nine-month periods ended September 30, 2023 and 2022:

(in thousands)

 

2023

 

2022

Operating cash flows

$

342,192

$

282,886

Investing cash flows

(211,473)

384,536

Financing cash flows

(135,092)

(32,715)

Total

$

(4,373)

$

634,707

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 nine months of 2023 benefited from increased premium receipts relative to the first nine months of 2022, but were also impacted by elevated levels of loss and settlement expense payments. Investing cash flows in 2022 reflect the cash received from the sale of our investment in Maui Jim at the end of the third quarter. Given proceeds from the sale were received on September 30, 2022, only a portion of the funds could be reinvested prior to the end of the quarter.

As of September 30, 2023, we had $100 million in debt outstanding. On September 15, 2023, we retired $150 million in senior notes that were originally issued in 2013. Additionally, on September 15, 2023, we accessed $50 million from our revolving line of credit with PNC Bank, N.A. (PNC). The borrowing may be repaid at any time and carries a floating interest rate of 7.07 percent which will reset during the first quarter of 2024. The credit facility with PNC 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. The line of credit permits us to borrow up to an aggregate principal amount of $100 million, but may be increased up to an aggregate principal amount of $130 million under certain conditions. The facility has a three-year term that expires on May 29, 2026. Further, 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.

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Table of Contents

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 September 30, 2023, $57 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility.

As of September 30, 2023, we had cash and other investments maturing within one year of approximately $318 million and an additional $892 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.

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 September 30, 2023 have increased $183 million from December 31, 2022. As of September 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

$

334,650

$

321,611

$

(13,039)

9.3

%

AA+

U.S. agency

51,477

48,368

(3,109)

1.4

%

AA+

Non-U.S. government & agency

4,800

3,811

(989)

0.1

%

BBB+

Agency MBS

457,496

399,381

(58,115)

11.6

%

AA+

ABS/CMBS/MBS**

302,659

265,779

(36,880)

7.7

%

AA+

Corporate

1,253,152

1,153,384

(99,768)

33.4

%

A-

Municipal

642,551

525,293

(117,258)

15.2

%

AA

Total fixed income

$

3,046,785

$

2,717,627

$

(329,158)

78.7

%

AA-

Equity

347,772

534,436

186,664

15.5

%

Short-term investments

125,032

125,032

3.6

%

Other invested assets

56,617

59,730

3,113

1.7

%

Cash

18,445

18,445

0.5

%

Total portfolio

$

3,594,651

$

3,455,270

$

(139,381)

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 September 30, 2023, our fixed income portfolio had the following rating distribution:

 

Below

Investment

AAA

AA

A

BBB

Grade

No Rating

Fair Value

U.S. government

-

321,611

-

-

-

-

321,611

U.S. agency

-

48,368

-

-

-

-

48,368

Non-U.S. government & agency

-

-

1,640

2,171

-

-

3,811

Agency MBS

-

399,381

-

-

-

-

399,381

ABS/CMBS/MBS*

169,828

23,651

53,831

-

-

18,469

265,779

Corporate

30,231

109,213

488,165

321,356

141,027

63,392

1,153,384

Municipal

132,118

340,260

52,915

-

-

-

525,293

Total

332,177

1,242,484

596,551

323,527

141,027

81,861

2,717,627

*

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

As of September 30, 2023, our fixed income portfolio remained well diversified, with 1,783 individual issues.

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Our investment portfolio has limited exposure to structured asset-backed securities. As of September 30, 2023, we had $146 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 September 30, 2023, we had $119 million in commercial and non-agency mortgage-backed securities and $399 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 7.7 percent of our investment portfolio at quarter end.

We had $1,153 million in corporate fixed income securities as of September 30, 2023, which includes $112 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 September 30, 2023, our equity portfolio had a dividend yield of 2.4 percent, compared to 1.6 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 84 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 $56 million of investments in unconsolidated investees at September 30, 2023, compared to $58 million at December 31, 2022.

Our investment portfolio does not have any exposure to derivatives.

As of September 30, 2023, our capital structure consisted of $100 million in debt and $1.3 billion of shareholders’ equity. Debt outstanding comprised 7 percent of total capital as of September 30, 2023. Interest and fees on debt obligations totaled $6 million for the first nine months of 2023 and 2022. We incurred interest expense on debt at an average annual interest rate of 3.90 percent during the first nine months of 2023, compared to 3.89 percent during the same period last year.

We paid a regular quarterly cash dividend of $0.27 per share on September 20, 2023, the same amount as 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 September 30, 2023, our holding company had $1.3 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 $156 million in liquid assets. 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.

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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 nine months of 2023, RLI Ins. paid $45 million in ordinary dividends to RLI Corp. In 2022, our principal insurance subsidiary paid ordinary dividends totaling $13 million. As of September 30, 2023, $105 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.

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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. In 2023, our Board of Directors terminated the share repurchase program. We did not repurchase any shares during 2023.

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 September 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

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.

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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: October 25, 2023

36