RLI CORP - Quarter Report: 2024 March (Form 10-Q)

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-Month Periods Ended March 31, 2024 and 2023 (unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023 (unaudited)	4
	Condensed Consolidated Statements of Shareholders’ Equity for the Three-Month Periods Ended March 31, 2024 and 2023 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2024 and 2023 (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	31
Item 4.	Controls and Procedures	31
Part II - Other Information		32
Item 1.	Legal Proceedings	32
Item 1a.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
Signatures		33

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
	Ended March 31,
(in thousands, except per share data)	2024		2023
Net premiums earned	$		$
Net investment income
Net realized gains
Net unrealized gains on equity securities
Consolidated revenue	$		$
Losses and settlement expenses
Policy acquisition costs
Insurance operating expenses
Interest expense on debt
General corporate expenses
Total expenses	$		$
Equity in earnings of unconsolidated investees
Earnings before income taxes	$		$
Income tax expense
Net earnings	$		$

Other comprehensive earnings (loss), net of tax		()
Comprehensive earnings	$		$

Basic net earnings per share	$		$
Diluted net earnings per share	$		$

Weighted average number of common shares outstanding:
Basic
Diluted

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

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RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)


	March 31,		December 31,
(in thousands, except share and per share data)	2024		2023
ASSETS
Investments and cash:
Fixed income:
Available-for-sale, at fair value	$		$
(amortized cost of $ and allowance for credit losses of $ at 3/31/24)
(amortized cost of $ and allowance for credit losses of $ at 12/31/23)
Equity securities, at fair value (cost - $ at 3/31/24 and $ at 12/31/23)
Short-term investments, at cost which approximates fair value
Other invested assets
Cash
Total investments and cash	$		$
Accrued investment income
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $ at 3/31/24 and $ at 12/31/23
Ceded unearned premium
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $ at 3/31/24 and $ at 12/31/23
Deferred policy acquisition costs
Property and equipment, at cost, net of accumulated depreciation of $ at 3/31/24 and $ at 12/31/23
Investment in unconsolidated investees
Goodwill and intangibles
Income taxes-deferred
Other assets
TOTAL ASSETS	$		$

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Unpaid losses and settlement expenses	$		$
Unearned premiums
Reinsurance balances payable
Funds held
Income taxes-current
Debt
Accrued expenses
Other liabilities
TOTAL LIABILITIES	$		$

Shareholders’ Equity
Common stock ($ par value)
(Shares authorized - )
( shares issued, shares outstanding at 3/31/24)
( shares issued, shares outstanding at 12/31/23)	$		$
Paid-in capital
Accumulated other comprehensive earnings (loss)		()		()
Retained earnings
Deferred compensation
Less: Treasury shares, at cost ( shares at 3/31/24 and 12/31/23)		()		()
TOTAL SHAREHOLDERS’ EQUITY	$		$
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$		$

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, 2023

$

()

$

()

Cumulative-effect adjustment from ASU 2023-02

—

()

—

()

—

Net earnings

—

Other comprehensive earnings (loss), net of tax

—

Deferred compensation

—

()

Share-based compensation

—

Dividends and dividend equivalents ($ per share)

—

()

—

()

—

Balance, March 31, 2023

$

()

$

()

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, 2024

$

()

$

()

Net earnings

—

Other comprehensive earnings (loss), net of tax

—

()

—

()

—

Deferred compensation

—

()

Share-based compensation

—

Dividends and dividend equivalents ($ per share)

—

()

—

()

—

Balance, March 31, 2024

$

()

$

()

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 Three Months
	Ended March 31,
(in thousands)	2024		2023
Net cash provided by operating activities	$		$
Cash Flows from Investing Activities
Purchase of:
Fixed income securities, available-for-sale	$	()	$	()
Equity securities		()		()
Property and equipment		()		()
Other		()		()
Proceeds from sale of:
Fixed income securities, available-for-sale
Equity securities
Equity method investments		—
Other
Proceeds from call or maturity of:
Fixed income securities, available-for-sale
Net proceeds from sale (purchase) of short-term investments		()		()
Net cash used in investing activities	$	()	$	()
Cash Flows from Financing Activities
Cash dividends paid	$	()	$	()
Proceeds from stock option exercises
Net cash used in financing activities	$	()	$	()
Net increase (decrease) in cash	$		$	()
Cash at the beginning of the period
Cash at March 31,	$		$

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

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million and $ million, respectively, at March 31, 2024 and December 31, 2023. 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. write-offs were applied to the allowances in the first three months of 2024 and less than $ million was recovered.

$

Casualty

Total goodwill

$

Indefinite-lived intangibles

Total goodwill and intangibles

$

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, of the assets were impaired. In addition, there were no triggering events as of March 31, 2024 that would suggest an updated impairment test would be needed for our goodwill and intangible assets.

$

Effect of Dilutive Securities

Stock options and restricted stock units

—

Diluted EPS

Earnings available to common shareholders

$

Anti-dilutive securities excluded from diluted EPS

—

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percent. Other comprehensive earnings (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax benefit of $ million for the first quarter of 2024, compared to $ million of tax expense for the same period in 2023.

Unrealized losses, net of tax, recognized in other comprehensive earnings (loss) were $ million for the first three months of 2024, compared to $ million of unrealized gains, net of tax, during the same period last year. The unrealized losses in the first quarter of 2024 were attributable to an increase in interest rates, which decreased the fair value of securities held in the fixed income portfolio, compared to declining interest rates during the first quarter of 2023, which increased the fair value of fixed income securities.

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

)

$

()

Other comprehensive earnings (loss) before reclassifications

()

Amounts reclassified from accumulated other comprehensive earnings

Net current-period other comprehensive earnings (loss)

$

()

$

Ending balance

$

()

$

()

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

$

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:

)

$

()

Net realized gains (losses)

()

Credit gains (losses) presented within net realized gains

$

()

$

()

Earnings (loss) before income taxes

Income tax (expense) benefit

$

()

$

()

Net earnings (loss)

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$

()

$

()

Equity securities

()

2023

Fixed income securities - available-for-sale

$

()

$

()

Equity securities

()

Calls/Maturities

Gross Realized

Net Realized

(in thousands)

Proceeds

Gains

Losses

Gain (Loss)

2024

Fixed income securities - available-for-sale

$

()

$

()

2023

Fixed income securities - available-for-sale

$

()

$

()

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 are summarized below:

$

—

$

U.S. agency

—

Non-U.S. government & agency

—

Agency MBS

—

ABS/CMBS/MBS*

—

Corporate

—

Municipal

—

Total fixed income securities - available-for-sale

$

—

$

Equity securities

—

Total

$

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

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$

—

$

U.S. agency

—

Non-U.S. government & agency

—

Agency MBS

—

ABS/CMBS/MBS*

—

Corporate

—

Municipal

—

Total fixed income securities - available-for-sale

$

—

$

Equity securities

—

Total

$

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

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

Net realized and unrealized gains (losses)

Included in other comprehensive earnings (loss)

()

Purchases

Sales / Calls / Maturities

()

Balance as of March 31, 2024

$

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

$

()

The amortized cost and fair value of available-for-sale fixed income securities by contractual maturity as of March 31, 2024 were as follows:

$

Due after one year through five years

Due after five years through 10 years

Due after 10 years

ABS/CMBS/MBS*

Total available-for-sale

$

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

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million and $ million of accrued interest receivable as of March 31, 2024 and December 31, 2023, respectively.

$

—

$

()

$

U.S. agency

—

()

Non-U.S. government & agency

—

()

Agency MBS

—

()

ABS/CMBS/MBS*

()

Corporate

()

Municipal

—

()

Total Fixed Income

$

()

$

()

$

December 31, 2023

Cost or

Allowance

Gross

Amortized

for Credit

Unrealized

Fair

(in thousands)

Cost

Losses

Gains

Losses

Value

U.S. government

$

—

$

()

$

U.S. agency

—

()

Non-U.S. government & agency

—

()

Agency MBS

—

()

ABS/CMBS/MBS*

()

Corporate

()

Municipal

—

()

Total Fixed Income

$

()

$

()

$

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

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 March 31, 2024, the discounted cash flow analysis resulted in an allowance for credit losses on securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:

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$

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

Reduction from securities sold during the period

()

—

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

()

Balance as of March 31,

$

We recognized $ million of losses on securities for which we no longer had the intent to hold until recovery during the first three months of 2023. such losses were recognized during the first three months of 2024.

As of March 31, 2024, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $ million in associated unrealized losses represents percent of the fixed income portfolio’s cost basis and percent of total invested assets. Isolated to these securities, unrealized losses increased slightly through the first three months of 2024, as interest rates increased during the period. Of the total securities, 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 March 31, 2024 and December 31, 2023 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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$

Amortized cost

Unrealized loss

$

()

$

()

$

()

$

()

$

()

$

()

U.S. agency

Fair value

$

Amortized cost

Unrealized loss

$

()

$

()

$

()

$

()

$

()

$

()

Non-U.S. government

Fair value

$

—

$

—

$

Amortized cost

—

Unrealized Loss

$

—

$

()

$

()

$

—

$

()

$

()

Agency MBS

Fair value

$

Amortized cost

Unrealized loss

$

()

$

()

$

()

$

()

$

()

$

()

ABS/CMBS/MBS*

Fair value

$

Amortized cost

Unrealized loss

$

()

$

()

$

()

$

()

$

()

$

()

Corporate

Fair value

$

Amortized cost

Unrealized loss

$

()

$

()

$

()

$

()

$

()

$

()

Municipal

Fair value

$

Amortized cost

Unrealized loss

$

()

$

()

$

()

$

()

$

()

$

()

Total fixed income

Fair value

$

Amortized cost

Unrealized loss

$

()

$

()

$

()

$

()

$

()

$

()

*	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 March 31, 2024 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.

$

()

%

2

BBB

Baa

()

%

3

BB

Ba

()

%

4

B

()

%

5

CCC

Caa

()

%

6

CC or lower

Ca or lower

()

%

Total

$

()

%

Other Invested Assets

We had $ million of other invested assets at March 31, 2024, compared to $ million at December 31, 2023. Other invested assets include investments in low income housing tax credit partnerships (LIHTC) and historic tax credit partnerships (HTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), and investments in private funds. Our LIHTC and

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million at March 31, 2024, compared to $ million on December 31, 2023. Our LIHTC interests recognized amortization of $ million as a component of income tax expense and a total tax benefit of $ million during the first quarter of 2024 and 2023. Our unfunded commitment for our LIHTC investments was less than $ million at March 31, 2024 and will be paid out in installments through 2035.

Our HTC investment had a balance of $ million at March 31, 2024, compared to $ million at December 31, 2023. Our HTC investment recognized $ million of amortization as a component of income tax expense and a total tax benefit of $ million during the first quarter of 2024 and 2023.

As of March 31, 2024, $ 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 March 31, 2024, $ million of borrowings were outstanding with the FHLBC.

Our investments in private funds totaled $ million as of March 31, 2024, down from $ million as of December 31, 2023, and had $ million of associated unfunded commitments at March 31, 2024. 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 $ million of investments in unconsolidated investees at March 31, 2024, compared to $ million at December 31, 2023. At March 31, 2024, our investment in Prime Holdings Insurance Services, Inc. (Prime) was $ million and other investments in unconsolidated investees totaled less than $ million.

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 $ million and $ million, respectively, at March 31, 2024, compared to $ million and $ million, respectively, at December 31, 2023.

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$

Ceded

()

Net

$

Increase (decrease) in incurred losses and LAE

Current accident year

$

Prior accident years

()

Total incurred

$

Loss and LAE payments for claims incurred

Current accident year

$

()

$

()

Prior accident years

()

Total paid

$

()

$

()

Net unpaid losses and LAE at March 31,

$

Unpaid losses and LAE at March 31,

Gross

$

Ceded

()

Net

$

For the first three months of 2024, incurred losses and LAE included $ million of favorable development on prior years’ loss reserves, largely from accident years 2016 through 2019 and 2023. Marine, commercial property, personal umbrella, general liability, executive products, transportation and surety were drivers of the favorable development. No products experienced significant adverse development.

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

percent, compared to percent for the same period in 2023. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective tax rate was higher for the three-month period in 2024, as higher pretax income decreased the percentage impact of tax-favored adjustments.

Income tax expense attributable to income from operations for the three-month period ended March 31, 2024 and 2023 differed from the amounts computed by applying the U.S. federal tax rate of 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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%

$

%

$

%

Increase (reduction) in taxes resulting from:

Excess tax benefit on share-based compensation

()

%

()

%

Tax exempt interest income

()

%

()

%

Dividends received deduction

()

%

()

%

Tax credit

()

%

()

%

ESOP dividends paid deduction

()

%

()

%

Nondeductible expenses

%

Other items, net

%

Total tax expense

$

%

$

%

We have recorded our deferred tax assets and liabilities using the statutory federal tax rate of 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 we believe will generate sufficient taxable income to realize the deferred tax asset.

shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2015 and 2023, we granted 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 shares (subject to adjustment for changes in our capitalization and other events). Since the plan’s approval in 2023, we have granted awards under the 2023 LTIP, including thus far in 2024.

Compensation expense is based on the probable number of awards expected to vest. The total compensation expense related to equity awards was $ million in the three-month period ended March 31, 2024, compared to $ million for the same period in 2023. The total income tax benefit was $ million for the three-month period ended March 31, 2024, compared to $ million for the same period in 2023. Total unrecognized compensation expense relating to outstanding and unvested awards was $ million, which will be recognized over the weighted average vesting period of 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 period and expire 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 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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$

Options granted

Options exercised

()

Options canceled/forfeited

()

Outstanding options at March 31, 2024

$

Exercisable options at March 31, 2024

$

The intrinsic value of options exercised, which is the difference between the fair value and the exercise price, was $ million and $ million during the first three months of 2024 and 2023, 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 March 31:

$

Risk-free interest rates

%

Dividend yield

%

Expected volatility

%

Expected option life

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 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 or greater. For directors, these units vest on the earlier of 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.

$

Granted

Reinvested

Forfeited

()

Nonvested at March 31, 2024

$

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$

Property

Surety

Net premiums earned

$

Net investment income

Net realized gains

Net unrealized gains on equity securities

Total consolidated revenue

$

Net Earnings

(in thousands)

2024

2023

Casualty

$

Property

Surety

Net underwriting income

$

Net investment income

Net realized gains

Net unrealized gains on equity securities

General corporate expense and interest on debt

()

Equity in earnings of unconsolidated investees

Earnings before income taxes

$

Income tax expense

Net earnings

$

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

$

Commercial transportation

General liability

Professional services

Small commercial

Executive products

Other casualty

Total

$

Property

Commercial property

$

Marine

Other property

Total

$

Surety

Transactional

$

Commercial

Contract

Total

$

Grand Total

$

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$

Variable lease cost

Sublease income

()

Total lease cost

$

Cash paid for amounts included in measurement of lease liabilities

Operating cash outflows from operating leases

$

ROU assets obtained in exchange for new operating lease liabilities

$

Reduction to ROU assets resulting from reduction to lease liabilities

$

—

$


(in thousands)	March 31, 2024		December 31, 2023
Operating lease ROU assets	$		$
Operating lease liabilities	$		$
Weighted-average remaining lease term - operating leases		years		years
Weighted-average discount rate - operating leases		%		%

Future minimum lease payments under non-cancellable leases as of March 31, 2024 were as follows:

2025

2026

2027

2028

2029

Thereafter

Total future minimum lease payments

$

Less imputed interest

()

Total operating lease liability

$

million gain that was recorded in the net realized gain line item of the statement of earnings.

21

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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 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 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, 2023 and Part II within this report. Actual results could differ materially from those expressed in, or implied by, these forward looking statements. Forward looking statements reflect the Company’s expectations, plans or forecasts of future events and views as of the date of this report. While the Company may elect to update these forward looking statements at some point in the future, the Company specifically disclaims any obligation to do so. 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 2023, we achieved our 28th consecutive year of underwriting profitability. Over the 28-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 risks through quota share and excess of loss reinsurance agreements. 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, hurricane, earthquake, difference in conditions and marine coverages. We also offer 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 windstorms affecting commercial properties in coastal regions of the United States. 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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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 and energy, including renewable energy. We also offer a variety of transactional 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 components are presented in the statements of earnings but is not subtotaled. However, this information is available in total and by segment in note 6 to the unaudited condensed consolidated interim financial statements in this quarterly report on Form 10-Q, and in note 12 to the consolidated financial statements in our 2023 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
	Ended March 31,
(in thousands)	2024		2023
Net earnings	$	127,900	$	98,811
Income tax expense		32,091		23,980
Earnings before income taxes	$	159,991	$	122,791
Equity in earnings of unconsolidated investees		(4,769)		(3,923)
General corporate expenses		5,010		4,214
Interest expense on debt		1,618		2,008
Net unrealized gains on equity securities		(45,314)		(15,496)
Net realized gains		(5,994)		(14,620)
Net investment income		(32,847)		(27,084)
Net underwriting income	$	77,695	$	67,890

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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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 2023 Annual Report on Form 10-K.

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

RESULTS OF OPERATIONS

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Net premiums earned increased 17 percent, driven by products in our property and casualty segments. Positive market performance resulted in $45 million of unrealized gains on equity securities in the first three months of 2024, compared to $15 million in 2023. Investment income was up 21 percent, due to an increased average asset base and higher interest rates relative to the prior year. Realized gains during the first three months of 2024 were comprised of $7 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, and $1 million of realized losses on the fixed income portfolio. This compares to $2 million of realized gains on the equity portfolio, $2 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) in the previous year.


	For the Three Months
	Ended March 31,
Consolidated Revenues (in thousands)	2024		2023
Net premiums earned	$	360,676	$	307,723
Net investment income		32,847		27,084
Net realized gains		5,994		14,620
Net unrealized gains on equity securities		45,314		15,496
Total consolidated revenue	$	444,831	$	364,923

Underwriting income was $78 million on a 78.5 combined ratio for the first three months of 2024, compared to $68 million on a 77.9 combined ratio in the same period of 2023. A larger earned premium base resulted in higher levels of underwriting income. Underwriting results were impacted by $12 million of pretax storm losses in 2024 and $4 million of pretax storm losses in 2023. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $42 million in the first three months of 2024, compared to $52 million in 2023.

The loss ratio increased to 39.9 from 37.2, due to a decrease in favorable development on prior accident years’ loss reserves and higher levels of catastrophe losses in 2024. The expense ratio decreased to 38.6 from 40.7. Despite continued investments in our people and technology, as well as higher levels of bonus and profit-sharing expenses that resulted from improved operating performance, growth of net premiums earned allowed for improved leveraging of our expense base.

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.

Our equity in earnings of unconsolidated investees primarily relates to our investment in Prime Holdings Insurance Services, Inc. (Prime), a specialty insurance company. We recognized $5 million of investee earnings from Prime in the first three months of 2024, compared to $4 million in 2023.

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Net earnings for the first three months of 2024 totaled $128 million, compared to $99 million for the same period in 2023. Higher levels of underwriting income, investment income and unrealized gains on equity securities all contributed to the improved results.

Comprehensive earnings totaled $115 million for the first three months of 2024, compared to $137 million for the first three months of 2023. Other comprehensive earnings (loss) primarily included net after-tax unrealized gains (losses) from the fixed income portfolio. Other comprehensive loss of $13 million in the first three months of 2024 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio. Comparatively, $38 million of other comprehensive earnings was recognized in 2023, as declining interest rates increased the fair value of securities held in the fixed income portfolio.

Premiums

Gross premiums written increased $54 million for the first three months of 2024, compared to the same period of 2023. Growth was achieved in all three segments. Net premiums earned increased $53 million, driven by products in our property and casualty segments.


	Gross Premiums Written						Net Premiums Earned
	For the Three Months						For the Three Months
	Ended March 31,						Ended March 31,
(in thousands)	2024		2023		% Change		2024		2023		% Change
Casualty
Commercial excess and personal umbrella	$	102,182	$	81,431	25	%	$	80,035	$	67,582	18	%
Commercial transportation		29,129		22,873	27	%		27,301		25,232	8	%
General liability		26,760		24,789	8	%		25,412		25,900	(2)	%
Professional services		26,792		26,189	2	%		25,085		24,357	3	%
Small commercial		21,626		19,959	8	%		18,337		17,941	2	%
Executive products		16,413		17,827	(8)	%		5,915		6,353	(7)	%
Other casualty		22,427		24,766	(9)	%		16,191		18,666	(13)	%
Total	$	245,329	$	217,834	13	%	$	198,276	$	186,031	7	%
Property
Commercial property	$	128,694	$	111,939	15	%	$	87,605	$	49,262	78	%
Marine		40,574		37,189	9	%		32,568		30,636	6	%
Other property		11,096		9,718	14	%		9,238		8,869	4	%
Total	$	180,364	$	158,846	14	%	$	129,411	$	88,767	46	%
Surety
Transactional		14,114		13,347	6	%		12,108		12,047	1	%
Commercial	$	15,631	$	15,096	4	%	$	10,625	$	12,418	(14)	%
Contract		13,237		9,889	34	%		10,256		8,460	21	%
Total	$	42,982	$	38,332	12	%	$	32,989	$	32,925	0	%
Grand Total	$	468,675	$	415,012	13	%	$	360,676	$	307,723	17	%

Casualty

Gross premiums written for the casualty segment increased $27 million in the first three months of 2024. We continued to benefit from positive rate movement across a large portion of our casualty segment, as well as from new business growth across our personal umbrella and small commercial distribution channels. General liability premium grew as we were able to secure new accounts and commercial transportation benefited from an increase in submissions, as well as the timing of a large renewal. However, executive products premium continued to decline as a result of competitive market conditions.

Property

Gross premiums written for the property segment increased $22 million in the first three months of 2024. Our commercial property business was up $17 million, as wind rates continued to increase, though at a more moderate pace than in recent quarters. New opportunities led to $3 million of premium growth for our marine product. Additionally, some competitors have reduced their appetite for select Hawaii homeowner coverages, which has allowed our other property premium to grow.

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Surety

Gross premiums written for the surety segment increased $5 million for the first three months of 2024. Contract surety benefited from new agency relationships, new construction projects and continued increases in material costs.

Underwriting Income


	For the Three Months
	Ended March 31,
	2024		2023
Underwriting Income (in thousands)
Casualty	$	13,674	$	31,831
Property		57,716		28,383
Surety		6,305		7,676
Total	$	77,695	$	67,890

Combined Ratio
Casualty		93.2		82.9
Property		55.3		68.0
Surety		80.8		76.7
Total		78.5		77.9

Casualty

The casualty segment recorded underwriting income of $14 million in the first three months of 2024, compared to $32 million for the same period last year. Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $18 million, primarily on accident years 2016 through 2019 and 2023. Favorable development was widespread, with notable amounts from personal umbrella, general liability, executive products and transportation. In comparison, $36 million of prior accident years’ reserves were released in the first three months of 2023. General liability, professional services, commercial excess, executive products and personal umbrella were drivers of the favorable development in 2023.

The combined ratio for the casualty segment was 93.1 in 2024, compared to 82.9 in 2023. The segment’s loss ratio was 55.2 in 2024, up from 45.5 in 2023. Lower levels of reserve releases on prior accident years resulted in the higher loss ratio in 2024. The expense ratio for the casualty segment was 37.9, up from 37.4 for the same period last year.

Property

The property segment recorded underwriting income of $58 million for the first three months of 2024, compared to $28 million for the same period last year. Underwriting results for 2024 included $19 million of favorable development on prior years’ loss and catastrophe reserves and $12 million of storm losses in the current year. Comparatively, the 2023 underwriting results included $13 million of favorable development on prior years’ loss and catastrophe reserves and $4 million of other storm losses.

Underwriting results for the first three months of 2024 translated into a combined ratio of 55.4, compared to 68.0 for the same period last year. The segment’s loss ratio was 25.2 in 2024, down from 29.8 in 2023. Larger releases on prior years’ loss reserves and low attritional, non-catastrophe losses more than offset the impact of higher storm losses. The segment’s expense ratio decreased to 30.2 in 2024 from 38.2 in the prior year, as the growth in the earned premium base exceeded the growth in expense. Additionally, the expense ratio benefited from an increase in expense override we earn for writing business on behalf of other carriers.

Surety

The surety segment recorded underwriting income of $6 million for the first three months of 2024, compared to $8 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 2024 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $5 million. Results for 2023 included $3 million of favorable development on prior accident years’ reserves. Additionally, $2 million of reinsurance

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reinstatement premium was recorded in 2024 on a prior year loss, which reduced net premiums earned and underwriting income.

The combined ratio for the surety segment totaled 80.9 for the first three months of 2024, compared to 76.7 for the same period in 2023. The segment’s loss ratio was 5.4 in 2024, down from 10.2 in 2023, due to higher levels of favorable prior accident years’ reserve development. The expense ratio was 75.5, up from 66.5 in the prior year. The impact of the reinsurance reinstatement premium on the earned premium base increased the expense ratio by 4.3 points. In addition, the increase in expense ratio was the result of continued investments in technology and people to support growth and improve customer experiences.

Investment Income

Our investment portfolio generated net investment income of $33 million during the first three months of 2024, an increase of 21 percent from that reported for the same period in 2023. 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 three months of 2024 and 2023 were as follows:


	2024		2023
Pretax Yield
Taxable	3.72	%	3.39	%
Tax-Exempt	2.85	%	2.79	%
After-Tax Yield
Taxable	2.94	%	2.68	%
Tax-Exempt	2.70	%	2.64	%

The following table depicts the composition of our investment portfolio at March 31, 2024 as compared to December 31, 2023:


(in thousands)	March 31, 2024				December 31, 2023
Fixed income	$	2,863,321	76.2	%	$	2,855,849	77.7	%
Equity securities		643,367	17.1	%		590,041	16.0	%
Short-term investments		147,186	3.9	%		134,923	3.7	%
Other invested assets		59,273	1.6	%		59,081	1.6	%
Cash		44,557	1.2	%		36,424	1.0	%
Total investments and cash	$	3,757,704	100.0	%	$	3,676,318	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 $7 million in the first three months of 2024. Average fixed income duration was 4.6 years at March 31, 2024, reflecting our liability structure and sound capital position. The equity portfolio increased by $53 million during the first three months of 2024, due to the positive performance of equity markets. Short-term investments increased by $12 million, as improved yields made AAA-rated government money market funds an investable asset class.

Income Taxes

Our effective tax rate for the first three months of 2024 was 20.1 percent, compared to 19.5 percent for the same period in 2023. Effective rates are dependent upon components of pretax earnings or losses and the related tax effects. The effective tax rate was higher for the three-month period in 2024, as higher pretax income decreased 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

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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 three-month periods ended March 31, 2024 and 2023:


(in thousands)	2024		2023
Operating cash flows	$	70,946	$	69,219
Investing cash flows		(53,064)		(57,804)
Financing cash flows		(9,749)		(11,464)
Total	$	8,133	$	(49)

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 three months of 2024 benefited from increased premium receipts relative to the first three months of 2023, but were also impacted by elevated levels of loss and settlement expense payments.

As of March 31, 2024, we had $100 million in debt outstanding. 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 an adjustable interest rate of 6.93 percent, which will reset during the second 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, 2023. The borrowing matures on November 12, 2024. Interest is paid monthly at an annualized rate of 5.44 percent.

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 March 31, 2024, $57 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility.

As of March 31, 2024, we had cash and other investments maturing within one year of approximately $378 million and an additional $879 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.

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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 March 31, 2024 have increased $81 million from December 31, 2023. As of March 31, 2024, 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	$	337,014	$	329,559	$	(7,455)	8.8	%	AA+
U.S. agency		59,956		58,455		(1,501)	1.6	%	AA+
Non-U.S. government & agency		4,800		3,844		(956)	0.1	%	BBB+
Agency MBS		456,358		414,428		(41,930)	11.0	%	AA+
ABS/CMBS/MBS**		315,414		289,476		(25,938)	7.7	%	AA+
Corporate		1,277,258		1,221,047		(56,211)	32.5	%	A-
Municipal		631,473		546,512		(84,961)	14.5	%	AA
Total fixed income	$	3,082,273	$	2,863,321	$	(218,952)	76.2	%	AA-
Equity		362,527		643,367		280,840	17.1	%
Short-term investments		147,186		147,186		—	3.9	%
Other invested assets		55,709		59,273		3,564	1.6	%
Cash		44,557		44,557		—	1.2	%
Total portfolio	$	3,692,252	$	3,757,704	$	65,452	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 March 31, 2024, our fixed income portfolio had the following rating distribution:


					Below
					Investment
	AAA	AA	A	BBB	Grade	No Rating	Fair Value
U.S. government	-	329,559	-	-	-	-	329,559
U.S. agency	-	58,455	-	-	-	-	58,455
Non-U.S. government & agency	-	-	1,680	2,164	-	-	3,844
Agency MBS	-	414,428	-	-	-	-	414,428
ABS/CMBS/MBS*	182,626	23,560	64,620	-	-	18,670	289,476
Corporate	30,905	129,513	523,288	328,119	146,662	62,560	1,221,047
Municipal	142,850	350,658	52,664	-	-	340	546,512
Total	356,381	1,306,173	642,252	330,283	146,662	81,570	2,863,321

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

As of March 31, 2024, our fixed income portfolio remained well diversified, with 1,781 individual issues.

Our investment portfolio has limited exposure to structured asset-backed securities. As of March 31, 2024, we had $148 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 March 31, 2024, we had $139 million in commercial and non-agency mortgage-backed securities and $414 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 $1,221 million in corporate fixed income securities as of March 31, 2024, which includes $115 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.

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The municipal portfolio includes approximately 58 percent taxable securities and 42 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 March 31, 2024, our equity portfolio had a dividend yield of 1.9 percent, compared to 1.4 percent for the S&P 500 index. Because of the corporate dividend-received-deduction applicable to our dividend income, we pay an effective tax rate of 13.1 percent on dividends, compared to 21.0 percent on taxable interest and 5.3 percent on municipal bond interest income. The equity portfolio is managed in a diversified and granular manner, with 85 individual securities and four ETF positions. No single company exposure in the equity portfolio represents more than 1 percent of invested assets.

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

We had $66 million of investments in unconsolidated investees at March 31, 2024, compared to $57 million at December 31, 2023.

Our investment portfolio does not have any exposure to derivatives.

As of March 31, 2024, our capital structure consisted of $100 million in debt and $1.5 billion of shareholders’ equity. Debt outstanding comprised 6 percent of total capital as of March 31, 2024. Interest and fees on debt obligations totaled $2 million for the first three months of 2024 and 2023. We incurred interest expense on debt at an average annual interest rate of 6.24 percent during the first three months of 2024, compared to 3.89 percent during the same period last year.

We paid a regular quarterly cash dividend of $0.27 per share on March 20, 2024, 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 March 31, 2024, our holding company had $1.5 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 $153 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.

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 three months of 2024, RLI Ins. paid $17 million in ordinary dividends to RLI Corp. In 2023, RLI Ins. paid ordinary dividends totaling $145 million. As of March 31, 2024, $5 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.

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Item 3.Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes to our exposure to market risk from that reported in our 2023 Annual Report on Form 10-K.

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 income securities. We have consistently invested in high credit quality, investment grade securities. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” of our 2023 Annual Report on Form 10-K for more information.

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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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 - not applicable.

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 March 31, 2024, director or officer of the Company or a Rule 10b5-1 trading arrangement or trading arrangement, as each term is defined in Item 408(a) of Regulation S-K.

Item 6.Exhibits

Exhibit

Incorporated by Reference

Filed or Furnished

Number

Description of Document

Form

Filing Date

Herewith

31.1

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

X

31.2

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

X

32.1

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

X

32.2

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

X

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

X

101.SCH

Inline XBRL Taxonomy Extension Schema

X

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

X

101.DEF

Inline XBRL Taxonomy Definition Linkbase

X

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

X

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

X

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

X

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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: April 24, 2024

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RLI CORP - Quarter Report: 2024 March (Form 10-Q)

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