RLI Corp. (NYSE:RLI) Q2 2021 Earnings Conference Call July 22, 2021 11:00 AM ET Corporate Participants Aaron Diefenthaler - Vice President, Chief Investment Officer and Treasurer Jon Michael - Chairman and Chief Executive Officer Todd Bryant - Vice President and Chief Financial Officer Craig Kliethermes - President and Chief Operating Officer Conference Call Participants Jeff Schmitt - William Blair Meyer Shields - KBW Mark Dwelle - RBC Capital Markets Jamie Inglis - Philo Smith Operator Good morning ladies ...

PART I - FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated interim financial statements, including statements of earnings, balance sheets, shareholders' equity, and cash flows, along with detailed notes on significant accounting policies, investments, loss development, income taxes, stock-based compensation, operating segments, and leases [Condensed Consolidated Statements of Earnings and Comprehensive Earnings](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Earnings%20and%20Comprehensive%20Earnings%20for%20the%20Three-Month%20Periods%20Ended%20March%2031%2C%202021%20and%202020%20%28unaudited%29) Condensed Consolidated Statements of Earnings and Comprehensive Earnings (in thousands, except per share data) | (in thousands, except per share data) | 2021 | 2020 | | :------------------------------------ | :--- | :--- | | Net premiums earned | $228,595 | $215,582 | | Net investment income | $16,424 | $17,778 | | Net realized gains | $14,150 | $15,152 | | Net unrealized gains (losses) on equity securities | $28,162 | $(130,395) | | **Consolidated revenue** | **$287,331** | **$118,117** | | Losses and settlement expenses | $104,892 | $111,021 | | Policy acquisition costs | $74,990 | $72,941 | | Insurance operating expenses | $18,796 | $14,381 | | Interest expense on debt | $1,901 | $1,897 | | General corporate expenses | $3,342 | $1,755 | | **Total expenses** | **$203,921** | **$201,995** | | Equity in earnings of unconsolidated investees | $6,424 | $4,514 | | **Earnings (loss) before income taxes** | **$89,834** | **$(79,364)** | | Income tax expense (benefit) | $16,822 | $(18,097) | | **Net earnings (loss)** | **$73,012** | **$(61,267)** | | Other comprehensive earnings (loss), net of tax | $(44,747) | $(13,031) | | **Comprehensive earnings (loss)** | **$28,265** | **$(74,298)** | | Basic net earnings (loss) per share | $1.62 | $(1.36) | | Diluted net earnings (loss) per share | $1.60 | $(1.36) | [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20as%20of%20March%2031%2C%202021%20and%20December%2031%2C%202020%20%28unaudited%29) Condensed Consolidated Balance Sheets (in thousands, except share and per share data) | (in thousands, except share and per share data) | March 31, 2021 | December 31, 2020 | | :---------------------------------------------- | :------------- | :---------------- | | **ASSETS** | | | | Total investments and cash | $2,876,426 | $2,837,081 | | Premiums and reinsurance balances receivable, net | $149,736 | $174,628 | | Reinsurance balances recoverable on unpaid losses and settlement expenses, net | $454,921 | $443,729 | | Deferred policy acquisition costs | $92,595 | $88,425 | | Investment in unconsolidated investees | $134,314 | $128,382 | | Goodwill and intangibles | $53,617 | $53,719 | | **TOTAL ASSETS** | **$3,972,440** | **$3,938,485** | | **LIABILITIES** | | | | Unpaid losses and settlement expenses | $1,795,275 | $1,750,049 | | Unearned premiums | $590,364 | $586,386 | | Bonds payable, long-term debt | $149,536 | $149,489 | | **TOTAL LIABILITIES** | **$2,817,654** | **$2,802,507** | | **SHAREHOLDERS' EQUITY** | | | | Common stock ($0.01 par value) | $681 | $681 | | Paid-in capital | $336,757 | $335,365 | | Accumulated other comprehensive earnings | $63,967 | $108,714 | | Retained earnings | $1,146,380 | $1,084,217 | | Less: Treasury shares, at cost | $(400,925) | $(401,291) | | **TOTAL SHAREHOLDERS' EQUITY** | **$1,154,786** | **$1,135,978** | | **TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY** | **$3,972,440** | **$3,938,485** | [Condensed Consolidated Statements of Shareholders' Equity](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders%27%20Equity%20for%20the%20Three-Month%20Periods%20Ended%20March%2031%2C%202021%20and%202020%20%28unaudited%29) Condensed Consolidated Statements of Shareholders' Equity (in thousands, except share and per share data) | (in thousands, except share and per share data) | Balance, January 1, 2021 | Net earnings (loss) | Other comprehensive earnings (loss), net of tax | Dividends and dividend equivalents ($0.24 per share) | Balance, March 31, 2021 | | :---------------------------------------------- | :----------------------- | :------------------ | :---------------------------------------------- | :--------------------------------------------------- | :---------------------- | | Total Shareholders' Equity | $1,135,978 | $73,012 | $(44,747) | $(10,849) | $1,154,786 | | Common Stock | $681 | — | — | — | $681 | | Paid-in Capital | $335,365 | — | — | — | $336,757 | | Accumulated Other Comprehensive Earnings (Loss) | $108,714 | — | $(44,747) | — | $63,967 | | Retained Earnings | $1,084,217 | $73,012 | — | $(10,849) | $1,146,380 | | Deferred Compensation | $8,292 | — | — | — | $7,926 | | Treasury Shares at Cost | $(401,291) | — | — | — | $(400,925) | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20Three-Month%20Periods%20Ended%20March%2031%2C%202021%20and%202020%20%28unaudited%29) Condensed Consolidated Statements of Cash Flows (in thousands) | (in thousands) | 2021 | 2020 | | :------------------------------------------ | :--- | :--- | | Net cash provided by (used in) operating activities | $60,287 | $(5,767) | | Net cash provided by (used in) investing activities | $(16,544) | $10,048 | | Net cash used in financing activities | $(11,025) | $(7,783) | | Net increase (decrease) in cash | $32,718 | $(3,502) | | Cash at the beginning of the period | $62,217 | $46,203 | | Cash at March 31 | $94,935 | $42,701 | [Notes to Unaudited Condensed Consolidated Interim Financial Statements](index=7&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Interim%20Financial%20Statements) [1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=7&type=section&id=1.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) - The unaudited condensed consolidated interim financial statements are prepared in accordance with GAAP for interim financial reporting and Form 10-Q instructions, requiring management estimates and assumptions[20](index=20&type=chunk)[21](index=21&type=chunk) - No new accounting standards applicable in 2021 or prospective standards are expected to have a material impact on the financial statements[22](index=22&type=chunk)[23](index=23&type=chunk) - Reinsurance balances recoverable are reported separately as assets and are subject to credit risk, with allowances for uncollectible amounts of **$15.9 million** (paid) and **$9.0 million** (unpaid) at March 31, 2021[24](index=24&type=chunk)[26](index=26&type=chunk) Goodwill and Intangible Assets (in thousands) | Category | March 31, 2021 | December 31, 2020 | | :------------------------------------------------------------------------------------------------ | :------------- | :---------------- | | Goodwill - Surety | $40,816 | $40,816 | | Goodwill - Casualty | $5,246 | $5,246 | | Total goodwill | $46,062 | $46,062 | | Indefinite-lived intangibles - state insurance licenses | $7,500 | $7,500 | | Definite-lived intangibles, net | $55 | $157 | | Total intangibles | $7,555 | $7,657 | | **Total goodwill and intangibles** | **$53,617** | **$53,719** | - Unrealized losses, net of tax, recognized in other comprehensive earnings (loss) were **$44.7 million** for the first three months of 2021, compared to **$13.0 million** in the same period last year, primarily due to increased interest rates[31](index=31&type=chunk) - Fair value measurements classify financial assets into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs). Most fixed income securities are Level 2, common stock is Level 1, and Regulation D private placements are Level 3[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk)[38](index=38&type=chunk)[39](index=39&type=chunk)[40](index=40&type=chunk)[42](index=42&type=chunk) - The company faces risks and uncertainties from adverse economic changes, including the COVID-19 pandemic, which could impact demand for insurance products, investment results, and the fair value of goodwill[44](index=44&type=chunk) [2. INVESTMENTS](index=10&type=section&id=2.%20INVESTMENTS) Investment Portfolio Composition (in thousands) | Category | March 31, 2021 Fair Value | December 31, 2020 Fair Value | | :---------------------------------------- | :-------------------------- | :--------------------------- | | Fixed income securities - available-for-sale | $2,175,869 | $2,196,626 | | Equity securities | $555,209 | $524,006 | | Other invested assets | $50,413 | $54,232 | | Cash | $94,935 | $62,217 | | **Total investments and cash** | **$2,876,426** | **$2,837,081** | Net Realized Gains (in thousands) | Category | 2021 | 2020 | | :---------------------- | :--- | :--- | | Available-for-sale | $976 | $2,168 | | Equities | $13,083 | $15,159 | | **Total Net Realized Gain (Loss)** | **$14,150** | **$15,152** | - Unrealized gains recognized on equity securities were **$41.2 million** in Q1 2021, a significant improvement compared to **$115.2 million** in unrealized losses in Q1 2020[58](index=58&type=chunk) - The allowance for credit losses on available-for-sale fixed income securities was **$375 thousand** at March 31, 2021, down from **$397 thousand** at December 31, 2020[54](index=54&type=chunk) - The fixed income portfolio contained 320 securities with an unrealized loss position totaling **$15.0 million** at March 31, 2021, representing **0.7%** of the portfolio's cost basis, primarily due to increased interest rates[54](index=54&type=chunk) [3. HISTORICAL LOSS AND LAE DEVELOPMENT](index=16&type=section&id=3.%20HISTORICAL%20LOSS%20AND%20LAE%20DEVELOPMENT) Net Unpaid Losses and LAE (in thousands) | Category | March 31, 2021 | March 31, 2020 | | :------------------------------------ | :------------- | :------------- | | Net unpaid losses and LAE at beginning of year | $1,306,320 | $1,189,835 | | Increase (decrease) in incurred losses and LAE | $104,892 | $111,021 | | Loss and LAE payments for claims incurred | $(70,858) | $(91,192) | | **Net unpaid losses and LAE at March 31** | **$1,340,354** | **$1,208,319** | - Incurred losses and LAE included **$37.1 million** of favorable development on prior years' loss reserves in Q1 2021, compared to **$15.2 million** in Q1 2020, driven by general liability, transportation, small commercial, professional services, personal umbrella, and surety[66](index=66&type=chunk)[67](index=67&type=chunk) - Actuarial models face increased uncertainty due to COVID-19, potentially impacting loss emergence timing and ultimate loss ratios, with new issues like civil court case postponements and changes in settlement trends[68](index=68&type=chunk) [4. INCOME TAXES](index=17&type=section&id=4.%20INCOME%20TAXES) - The effective tax rate for Q1 2021 was **18.7%**, down from **22.8%** for Q1 2020, primarily due to tax-favored adjustments reducing income tax expense in 2021 and increasing tax benefit in 2020 (due to pretax losses)[69](index=69&type=chunk) Income Tax Expense (Benefit) Reconciliation (in thousands) | Item | 2021 Amount | 2021 % | 2020 Amount | 2020 % | | :------------------------------------------ | :---------- | :----- | :---------- | :----- | | Provision for income taxes at statutory rate of 21% | $18,865 | 21.0% | $(16,666) | 21.0% | | Excess tax benefit on share-based compensation | $(1,924) | (2.1)% | $(1,029) | 1.3% | | Investment tax credit | $(801) | (0.9)% | $(1,321) | 1.7% | | **Total tax expense (benefit)** | **$16,822** | **18.7%** | **$(18,097)** | **22.8%** | [5. STOCK BASED COMPENSATION](index=17&type=section&id=5.%20STOCK%20BASED%20COMPENSATION) - The 2015 RLI Corp. Long-Term Incentive Plan (LTIP) replaced the 2010 LTIP, allowing for various equity-based awards, with 2,667,865 awards granted since 2015, including 44,496 in 2021[73](index=73&type=chunk) - Total compensation expense related to equity awards was **$1.6 million** in Q1 2021, up from **$1.3 million** in Q1 2020. Total unrecognized compensation expense is **$5.4 million**, to be recognized over a weighted average vesting period of 2.56 years[74](index=74&type=chunk) Stock Option Activity (Three-Month Period Ended March 31, 2021) | Category | Options | Weighted Average Exercise Price | | :-------------------------- | :-------- | :------------------------------ | | Outstanding options at January 1, 2021 | 1,632,334 | $70.67 | | Options granted | 44,496 | $97.64 | | Options exercised | (121,645) | $56.04 | | Options canceled/forfeited | (600) | $93.24 | | **Outstanding options at March 31, 2021** | **1,554,585** | **$72.57** | | Exercisable options at March 31, 2021 | 563,215 | $61.80 | - The intrinsic value of options exercised was **$6.9 million** in Q1 2021, compared to **$2.5 million** in Q1 2020[78](index=78&type=chunk) [6. OPERATING SEGMENT INFORMATION](index=18&type=section&id=6.%20OPERATING%20SEGMENT%20INFORMATION) Net Premiums Earned by Segment (in thousands) | Segment | 2021 | 2020 | | :-------- | :--- | :--- | | Casualty | $148,770 | $143,420 | | Property | $51,642 | $44,348 | | Surety | $28,183 | $27,814 | | **Total** | **$228,595** | **$215,582** | Net Underwriting Income by Segment (in thousands) | Segment | 2021 | 2020 | | :-------- | :--- | :--- | | Casualty | $24,867 | $(1,323) | | Property | $(1,005) | $9,908 | | Surety | $6,055 | $8,654 | | **Total** | **$29,917** | **$17,239** | Combined Ratio by Segment | Segment | 2021 | 2020 | | :-------- | :--- | :--- | | Casualty | 83.3 | 100.9 | | Property | 101.9 | 77.7 | | Surety | 78.5 | 68.9 | | **Total** | **86.9** | **92.0** | [7. LEASES](index=20&type=section&id=7.%20LEASES) Lease Information (in thousands) | Category | 2021 | 2020 | | :-------------------------------------------------- | :--- | :--- | | Operating lease cost | $1,351 | $1,406 | | Variable lease cost | $384 | $355 | | Sublease income | $(123) | — | | **Total lease cost** | **$1,612** | **$1,761** | | Operating cash outflows from operating leases | $1,488 | $1,486 | | ROU assets obtained in exchange for new operating lease liabilities | $58 | $15 | | Reduction to ROU assets resulting from reduction to lease liabilities | $59 | — | | Other non-cash reductions to ROU assets | — | $1,192 | - Operating lease ROU assets were **$14,952 thousand** and operating lease liabilities were **$17,676 thousand** as of March 31, 2021. The weighted-average remaining lease term is 3.68 years[85](index=85&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, including an overview of its business model, definitions of GAAP and non-GAAP measures, critical accounting policies, the impact of COVID-19, detailed results of operations by segment, and an analysis of liquidity and capital resources [OVERVIEW](index=21&type=section&id=OVERVIEW) - RLI Corp. is a U.S.-based specialty insurance company focused on niche markets, unique products, and underwriting profitability, having achieved 25 consecutive years of underwriting profit with an average **88.3** combined ratio[87](index=87&type=chunk) - The company measures insurance operations by growth (gross premiums written) and profitability (combined ratios) across three segments: casualty, property, and surety[88](index=88&type=chunk) - The casualty business involves long-tail claims and is subject to inflation and evolving legislation. The property segment is exposed to catastrophic events like earthquakes and wind storms. The surety segment generally has low loss ratios but can fluctuate with economic conditions[90](index=90&type=chunk)[91](index=91&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk) [GAAP, non-GAAP and Performance Measures](index=22&type=section&id=GAAP%2C%20non-GAAP%20and%20Performance%20Measures) - Underwriting income (non-GAAP) is a key measure of pretax profitability, derived by subtracting losses and settlement expenses, policy acquisition costs, and insurance operating expenses from net premiums earned[97](index=97&type=chunk) - The combined ratio (non-GAAP) is an industry performance measure of underwriting profitability, calculated as the sum of the loss ratio and expense ratio[98](index=98&type=chunk) Reconciliation of Net Earnings to Underwriting Income (in thousands) | Item | 2021 | 2020 | | :-------------------------------------- | :--- | :--- | | Net earnings (loss) | $73,012 | $(61,267) | | Income tax expense (benefit) | $16,822 | $(18,097) | | Earnings (loss) before income taxes | $89,834 | $(79,364) | | Equity in earnings of unconsolidated investees | $(6,424) | $(4,514) | | General corporate expenses | $3,342 | $1,755 | | Interest expense on debt | $1,901 | $1,897 | | Net unrealized (gains) losses on equity securities | $(28,162) | $130,395 | | Net realized gains | $(14,150) | $(15,152) | | Net investment income | $(16,424) | $(17,778) | | **Net underwriting income** | **$29,917** | **$17,239** | [Critical Accounting Policies](index=23&type=section&id=Critical%20Accounting%20Policies) - The most critical accounting policies involve significant estimates for liability for unpaid losses and settlement expenses, investment valuation, recoverability of reinsurance balances, deferred policy acquisition costs, and deferred taxes[100](index=100&type=chunk) - There have been no significant changes to critical accounting policies during the year[101](index=101&type=chunk) [IMPACT OF COVID-19](index=23&type=section&id=IMPACT%20OF%20COVID-19) - COVID-19 has significantly impacted the public transportation product line and construction-related products (general liability, commercial umbrella, contract surety), leading to premium declines, while personal lines, management liability, and property businesses saw little impact[103](index=103&type=chunk) - Actuarial models face greater uncertainty regarding loss emergence and ultimate loss ratios due to COVID-19, with issues like court case postponements and changes in settlement trends[105](index=105&type=chunk) - Investment yields decreased in 2020, resulting in lower investment income in Q1 2021. Rising interest rates led to a **$44.7 million** after-tax other comprehensive loss in Q1 2021 due to declining fixed income fair value[106](index=106&type=chunk) - The company generated **$60.3 million** in net operating cash inflows in Q1 2021 and maintains sufficient liquidity through operations, a **$60.0 million** revolving credit facility, and a **$30.0 million** FHLBC secured lending facility[107](index=107&type=chunk) [RESULTS OF OPERATIONS](index=24&type=section&id=RESULTS%20OF%20OPERATIONS) - Consolidated revenue increased by **$169.2 million** in Q1 2021 compared to Q1 2020, primarily driven by **$28.2 million** in unrealized gains on equity securities in 2021 versus **$130.4 million** in unrealized losses in 2020[109](index=109&type=chunk) - Net earnings for Q1 2021 totaled **$73.0 million**, a significant improvement from a **$61.3 million** net loss in Q1 2020, largely attributed to the positive performance of the equity portfolio[110](index=110&type=chunk) - Underwriting income was **$29.9 million** on an **86.9** combined ratio in Q1 2021, up from **$17.2 million** on a **92.0** combined ratio in Q1 2020, benefiting from favorable reserve development[111](index=111&type=chunk) - The loss ratio decreased to **45.9%** in Q1 2021 from **51.5%** in Q1 2020 due to improvements in the current accident year loss ratio, higher favorable development, and COVID-19 related reserve additions in 2020[111](index=111&type=chunk) - Comprehensive earnings totaled **$28.3 million** for Q1 2021, compared to a **$74.3 million** comprehensive loss for Q1 2020, with Q1 2021 impacted by **$44.7 million** in after-tax unrealized losses from the fixed income portfolio due to increased interest rates[113](index=113&type=chunk) [Premiums](index=24&type=section&id=Premiums) Gross and Net Premiums by Segment (in thousands) | Segment | Gross Premiums Written 2021 | Gross Premiums Written 2020 | % Change | Net Premiums Earned 2021 | Net Premiums Earned 2020 | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :------- | :----------------------- | :----------------------- | :------- | | **Casualty** | | | | | | | | Commercial excess and personal umbrella | $64,723 | $55,590 | 16% | $51,554 | $40,088 | 29% | | General liability | $23,209 | $24,691 | (6)% | $22,407 | $23,998 | (7)% | | Professional services | $22,407 | $21,498 | 4% | $21,728 | $20,695 | 5% | | Commercial transportation | $16,438 | $(3,777) | NM | $16,830 | $21,185 | (21)% | | Small commercial | $16,378 | $16,117 | 2% | $15,722 | $15,633 | 1% | | Executive products | $22,770 | $20,947 | 9% | $5,241 | $7,331 | (29)% | | Other casualty | $22,971 | $24,170 | (5)% | $15,288 | $14,490 | 6% | | **Total Casualty** | **$188,896** | **$159,236** | **19%** | **$148,770** | **$143,420** | **4%** | | **Property** | | | | | | | | Marine | $26,853 | $21,111 | 27% | $22,958 | $19,577 | 17% | | Commercial property | $40,136 | $29,779 | 35% | $22,712 | $19,155 | 19% | | Specialty personal | $5,662 | $4,872 | 16% | $5,034 | $5,000 | 1% | | Other property | $1,886 | $959 | 97% | $938 | $616 | 52% | | **Total Property** | **$74,537** | **$56,721** | **31%** | **$51,642** | **$44,348** | **16%** | | **Surety** | | | | | | | | Commercial | $13,301 | $11,280 | 18% | $11,013 | $10,938 | 1% | | Miscellaneous | $11,974 | $11,948 | 0% | $10,635 | $10,516 | 1% | | Contract | $6,187 | $6,647 | (7)% | $6,535 | $6,360 | 3% | | **Total Surety** | **$31,462** | **$29,875** | **5%** | **$28,183** | **$27,814** | **1%** | | **Grand Total** | **$294,895** | **$245,832** | **20%** | **$228,595** | **$215,582** | **6%** | - Gross premiums written for the Group increased by **$49.1 million** (**20%**) in Q1 2021, driven by growth in all three segments, particularly property and casualty[114](index=114&type=chunk)[116](index=116&type=chunk) - Commercial transportation premiums increased to **$16.4 million** in Q1 2021 from negative premiums in Q1 2020 (due to reversals), though still below pre-pandemic levels[118](index=118&type=chunk) - Commercial property gross premiums were up **$10.4 million** (**35%**) and marine was up **$5.7 million** (**27%**) in Q1 2021, driven by rate increases and market disruption[119](index=119&type=chunk) [Underwriting Income](index=26&type=section&id=Underwriting%20Income) - Casualty segment underwriting earnings were **$24.9 million** in Q1 2021 (vs. **$1.3 million** loss in Q1 2020), with a combined ratio of **83.3%** (vs. **100.9%**), benefiting from **$28.3 million** in reserve releases[122](index=122&type=chunk)[123](index=123&type=chunk) - Property segment recorded an underwriting loss of **$1.0 million** in Q1 2021 (vs. **$9.9 million** income in Q1 2020), with a combined ratio of **101.9%** (vs. **77.7%**), impacted by **$14.9 million** in winter storm losses[124](index=124&type=chunk)[125](index=125&type=chunk) - Surety segment underwriting income was **$6.1 million** in Q1 2021 (vs. **$8.7 million** in Q1 2020), with a combined ratio of **78.5%** (vs. **68.9%**), including **$2.8 million** in favorable reserve development[126](index=126&type=chunk)[127](index=127&type=chunk) [Investment Income](index=27&type=section&id=Investment%20Income) - Net investment income decreased by **7.6%** to **$16.4 million** in Q1 2021 compared to Q1 2020, primarily due to a decline in reinvestment rates during 2020[128](index=128&type=chunk) Fixed Income Investment Yields | Yield Type | 2021 | 2020 | | :----------- | :--- | :--- | | Pretax Yield - Taxable | 2.87% | 3.27% | | Pretax Yield - Tax-Exempt | 2.63% | 2.77% | | After-Tax Yield - Taxable | 2.27% | 2.58% | | After-Tax Yield - Tax-Exempt | 2.49% | 2.62% | - The fixed income portfolio decreased by **$20.8 million** in Q1 2021 due to increased interest rates, while the equity portfolio increased by **$31.2 million** due to strong market returns[130](index=130&type=chunk) [Income Taxes](index=27&type=section&id=Income%20Taxes) - The effective tax rate for Q1 2021 was **18.7%**, compared to **22.8%** for Q1 2020, with rates dependent on pretax earnings/losses and related tax effects[131](index=131&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=27&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) Cash Flows (in thousands) | Activity | 2021 | 2020 | | :-------------------- | :--- | :--- | | Operating cash flows | $60,287 | $(5,767) | | Investing cash flows | $(16,544) | $10,048 | | Financing cash flows | $(11,025) | $(7,783) | | **Total** | **$32,718** | **$(3,502)** | - Operating cash flows in Q1 2021 benefited from lower loss and settlement expense payments and increased premium receipts[134](index=134&type=chunk) - The company has **$149.5 million** in senior notes outstanding, maturing in 2023 with a **4.875%** interest rate. The estimated fair value was **$164.4 million** at March 31, 2021[135](index=135&type=chunk) - Liquidity sources include **$201.8 million** in cash and investments maturing within one year, a **$60.0 million** revolving line of credit (expandable to **$120.0 million**), and access to a **$30.0 million** secured lending facility via FHLBC membership[136](index=136&type=chunk)[137](index=137&type=chunk)[138](index=138&type=chunk) - The fixed income portfolio has an average rating of AA, with **83%** rated A or better. The equity portfolio is primarily invested in large-cap issues with a focus on dividend income and has a dividend yield of **2.0%**[140](index=140&type=chunk)[141](index=141&type=chunk)[146](index=146&type=chunk)[147](index=147&type=chunk) - The capital structure at March 31, 2021, consisted of **$149.5 million** in debt and **$1.2 billion** in shareholders' equity, with debt comprising **11.5%** of total capital[150](index=150&type=chunk) - The company paid a regular quarterly cash dividend of **$0.24** per share and has increased dividends for 45 consecutive years[151](index=151&type=chunk) - Dividends from the principal insurance subsidiary are restricted by Illinois law. As of March 31, 2021, **$11.8 million** of the principal insurance subsidiary's net assets were unrestricted for ordinary dividends[153](index=153&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=30&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section outlines the company's exposure to market risks, primarily equity price risk and interest rate risk, and discusses credit risk management, noting no significant changes from the prior annual report but acknowledging new uncertainties from the COVID-19 pandemic - Primary market risks include equity price risk (equity securities) and interest rate risk (fixed maturities), with limited exposure to foreign currency and commodity risk[154](index=154&type=chunk) - Credit risk is managed by investing in high credit quality, investment grade securities; the fixed maturity portfolio has an average rating of AA-, with **83%** rated A or better[155](index=155&type=chunk) - Overall market risk exposure has not significantly changed from the 2020 Annual Report, but the COVID-19 pandemic introduces new and emerging uncertainties to financial markets[156](index=156&type=chunk) [Item 4. Controls and Procedures](index=30&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures, based on an evaluation by management, including the CEO and CFO, and states that no material changes were made to internal control over financial reporting - The company maintains a system of disclosure controls and procedures designed to provide reasonable assurance of financial statement reliability and asset safeguarding[157](index=157&type=chunk) - An evaluation, supervised by management, CEO, and CFO, concluded that these disclosure controls and procedures are effective as of the end of the reporting period[157](index=157&type=chunk) - No changes were made to internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[159](index=159&type=chunk) PART II - OTHER INFORMATION [Item 1. Legal Proceedings](index=31&type=section&id=Item%201.%20Legal%20Proceedings) This section states that there were no material changes to report regarding legal proceedings - No material changes to report regarding legal proceedings[161](index=161&type=chunk) [Item 1a. Risk Factors](index=31&type=section&id=Item%201a.%20Risk%20Factors) This section indicates that there were no material changes to report regarding risk factors - No material changes to report regarding risk factors[161](index=161&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=31&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports on the company's share repurchase program, noting no repurchases during 2021 and the remaining capacity - The company has a **$100 million** share repurchase program implemented in 2010[162](index=162&type=chunk) - No shares were repurchased during 2021[162](index=162&type=chunk) - There is **$87.5 million** of remaining capacity from the repurchase program[162](index=162&type=chunk) [Item 3. Defaults upon Senior Securities](index=31&type=section&id=Item%203.%20Defaults%20upon%20Senior%20Securities) This section states that it is not applicable - Not applicable[164](index=164&type=chunk) [Item 4. Mine Safety Disclosures](index=31&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section states that it is not applicable - Not applicable[164](index=164&type=chunk) [Item 5. Other Information](index=31&type=section&id=Item%205.%20Other%20Information) This section states that it is not applicable - Not applicable[164](index=164&type=chunk) [Item 6. Exhibits](index=31&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including various certifications and iXBRL documents - Includes certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 (Exhibits 31.1, 31.2, 32.1, 32.2)[163](index=163&type=chunk) - Includes iXBRL-Related Documents (Exhibit 101) and Cover Page Interactive Data File (Exhibit 104)[163](index=163&type=chunk) SIGNATURES [Signatures Details](index=32&type=section&id=Signatures_Details) This section provides the formal signatures for the Form 10-Q report, confirming its submission on behalf of RLI Corp - The report was signed by Todd W. Bryant, Vice President, Chief Financial Officer (Principal Financial and Chief Accounting Officer) of RLI Corp[168](index=168&type=chunk) - The signing date was April 23, 2021[168](index=168&type=chunk)

RLI Corp. (NYSE:RLI) Q1 2021 Earnings Conference Call April 22, 2021 11:00 AM ET Company Participants Aaron Diefenthaler - VP, Chief Investment Officer and Treasurer Todd Bryant - VP and CFO Craig Kliethermes - President and COO Jon Michael - Chairman and CEO Conference Call Participants Randy Binner - B. Riley Securities, Inc., FBR Mark Dwelle - RBC Capital Markets Matt Carletti - JMP Operator Good day, and welcome ladies and gentlemen to the RLI Corp's First Quarter Earnings Teleconference. As a reminder, ...

G RLI INVESTOR PRESENTATION 4th Quarter, 2020 DIFFERENT WORKS 8.52 6.47 7.42 6.02 0.58 5.42 7.43 3.56 9.42 | --- | --- | --- | --- | |-----------------------|-------|-------|-------| | | | | | | | | | | | INTRODUCTION | | | | | IRLI' DIFFERENT WORKS | | | | | | | | | STRATEGY From our niche product offerings to our business model, our culture to our results — we're different. We will continue to: | --- | |-------| | | | | Remain a destination for talented, entrepreneurial underwriters with 'narrow & deep' e ...

PART I [Item 1. Business](index=4&type=section&id=Item%201.%20Business) RLI Corp. is a specialty property and casualty insurer focused on niche markets, utilizing reinsurance, and segmented into casualty, property, and surety - RLI Corp. operates as a specialty property and casualty insurance company through its subsidiaries, RLI Insurance Company, Mt. Hawley Insurance Company, and Contractors Bonding and Insurance Company, underwriting in all 50 states, D.C., Puerto Rico, the Virgin Islands, and Guam[11](index=11&type=chunk) - The company focuses on niche specialty admitted and excess and surplus markets, distributing through branch offices to wholesale and retail producers, with competition centered on availability, coverage, and service rather than price[12](index=12&type=chunk)[16](index=16&type=chunk) Premiums Written and Earned (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | **PREMIUMS WRITTEN** | | | | | Direct and Assumed | $1,136,432 | $1,065,002 | $983,216 | | Reinsurance ceded | (244,344) | (204,665) | (160,041) | | Net | $892,088 | $860,337 | $823,175 | | **PREMIUMS EARNED** | | | | | Direct and Assumed | $1,090,259 | $1,021,294 | $938,160 | | Reinsurance ceded | (224,512) | (182,183) | (146,794) | | Net | $865,747 | $839,111 | $791,366 | - In 2020, specialty admitted operations generated **$720.6 million** (64% of total gross premiums), excess and surplus operations **$388.4 million** (34%), and specialty reinsurance operations **$27.4 million** (2%)[17](index=17&type=chunk)[18](index=18&type=chunk)[19](index=19&type=chunk) Net Premiums Earned by Segment (2018-2020) | Segment | 2020 (in millions) | % of Total | 2019 (in millions) | % of Total | 2018 (in millions) | % of Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Commercial Excess and Personal Umbrella | $178.2 | 21% | $140.5 | 17% | $124.4 | 16% | | General Liability | $91.7 | 11% | $98.9 | 12% | $93.9 | 12% | | Professional Services | $85.2 | 10% | $81.3 | 10% | $80.0 | 10% | | Commercial Transportation | $64.6 | 7% | $83.2 | 10% | $81.1 | 10% | | Small Commercial | $63.4 | 7% | $55.7 | 7% | $51.5 | 6% | | Executive Products | $26.5 | 3% | $27.1 | 3% | $21.3 | 3% | | Other Casualty | $59.9 | 7% | $71.8 | 8% | $71.3 | 9% | | Marine | $81.9 | 10% | $74.9 | 9% | $59.8 | 8% | | Commercial Property | $79.4 | 9% | $68.3 | 8% | $71.5 | 9% | | Specialty Personal | $19.6 | 2% | $19.3 | 3% | $16.9 | 2% | | Other Property | $2.8 | <1% | $1.5 | <1% | $1.1 | <1% | | Commercial Surety | $42.9 | 5% | $43.6 | 5% | $43.4 | 5% | | Miscellaneous Surety | $42.3 | 5% | $44.7 | 5% | $47.0 | 6% | | Contract Surety | $27.3 | 3% | $28.3 | 3% | $28.2 | 4% | - The company's insurance subsidiaries hold strong financial strength ratings: AM Best A+ (Superior), Standard & Poor's A+ (Strong), and Moody's A2 for RLI Ins. and Mt. Hawley, with CBIC also rated A+ by AM Best[42](index=42&type=chunk) Operating Ratios (2016-2020) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Loss ratio | 51.2 | 49.3 | 54.1 | 54.4 | 48.0 | | Expense ratio | 40.8 | 42.6 | 40.6 | 42.0 | 41.5 | | Combined ratio | 92.0 | 91.9 | 94.7 | 96.4 | 89.5 | - As of December 31, 2020, the investment portfolio was **77% fixed income** (83% rated A or better, 63% AA or better), **19% equity**, and **2% other invested assets**, with the remaining **2% in cash and equivalents**[94](index=94&type=chunk) - The company employed **875 associates** as of December 31, 2020, with a focus on hiring and developing specialized underwriting and claims talent within an entrepreneurial and ownership culture[123](index=123&type=chunk)[124](index=124&type=chunk) [Item 1A. Risk Factors](index=21&type=section&id=Item%201A.%20Risk%20Factors) RLI faces risks from industry cyclicality, competition, geographic concentration, rating downgrades, loss reserve uncertainty, catastrophic losses, and operational challenges - The property and casualty insurance industry is cyclical and competitive, leading to potential fluctuations in RLI's operations and revenues, especially due to competitive pressures, rising loss costs, and unpredictable catastrophic events[130](index=130&type=chunk)[131](index=131&type=chunk) - **51% of RLI's direct premiums earned in 2020** were generated in four states: California (**17%**), New York (**14%**), Florida (**10%**), and Texas (**10%**), making the company vulnerable to adverse changes in these regions[132](index=132&type=chunk) - A downgrade in financial strength ratings from AM Best, Standard & Poor's, or Moody's could negatively impact RLI's competitive position and lead to a substantial loss of business[137](index=137&type=chunk)[138](index=138&type=chunk) - Loss reserves are based on estimates and may be inadequate to cover actual insured losses due to the complex and uncertain nature of claims, evolving legal interpretations, and external factors, potentially impacting profitability[143](index=143&type=chunk)[144](index=144&type=chunk)[146](index=146&type=chunk) - Catastrophic losses from natural disasters (e.g., earthquakes, hurricanes, wildfires) or man-made events are unpredictable and could cause material financial losses, with climate change potentially increasing the severity and volatility of weather-related events[147](index=147&type=chunk)[148](index=148&type=chunk) - The COVID-19 pandemic has led to reduced demand in certain product lines (e.g., commercial transportation), established **$18.3 million** in related loss and defense reserves in 2020, and introduced uncertainty in loss emergence timing and ultimate loss ratios[165](index=165&type=chunk)[166](index=166&type=chunk)[167](index=167&type=chunk) - Technology breaches or failures, including cybersecurity incidents, could disrupt operations, lead to loss of critical information, expose the company to liabilities, and damage its reputation and financial results[169](index=169&type=chunk) [Item 1B. Unresolved Staff Comments](index=29&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments to report - No unresolved staff comments[173](index=173&type=chunk) [Item 2. Properties](index=29&type=section&id=Item%202.%20Properties) RLI Corp. owns five commercial buildings totaling 173,000 square feet for its corporate headquarters in Peoria, Illinois, and leases office space for its branch offices nationwide - RLI Corp. owns five commercial buildings (**173,000 sq ft**) for its corporate headquarters in Peoria, Illinois, and leases office space for branch offices across the country[173](index=173&type=chunk) [Item 3. Legal Proceedings](index=30&type=section&id=Item%203.%20Legal%20Proceedings) Information regarding RLI Corp.'s legal proceedings is detailed in Note 10 to the Consolidated Financial Statements - Legal proceedings information is detailed in Note 10 to the Consolidated Financial Statements[174](index=174&type=chunk) [Item 4. Mine Safety Disclosures](index=30&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine Safety Disclosures are not applicable to RLI Corp - Mine Safety Disclosures are not applicable[175](index=175&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=31&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) RLI Corp.'s common stock trades on the NYSE, with a history of consistent and increasing dividends, competitive shareholder returns, and an active share repurchase program - RLI Corp. common stock trades on the New York Stock Exchange under the symbol RLI[177](index=177&type=chunk) - The company has paid dividends for **178 consecutive quarters** and increased quarterly dividends for the last **45 years**, including special cash dividends of **$1.00 per share** in December 2020 and 2019[177](index=177&type=chunk) Five-Year Total Shareholder Return Comparison (2015-2020) | | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | RLI | $100 | $107 | $107 | $125 | $167 | $197 | | S&P 500 | $100 | $112 | $136 | $130 | $171 | $203 | | S&P 500 P&C Index | $100 | $116 | $142 | $135 | $170 | $181 | *Five-year annualized total return: RLI: 14.5%, S&P 500: 15.2%, S&P 500 P&C Index: 12.5%.* - RLI Corp. has a **$100 million** share repurchase program, with **$87.5 million** of remaining capacity, though no shares were repurchased since 2011[181](index=181&type=chunk) [Item 6. Selected Financial Data](index=31&type=section&id=Item%206.%20Selected%20Financial%20Data) This item is not applicable for the current report - Selected Financial Data is not applicable[182](index=182&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes RLI Corp.'s financial condition and operations, highlighting consistent underwriting profitability, COVID-19 impacts, revenue, earnings, investment performance, liquidity, and 2021 outlook - RLI Corp. achieved its **25th consecutive year of underwriting profitability** in 2020, with an average combined ratio of **88.4%** over that period[183](index=183&type=chunk) Consolidated Revenue (2019-2020) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net premiums earned | $865,747 | $839,111 | | Net investment income | 67,893 | 68,870 | | Net realized gains | 17,885 | 17,520 | | Net unrealized gains on equity securities | 32,101 | 78,090 | | **Total consolidated revenue** | **$983,626** | **$1,003,591** | Net Earnings (2019-2020) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Underwriting income | $69,597 | $67,568 | | Net investment income | 67,893 | 68,870 | | Net realized gains | 17,885 | 17,520 | | Net unrealized gains on equity securities | 32,101 | 78,090 | | Interest expense on debt | (7,603) | (7,588) | | General corporate expenses | (10,265) | (12,686) | | Equity in earnings of unconsolidated investees | 20,233 | 20,960 | | Earnings before income taxes | $189,841 | $232,734 | | Income tax expense | (32,750) | (41,092) | | **Net earnings** | **$157,091** | **$191,642** | - Gross premiums written increased by **7%** in 2020 to **$1.136 billion**, driven by positive rate movement and distribution channel expansion, despite a **$42.2 million** decline in commercial transportation due to COVID-19[251](index=251&type=chunk)[260](index=260&type=chunk) - Underwriting income in 2020 was **$69.6 million** (**92.0 combined ratio**), up from **$67.6 million** (**91.9 combined ratio**) in 2019, benefiting from **$101.1 million** in favorable prior years' reserve development, but impacted by **$51.5 million** in catastrophe losses and **$18.3 million** in COVID-19 related loss reserves[252](index=252&type=chunk)[254](index=254&type=chunk) Underwriting Income and Combined Ratio by Segment (2019-2020) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | **Underwriting Income** | | | | Casualty | $44,427 | $20,601 | | Property | (3,182) | 18,143 | | Surety | 28,352 | 28,824 | | **Total** | **$69,597** | **$67,568** | | **Combined Ratio** | | | | Casualty | 92.2 | 96.3 | | Property | 101.7 | 88.9 | | Surety | 74.8 | 75.3 | | **Total** | **92.0** | **91.9** | - Net investment income decreased **1%** in 2020 due to lower reinvestment rates, while the investment portfolio increased by **$276.7 million** to **$2.8 billion**, with a tax-adjusted total return of **6.6%** on fixed income and **12.5%** on equity[247](index=247&type=chunk)[271](index=271&type=chunk)[272](index=272&type=chunk)[279](index=279&type=chunk) - The company generated **$263.3 million** in net operating cash inflows in 2020 and maintains strong liquidity with **$155.9 million** in cash and short-term investments maturing within one year, plus available credit facilities[244](index=244&type=chunk)[308](index=308&type=chunk)[313](index=313&type=chunk) [Overview](index=32&type=section&id=7.1.%20Overview) RLI Corp. is a U.S.-based specialty insurer focused on niche markets, achieving 25 consecutive years of underwriting profitability - RLI Corp. is a U.S.-based specialty insurance company underwriting property and casualty insurance through RLI Insurance Group, focusing on niche markets and unique products[183](index=183&type=chunk) - The company achieved its **25th consecutive year of underwriting profitability** in 2020, with an average combined ratio of **88.4%** over that period, driving shareholder returns through underwriting income, net investment income, and equity portfolio appreciation[183](index=183&type=chunk) [GAAP, Non-GAAP and Performance Measures](index=32&type=section&id=7.2.%20GAAP%2C%20NON-GAAP%20AND%20PERFORMANCE%20MEASURES) This section defines GAAP and non-GAAP financial measures, including underwriting income and combined ratio, used to assess RLI's business performance - The report includes non-GAAP financial measures, such as underwriting income and combined ratio, which management believes provide a more complete understanding of underlying business trends[185](index=185&type=chunk)[186](index=186&type=chunk) - Underwriting income is a pretax measure of insurance operations profitability, calculated by subtracting losses, policy acquisition costs, and operating expenses from net premiums earned[187](index=187&type=chunk) Reconciliation of Net Earnings to Underwriting Income (2019-2020) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net earnings | $157,091 | $191,642 | | Income tax expense | 32,750 | 41,092 | | Earnings before income taxes | $189,841 | $232,734 | | Equity in earnings of unconsolidated investees | (20,233) | (20,960) | | General corporate expenses | 10,265 | 12,686 | | Interest expense on debt | 7,603 | 7,588 | | Net unrealized gains on equity securities | (32,101) | (78,090) | | Net realized gains | (17,885) | (17,520) | | Net investment income | (67,893) | (68,870) | | **Net underwriting income** | **$69,597** | **$67,568** | - The combined ratio, a key industry performance measure, is the sum of the loss ratio (losses and settlement expenses to net premiums earned) and the expense ratio (policy acquisition and operating expenses to net premiums earned)[188](index=188&type=chunk) [Critical Accounting Policies](index=33&type=section&id=7.3.%20Critical%20Accounting%20Policies) Critical accounting policies involve significant estimates for loss reserves, investment valuation, reinsurance recoverability, deferred policy acquisition costs, and deferred taxes - Critical accounting policies involve significant estimates for unpaid losses and settlement expenses, investment valuation, recoverability of reinsurance balances, deferred policy acquisition costs, and deferred taxes[190](index=190&type=chunk) - Loss and loss adjustment expense (LAE) reserves are estimates of ultimate payments for reported and unreported claims, based on historical patterns, trends, legal interpretations, and actuarial expertise, with no discounting for time value of money[191](index=191&type=chunk)[192](index=192&type=chunk)[200](index=200&type=chunk) - The company uses multiple standard actuarial methodologies (Paid Loss Development, Incurred Loss Development, Case Reserve Development, Expected Loss Ratio, Bornhuetter/Ferguson) to estimate IBNR reserves, with weights adjusted based on accident year maturity and claim emergence[66](index=66&type=chunk)[69](index=69&type=chunk)[70](index=70&type=chunk)[73](index=73&type=chunk)[75](index=75&type=chunk)[78](index=78&type=chunk)[79](index=79&type=chunk) - Investment valuation classifies all fixed income securities as available-for-sale (fair value, unrealized gains/losses in OCI) and equity securities at fair value (unrealized gains/losses in net earnings)[226](index=226&type=chunk) - Reinsurance balances recoverable are reported as assets and are subject to credit risk, with continuous monitoring of reinsurer financial condition and an allowance for uncollectible amounts[228](index=228&type=chunk)[229](index=229&type=chunk) - Deferred policy acquisition costs (commissions, premium taxes) are capitalized and amortized in proportion to premium revenue, limited to estimated realizable value[230](index=230&type=chunk) - Deferred tax assets and liabilities are recognized for temporary differences, with management periodically reviewing for realizability and establishing a valuation allowance if necessary[231](index=231&type=chunk)[232](index=232&type=chunk) [Impact of COVID-19](index=39&type=section&id=7.4.%20Impact%20of%20COVID-19) The COVID-19 pandemic impacted commercial transportation premiums, led to $18.3 million in loss reserves, affected investment portfolio values, and influenced unconsolidated investee earnings - The COVID-19 pandemic significantly impacted commercial transportation premiums (down **$42.2 million** in 2020) and contributed to declines in general liability and surety products due to economic slowdowns[237](index=237&type=chunk) - RLI established **$18.3 million** of net reserves in 2020 for increased loss and expense risk from the pandemic, particularly for financial-related product lines and potential claims against reopening businesses[239](index=239&type=chunk) - The equity portfolio recovered from Q1 sell-off, generating **$37.8 million** in net after-tax realized and unrealized gains in 2020, while lower interest rates increased fixed income fair value by **$53.5 million** after-tax but will limit future investment income[242](index=242&type=chunk) - Maui Jim's sales were negatively impacted by retail sector shutdowns, while Prime's earnings were higher in 2020[243](index=243&type=chunk) - The company generated **$263.3 million** in net operating cash inflows in 2020 and believes it has adequate liquidity to meet anticipated needs over the next 12-24 months[244](index=244&type=chunk) [Results of Operations](index=40&type=section&id=7.5.%20Results%20of%20Operations) This section details RLI's consolidated revenue, net earnings, and segment-specific underwriting performance, highlighting premium growth, investment income, and tax rates Consolidated Revenue (2019-2020) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net premiums earned | $865,747 | $839,111 | | Net investment income | 67,893 | 68,870 | | Net realized gains | 17,885 | 17,520 | | Net unrealized gains on equity securities | 32,101 | 78,090 | | **Total consolidated revenue** | **$983,626** | **$1,003,591** | Net Earnings (2019-2020) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Underwriting income | $69,597 | $67,568 | | Net investment income | 67,893 | 68,870 | | Net realized gains | 17,885 | 17,520 | | Net unrealized gains on equity securities | 32,101 | 78,090 | | Interest expense on debt | (7,603) | (7,588) | | General corporate expenses | (10,265) | (12,686) | | Equity in earnings of unconsolidated investees | 20,233 | 20,960 | | Earnings before income taxes | $189,841 | $232,734 | | Income tax expense | (32,750) | (41,092) | | **Net earnings** | **$157,091** | **$191,642** | - Gross premiums written increased by **$71.4 million** (**7%**) in 2020, driven by rate increases and distribution channel expansion, excluding the COVID-19 impacted commercial transportation[251](index=251&type=chunk) - Underwriting income was **$69.6 million** on a **92.0 combined ratio** in 2020, compared to **$67.6 million** on a **91.9 combined ratio** in 2019, marking the **25th consecutive year of underwriting profit**[254](index=254&type=chunk)[255](index=255&type=chunk) Gross Premiums Written and Net Premiums Earned by Segment (2019-2020) | (in thousands) | Gross Premiums Written 2020 | Gross Premiums Written 2019 | % Change | Net Premiums Earned 2020 | Net Premiums Earned 2019 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **CASUALTY** | | | | | | | | Commercial excess and personal umbrella | $237,239 | $183,098 | 30% | $178,214 | $140,483 | 27% | | General liability | 94,307 | 99,345 | (5)% | 91,653 | 98,880 | (7)% | | Professional services | 91,300 | 89,347 | 2% | 85,196 | 81,329 | 5% | | Commercial transportation | 63,345 | 105,592 | (40)% | 64,624 | 83,213 | (22)% | | Small commercial | 65,843 | 63,925 | 3% | 63,357 | 55,701 | 14% | | Executive products | 121,653 | 96,828 | 26% | 26,509 | 27,088 | (2)% | | Other casualty | 75,722 | 66,057 | 15% | 59,968 | 71,764 | (16)% | | **Total casualty** | **$749,409** | **$704,192** | **6%** | **$569,521** | **$558,458** | **2%** | | **PROPERTY** | | | | | | | | Marine | $98,027 | $91,315 | 7% | $81,852 | $74,887 | 9% | | Commercial property | 145,371 | 126,358 | 15% | 79,406 | 68,310 | 16% | | Specialty personal | 20,962 | 21,190 | (1)% | 19,596 | 19,316 | 1% | | Other property | 4,409 | 2,562 | 72% | 2,866 | 1,509 | 90% | | **Total property** | **$268,769** | **$241,425** | **11%** | **$183,720** | **$164,022** | **12%** | | **SURETY** | | | | | | | | Commercial | $46,426 | $47,436 | (2)% | $42,872 | $43,553 | (2)% | | Miscellaneous | 43,174 | 42,614 | 1% | 42,292 | 44,721 | (5)% | | Contract | 28,654 | 29,335 | (2)% | 27,342 | 28,357 | (4)% | | **Total surety** | **$118,254** | **$119,385** | **(1)%** | **$112,506** | **$116,631** | **(4)%** | | **Grand total** | **$1,136,432** | **$1,065,002** | **7%** | **$865,747** | **$839,111** | **3%** | Underwriting Income and Combined Ratio by Segment (2019-2020) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | **Underwriting Income** | | | | Casualty | $44,427 | $20,601 | | Property | (3,182) | 18,143 | | Surety | 28,352 | 28,824 | | **Total** | **$69,597** | **$67,568** | | **Combined Ratio** | | | | Casualty | 92.2 | 96.3 | | Property | 101.7 | 88.9 | | Surety | 74.8 | 75.3 | | **Total** | **92.0** | **91.9** | Average Annual Investment Yields (2019-2020) | | 2020 | 2019 | | :--- | :--- | :--- | | **PRETAX YIELD** | | | | Taxable (on book value) | 3.10% | 3.39% | | Tax-exempt (on book value) | 2.69% | 2.77% | | Equities (on fair value) | 2.33% | 2.41% | | **AFTER-TAX YIELD** | | | | Taxable (on book value) | 2.45% | 2.68% | | Tax-exempt (on book value) | 2.55% | 2.62% | | Equities (on fair value) | 2.02% | 2.09% | - The investment portfolio's fair value increased by **$276.7 million** to **$2.8 billion** in 2020, with fixed income at **77%** and equities at **19%** of the total portfolio[279](index=279&type=chunk)[281](index=281&type=chunk)[283](index=283&type=chunk) - Equity in earnings from unconsolidated investees totaled **$20.2 million** in 2020, with Maui Jim contributing **$10.4 million** and Prime **$10.8 million**[298](index=298&type=chunk)[299](index=299&type=chunk) - The effective tax rate was **17.3%** in 2020, lower than **17.7%** in 2019, due to investment tax credits and lower pretax earnings amplifying tax-favored adjustments[302](index=302&type=chunk) - Net unpaid losses and settlement expenses increased to **$1.3 billion** at December 31, 2020, from **$1.2 billion** in 2019, reflecting **$442.9 million** in incurred losses offset by **$325.1 million** in paid losses[305](index=305&type=chunk) [Liquidity and Capital Resources](index=49&type=section&id=7.6.%20Liquidity%20and%20Capital%20Resources) This section reviews RLI's cash flows, contractual obligations, dividend capacity from subsidiaries, and available credit facilities, demonstrating strong liquidity Cash Flows (2019-2020) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Operating cash flows | $263,259 | $276,917 | | Investing cash flows (uses) | (167,987) | (184,753) | | Financing cash flows (uses) | (79,258) | (76,101) | Contractual Obligations as of December 31, 2020 | (in thousands) | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Loss and settlement expense reserves | $481,137 | $624,472 | $344,755 | $299,685 | $1,750,049 | | Long-term debt | — | 150,000 | — | — | 150,000 | | Interest on long-term debt | 7,313 | 12,492 | — | — | 19,805 | | Operating leases | 5,992 | 10,339 | 3,136 | 563 | 20,030 | | Other invested assets and equity method investees | 21,787 | 957 | 199 | 127 | 23,070 | | **Total** | **$516,229** | **$798,260** | **$348,090** | **$300,375** | **$1,962,954** | - RLI Corp. relies on dividends from its insurance subsidiaries, which are restricted by state insurance laws; in 2020, the principal subsidiary paid **$110.0 million** in ordinary dividends[322](index=322&type=chunk)[323](index=323&type=chunk) - As of December 31, 2020, **$25.3 million** of the principal insurance subsidiary's net assets were unrestricted and available for ordinary dividends[323](index=323&type=chunk) - The company has a **$60.0 million** revolving line of credit (expandable to **$120.0 million**) and access to a **$30.0 million** secured lending facility through the Federal Home Loan Bank of Chicago, with no outstanding amounts in 2020[313](index=313&type=chunk)[314](index=314&type=chunk) [Outlook for 2021](index=52&type=section&id=7.7.%20Outlook%20for%202021) RLI anticipates continued premium growth in 2021 driven by broad-based rate increases, with positive outlooks for casualty and property segments, and measured growth for surety - RLI expects continued premium growth in 2021, driven by broad-based rate increases in the industry due to loss cost inflation, elevated catastrophe activity, reinsurance pricing, and prolonged low interest rates[325](index=325&type=chunk) - The casualty segment anticipates continued growth in premium and underwriting profit, benefiting from pricing responses to volatile loss trends[331](index=331&type=chunk)[332](index=332&type=chunk) - The property segment expects continued positive rate change and new business opportunities due to market disruption, capital constraints for other carriers, and a reactive reinsurance market[333](index=333&type=chunk)[334](index=334&type=chunk) - The surety segment is cautiously optimistic for measured growth in 2021, as macroeconomic factors and past competitiveness have increased losses, influencing terms, conditions, and rates[335](index=335&type=chunk)[336](index=336&type=chunk) - Investment income will face headwinds from the low interest rate environment, but a growing invested asset base may provide an offset, with equity and credit markets expected to respond positively to ongoing economic recovery[329](index=329&type=chunk) [Prospective Accounting Standards](index=53&type=section&id=7.8.%20Prospective%20Accounting%20Standards) No prospective accounting standards are expected to materially impact RLI's financial statements as of December 31, 2020 - There are no prospective accounting standards expected to have a material impact on RLI's financial statements as of December 31, 2020[338](index=338&type=chunk)[367](index=367&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=54&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) RLI manages market risk from interest rate and equity price fluctuations through active monitoring, investment adjustments, and asset-liability balancing, with sensitivity analyses illustrating potential impacts - RLI manages market risk by monitoring financial asset fair values, adjusting future investment purchases, and balancing asset and liability portfolios[339](index=339&type=chunk) - The fixed income portfolio is sensitive to interest rate changes, with RLI attempting to minimize this risk by matching asset duration to liabilities and diversifying across sectors and issuers[339](index=339&type=chunk) - Equity price risk is measured using beta analysis against the S&P 500 Index; RLI's equity portfolio has a **beta of 0.9**, reflecting a value-oriented, dividend-driven investment philosophy[341](index=341&type=chunk) Sensitivity Analysis: Effect of Interest Rate Increase and S&P 500 Decline (December 31, 2020) | (in thousands) | 12/31/20 Fair Value | Interest Rate Risk (100bps increase) | Equity Risk (10% decline) | | :--- | :--- | :--- | :--- | | Fixed income securities | $2,196,626 | $(113,648) | — | | Equity securities | 524,006 | — | $(46,878) | | **Total** | **$2,720,632** | **$(113,648)** | **$(46,878)** | | (in thousands) | 12/31/20 Fair Value | Interest Rate Risk (200bps increase) | Equity Risk (20% decline) | | :--- | :--- | :--- | :--- | | Fixed income securities | $2,196,626 | $(219,874) | — | | Equity securities | 524,006 | — | $(93,755) | | **Total** | **$2,720,632** | **$(219,874)** | **$(93,755)** | Sensitivity Analysis: Effect of Interest Rate Decrease and S&P 500 Increase (December 31, 2020) | (in thousands) | 12/31/20 Fair Value | Interest Rate Risk (100bps decrease) | Equity Risk (10% increase) | | :--- | :--- | :--- | :--- | | Fixed income securities | $2,196,626 | $124,089 | — | | Equity securities | 524,006 | — | $46,878 | | **Total** | **$2,720,632** | **$124,089** | **$46,878** | | (in thousands) | 12/31/20 Fair Value | Interest Rate Risk (200bps decrease) | Equity Risk (20% increase) | | :--- | :--- | :--- | :--- | | Fixed income securities | $2,196,626 | $257,714 | — | | Equity securities | 524,006 | — | $93,755 | | **Total** | **$2,720,632** | **$257,714** | **$93,755** | [Item 8. Financial Statements and Supplementary Data](index=57&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents RLI Corp.'s audited consolidated financial statements, including balance sheets, statements of earnings, comprehensive earnings, shareholders' equity, and cash flows, with detailed notes and auditor reports - The consolidated financial statements include balance sheets, statements of earnings and comprehensive earnings, shareholders' equity, and cash flows for the years ended December 31, 2020, 2019, and 2018[350](index=350&type=chunk) Consolidated Balance Sheet Highlights (December 31, 2019-2020) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | **ASSETS** | | | | Total investments and cash | $2,837,081 | $2,560,360 | | Reinsurance balances recoverable on unpaid losses and settlement expenses, net | 443,729 | 384,517 | | **TOTAL ASSETS** | **$3,938,485** | **$3,545,721** | | **LIABILITIES** | | | | Unpaid losses and settlement expenses | $1,750,049 | $1,574,352 | | Unearned premiums | 586,386 | 540,213 | | Bonds payable, long-term debt | 149,489 | 149,302 | | **TOTAL LIABILITIES** | **$2,802,507** | **$2,550,333** | | **SHAREHOLDERS' EQUITY** | | | | Total Shareholders' Equity | $1,135,978 | $995,388 | Consolidated Statements of Earnings Highlights (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net premiums earned | $865,747 | $839,111 | $791,366 | | Net investment income | 67,893 | 68,870 | 62,085 | | Net realized gains | 17,885 | 17,520 | 63,624 | | Net unrealized gains (losses) on equity securities | 32,101 | 78,090 | (98,735) | | **Consolidated revenue** | **$983,626** | **$1,003,591** | **$818,123** | | Losses and settlement expenses | 442,884 | 413,416 | 428,193 | | Policy acquisition costs | 286,438 | 288,697 | 267,738 | | Insurance operating expenses | 66,828 | 69,430 | 53,803 | | Interest expense on debt | 7,603 | 7,588 | 7,437 | | General corporate expenses | 10,265 | 12,686 | 9,427 | | **Total expenses** | **$814,018** | **$791,817** | **$766,598** | | Equity in earnings of unconsolidated investees | 20,233 | 20,960 | 16,056 | | Earnings before income taxes | $189,841 | $232,734 | $67,581 | | Income tax expense (benefit) | 32,750 | 41,092 | 3,402 | | **Net earnings** | **$157,091** | **$191,642** | **$64,179** | | Other comprehensive earnings (loss), net of tax | 56,219 | 67,045 | (33,997) | | **Comprehensive earnings** | **$213,310** | **$258,687** | **$30,182** | | Basic net earnings per share | $3.49 | $4.28 | $1.45 | | Diluted net earnings per share | $3.46 | $4.23 | $1.43 | Consolidated Statements of Cash Flows Highlights (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $263,259 | $276,917 | $217,102 | | Net cash used in investing activities | (167,987) | (184,753) | (134,209) | | Net cash used in financing activities | (79,258) | (76,101) | (77,024) | | Net increase in cash | $16,014 | $16,063 | $5,869 | | Cash at end of year | $62,217 | $46,203 | $30,140 | - Deloitte & Touche LLP audited the 2020 financial statements and internal controls, issuing an unqualified opinion, while KPMG LLP audited the 2019 and 2018 statements[530](index=530&type=chunk)[531](index=531&type=chunk)[542](index=542&type=chunk) - A critical audit matter was identified regarding the assessment of the company's estimate of unpaid losses and settlement expenses, requiring specialized actuarial skills due to the complexity of methodologies and assumptions[538](index=538&type=chunk)[539](index=539&type=chunk) [1. Summary of Significant Accounting Policies](index=62&type=section&id=1.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines RLI Corp.'s significant accounting policies, including consolidation, investment classification, equity method accounting, loss reserve estimation, and regulatory capital requirements - RLI Corp. is an insurance holding company with three principal insurance subsidiaries: RLI Insurance Company, Mt. Hawley Insurance Company, and Contractors Bonding and Insurance Company, all domiciled in Illinois[362](index=362&type=chunk) - The company adopted ASU 2016-13 (Financial Instruments – Credit Losses) on January 1, 2020, using a modified-retrospective approach, which had an immaterial impact on financial statements[365](index=365&type=chunk)[366](index=366&type=chunk) - All fixed income securities are classified as available-for-sale and reported at fair value, with unrealized gains/losses excluded from net earnings but recorded in comprehensive earnings[368](index=368&type=chunk)[369](index=369&type=chunk) - Investments in unconsolidated investees, primarily Maui Jim, Inc. (**40% interest**) and Prime Holdings Insurance Services, Inc. (**23% interest**), are accounted for under the equity method[376](index=376&type=chunk)[378](index=378&type=chunk) - The liability for unpaid losses and settlement expenses represents estimates of ultimate payments for reported and unreported claims, subject to inherent uncertainty and periodic adjustments[384](index=384&type=chunk) - RLI's insurance subsidiaries are subject to state regulation, including RBC requirements, and maintain capital levels significantly in excess of minimum requirements[424](index=424&type=chunk) [2. Investments](index=71&type=section&id=2.%20Investments) This note details RLI's investment portfolio, including net investment income, realized and unrealized gains/losses, fair value measurements, fixed income duration, and pledged assets Net Investment Income (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Interest on fixed income securities | $59,755 | $60,364 | $54,491 | | Dividends on equity securities | 9,728 | 9,950 | 9,814 | | Interest on cash, short-term investments and other invested assets | 3,379 | 3,674 | 2,309 | | **Gross investment income** | **$72,862** | **$73,988** | **$66,614** | | Less investment expenses | (4,969) | (5,118) | (4,529) | | **Net investment income** | **$67,893** | **$68,870** | **$62,085** | Net Realized Gains (Losses) and Changes in Unrealized Gains (Losses) on Investments (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | **Net realized gains (losses):** | | | | | Fixed income: Available-for-sale | $3,872 | $3,184 | $(2,018) | | Equity securities | 15,796 | 14,445 | 69,868 | | Other | (1,783) | (109) | (4,226) | | **Total net realized gains (losses)** | **$17,885** | **$17,520** | **$63,624** | | Other-than-temporary-impairment losses on investments | — | — | (217) | | **Net changes in unrealized gains (losses) on investments:** | | | | | Equity securities | $32,317 | $78,389 | $(98,380) | | Other invested assets | (216) | (299) | (355) | | **Total unrealized gains (losses) on equity securities recognized in net earnings** | **$32,101** | **$78,090** | **$(98,735)** | | Fixed income: Available-for-sale | $67,350 | $83,758 | $(41,778) | | Investment in unconsolidated investees | 3,444 | 1,109 | (1,257) | | Other | 369 | — | — | | **Total unrealized gains (losses) recognized in other comprehensive earnings** | **$71,163** | **$84,867** | **$(43,035)** | | **Net realized gains (losses) and changes in unrealized gains (losses) on investments** | **$121,149** | **$180,477** | **$(78,363)** | Fair Value Measurements of Financial Assets (December 31, 2020) | (in thousands) | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Fixed income securities - available-for-sale | $— | $2,178,828 | $17,798 | $2,196,626 | | Equity securities | 523,923 | 83 | — | 524,006 | | Other invested assets | 6,068 | — | — | 6,068 | | **Total** | **$529,991** | **$2,178,911** | **$17,798** | **$2,726,700** | - As of December 31, 2020, the fixed income portfolio's duration was **4.7 years**, with **44% AAA-rated**, **19% AA-rated**, **21% A-rated**, **10% BBB-rated**, and **6% non-investment grade or non-rated securities**[281](index=281&type=chunk)[282](index=282&type=chunk) - The company recorded an allowance for credit losses of **$397 thousand** on available-for-sale fixed income securities in 2020, primarily on **21 securities**, following the adoption of ASU 2016-13[438](index=438&type=chunk)[440](index=440&type=chunk) - Other invested assets totaled **$54.2 million** in 2020, including low income housing tax credit (LIHTC) partnerships, Federal Home Loan Bank of Chicago (FHLBC) stock, private funds, and restricted stock[445](index=445&type=chunk) - As of December 31, 2020, **$12.3 million** of investments were pledged as collateral with the FHLBC, and **$77.7 million** of fixed income securities were on deposit with regulatory authorities[449](index=449&type=chunk) [3. Policy Acquisition Costs](index=77&type=section&id=3.%20Policy%20Acquisition%20Costs) This note provides details on deferred policy acquisition costs (DAC), including beginning and end-of-year balances, net deferred amounts, and amortization Deferred Policy Acquisition Costs (DAC) and Policy Acquisition Costs (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | DAC, beginning of year | $85,044 | $84,934 | $77,716 | | Net deferred | 173,585 | 168,419 | 166,161 | | Amortized | 170,204 | 168,309 | 158,943 | | **DAC, end of year** | **$88,425** | **$85,044** | **$84,934** | | **Total policy acquisition costs** | **$286,438** | **$288,697** | **$267,738** | [4. Debt](index=77&type=section&id=4.%20Debt) This note details RLI's outstanding debt, including senior notes maturing in 2023 with a fixed interest rate, and available revolving credit facilities - As of December 31, 2020, outstanding debt totaled **$149.5 million**, consisting of **$150.0 million** in senior notes maturing September 15, 2023, with a fixed interest rate of **4.875%**[451](index=451&type=chunk)[452](index=452&type=chunk) - The company maintains a revolving line of credit with Bank of Montreal, Chicago Branch, for up to **$60.0 million** (expandable to **$120.0 million**), expiring March 27, 2023, with no outstanding amounts in 2020, 2019, or 2018[454](index=454&type=chunk) [5. Reinsurance](index=77&type=section&id=5.%20Reinsurance) This note describes RLI's reinsurance activities, including assumed and ceded premiums, losses, and the financial strength of its reinsurance partners - RLI's insurance subsidiaries assume and cede premiums and risks through reinsurance, including quota share, excess of loss, and catastrophe contracts, to diversify business and limit maximum net loss[455](index=455&type=chunk)[456](index=456&type=chunk) Premiums Written and Earned, and Losses and Settlement Expenses Incurred (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | **WRITTEN** | | | | | Direct | $1,107,303 | $1,039,955 | $934,913 | | Reinsurance assumed | 29,129 | 25,047 | 48,303 | | Reinsurance ceded | (244,344) | (204,665) | (160,041) | | **Net** | **$892,088** | **$860,337** | **$823,175** | | **EARNED** | | | | | Direct | $1,062,608 | $981,121 | $896,234 | | Reinsurance assumed | 27,651 | 40,173 | 41,926 | | Reinsurance ceded | (224,512) | (182,183) | (146,794) | | **Net** | **$865,747** | **$839,111** | **$791,366** | | **LOSSES AND SETTLEMENT EXPENSES INCURRED** | | | | | Direct | $608,638 | $521,055 | $560,421 | | Reinsurance assumed | 18,783 | 21,951 | 20,376 | | Reinsurance ceded | (184,537) | (129,590) | (152,604) | | **Net** | **$442,884** | **$413,416** | **$428,193** | - Over **88%** of RLI's reinsurance recoverables are from companies with financial strength ratings of A or better by AM Best and S&P[458](index=458&type=chunk) - Allowances for uncollectible amounts on paid and unpaid recoverables were **$15.9 million** and **$8.6 million**, respectively, at December 31, 2020[459](index=459&type=chunk) [6. Historical Loss and LAE Development](index=79&type=section&id=6.%20Historical%20Loss%20and%20LAE%20Development) This note reconciles unpaid losses and LAE, details favorable development from prior years, and addresses environmental, asbestos, and mass tort exposures Reconciliation of Unpaid Losses and LAE (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net unpaid losses and LAE at beginning of year | $1,189,835 | $1,096,349 | $969,512 | | Adoption impact of ASU 2016-13 on reinsurance balances recoverable | (1,345) | — | — | | Increase (decrease) in incurred losses and LAE: Current accident year | 543,937 | 488,700 | 478,143 | | Increase (decrease) in incurred losses and LAE: Prior accident years | (101,053) | (75,284) | (49,950) | | Total incurred | $442,884 | $413,416 | $428,193 | | Loss and LAE payments for claims incurred: Current accident year | (93,077) | (80,055) | (76,050) | | Loss and LAE payments for claims incurred: Prior accident year | (231,977) | (239,875) | (225,306) | | Total paid | $(325,054) | $(319,930) | $(301,356) | | **Net unpaid losses and LAE at end of year** | **$1,306,320** | **$1,189,835** | **$1,096,349** | | Gross unpaid losses and LAE at end of year | $1,750,049 | $1,574,352 | $1,461,348 | | Ceded unpaid losses and LAE at end of year | (443,729) | (384,517) | (364,999) | - In 2020, RLI experienced **$101.1 million** in favorable development on prior years' loss reserves, with the casualty segment contributing **$75.1 million**, property **$13.0 million**, and surety **$13.0 million**[473](index=473&type=chunk)[474](index=474&type=chunk)[475](index=475&type=chunk) - The casualty segment's favorable development in 2020 was predominantly from accident years 2017-2019, driven by better-than-expected frequency and severity trends in transportation, general liability, commercial excess, and professional services[473](index=473&type=chunk) - RLI's environmental, asbestos, and mass tort exposure is limited due to appropriate coverage exclusions adopted after the industry recognized these issues, with most reserves associated with runoff products[483](index=483&type=chunk)[484](index=484&type=chunk) Environmental, Asbestos, and Mass Tort Claims Data (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | **Loss and LAE Payments (Cumulative):** | | | | | Gross | $139,804 | $137,485 | $136,043 | | Ceded | (69,219) | (68,849) | (68,638) | | **Net** | **$70,585** | **$68,636** | **$67,405** | | **Unpaid Losses and LAE at End of Year:** | | | | | Gross | $22,485 | $22,616 | $24,262 | | Ceded | (4,619) | (5,149) | (5,373) | | **Net** | **$17,866** | **$17,467** | **$18,889** | [7. Income Taxes](index=86&type=section&id=7.%20Income%20Taxes) This note details deferred tax assets and liabilities, reconciles income tax expense to the statutory federal rate, and explains the effective tax rate fluctuations Deferred Tax Assets and Liabilities (December 31, 2019-2020) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | **Deferred tax assets:** | | | | Total deferred tax assets | $50,896 | $49,022 | | **Deferred tax liabilities:** | | | | Net unrealized appreciation of securities | $77,639 | $56,532 | | Deferred policy acquisition costs | 18,569 | 17,859 | | Undistributed earnings of unconsolidated investees | 21,813 | 17,673 | | **Total deferred tax liabilities** | **$131,131** | **$105,749** | | **Net deferred tax liability** | **$(80,235)** | **$(56,727)** | Income Tax Expense Reconciliation to Statutory Federal Tax Rate (2018-2020) | (in thousands) | 2020 | % | 2019 | % | 2018 | % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Provision for income taxes at the statutory federal tax rates | $39,867 | 21.0% | $48,874 | 21.0% | $14,192 | 21.0% | | Excess tax benefit on share-based compensation | (3,537) | (1.8)% | (3,958) | (1.7)% | (4,533) | (6.7)% | | Tax-exempt interest income | (1,293) | (0.7)% | (1,238) | (0.5)% | (1,795) | (2.7)% | | ESOP dividends paid deduction | (1,083) | (0.6)% | (1,122) | (0.5)% | (1,184) | (1.8)% | | Unconsolidated investee dividends | (479) | (0.2)% | (1,802) | (0.8)% | — | —% | | **Total Income Tax Expense (Benefit)** | **$32,750** | **17.3%** | **$41,092** | **17.7%** | **$3,402** | **5.0%** | - The effective tax rate was lower in 2020 (**17.3%**) compared to 2019 (**17.7%**) due to investment tax credits and lower pretax earnings, which magnified tax-favored adjustments[488](index=488&type=chunk) - Dividends from unconsolidated investees (Prime in 2020, Maui Jim in 2019) resulted in tax benefits due to lower tax rates applicable to affiliated dividends compared to the corporate capital gains rate[491](index=491&type=chunk) - Dividends paid to the Employee Stock Ownership Plan (ESOP) also generated tax benefits of approximately **$1.1 million** annually from 2018-2020[492](index=492&type=chunk) [8. Employee Benefits](index=87&type=section&id=8.%20EMPLOYEE%20BENEFITS) This note describes RLI's employee benefit plans, including ESOP, 401(k), and incentive plans, detailing related expenses and equity-based compensation activity - RLI maintains ESOP, 401(k), and incentive plans for employees, with funding dependent on corporate performance metrics like operating return on equity, combined ratio, and Market Value Potential (MVP)[496](index=496&type=chunk) - ESOP and 401(k)-related expenses (basic and profit-sharing) were **$14.4 million** in 2020, **$15.7 million** in 2019, and **$8.8 million** in 2018[498](index=498&type=chunk) - Annual incentive plan expenses totaled **$26.6 million** in 2020, **$30.1 million** in 2019, and **$11.9 million** in 2018[500](index=500&type=chunk) - The company's 2015 Long-Term Incentive Plan (LTIP) provides equity-based compensation, including stock options and restricted stock units (RSUs), with **340,909 awards granted** in 2020[503](index=503&type=chunk) - Total compensation expense for equity awards was **$5.4 million** in 2020, with **$6.4 million** in unrecognized compensation expense remaining to be recognized over a weighted average vesting period of **2.65 years**[504](index=504&type=chunk) Stock Option Activity (2020) | | Options | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding as of January 1, 2020 | 1,667,290 | $62.52 | | Granted | 322,479 | $92.86 | | Exercised | (351,025) | $52.34 | | Cancelled or forfeited | (6,410) | $73.42 | | **Outstanding as of December 31, 2020** | **1,632,334** | **$70.67** | | Exercisable at December 31, 2020 | 658,290 | $60.35 | Restricted Stock Unit (RSU) Activity (2020) | | RSUs | Weighted Average Grant Date Fair Value | | :--- | :--- | :--- | | Nonvested at January 1, 2020 | 49,733 | $70.07 | | Granted | 18,430 | $93.24 | | Reinvested | 920 | $96.14 | | Vested | (20,837) | $65.24 | | Forfeited | (588) | $79.54 | | **Nonvested at December 31, 2020** | **47,658** | **$81.53** | [9. Statutory Information and Dividend Restrictions](index=89&type=section&id=9.%20STATUTORY%20INFORMATION%20AND%20DIVIDEND%20RESTRICTIONS) This note outlines RLI's statutory financial information, including capital and surplus, and details dividend restrictions imposed by Illinois insurance laws on its subsidiaries - RLI's insurance companies' statutory financial statements conform to NAIC's statutory accounting principles (SAP), which differ from GAAP[511](index=511&type=chunk) - As of December 31, 2020, RLI Insurance Company's (principal subsidiary) actual statutory capital and surplus was **$1.1 billion**, more than **five times** its authorized control level RBC of **$203.9 million**[512](index=512&type=chunk) Selected Statutory Information for Insurance Subsidiaries (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Consolidated net income, statutory basis | $120,329 | $129,625 | $135,791 | | Consolidated surplus, statutory basis | $1,121,592 | $1,029,671 | $829,775 | - RLI Corp. relies on dividends from its insurance subsidiaries, which are restricted by Illinois insurance laws; ordinary dividends are limited to the greater of **10% of prior year-end surplus** or prior year net income[514](index=514&type=chunk)[515](index=515&type=chunk) - In 2020, the principal insurance subsidiary paid **$110.0 million** in ordinary dividends to RLI Corp., with **$25.3 million** of net assets unrestricted for future ordinary dividends as of December 31, 2020[515](index=515&type=chunk) [10. Commitments and Contingent Liabilities](index=90&type=section&id=10.%20COMMITMENTS%20AND%20CONTINGENT%20LIABILITIES) This note addresses RLI's legal claims, loss, and litigation matters, and details unfunded commitments related to investments in private funds and equity method investees - RLI is party to numerous claims, loss, and litigation matters in the normal course of business, including policy-related claims and other legal proceedings[516](index=516&type=chunk) - Management believes the resolution of these legal matters is not reasonably likely to have a material adverse effect on the company's financial condition, results of operations, or cash flows[516](index=516&type=chunk) - As of December 31, 2020, RLI had **$23.1 million** in unfunded commitments related to investments in private funds, low income housing tax credit investments, and equity method investees[517](index=517&type=chunk) [11. Leases](index=90&type=section&id=11.%20LEASES) This note outlines RLI's operating lease Right-of-Use assets and liabilities, primarily for branch offices, and provides details on lease costs and future minimum lease payments - RLI recognizes operating lease Right-of-Use (ROU) assets and liabilities based on the present value of future minimum lease payments, primarily for branch office facilities[518](index=518&type=chunk)[519](index=519&type=chunk) Lease Expense and Information (2019-2020) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Operating lease cost | $5,504 | $5,772 | | Variable lease cost | 1,346 | 1,850 | | Sublease income | (262) | — | | **Total lease cost** | **$6,588** | **$7,622** | | Operating lease ROU assets | $16,200 | $22,335 | | Operating lease liabilities | $19,072 | $24,475 | | Weighted-average remaining lease term - operating leases | 3.87 years | 4.69 years | | Weighted-average discount rate - operating leases | 2.32% | 2.33% | Future Minimum Lease Payments (December 31, 2020) | (in thousands) | 2020 | | :--- | :--- | | 2021 | $5,992 | | 2022 | 5,915 | | 2023 | 4,424 | | 2024 | 2,334 | | 2025 | 802 | | Thereafter | 563 | | **Total future minimum lease payments** | **$20,030** | | Less imputed interest | (958) | | **Total operating lease liability** | **$19,072** | [12. Operating Segment Information](index=91&type=section&id=12.%20OPERATING%20SEGMENT%20INFORMATION) This note provides financial information for RLI's Casualty, Property, and Surety segments, detailing their distinct product offerings, risk profiles, and underwriting performance - RLI's insurance operations are segmented into Casualty, Property, and Surety, each with distinct product offerings and risk profiles[520](index=520&type=chunk) - The Casualty segment includes commercial excess, personal umbrella, general liability, transportation, and executive products, subject to long development periods and inflation risk[520](index=520&type=chunk) - The Property segment covers commercial fire, earthquake, DIC, and marine, with results highly variable due to perils like earthquakes and hurricanes, managed through policy limits and reinsurance[521](index=521&type=chunk)[522](index=522&type=chunk) - The Surety segment specializes in commercial and contract surety, including payment and performance bonds, with losses fluctuating based on economic conditions affecting insureds' financial viability[523](index=523&type=chunk) Net Premiums Earned by Segment (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Casualty | $569,521 | $558,458 | $523,472 | | Property | 183,720 | 164,022 | 149,261 | | Surety | 112,506 | 116,631 | 118,633 | | **Net premiums earned** | **$865,747** | **$839,111** | **$791,366** | Net Underwriting Income by Segment (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Casualty | $44,427 | $20,601 | $11,140 | | Property | (3,182) | 18,143 | 884 | | Surety | 28,352 | 28,824 | 29,608 | | **Net underwriting income** | **$69,597** | **$67,568** | **$41,632** | [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=96&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) Deloitte & Touche LLP was engaged as RLI Corp.'s new independent auditor for 2020, replacing KPMG LLP, with no prior disagreements or consultations - Deloitte & Touche LLP was engaged as RLI Corp.'s new independent registered public accounting firm for the fiscal year ending December 31, 2020, replacing KPMG LLP[546](index=546&type=chunk) - KPMG's audit reports for 2019 and 2018 did not contain adverse opinions, disclaimers, or qualifications, though they noted a change in accounting method for equity investments in 2018[547](index=547&type=chunk) - There were no disagreements on accounting principles, financial statement disclosure, or auditing scope/procedure with KPMG, nor any reportable events during 2018 and 2019[547](index=547&type=chunk) - RLI Corp. did not consult with Deloitte regarding accounting principles or audit opinions prior to their engagement[548](index=548&type=chunk) [Item 9A. Controls and Procedures](index=97&type=section&id=Item%209A.%20Controls%20and%20Procedures) RLI Corp.'s management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with external audit confirmation - Management concluded that RLI Corp.'s disclosure controls and procedures were effective as of December 31, 2020[549](index=549&type=chunk) - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[550](index=550&type=chunk) - The effectiveness of internal control over financial reporting as of December 31, 2020, was audited by Deloitte & Touche LLP[551](index=551&type=chunk) - There were no material changes in internal control over financial reporting during the fourth fiscal quarter ended December 31, 2020[551](index=551&type=chunk) [Item 9B. Other Information](index=97&type=section&id=Item%209B.%20Other%20Information) There is no other information to report under this item - No other information to report[552](index=552&type=chunk) PART III [Items 10-14.](index=98&type=section&id=Items%2010-14.) Information for Items 10 through 14 is incorporated by reference from the Company's definitive Proxy Statement, which will be filed with the SEC - Information for Items 10 through 14 is incorporated by reference from the Company's definitive Proxy Statement[553](index=553&type=chunk) PART IV [Item 15. Exhibits and Financial Statement Schedules](index=98&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all exhibits and financial statement schedules, including investments, parent company financial information, supplementary insurance details, reinsurance, and valuation accounts - Item 15 includes a list of exhibits and financial statement schedules, with references to their respective pages[555](index=555&type=chunk)[556](index=556&type=chunk) - Financial statement schedules include Summary of Investments, Condensed Financial Information of Registrant (Parent Company), Supplementary Insurance Information, Reinsurance, Valuation and Qualifying Accounts, and Supplementary Information Concerning Property-Casualty Insurance Operations[558](index=558&type=chunk) Schedule I—Summary of Investments—Other Than Investments in Related Parties (December 31, 2020) | (in thousands) | Cost (1) | Fair Value | Amount at which shown in the balance sheet | | :--- | :--- | :--- | :--- | | **Fixed maturities:** | | | | | U.S. government | $170,110 | $183,357 | $183,357 | | U.S. agency | 28,902 | 32,872 | 32,872 | | Non-U.S. government & agency | 10,298 | 10,965 | 10,965 | | Agency MBS | 384,015 | 402,071 | 402,071 | | ABS/CMBS/MBS* | 213,223 | 218,373 | 218,373 | | Corporate | 753,404 | 816,592 | 816,592 | | Municipal | 501,515 | 532,396 | 532,396 | | **Total fixed maturities** | **$2,061,467** | **$2,196,626** | **$2,196,626** | | **Equity securities:** | | | | | Common stock: Ind Misc and all other | $156,941 | $257,154 | $257,154 | | ETFs (Ind/misc) | 136,249 | 266,852 | 266,852 | | **Total equity securities** | **$293,190** | **$524,006** | **$524,006** | | Cash and short-term investments | 62,217 | 62,217 | 62,217 | | Other invested assets | 51,941 | 54,232 | 54,232 | | **Total investments and cash** | **$2,468,815** | **$2,837,081** | **$2,837,081** | Schedule II—Condensed Financial Information of Registrant (Parent Company) - Condensed Balance Sheets (December 31, 2019-2020) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | **ASSETS** | | | | Investments in subsidiaries | $1,148,342 | $1,034,679 | | Investments in unconsolidated investee | 90,893 | 79,597 | | Fixed income: Available-for-sale, at fair value | 64,211 | 45,538 | | **TOTAL ASSETS** | **$1,308,001** | **$1,163,252** | | **LIABILITIES** | | | | Bonds payable, long-term debt | $149,489 | $149,302 | | **TOTAL LIABILITIES** | **$172,023** | **$167,864** | | **TOTAL SHAREHOLDERS' EQUITY** | **$1,135,978** | **$995,388** | Schedule II—Condensed Financial Information of Registrant (Parent Company) - Condensed Statements of Earnings and Comprehensive Earnings (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net investment income | $1,412 | $1,656 | $648 | | Equity in earnings of unconsolidated investee | 10,368 | 13,592 | 12,471 | | **Net earnings** | **$157,091** | **$191,642** | **$64,179** | | Other comprehensive earnings (loss) | 56,219 | 67,045 | (33,997) | | **Comprehensive earnings** | **$213,310** | **$258,687** | **$30,182** | Schedule II—Condensed Financial Information of Registrant (Parent Company) - Condensed Statements of Cash Flows (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(8,589) | $1,633 | $257 | | Net cash provided by investing activities | 91,963 | 75,270 | 87,339 | | Net cash used in financing activities | (83,343) | (79,767) | (84,586) | | **Net increase (decrease) in cash** | **$31** | **$(2,864)** | **$3,010** | | Cash at end of year | $381 | $350 | $3,214 | Schedule III—Supplementary Insurance Information (2018-2020) | (in thousands) | Deferred policy acquisition costs | Unpaid losses and settlement expenses, gross | Unearned premiums, gross | Net premiums earned | Incurred losses and settlement expenses current year | | :--- | :--- | :--- | :--- | :--- | :--- | | **2020** | $88,425 | $1,750,049 | $586,386 | $865,747 | $543,937 | | **2019** | $85,044 | $1,574,352 | $540,213 | $839,111 | $488,700 | | **2018** | $84,934 | $1,461,348 | $496,505 | $791,366 | $478,143 | Schedule IV—Reinsurance (2018-2020) | (in thousands) | Direct amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount assumed to net | | :--- | :--- | :--- | :--- | :--- | :--- | | **2020** | $1,062,608 | $224,512 | $27,651 | $865,747 | 3.2% | | **2019** | $981,121 | $182,183 | $40,173 | $839,111 | 4.8% | | **2018** | $896,234 | $146,794 | $41,926 | $791,366 | 5.3% | Schedule V—Valuation and Qualifying Accounts - Allowance for Uncollectible Reinsurance (2018-2020) | (in thousands) | Balance at beginning of period | Amounts charged to expense | Amounts recovered (written off) | Balance at end of period | | :--- | :--- | :--- | :--- | :--- | | **2020** | $25,066 | $(522) | $(5) | $24,539 | | **2019** | $25,911 | $(647) | $(198) | $25,066 | | **2018** | $25,911 | $— | $— | $25,911 | Schedule VI—Supplementary Information Concerning Property-Casualty Insurance Operations (2018-2020) | (in thousands) | Deferred policy costs | Claims and claim adjustment expense reserves | Unearned premiums, gross | Net premiums earned | Net investment income | | :--- | :--- | :--- | :--- | :--- | :--- | | **2020** | $88,425 | $1,750,049 | $586,386 | $865,747 | $67,893 | | **2019** | $85,044 | $1,574,352 | $540,213 | $839,111 | $68,870 | | **2018** | $84,934 | $1,461,348 | $496,505 | $791,366 | $62,085 |

Call Start: 11:00 January 1, 0000 11:34 AM ET RLI Corp. (NYSE:RLI) Q4 2020 Earnings Conference Call January 28, 2021, 11:00 AM ET Company Participants Aaron Diefenthaler - Vice President, Chief Investment Officer and Treasurer Jonathan Michael - Chairman and Chief Executive Officer Todd Bryant - Vice President and Chief Financial Officer Craig Kliethermes - President and Chief Operating Officer Conference Call Participants Cullen Johnson - B Riley Securities Jeff Schmitt - William Blair Matt Carletti - JMP ...

Rli Corp (NYSE:RLI) Q3 2020 Earnings Conference Call October 22, 2020 11:00 AM ET Company Participants Aaron Diefenthaler - VP, CIO & Treasurer Todd Bryant - VP & CFO Craig Kliethermes - President & COO Jonathan Michael - President, CEO & Chairman Conference Call Participants Randolph Binner - B. Riley Securities, Inc. Jeffrey Schmitt - William Blair & Company Meyer Shields - KBW Scott Heleniak - RBC Capital Markets Operator Good morning, and welcome, ladies and gentlemen, to the RLI Corp. Third Quarter Ear ...

RLI Corp. (NYSE:RLI) Q2 2020 Earnings Conference Call July 23, 2020 11:00 AM ET Company Participants Jonathan Michael - Chairman & CEO Aaron Diefenthaler - Vice President, CIO & Treasurer Todd Bryant - CFO Craig Kliethermes - President & COO Conference Call Participants Matt Carletti - JMP Securities Randy Binner - B. Riley Jeff Schmitt - William Blair Meyer Shields - KBW Mark Dwelle - RBC Capital Markets Operator Good morning, and welcome ladies and gentlemen to the RLI Corp. Second Quarter Earnings Teleco ...

RLI Corp. (NYSE:RLI) Q1 2020 Earnings Conference Call April 22, 2020 11:00 AM ET Company Participants Jonathan Michael - Chairman & CEO Aaron Diefenthaler - Vice President, CIO & Treasurer Todd Bryant - CFO Craig Kliethermes - President & COO Conference Call Participants Randy Binner - B. Riley Matt Carletti - JMP Jeff Schmitt - William Blair Meyer Shields - KBW Mark Dwelle - RBC Capital Markets Ron Bobman - Capital Returns Jamie Inglis - Philo Smith Operator Good morning, and welcome ladies and gentlemen t ...

RLI Corp. (NYSE:RLI) Q4 2019 Earnings Conference Call January 23, 2020 11:00 AM ET Â Company Participants Aaron Diefenthaler - Vice President, CIO & Treasurer Jon Michael - Chairman & CEO Craig Kliethermes - President & COO Todd Bryant - CFO Conference Call Participants Randy Binner - B. Riley FBR Christopher Campbell - KBW Jeff Schmitt - William Blair. Ron Bobman - Capital Returns Operator Good morning and welcome ladies and gentlemen to the RLI Corp. Fourth Quarter Earnings Teleconference. At the request ...