RLI Corp. (NYSE:RLI) Q4 2023 Earnings Conference Call January 25, 2024 11:00 AM ET Company Participants Aaron Diefenthaler - Chief Investment Officer & Treasurer Craig Kliethermes - President & Chief Executive Officer Todd Bryant - Chief Financial Officer Jen Klobnak - Chief Operating Officer Conference Call Participants Gregory Peters - Raymond James Andrew Andersen - Jefferies Meyer Shields - KBW Scott Heleniak - RBC Capital Markets Operator Good morning, and welcome to the RLI Corp. Fourth Quarter Earnin ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2023 or ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number: 001-09463 RLI Corp. (Exact name of registrant as specified in its charter) Delaware 37-0889946 (I.R.S. Employ ...

RLI Corp. (NYSE:RLI) Q3 2023 Earnings Conference Call October 24, 2023 11:00 AM ET Company Participants Aaron Diefenthaler - Chief Investment Officer & Treasurer Todd Bryant - Chief Financial Officer Craig Kliethermes - President & Chief Executive Officer Jennifer Klobnak - Chief Operating Officer Conference Call Participants Gregory Peters - Raymond James Andrew Andersen - Jefferies Meyer Shields - KBW Scott Heleniak - RBC Capital Markets Operator Good morning, and welcome to the RLI Corp. Third Quarter Ea ...

[PART I - FINANCIAL INFORMATION](index=4&type=section&id=Part%20I%20-%20Financial%20Information) This section presents RLI Corp.'s unaudited condensed consolidated interim financial statements and management's discussion and analysis [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents RLI Corp.'s unaudited condensed consolidated interim financial statements and related notes on accounting policies, investments, and operations [Condensed Consolidated Statements of Earnings and Comprehensive Earnings](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Earnings%20and%20Comprehensive%20Earnings) This section provides the condensed consolidated statements of earnings and comprehensive earnings for the specified interim periods Consolidated Statements of Earnings and Comprehensive Earnings (3M & 6M Ended June 30) | Metric | 3 Months Ended June 30, 2023 (in thousands) | 3 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Net premiums earned | $322,280 | $282,810 | $630,003 | $551,962 | | Consolidated revenue | $381,862 | $213,092 | $746,785 | $477,905 | | Net earnings (loss) | $77,652 | $(2,239) | $176,463 | $45,684 | | Basic net earnings (loss) per share | $1.70 | $(0.05) | $3.87 | $1.01 | | Diluted net earnings (loss) per share | $1.69 | $(0.05) | $3.83 | $1.00 | | Net unrealized gains (losses) on equity securities | $25,214 | $(100,994) | $40,710 | $(128,804) | [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section presents the condensed consolidated balance sheets, detailing assets, liabilities, and equity at period-end Consolidated Balance Sheet Highlights (as of June 30, 2023 and December 31, 2022) | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total investments and cash | $3,590,576 | $3,272,301 | | Total Assets | $5,065,846 | $4,767,068 | | Total Liabilities | $3,713,934 | $3,589,727 | | Total Shareholders' Equity | $1,351,912 | $1,177,341 | | Fixed income: Available-for-sale, at fair value | $2,689,100 | $2,666,950 | | Equity securities, at fair value | $552,566 | $498,382 | | Short-term investments, at cost | $271,296 | $36,229 | [Condensed Consolidated Statements of Shareholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity) This section outlines changes in shareholders' equity, including retained earnings and comprehensive earnings (loss) Consolidated Statements of Shareholders' Equity Highlights (as of June 30, 2023 and 2022) | Metric | June 30, 2023 (in thousands) | June 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total Shareholders' Equity | $1,351,912 | $1,044,188 | | Retained Earnings | $1,597,660 | $1,250,661 | | Accumulated Other Comprehensive Earnings (Loss) | $(211,090) | $(163,318) | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section details cash flows from operating, investing, and financing activities for the interim periods Consolidated Statements of Cash Flows Highlights (6M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------------- | :-------------------- | :-------------------- | | Net cash provided by operating activities | $243,595 | $170,645 | | Net cash used in investing activities | $(226,116) | $(124,946) | | Net cash used in financing activities | $(23,590) | $(21,459) | | Net increase (decrease) in cash | $(6,111) | $24,240 | [Notes to Unaudited Condensed Consolidated Interim Financial Statements](index=9&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Interim%20Financial%20Statements) This section provides detailed notes supporting the interim financial statements, covering accounting policies, investments, and other key financial areas [1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=9&type=section&id=1.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This section details the basis of interim financial statement presentation, adopted accounting standards, and key policies for reinsurance, intangibles, and fair value measurements - The unaudited condensed consolidated interim financial statements are prepared in accordance with GAAP for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X[20](index=20&type=chunk) - Adopted ASU 2023-02 on January 1, 2023, using a modified-retrospective approach, reclassifying an **$11 million** historic tax credit investment and recognizing a **$7 million** liability, with no material impact on net earnings[23](index=23&type=chunk) - No prospective accounting standards are expected to have a material impact on financial statements as of June 30, 2023[24](index=24&type=chunk) Allowances for Uncollectible Reinsurance Recoverables | Metric | June 30, 2023 (in millions) | December 31, 2022 (in millions) | | :-------------------------------- | :------------------------------ | :------------------------------ | | Paid reinsurance recoverables | $16.2 | $16.1 | | Unpaid reinsurance recoverables | $10.3 | $11.3 | - Total goodwill and indefinite-lived intangibles remained at **$53.562 million** at June 30, 2023, with no impairment identified during Q2 2023 assessments[30](index=30&type=chunk) - Comprehensive earnings for the first six months of 2023 were **$194.449 million**, including **$17.986 million** in after-tax unrealized gains on available-for-sale fixed income securities due to declining interest rates, contrasting with **$213.144 million** in unrealized losses in 2022 due to rising rates[10](index=10&type=chunk)[33](index=33&type=chunk)[34](index=34&type=chunk) - Catastrophe reinsurance limits were increased on June 1, 2023, to **$850 million** for California earthquakes, **$850 million** for non-California earthquakes, and **$750 million** for all other perils[50](index=50&type=chunk) [2. INVESTMENTS](index=17&type=section&id=2.%20INVESTMENTS) This section details the investment portfolio, including fixed income and equity securities, fair value measurements, and allowances for credit losses Investment Portfolio Fair Value (as of June 30, 2023 and December 31, 2022) | Investment Type | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------ | | Fixed income securities - available-for-sale | $2,689,100 | $2,666,950 | | Equity securities | $552,566 | $498,382 | | Total investments measured at fair value | $3,241,666 | $3,165,332 | - The allowance for expected credit losses on available-for-sale securities was **$434k** at June 30, 2023, up from **$339k** at January 1, 2023[58](index=58&type=chunk) - At June 30, 2023, the fixed income portfolio contained 1,474 securities with **$261 million** in unrealized losses (9% of cost basis), for which no credit loss allowance was recorded as recovery of amortized cost is expected[59](index=59&type=chunk) - Other invested assets increased to **$61 million** at June 30, 2023, from **$48 million** at December 31, 2022, including LIHTC, HTC (reclassified due to ASU 2023-02), FHLBC membership, and private funds[62](index=62&type=chunk)[66](index=66&type=chunk) - Investments in unconsolidated investees decreased to **$55 million** at June 30, 2023, primarily due to the reclassification of the HTC investment, with the main remaining investment being **$55 million** in Prime Holdings Insurance Services, Inc[69](index=69&type=chunk) Cash and Short-Term Investments (as of June 30, 2023 and December 31, 2022) | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------ | | Cash | $16,707 | $22,818 | | Short-term investments | $271,296 | $36,229 | [3. HISTORICAL LOSS AND LAE DEVELOPMENT](index=26&type=section&id=3.%20HISTORICAL%20LOSS%20AND%20LAE%20DEVELOPMENT) This section reports **$72 million** of favorable development on prior years' loss reserves for the first six months of 2023 Net Unpaid Losses and LAE (6M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------------- | :-------------------- | :-------------------- | | Net unpaid losses and LAE at beginning of year | $1,575,548 | $1,435,469 | | Increase (decrease) in incurred losses and LAE - Prior accident years | $(71,520) | $(69,720) | | Net unpaid losses and LAE at June 30, | $1,640,719 | $1,483,789 | - Favorable development on prior years' loss reserves for the first six months of 2023 was **$72 million**, largely from accident years 2018 through 2022, driven by commercial excess, professional services, surety, general liability, personal umbrella, marine, and commercial property[71](index=71&type=chunk) [4. INCOME TAXES](index=26&type=section&id=4.%20INCOME%20TAXES) This section details effective tax rates for the three and six months ended June 30, 2023, and their influencing factors Effective Tax Rates (3M & 6M Ended June 30) | Period | 2023 Effective Tax Rate | 2022 Effective Tax Rate | | :-------------------------------- | :---------------------- | :---------------------- | | Three Months Ended June 30 | 19.1% | 65.8% | | Six Months Ended June 30 | 19.4% | 12.1% | - The effective tax rate was higher for the six-month period in 2023, as higher pretax income decreased the percentage impact of tax-favored adjustments[73](index=73&type=chunk) [5. STOCK BASED COMPENSATION](index=27&type=section&id=5.%20STOCK%20BASED%20COMPENSATION) This section covers the 2023 LTIP, equity-based compensation expense, and unrecognized compensation for outstanding awards - The 2023 RLI Corp. Long-Term Incentive Plan (LTIP) was approved, authorizing **4,004,891 shares** for equity-based compensation[77](index=77&type=chunk) Total Compensation Expense and Tax Benefit for Equity Awards (3M & 6M Ended June 30) | Metric | 3 Months Ended June 30, 2023 (in millions) | 3 Months Ended June 30, 2022 (in millions) | 6 Months Ended June 30, 2023 (in millions) | 6 Months Ended June 30, 2022 (in millions) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Total compensation expense | $2.2 | $2.3 | $4.7 | $3.7 | | Total income tax benefit | $0.3 | $0.4 | $0.8 | $0.6 | - Total unrecognized compensation expense relating to outstanding and unvested awards was **$8 million**, to be recognized over a weighted average vesting period of **2.77 years**[78](index=78&type=chunk) [Stock Options](index=27&type=section&id=Stock%20Options) This section details stock option activity, including grants, exercises, and outstanding options - The intrinsic value of stock options exercised was **$16 million** during the first six months of 2023, up from **$5 million** in the same period of 2022[83](index=83&type=chunk) Stock Option Activity (6M Ended June 30, 2023) | Metric | Options | Weighted Average Exercise Price | | :-------------------------------- | :-------- | :------------------------------ | | Outstanding options at January 1, 2023 | 1,695,660 | $82.42 | | Options granted | 144,375 | $135.72 | | Options exercised | (199,145) | $56.17 | | Outstanding options at June 30, 2023 | 1,639,890 | $90.33 | | Exercisable options at June 30, 2023 | 806,436 | $75.52 | [Restricted Stock Units](index=29&type=section&id=Restricted%20Stock%20Units) This section outlines restricted stock unit activity, including nonvested, granted, and vested units - The total fair value of restricted stock units that vested was **$1 million** during the first six months of 2023, compared to **$2 million** in the same period of 2022[84](index=84&type=chunk) Restricted Stock Unit Activity (6M Ended June 30, 2023) | Metric | RSUs | Weighted Average Grant Date Fair Value | | :-------------------------------- | :------- | :------------------------------------- | | Nonvested at January 1, 2023 | 44,208 | $109.51 | | Granted | 19,063 | $136.33 | | Vested | (6,748) | $118.66 | | Nonvested at June 30, 2023 | 55,997 | $117.49 | [6. OPERATING SEGMENT INFORMATION](index=30&type=section&id=6.%20OPERATING%20SEGMENT%20INFORMATION) This section presents financial performance by operating segment, including net premiums earned and underwriting income, for interim periods Net Premiums Earned by Segment (6M Ended June 30) | Segment | 2023 (in thousands) | 2022 (in thousands) | % Change | | :-------------------------------- | :-------------------- | :-------------------- | :------- | | Casualty | $373,079 | $348,879 | 7% | | Property | $190,608 | $142,130 | 34% | | Surety | $66,316 | $60,953 | 9% | | Total Net Premiums Earned | $630,003 | $551,962 | 14% | Net Underwriting Income by Segment (6M Ended June 30) | Segment | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------------- | :-------------------- | :-------------------- | | Casualty | $38,808 | $49,089 | | Property | $54,260 | $48,581 | | Surety | $16,023 | $17,764 | | Total Net Underwriting Income | $109,091 | $115,434 | [7. LEASES](index=32&type=section&id=7.%20LEASES) This section details operating lease ROU assets, liabilities, and total lease costs for branch office facilities Operating Lease Information (as of and 6M Ended June 30) | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------ | | Operating lease ROU assets | $11,185 | $12,766 | | Operating lease liabilities | $12,635 | $14,499 | | Total lease cost (6M) | $3,113 | $2,832 | [8. ACQUISITIONS AND DISPOSITIONS](index=32&type=section&id=8.%20ACQUISITIONS%20AND%20DISPOSITIONS) This section reports a **$14 million** realized gain from the Maui Jim, Inc. sale working capital escrow payout in Q1 2023 - An additional **$14 million** realized gain was recognized in the first quarter of 2023 from the payout of the working capital escrow related to the sale of Maui Jim, Inc[92](index=92&type=chunk) - The sale of Maui Jim, Inc. was completed on September 30, 2022, resulting in a net realized gain of **$571 million** recognized in 2022[90](index=90&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=34&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of RLI Corp.'s financial condition, operational results, key performance measures, and liquidity [OVERVIEW](index=34&type=section&id=OVERVIEW) RLI Corp. is a U.S. specialty insurer focused on niche markets, emphasizing underwriting profitability and shareholder returns - RLI Corp. is a U.S.-based specialty insurance company underwriting select property, casualty, and surety products[94](index=94&type=chunk) - Achieved its **27th consecutive year** of underwriting profitability in 2022, with an average **88.2 combined ratio** over that period[94](index=94&type=chunk) - Shareholder returns are driven by underwriting income, net investment income from the investment portfolio, and long-term appreciation in the equity portfolio[94](index=94&type=chunk) [Key Performance Measures](index=36&type=section&id=Key%20Performance%20Measures) This section defines key performance measures, including underwriting income and combined ratio, used to assess company operations [Underwriting Income](index=36&type=section&id=Underwriting%20Income) This section defines underwriting income as a pretax measure of profitability for insurance operations - Underwriting income is a pretax measure of profitability for insurance operations, derived by subtracting losses and settlement expenses, policy acquisition costs, and insurance operating expenses from net premiums earned[103](index=103&type=chunk) Net Underwriting Income (3M & 6M Ended June 30) | Period | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------------- | :-------------------- | :-------------------- | | Three Months Ended June 30 | $41,201 | $55,956 | | Six Months Ended June 30 | $109,091 | $115,434 | [Combined Ratio](index=37&type=section&id=Combined%20Ratio) This section defines the combined ratio as an industry measure of underwriting profitability - The combined ratio is a common industry performance measure of underwriting profitability, calculated as the sum of the loss ratio (losses and settlement expenses divided by net premiums earned) and the expense ratio (policy acquisition costs and insurance operating expenses divided by net premiums earned)[104](index=104&type=chunk) Combined Ratio (3M & 6M Ended June 30) | Period | 2023 Combined Ratio | 2022 Combined Ratio | | :-------------------------------- | :-------------------- | :-------------------- | | Three Months Ended June 30 | 87.2% | 80.2% | | Six Months Ended June 30 | 82.7% | 79.1% | [Critical Accounting Policies](index=38&type=section&id=Critical%20Accounting%20Policies) This section outlines critical accounting policies involving significant estimates for losses, investments, reinsurance, 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[106](index=106&type=chunk) - There have been no significant changes to critical accounting policies during the year[107](index=107&type=chunk) [RESULTS OF OPERATIONS](index=38&type=section&id=RESULTS%20OF%20OPERATIONS) This section analyzes financial performance for the three and six months ended June 30, 2023, covering revenues, net earnings, and segment results [Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022](index=38&type=section&id=Six%20Months%20Ended%20June%2030%2C%202023%20Compared%20to%20Six%20Months%20Ended%20June%2030%2C%202022) Net premiums earned increased **14%**, and net earnings surged to **$176 million** for the first six months of 2023, despite higher storm losses - Net premiums earned increased **14%** for the first six months of 2023, driven by growth from property and casualty segments[108](index=108&type=chunk) Consolidated Revenues (6M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------------- | :-------------------- | :-------------------- | | Net premiums earned | $630,003 | $551,962 | | Net investment income | $55,872 | $36,355 | | Net realized gains | $20,200 | $18,392 | | Net unrealized gains (losses) on equity securities | $40,710 | $(128,804) | | Total consolidated revenue | $746,785 | $477,905 | - Net earnings for the first six months of 2023 totaled **$176 million**, compared to **$46 million** for the same period in 2022, largely attributed to **$39 million** of net after-tax realized and unrealized gains on equity securities (vs. **$87 million** losses in 2022)[109](index=109&type=chunk) - Underwriting income was **$109 million** on an **82.7 combined ratio** for the first six months of 2023, compared to **$115 million** on a **79.1 combined ratio** in 2022[111](index=111&type=chunk) - Underwriting results for 2023 included **$22 million** of pretax storm losses, compared to **$5 million** in 2022, and benefited from **$72 million** of favorable development on prior years' loss reserves (vs. **$70 million** in 2022)[109](index=109&type=chunk) [Premiums (Six Months)](index=40&type=section&id=Premiums%20%28Six%20Months%29) This section details gross and net premiums earned for the six-month period, showing overall and segment growth Gross and Net Premiums Earned (6M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | % Change | | :-------------------------------- | :-------------------- | :-------------------- | :------- | | Gross Premiums Written | $922,976 | $777,948 | 19% | | Net Premiums Earned | $630,003 | $551,962 | 14% | - Growth in gross premiums written was achieved in all three segments, largely driven by products in the property segment (up **55%**)[114](index=114&type=chunk)[115](index=115&type=chunk) [Casualty (Six Months)](index=40&type=section&id=Casualty%20%28Six%20Months%29) This section details casualty segment premiums, highlighting growth in personal umbrella and challenges in other lines Casualty Premiums (6M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | % Change | | :-------------------------------- | :-------------------- | :-------------------- | :------- | | Gross Premiums Written | $468,891 | $464,136 | 1% | | Net Premiums Earned | $373,079 | $348,879 | 7% | | Commercial excess and personal umbrella GPW | $176,840 | $163,298 | 8% | | Executive products GPW | $40,345 | $45,622 | (12)% | - Continued growth in personal umbrella distribution and positive rate movement offset challenging conditions in excess energy liability and executive products due to increased competition[116](index=116&type=chunk) [Property (Six Months)](index=40&type=section&id=Property%20%28Six%20Months%29) This section details property segment premiums, noting significant growth in commercial property due to rate increases Property Premiums (6M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | % Change | | :-------------------------------- | :-------------------- | :-------------------- | :------- | | Gross Premiums Written | $380,735 | $245,446 | 55% | | Net Premiums Earned | $190,608 | $142,130 | 34% | | Commercial property GPW | $284,945 | $162,148 | 76% | | Marine GPW | $74,970 | $64,996 | 15% | - Commercial property business was up **$123 million** due to continued wind rate increases and limited exposure growth[117](index=117&type=chunk) [Surety (Six Months)](index=42&type=section&id=Surety%20%28Six%20Months%29) This section details surety segment premiums, showing growth from new agency relationships and construction projects Surety Premiums (6M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | % Change | | :-------------------------------- | :-------------------- | :-------------------- | :------- | | Gross Premiums Written | $73,350 | $68,366 | 7% | | Net Premiums Earned | $66,316 | $60,953 | 9% | | Contract GPW | $20,490 | $17,322 | 18% | - Contract surety benefited from new agency relationships and new construction projects, while commercial surety increased from existing accounts and new business[119](index=119&type=chunk) [Underwriting Income (Six Months)](index=42&type=section&id=Underwriting%20Income%20%28Six%20Months%29) This section analyzes underwriting income and combined ratios by segment, noting impacts from storm losses and reserve development Underwriting Income and Combined Ratio by Segment (6M Ended June 30) | Segment | Underwriting Income 2023 (in thousands) | Underwriting Income 2022 (in thousands) | Combined Ratio 2023 | Combined Ratio 2022 | | :-------------------------------- | :-------------------------------------- | :-------------------------------------- | :------------------ | :------------------ | | Casualty | $38,808 | $49,089 | 89.6 | 85.9 | | Property | $54,260 | $48,581 | 71.5 | 65.8 | | Surety | $16,023 | $17,764 | 75.8 | 70.9 | | Total | $109,091 | $115,434 | 82.7 | 79.1 | - Casualty underwriting income decreased due to a higher earned premium base reducing the impact of favorable prior years' reserve development and increased storm losses[121](index=121&type=chunk)[122](index=122&type=chunk) - Property underwriting income increased despite **$20 million** of storm losses (vs. **$5 million** in 2022), benefiting from **$17 million** of favorable development and earned premium growth exceeding expense growth[123](index=123&type=chunk)[124](index=124&type=chunk) - Surety underwriting income decreased slightly, with a higher combined ratio due to a higher earned premium base reducing the loss ratio impact of favorable prior accident years' reserve development[125](index=125&type=chunk)[127](index=127&type=chunk)[128](index=128&type=chunk) [Investment Income (Six Months)](index=44&type=section&id=Investment%20Income%20%28Six%20Months%29) This section details a **54%** increase in net investment income, driven by higher interest rates and asset base growth - Net investment income increased by **54%** to **$56 million** during the first six months of 2023, driven by higher interest rates and an increased average asset base[129](index=129&type=chunk) Fixed Income Investment Yields (6M Ended June 30) | Yield Type | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Pretax Yield - Taxable | 3.40% | 2.75% | | Pretax Yield - Tax-Exempt | 2.78% | 2.66% | | After-Tax Yield - Taxable | 2.69% | 2.17% | | After-Tax Yield - Tax-Exempt | 2.63% | 2.52% | - The fixed income portfolio increased by **$22 million**, and short-term investments increased by **$235 million** due to improved yields on AAA-rated government money market funds[131](index=131&type=chunk) [Income Taxes (Six Months)](index=44&type=section&id=Income%20Taxes%20%28Six%20Months%29) This section discusses the effective tax rate for the six-month period, influenced by pretax income and tax adjustments - The effective tax rate for the first six months of 2023 was **19.4%**, compared to **12.1%** for the same period in 2022, with the higher rate in 2023 attributed to higher pretax income decreasing the percentage impact of tax-favored adjustments[132](index=132&type=chunk) [Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022](index=44&type=section&id=Three%20Months%20Ended%20June%2030%2C%202023%20Compared%20to%20Three%20Months%20Ended%20June%2030%2C%202022) Net premiums earned increased **14%**, and net earnings reached **$78 million** in Q2 2023, despite higher storm losses and lower reserve releases - Net premiums earned increased **14%** for the second quarter of 2023, driven by growth from property and casualty segments[133](index=133&type=chunk) Consolidated Revenues (3M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------------- | :-------------------- | :-------------------- | | Net premiums earned | $322,280 | $282,810 | | Net investment income | $28,788 | $18,472 | | Net realized gains | $5,580 | $12,804 | | Net unrealized gains (losses) on equity securities | $25,214 | $(100,994) | | Total consolidated revenue | $381,862 | $213,092 | - Net earnings for the second quarter of 2023 totaled **$78 million**, compared to a net loss of **$2 million** for the same period in 2022, largely attributed to **$25 million** of net after-tax realized and unrealized gains on equity securities (vs. **$69 million** losses in 2022)[136](index=136&type=chunk) - Underwriting income was **$41 million** on an **87.2 combined ratio** for the second quarter of 2023, compared to **$56 million** on an **80.2 combined ratio** in 2022[138](index=138&type=chunk) - Underwriting results for 2023 included **$18 million** of pretax storm losses, compared to **$3 million** in 2022, and benefited from **$20 million** of favorable development on prior years' loss reserves (vs. **$24 million** in 2022)[136](index=136&type=chunk) [Premiums (Three Months)](index=46&type=section&id=Premiums%20%28Three%20Months%29) This section details gross and net premiums earned for the three-month period, showing overall and segment growth Gross and Net Premiums Earned (3M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | % Change | | :-------------------------------- | :-------------------- | :-------------------- | :------- | | Gross Premiums Written | $507,964 | $418,789 | 21% | | Net Premiums Earned | $322,280 | $282,810 | 14% | - Growth in gross premiums written was achieved in all three segments, largely driven by products in the property segment (up **63%**)[141](index=141&type=chunk)[143](index=143&type=chunk) [Casualty (Three Months)](index=48&type=section&id=Casualty%20%28Three%20Months%29) This section details casualty segment premiums, highlighting personal umbrella growth and challenges in other lines Casualty Premiums (3M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | % Change | | :-------------------------------- | :-------------------- | :-------------------- | :------- | | Gross Premiums Written | $251,057 | $248,315 | 1% | | Net Premiums Earned | $187,048 | $177,123 | 6% | | Commercial excess and personal umbrella GPW | $95,409 | $85,512 | 12% | | Executive products GPW | $22,518 | $24,941 | (10)% | - Continued momentum in personal umbrella distribution offset challenging conditions in excess energy liability, commercial transportation, and executive products due to competition and market conditions[144](index=144&type=chunk) [Property (Three Months)](index=48&type=section&id=Property%20%28Three%20Months%29) This section details property segment premiums, noting significant growth in commercial property due to rate increases Property Premiums (3M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | % Change | | :-------------------------------- | :-------------------- | :-------------------- | :------- | | Gross Premiums Written | $221,889 | $135,848 | 63% | | Net Premiums Earned | $101,841 | $74,690 | 36% | | Commercial property GPW | $173,006 | $93,068 | 86% | | Marine GPW | $37,781 | $32,913 | 15% | - Commercial property business was up **$80 million** due to continued rate increases on wind exposures and strengthened terms and conditions[145](index=145&type=chunk) [Surety (Three Months)](index=49&type=section&id=Surety%20%28Three%20Months%29) This section details surety segment premiums, showing growth in contract surety and a decline in commercial surety Surety Premiums (3M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | % Change | | :-------------------------------- | :-------------------- | :-------------------- | :------- | | Gross Premiums Written | $35,018 | $34,626 | 1% | | Net Premiums Earned | $33,391 | $30,997 | 8% | | Contract GPW | $10,601 | $9,607 | 10% | - Growth in contract surety was driven by new agency relationships, while commercial surety declined due to non-recurring activity in 2022[146](index=146&type=chunk) [Underwriting Income (Three Months)](index=49&type=section&id=Underwriting%20Income%20%28Three%20Months%29) This section analyzes underwriting income and combined ratios by segment, noting impacts from storm losses and reserve releases Underwriting Income and Combined Ratio by Segment (3M Ended June 30) | Segment | Underwriting Income 2023 (in thousands) | Underwriting Income 2022 (in thousands) | Combined Ratio 2023 | Combined Ratio 2022 | | :-------------------------------- | :-------------------------------------- | :-------------------------------------- | :------------------ | :------------------ | | Casualty | $6,977 | $21,442 | 96.3 | 87.9 | | Property | $25,877 | $26,105 | 74.6 | 65.0 | | Surety | $8,347 | $8,409 | 75.0 | 72.9 | | Total | $41,201 | $55,956 | 87.2 | 80.2 | - Casualty underwriting income decreased significantly due to lower levels of reserve releases on prior accident years, increased storm losses, and modest additions to the current accident year for energy casualty[148](index=148&type=chunk)[149](index=149&type=chunk) - Property underwriting income remained flat despite **$17 million** of storm losses (vs. **$3 million** in 2022), as growth in the earned premium base exceeded expense growth[150](index=150&type=chunk)[151](index=151&type=chunk) - Surety underwriting income was stable, with a slightly higher combined ratio, as higher levels of prior accident year reserve releases reduced the loss ratio[152](index=152&type=chunk)[153](index=153&type=chunk) [Investment Income (Three Months)](index=51&type=section&id=Investment%20Income%20%28Three%20Months%29) This section details a **56%** increase in net investment income, driven by higher interest rates and asset base growth - Net investment income increased by **56%** to **$29 million** during the second quarter of 2023, driven by higher interest rates and an increased average asset base[155](index=155&type=chunk) Fixed Income Investment Yields (3M Ended June 30) | Yield Type | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Pretax Yield - Taxable | 3.41% | 2.79% | | Pretax Yield - Tax-Exempt | 2.79% | 2.69% | | After-Tax Yield - Taxable | 2.69% | 2.20% | | After-Tax Yield - Tax-Exempt | 2.64% | 2.55% | [Income Taxes (Three Months)](index=51&type=section&id=Income%20Taxes%20%28Three%20Months%29) This section discusses the effective tax rate for the three-month period, influenced by pretax income and tax adjustments - The effective tax rate for the second quarter of 2023 was **19.1%**, significantly lower than **65.8%** in 2022, primarily due to tax-favored adjustments acting on pretax income in 2023 versus pretax loss in 2022[157](index=157&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=51&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) This section details liquidity sources, including operating cash flows, investment portfolio, debt, and capital resources Cash Flows (6M Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------------- | :-------------------- | :-------------------- | | Operating cash flows | $243,595 | $170,645 | | Investing cash flows | $(226,116) | $(124,946) | | Financing cash flows | $(23,590) | $(21,459) | | Total | $(6,111) | $24,240 | - The company has **$200 million** in debt outstanding, including **$150 million** in senior notes maturing September 15, 2023, and a **$50 million** borrowing from the FHLBC maturing November 10, 2023[160](index=160&type=chunk)[176](index=176&type=chunk) - A new **$100 million** revolving line of credit with PNC Bank, N.A. was entered into in Q1 2023, expiring May 29, 2026, with no amounts outstanding[163](index=163&type=chunk) Investment Portfolio Asset Allocation (as of June 30, 2023) | Investment Type | Fair Value (in thousands) | % of Total Fair Value | | :-------------------------------- | :------------------------ | :-------------------- | | Fixed income | $2,689,100 | 74.9% | | Equity | $552,566 | 15.4% | | Short-term investments | $271,296 | 7.5% | | Other invested assets | $60,907 | 1.7% | | Cash | $16,707 | 0.5% | | Total portfolio | $3,590,576 | 100.0% | - The fixed income portfolio has an average rating of **AA-**, with **80%** rated A or better[182](index=182&type=chunk) - The company paid a regular quarterly cash dividend of **$0.27 per share** on June 20, 2023, marking an increase for the **48th consecutive year**[177](index=177&type=chunk) - As of June 30, 2023, the holding company had **$262 million** in liquid assets, and **$120 million** of the principal insurance subsidiary's net assets were unrestricted for ordinary dividends[178](index=178&type=chunk)[180](index=180&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=57&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section discusses primary market risks, including equity price and interest rate risk, and credit risk management - Primary market risks are equity price risk and interest rate risk, with limited exposure to foreign currency and commodity risk[181](index=181&type=chunk) - The fixed maturity portfolio has an average rating of **AA-**, with **80%** rated A or better by at least two nationally recognized rating organizations[182](index=182&type=chunk) - No significant changes to market risk exposure were reported from the 2022 Annual Report on Form 10-K[183](index=183&type=chunk) [Item 4. Controls and Procedures](index=57&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of disclosure controls and procedures, with no material changes to internal control over financial reporting - Disclosure controls and procedures were deemed effective as of June 30, 2023, based on an evaluation by management, including the CEO and CFO[184](index=184&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[186](index=186&type=chunk) [PART II - OTHER INFORMATION](index=58&type=section&id=Part%20II%20-%20Other%20Information) This section provides other information, including legal proceedings, risk factors, equity sales, and exhibits [Item 1. Legal Proceedings](index=58&type=section&id=Item%201.%20Legal%20Proceedings) No material changes to legal proceedings were reported - No material changes to report regarding legal proceedings[188](index=188&type=chunk) [Item 1A. Risk Factors](index=58&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors were reported - No material changes to report regarding risk factors[189](index=189&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=58&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company made no share repurchases in 2023, with **$87.5 million** remaining in its repurchase program - The company did not repurchase any shares during 2023 under its **$100 million** share repurchase program[190](index=190&type=chunk) - There is **$87.5 million** of remaining capacity from the share repurchase program[190](index=190&type=chunk) [Item 3. Defaults upon Senior Securities](index=58&type=section&id=Item%203.%20Defaults%20upon%20Senior%20Securities) This item is not applicable to the company - This item is not applicable[191](index=191&type=chunk) [Item 4. Mine Safety Disclosures](index=58&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - This item is not applicable[192](index=192&type=chunk) [Item 5. Other Information](index=58&type=section&id=Item%205.%20Other%20Information) No executive officer or director adopted or terminated Rule 10b5-1 trading arrangements during Q2 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2023[194](index=194&type=chunk) [Item 6. Exhibits](index=58&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with Form 10-Q, including corporate documents, incentive plans, and certifications - Exhibits include Amended and Restated Certificate of Incorporation, RLI Corp. Nonemployee Directors' Deferred Compensation Plan, RLI Corp. Executive Deferred Compensation Plan, RLI Corp. 2023 Long-Term Incentive Plan and related agreements, and Certifications Pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of 2002[195](index=195&type=chunk) [SIGNATURES](index=60&type=section&id=Signatures) This section contains the official signatures for the report [Signatures](index=60&type=section&id=Signatures) The report was signed by Todd W. Bryant, Chief Financial Officer, on July 26, 2023 - The report was signed by Todd W. Bryant, Chief Financial Officer, on July 26, 2023[200](index=200&type=chunk)

Financial Data and Key Metrics Changes - RLI reported second quarter operating earnings of $1.16 per share, reflecting solid underwriting performance and continued growth in investment income, which advanced by 56% [11][12] - The combined ratio for the quarter was 87.2%, with a year-to-date combined ratio of 82.7%, indicating strong operational efficiency [11][13] - Operating cash flow increased to $174 million for the quarter, supporting growth in invested assets [12] - Book value per share increased by 17% from year-end 2022 to $29.65, reflecting strong overall performance [43][44] Business Line Data and Key Metrics Changes - The property segment experienced a premium growth of 63% with a combined ratio of 75, indicating a highly attractive market [50] - The marine division grew premiums by 15% and increased rates by 8%, demonstrating strong demand and effective underwriting [27] - The surety segment posted a 75 combined ratio and grew premiums by 1%, with contract surety leading the way with a 10% premium increase [29] - The casualty segment grew by 1% but posted a combined ratio of 96, reflecting competitive pressures and unusual claim severity [53][54] Market Data and Key Metrics Changes - Submissions in the catastrophe market increased over 20%, indicating a continued elevated state of activity since 2022 [25] - The energy casualty space saw a significant decrease in premium, down $15 million year-to-date in 2023, reflecting strategic exits from underperforming segments [34] - The public D&O market remains highly competitive, leading to a decrease in renewal retention [32] Company Strategy and Development Direction - RLI focuses on a diversified portfolio and disciplined underwriting to navigate market challenges and optimize profitable growth [8][36] - The company is adapting to market forces, including a shortage of natural catastrophe capacity and loss cost inflation, while continuing to serve customer and shareholder interests [118] - RLI is committed to maintaining underwriting discipline, particularly in the surety segment, to manage economic uncertainties [31][57] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in executing strategies despite competitive pressures and market challenges, emphasizing a long-term focus on customer and shareholder value [7][9] - The company anticipates that the impact of Florida tort reform will benefit the industry in the long term [48] - Management acknowledged the volatility in the casualty business but remains committed to disciplined underwriting practices [54] Other Important Information - RLI purchased an additional $150 million of catastrophe reinsurance limit effective June 1, supporting its evolving view of risk [26] - The company continues to invest in people and technology to enhance customer experience and drive efficiencies [43] Q&A Session Summary Question: Can you provide perspective on growth in the property business? - Management indicated that growth is driven by a combination of rate increases and new business, with a focus on maintaining underwriting discipline [38][39] Question: What happens to the energy underwriting team when exiting a market? - Management explained that underwriters may be redeployed to other areas, while those exiting the market typically seek opportunities outside the organization [64] Question: Are you seeing signs of economic uncertainty affecting your insured? - Management noted that while there are concerns about a potential recession, the construction market remains stable, indicating healthy conditions for surety [75] Question: Can you elaborate on the additional catastrophe limit purchased? - The additional limit is for all perils and adds a layer of coverage across all existing policies [103]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2023 or ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number: 001-09463 RLI Corp. (Exact name of registrant as specified in its charter) Delaware 37-0889946 (I.R.S. Employer I ...

RLI Corp. (NYSE:RLI) Q1 2023 Earnings Conference Call April 20, 2023 11:00 AM ET Company Participants Aaron Diefenthaler - Chief Investment Officer & Treasurer Todd Bryant - Chief Financial Officer Craig Kliethermes - President & Chief Executive Officer Jen Klobnak - Chief Operating Officer Conference Call Participants Meyer Shields - KBW Mark Dwelle - RBC Capital Markets Casey Alexander - Compass Point Operator Good morning and welcome to the RLI Corp. First Quarter Earnings Teleconference. After managemen ...

Part I [Item 1. Business](index=4&type=section&id=Item%201.%20Business) RLI Corp is a specialty insurance underwriter focused on niche property, casualty, and surety markets - RLI Corp., founded in 1965, underwrites specialty property, casualty, and surety products through its main subsidiaries: RLI Insurance Company (RLI Ins.), Mt. Hawley Insurance Company, and Contractors Bonding and Insurance Company (CBIC)[12](index=12&type=chunk) - The company operates in the specialty admitted, excess and surplus (E&S), and specialty reinsurance markets, focusing on risks that do not fit standard underwriting criteria[13](index=13&type=chunk)[15](index=15&type=chunk) 2022 Gross Premiums Written by Market | Market | Gross Premiums Written (2022) | Percentage of Total | | :--- | :--- | :--- | | Specialty Admitted | $916.0 million | 59% | | Excess and Surplus | $617.8 million | 39% | | Specialty Reinsurance | $31.7 million | 2% | - The company's insurance operations are divided into three segments: Casualty, Property, and Surety[19](index=19&type=chunk) Net Premiums Earned by Segment (2020-2022) | Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | **Casualty** | **$711.8 million (62%)** | **$633.6 million (65%)** | **$569.5 million (66%)** | | Commercial excess & personal umbrella | $253.9 million | $219.4 million | $178.2 million | | General liability | $100.4 million | $90.9 million | $91.7 million | | Commercial transportation | $97.0 million | $83.4 million | $64.6 million | | Professional services | $95.2 million | $88.9 million | $85.2 million | | **Property** | **$307.9 million (27%)** | **$231.8 million (23%)** | **$183.7 million (21%)** | | Commercial property | $163.1 million | $107.9 million | $79.4 million | | Marine | $113.2 million | $97.7 million | $81.9 million | | **Surety** | **$124.7 million (11%)** | **$115.4 million (12%)** | **$112.5 million (13%)** | | **Grand Total** | **$1,144.4 million** | **$980.9 million** | **$865.7 million** | - The Casualty segment is the largest, offering products like commercial excess, general liability, and transportation insurance. The Property segment covers commercial property and marine risks. The Surety segment provides commercial, miscellaneous, and contract bonds[21](index=21&type=chunk)[30](index=30&type=chunk)[33](index=33&type=chunk) - RLI distributes its products through a network of wholesale and retail brokers, independent agents, and carrier partners, as well as through digital and direct channels[36](index=36&type=chunk)[41](index=41&type=chunk) - The company competes in a cyclical and highly competitive industry with approximately 2,600 other property and casualty companies. Key competitors include Arch, Chubb, CNA, Markel, and Travelers. RLI competes based on innovative coverages, service quality, and financial strength rather than solely on price[42](index=42&type=chunk) Financial Strength Ratings (as of Dec 31, 2022) | Rating Agency | RLI Ins., Mt. Hawley, CBIC | Rating Description | | :--- | :--- | :--- | | AM Best | A+ | Superior | | Standard & Poor's | A | Strong | | Moody's | A2 | - | - The company uses reinsurance to diversify business, limit maximum net loss on large risks and catastrophes, and reduce volatility. In 2022, RLI ceded **$324.0 million** in premiums, representing about **20.7%** of its direct and assumed written premiums[45](index=45&type=chunk)[46](index=46&type=chunk) - RLI's reinsurance program includes both treaty and facultative coverage, primarily on an excess of loss basis. The company strives to purchase reinsurance from financially strong partners, with over **93% of recoverables** due from companies rated 'A' or better[46](index=46&type=chunk)[47](index=47&type=chunk)[48](index=48&type=chunk) Property Catastrophe Reinsurance Coverage (2022 vs. 2023) | Peril | 2023 Limit | 2023 Retention | 2022 Limit | 2022 Retention | | :--- | :--- | :--- | :--- | :--- | | California earthquake | $700 million | $25 million | $750 million | $25 million | | Non-California earthquake | $700 million | $50 million | $775 million | $25 million | | Other perils (incl. wind) | $600 million | $50 million | $625 million | $25 million | - For 2023, the company increased its retention for non-California earthquake and other perils from **$25 million to $50 million**, reflecting changes in the property reinsurance market[54](index=54&type=chunk)[56](index=56&type=chunk) Key Operating Ratios (2018-2022) | Ratio | 2022 | 2021 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Premiums Written to Surplus | 0.9 to 1 | 0.9 to 1 | 0.8 to 1 | 0.8 to 1 | 1.0 to 1 | | Combined Ratio (GAAP) | 84.4 | 86.8 | 92.0 | 91.9 | 94.7 | - The company's investment strategy prioritizes capital preservation with a secondary focus on growing book value. The portfolio does not contain derivatives[68](index=68&type=chunk) - As of December 31, 2022, the investment portfolio was allocated **82% to fixed income**, **15% to equities**, and 3% to other/cash. **81% of the fixed income portfolio** was rated 'A' or better[70](index=70&type=chunk) - RLI and its subsidiaries are subject to extensive state regulation, primarily by the Illinois Department of Insurance (IDOI), focusing on financial solvency and market conduct. Regulations restrict dividend payments, investments, and require adherence to Risk-Based Capital (RBC) standards[72](index=72&type=chunk)[75](index=75&type=chunk)[76](index=76&type=chunk) - As of December 31, 2022, each insurance subsidiary's RBC level was significantly in excess of the regulatory action level, with the principal subsidiary's statutory capital being **more than five times** its authorized control level[80](index=80&type=chunk) - As of December 31, 2022, the company employed **1,001 associates** with an average tenure of **9.2 years**. The compensation structure, including an Employee Stock Ownership Plan (ESOP), is designed to align employee and shareholder interests[97](index=97&type=chunk)[102](index=102&type=chunk) [Item 1A. Risk Factors](index=26&type=section&id=Item%201A.%20Risk%20Factors) The company faces key insurance, financial, and operational risks like market cycles and catastrophic events - Profitability is subject to significant fluctuations due to competitive pressures, rising loss costs (including social inflation), unpredictable catastrophes, and changes in reinsurance availability[105](index=105&type=chunk)[110](index=110&type=chunk) - Business is concentrated in key states, with **53% of direct premiums earned in 2022** from California (17%), Florida (14%), New York (11%), and Texas (11%), making the company vulnerable to adverse events or regulatory changes in these areas[108](index=108&type=chunk) - Loss reserves are based on estimates and are inherently uncertain. If actual losses exceed reserves, profitability could be negatively impacted. This is a key risk due to the long-tail nature of some insurance lines[121](index=121&type=chunk)[122](index=122&type=chunk)[123](index=123&type=chunk) - The company is exposed to unpredictable catastrophic events, particularly earthquakes and hurricanes. Climate change may increase the frequency and severity of weather-related catastrophes, affecting losses and reinsurance costs[125](index=125&type=chunk)[128](index=128&type=chunk) - Adverse economic conditions can lower demand for insurance products, as premiums are dependent on customer revenues, payroll, and construction spending[130](index=130&type=chunk) - As a holding company, RLI Corp. relies on dividends from its insurance subsidiaries, which are restricted by state insurance laws. This could impact its ability to pay corporate expenses and shareholder dividends[132](index=132&type=chunk) - The investment portfolio's value can fluctuate due to changes in interest rates, credit risk, and general market conditions, which may negatively impact the company's financial condition[134](index=134&type=chunk)[136](index=136&type=chunk) - The company's success depends on its ability to manage operational risks (e.g., fraud, errors, IT failures) through its Enterprise Risk Management (ERM) framework and comply with regulations like the Own Risk and Solvency Assessment (ORSA)[137](index=137&type=chunk) - RLI depends on attracting and retaining experienced underwriting and claim talent with deep knowledge of its niche businesses[139](index=139&type=chunk) - Technology breaches, including cybersecurity incidents, could disrupt operations, result in the loss of confidential information, and expose the company to liability, reputational damage, and significant costs[147](index=147&type=chunk) - Pandemics like COVID-19 could adversely affect business through reduced demand, increased claims, operational disruptions, and financial market volatility[143](index=143&type=chunk)[145](index=145&type=chunk) [Item 1B. Unresolved Staff Comments](index=43&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments - None[153](index=153&type=chunk) [Item 2. Properties](index=43&type=section&id=Item%202.%20Properties) The company owns its corporate headquarters in Peoria, Illinois, which includes a large solar field - The company owns its 23-acre corporate headquarters campus in Peoria, Illinois, which includes five buildings totaling 173,000 square feet[153](index=153&type=chunk) - The Peoria campus features a **1.8-megawatt solar field** designed to produce enough electrical power to meet or exceed the annual needs of the local office buildings[154](index=154&type=chunk) [Item 3. Legal Proceedings](index=43&type=section&id=Item%203.%20Legal%20Proceedings) Details on legal proceedings are incorporated by reference from the financial statement notes - Details on legal proceedings are provided in Note 10 to the Consolidated Financial Statements under Item 8[155](index=155&type=chunk) [Item 4. Mine Safety Disclosures](index=43&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[156](index=156&type=chunk) Part II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=43&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company shows a strong history of dividend growth and shareholder returns, outperforming market indices - RLI Corp. has paid dividends for **186 consecutive quarters** and has increased its quarterly dividend for **47 consecutive years**. A special cash dividend of **$7.00 per share** was paid in December 2022[157](index=157&type=chunk) Five-Year Annualized Total Return Comparison | Index | 5-Year Annualized Total Return | | :--- | :--- | | RLI Corp. | 20.4% | | S&P 500 | 9.4% | | S&P 500 P&C Index | 12.2% | - The company has a **$100 million** share repurchase program with **$87.5 million** of remaining capacity. The last share repurchase occurred in 2011[162](index=162&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=46&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net earnings surged in 2022 from a major asset sale, strong premium growth, and continued underwriting profit Consolidated Financial Highlights (2021 vs. 2022) | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total Consolidated Revenue | $1,697,992 | $1,179,245 | | Net Premiums Earned | $1,144,436 | $980,903 | | Underwriting Income | $178,216 | $129,926 | | Net Earnings | $583,411 | $279,354 | - The significant increase in net earnings in 2022 was primarily driven by a **$571.0 million realized gain** from the sale of the company's equity method investment in Maui Jim, Inc[238](index=238&type=chunk)[268](index=268&type=chunk) - Gross premiums written increased by **16% in 2022**, with growth in all three segments, led by a **44% increase** in the Property segment[242](index=242&type=chunk)[248](index=248&type=chunk) Underwriting Ratios (2021 vs. 2022) | Ratio | 2022 | 2021 | | :--- | :--- | :--- | | Loss Ratio | 44.9% | 46.5% | | Expense Ratio | 39.5% | 40.3% | | **Combined Ratio** | **84.4%** | **86.8%** | - Underwriting results in 2022 included **$38.0 million in pretax losses from Hurricane Ian** and benefited from **$122.6 million of favorable development** on prior years' loss reserves[243](index=243&type=chunk) - The most critical accounting policies involve significant estimates, including liability for unpaid losses and settlement expenses, investment valuation, recoverability of reinsurance, deferred policy acquisition costs, and deferred taxes[171](index=171&type=chunk) - Estimating loss reserves is an inherently uncertain process involving subjective judgments based on historical data and future trends. The process uses multiple standard actuarial methods (e.g., Paid Loss Development, Incurred Loss Development, Bornhuetter/Ferguson), with weights assigned based on the product and accident year maturity[122](index=122&type=chunk)[189](index=189&type=chunk)[190](index=190&type=chunk) - The company's best estimate of reserves is determined by the Loss Reserve Committee, which may enhance reserves beyond the actuarial central estimate to account for qualitative information and increased risk, particularly for its excess and surplus lines business[210](index=210&type=chunk)[215](index=215&type=chunk) Summary of Cash Flows (in thousands) | Cash Flow Type | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | $250,448 | $384,905 | | Net cash from (used in) investing activities | $48,879 | $(274,826) | | Net cash used in financing activities | $(365,313) | $(83,492) | - Operating cash flow in 2022 was impacted by **$141.5 million in tax payments** related to the sale of Maui Jim. Investing activities included **$686.6 million in cash proceeds** from this sale. Financing activities included significant dividend payments[303](index=303&type=chunk) - As of December 31, 2022, the company has contractual obligations totaling **$2.55 billion**, with the largest component being **$2.32 billion** in estimated loss and settlement expense reserves[306](index=306&type=chunk) - The company maintains a **$60.0 million revolving line of credit** and has access to a secured lending facility through the Federal Home Loan Bank of Chicago, ensuring sufficient liquidity[310](index=310&type=chunk)[311](index=311&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=82&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks are interest rate and equity price risk, managed via diversification - The most significant market risk for the fixed income portfolio is changes in interest rates. The company attempts to minimize this by matching the duration of assets to liabilities[325](index=325&type=chunk) - Equity price risk is managed through a value-oriented, dividend-driven philosophy. The equity portfolio has a **beta of 0.9** relative to the S&P 500, indicating slightly lower volatility than the broad market[327](index=327&type=chunk) Market Risk Sensitivity Analysis (as of Dec 31, 2022) | Hypothetical Event | Portfolio | Modeled Pretax Decrease in Fair Value | | :--- | :--- | :--- | | +100 basis point interest rate increase | Fixed Income ($2.7 billion) | $111.1 million | | -10% S&P 500 Index decline | Equity ($498.4 million) | $46.3 million | [Item 8. Financial Statements and Supplementary Data](index=85&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the audited consolidated financial statements, notes, and the auditor's report Consolidated Balance Sheet Highlights (as of Dec 31, 2022) | Account (in thousands) | Amount | | :--- | :--- | | **Total Assets** | **$4,767,068** | | Total Investments and Cash | $3,272,301 | | **Total Liabilities** | **$3,589,727** | | Unpaid Losses and Settlement Expenses | $2,315,637 | | Unearned Premiums | $785,085 | | **Total Shareholders' Equity** | **$1,177,341** | Consolidated Statement of Earnings Highlights (Year Ended Dec 31, 2022) | Account (in thousands) | Amount | | :--- | :--- | | Net Premiums Earned | $1,144,436 | | Net Realized Gains | $588,515 | | Total Consolidated Revenue | $1,697,992 | | Total Expenses | $987,167 | | **Net Earnings** | **$583,411** | | **Diluted EPS** | **$12.74** | - **Note 2 (Investments):** As of Dec 31, 2022, the investment portfolio had a fair value of **$3.3 billion**. The fixed income portfolio had **$280.2 million** in gross unrealized losses, primarily due to rising interest rates. The company believes it will recover the amortized cost basis of these securities[411](index=411&type=chunk)[420](index=420&type=chunk)[422](index=422&type=chunk) - **Note 5 (Reinsurance):** In 2022, the company ceded **$324.0 million** in written premiums. Over **93% of reinsurance recoverables** are from companies rated 'A' or better by AM Best and S&P. The top reinsurer by exposure is Munich Re / HSB, representing 13.6% of total ceded exposure[439](index=439&type=chunk)[441](index=441&type=chunk) - **Note 6 (Loss Development):** The company recorded favorable prior accident year development of **$122.6 million in 2022**, **$125.5 million in 2021**, and **$101.1 million in 2020**. The favorable development in 2022 was widespread, with the Casualty segment contributing $87.2 million[443](index=443&type=chunk)[461](index=461&type=chunk) - **Note 13 (Acquisitions and Dispositions):** On September 30, 2022, RLI completed the sale of its investment in Maui Jim, Inc. for cash proceeds of **$686.6 million**, resulting in a net realized gain of **$571.0 million**[520](index=520&type=chunk) [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=140&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on financial disclosure - There were no changes in or disagreements with accountants on accounting and financial disclosure[533](index=533&type=chunk) [Item 9A. Controls and Procedures](index=140&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal controls over financial reporting were effective - Management, including the principal executive and financial officers, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[534](index=534&type=chunk) - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework. This assessment was audited by Deloitte & Touche LLP[535](index=535&type=chunk)[536](index=536&type=chunk) Part III [Items 10-14](index=140&type=section&id=Items%2010-14) Information on governance and ownership is incorporated by reference from the company's Proxy Statement - Information for Items 10 through 14 is incorporated by reference from the company's definitive Proxy Statement for the 2023 annual meeting of shareholders[8](index=8&type=chunk)[538](index=538&type=chunk) Part IV [Item 15. Exhibits and Financial Statement Schedules](index=140&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements, schedules, and exhibits filed as part of the report - This section contains the index of all financial statements, schedules, and exhibits filed with the report[540](index=540&type=chunk)[541](index=541&type=chunk) - Key supplementary schedules provided include: Schedule I (Summary of Investments), Schedule II (Condensed Financial Information of Registrant), Schedule III (Supplementary Insurance Information), and Schedule VI (Supplementary Information Concerning Property-Casualty Insurance Operations)[542](index=542&type=chunk)

RLI Corp. (NYSE:RLI) Q4 2022 Earnings Conference Call January 26, 2023 11:00 AM ET Company Participants Aaron Diefenthaler - Chief Investment Officer and Treasurer Todd Bryant - CFO Craig Kliethermes - President and CEO Jen Klobnak - COO Conference Call Participants Greg Peters - Raymond James Casey Alexander - Compass Point Meyer Shields - KBW Mark Dwelle - RBC Capital Markets Matt Carletti - JMP Operator Good morning and welcome to the RLI Corp Fourth Quarter Earnings Teleconference. After management's pr ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2022 or ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 RLI Corp. (Exact name of registrant as specified in its charter) Delaware 37-0889946 (I.R.S. Employer Identification Number) (State or other jurisdiction of incorporat ...