RLI(RLI) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents RLI Corp.'s unaudited condensed consolidated interim financial statements and management's discussion and analysis Item 1. Financial Statements 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 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 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 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 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 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 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] - 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] - No prospective accounting standards are expected to have a material impact on financial statements as of June 30, 2023[24] 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] - 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][33][34] - 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] 2. INVESTMENTS 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] - 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] - 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][66] - 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] 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 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] 4. INCOME TAXES 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] 5. STOCK BASED COMPENSATION 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] 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] Stock Options 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] 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 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] 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 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 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 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] - 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of RLI Corp.'s financial condition, operational results, key performance measures, and liquidity 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] - Achieved its 27th consecutive year of underwriting profitability in 2022, with an average 88.2 combined ratio over that period[94] - Shareholder returns are driven by underwriting income, net investment income from the investment portfolio, and long-term appreciation in the equity portfolio[94] Key Performance Measures This section defines key performance measures, including underwriting income and combined ratio, used to assess company operations Underwriting Income 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] 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 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] 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 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] - There have been no significant changes to critical accounting policies during the year[107] RESULTS OF OPERATIONS 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 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] 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] - 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] - 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] Premiums (Six Months) 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][115] Casualty (Six Months) 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] Property (Six Months) 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] Surety (Six Months) 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] Underwriting Income (Six Months) 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][122] - 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][124] - 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][127][128] Investment Income (Six Months) 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] 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] Income Taxes (Six Months) 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] Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022 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] 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] - 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] - 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] Premiums (Three Months) 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][143] Casualty (Three Months) 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] Property (Three Months) 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] Surety (Three Months) 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] Underwriting Income (Three Months) 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][149] - 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][151] - 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][153] Investment Income (Three Months) 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] 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) 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] LIQUIDITY AND CAPITAL RESOURCES 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][176] - 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] 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] - 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] - 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][180] Item 3. Quantitative and Qualitative Disclosures about Market Risk 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] - 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] - No significant changes to market risk exposure were reported from the 2022 Annual Report on Form 10-K[183] Item 4. Controls and Procedures 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] - 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] PART II - OTHER INFORMATION This section provides other information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings No material changes to legal proceedings were reported - No material changes to report regarding legal proceedings[188] Item 1A. Risk Factors No material changes to risk factors were reported - No material changes to report regarding risk factors[189] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - There is $87.5 million of remaining capacity from the share repurchase program[190] Item 3. Defaults upon Senior Securities This item is not applicable to the company - This item is not applicable[191] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[192] Item 5. Other Information 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] Item 6. Exhibits 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] SIGNATURES This section contains the official signatures for the report 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]